Doubling down on a competitive advantage

Global Capability Centers or GCCs are now in vogue all over the world. GCCs are strategic hubs that are setup by multi-national corporations (MNCs) primarily to drive growth, expansion, innovation and competitiveness of the MNC globally. They execute this mandate by leveraging the MNCs global expertise and capabilities to standardise global operations and enhancing cross collaborations.

Historically, GCCs started off as back offices and cost-arbitrage centers but in last decade their role has transformed with GCCs taking a more prominent role in the growth and expansion efforts of MNCs, becoming potential alternative technological and development headquarters.

With a dynamic and fast-paced growing economy, India should seem like the perfect choice for setting up a GCC. Further, with a reported 1,580 GCCs which have approximately 1.66 million employees holding an overall market size of more than $46 billion, India definitely showcases a location offering, a ‘tried and tested’ GCC friendly ecosystem.

The ‘techade’ in India has only further accelerated this GCC expansion by fostering greater economic convergence integrating technological advancement and digitalization. One of the key determinants for the success of a GCC is its people, as one of the only destinations offering diversified top-tier accessible and affordable human capital, has crowned India as a ‘destination of choice’ for MNCs desirous of setting-up their GCCs.

From a legal and regulatory standpoint, a GCC in India would be required to comply with routine Central and State laws in India for its day-to-day operations and also for setting up. Most GCC’s operate in the IT/ITeS industry, where 100% foreign direct investment (FDI) is permitted under the automatic route. From an employment and resourcing perspective these would include proactive compliance with Indian labour laws and extend to putting in place necessary workplace policies. Further, given that the GCC would invariably transfer, use, process, and control IP and data between itself and the MNC it would have to build in the necessary safeguards and policies to ensure compliance from a domestic and cross-border perspective. Lastly, given India’s robust taxation regime, it would be imperative for the GCC to comply with transfer pricing requirements and take necessary precautions to prevent any risks from being classified as a ‘permanent establishment’.

Pertinently, the Government of India, drawing from the successes of GCCs and their massive impact on the Indian economy, has increasingly focussed on encouraging MNCs to directly or indirectly expand their operations by trying to facilitate the ease of doing business and bringing India’s regulatory frameworks in line with global ones.

To this end, India has already implemented a new data protection law and is en route to implement Digital India Bill, Telecommunications Bill, new labour codes, a robust central IT policy for GCCs and is also potentially considering revamping the regime governing special economic zones (SEZs) and international financial service centres (IFSCs) by way of the proposed Development of Enterprise and Service Hubs Bill, 2022.

Given the evolutionary and positive approach of the Indian regulatory framework vis-à-vis incentivizing MNCs to enter and scale in India, the Indian GCC ecosystem has become a sandbox for MNCs to drive, develop, test and explore new organisation-wide transformation initiatives.

It does not merely provide for compliance/ regulatory touchpoints, but also creates an opportunity for MNCs to utilize it as a means to think through cost-cutting (by setting up in special economic zones or SEZs and international financial service centres or IFSCs), setting up appropriate reporting structures and managing responsibilities across the GCC and the parent-MNC (the laws governing beneficial ownership would require the MNC to think through its reporting lines at the GCC level and also the oversight/control that it retains over the GCC).

Is more regulatory easing needed?

However, given the regulatory compliances, from taking around 60 days to incorporate a new company with foreign shareholders, varied central and state employment laws to comply with, 10+ registrations and licenses to even commence operations, the question is whether the needle has moved sufficiently to truly make the difference and whether we can truly claim that ‘ease of doing business’ in India has substantially improved, or is there still headroom to clear the road with more ‘regulatory easing’.

The increased focus of the Indian government on driving the ‘ease of doing business’ from a regulatory perspective and the fact that GCC’s in India are a tried-and-tested model in India’s legal, regulatory, commercial, and political environments, truly positions India as a global ‘destination of choice’ for setting up GCCs. While it would be beneficial to have a stronger push for a central specialized regulatory framework which can serve as a one stop shop for MNCs desirous of setting up GCCs and similar centers in India, many states have interestingly already started putting in place state specific policies to incentivize GCCs.

Written by Bharat Reddy and Abhishek Jain. (Bharat Reddy is Partner and Abhishek Jain, Associate, at Cyril Amarchand Mangaldas.)

Views are personal and do not represent the stand of this publication.