February 07, 2020
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Only-For-Profit Schools

How private schools work around the bar on profiteering and rake in the moolah

Only-For-Profit Schools
Hard Lesson
Ryan International School in Gurgaon, which is in the eye of a storm
Photograph by PTI
Only-For-Profit Schools

In India, where nearly 260 million children go to school, the highest globally, private schools can’t be for-profit business under the law. They must be run by not-for-profit trusts and societies, essentially as charities. So, it can be surprising that so many people want to be in the business of basic schooling. The demand for private schooling cuts across the income ladder. Here’s some data to begin with: nearly 50 per cent of urban students are in private schools, as are a fifth of rural students. The craze is such that enrolment in government schools fell by 13 million between 2010-11 and 2015-16. In contrast, admissions into private schools rose by 17 million in the same period.

Despite this aspirational demand, parents often cry foul over the ways of private schools. They allege the business models of private schools are shady. In four states—Uttar Pradesh, Delhi, Andhra Pradesh and Karnataka—disputes over exorbitant fees have reached high courts. Ashish Nar­edi, a representative of the Hyderabad Parents’ Association, reckons that just “10 to 12 per cent of the fees” goes towards teachers’ wages, the most critical annual expenditure. He has calculated that even a two per cent hike in school fees of a mid-size private school is enough to translate into a “10 per cent salary hike for teachers”. Much of the fee hikes, therefore, go into surpluses, he alleges. Citing a report by Anand Rathi and Company, Naredi, a businessman, has launched a video campaign to show that no business in India is as profitable as school education, with fast and high returns on investment (see graphic).

When norms that don’t allow profit-making institutions in education were tested in the light of the Constitution, they were pretty much found to be correct. A Supreme Court verdict (in T.M.A. Pai Foundation versus the State of Karnataka and Others, 2002) held that education cannot be a profession or trade in the sense the words are used in Article 19(1)(g) of the Constitution. That is the primary article governing the right to “practise any profession, or to carry on any occupation, trade or business”. Schools, therefore, must be a charitable activity regulated by the State.

So, how do private schools thrive then? For one, schools can have surpluses, if not profits. Not just in T.M.A. Pai, in two other landmark verdicts—Islamic Academy of Education versus State of Karnataka, 2003 and Modern School versus Union of India, 2004—the courts held that a private school should have “reasonable surplus”. However, no surplus can be taken out of the institutions or invested elsewhere. That’s how schools are supposed to be non-profit.

Most businesses raise money through equity, but since schools are meant to be non-profit, the equity model doesn’t work for schools. That doesn’t mean entrepreneurs aren’t setting up schools. In many states, it’s common for politicians to run schools. A two-way funding pattern has been the preferred model. A trust or society runs the school, while a company, which can be for-profit, owns all capital assets such as land and building. The company leases these assets permanently to the school trust. “This is a loophole. It allows for surplus to be taken out under the garb of lease fee to the company,” says Vikas Khot, a legal consultant who assisted the court-appointed Justice Anil Dev Singh Committee, which went through the books of over 500 Delhi schools.

In Delhi, court-ordered audits have found private schools having huge surpluses. Under a policy initiated in the 1970s, Delhi schools have got institutional land at a concession on the recommendation of the Delhi government to the land allotment committee of the Delhi Development Authority (DDA). The first allotment took place on July 20, 1973, for a senior secondary school. Since the inception of the policy, 134 trusts have been allotted land for senior secondary schools. “That’s the triangular nexus among politicians, bur­eaucrats and school trusts. That’s why so many politicians own schools,” says Ashok Agarwal, an advocate. Agarwal’s plea for regulating school fees has led to major reforms, such as fee refunds.

In August 2004, DDA reversed its long-time policy of land allotment at throwaway prices. After the policy change, institutional land is now allotted through open auctions.

A 2011 report by the Auditor and Comptroller General (CAG) held that 25 top private schools in Delhi had begun charging parents illegally through fees to implement higher pay mandated by the government’s Sixth Pay Commission. The fee hike was unjustified, it was held, because the schools didn’t touch their available surpluses­—pegged at up to 17 per cent. Some schools had transferred part of the money collected to management societies instead of utilising it for salary hike.

The CAG report indicted one school for inadequate provident fund deductions and contributions, while another was found to have more provident fund allocations than those on its rolls. It also found schools not sufficiently fulfilling the condition to serve poorer sections. The 25 schools aud­ited included Mother Divine, Air Force Bal Bharti, Mount Carmel, Sachdeva, ASN School, Sadhu Vaswani, St Mary, Ryan International, Birla Vidya Niketan, G.D. Salwan, Nat­ional Victor, Amity International, DPS-RK Puram, Ramjas Public School, G.D. Goenka, Convent of Jesus and Mary, Maharaja Agrasen, J.D. Tytler, Sardar Patel, Vasant Valley, St Xavier’s, Frank Anthony, Modern School, Presentation Convent and Summer Fields School.

The CAG audit revealed how schools have found a way to channel funds out, thus circumventing the non-profit rule. Birla Vidya Niketan paid Rs 5.23 crore as rent to Birla Academy of Art and Culture, while Sardar Patel paid Rs 2.33 crore as usage charge to Gujarat Education Society. G.D. Goenka school was found to have offered Rs 4.10 crore as interest-­free loan to its parent society despite the school running a loan of Rs 6.33 crore, the CAG audit said. “That’s the business model. That’s how they make money,” says Agarwal.

The Justice Anil Dev Singh Committee ordered 103 Delhi schools to refund Rs 104 crore to parents that they had illegally charged under various fee heads. In an affidavit filed before the Delhi High Court on September 6, 2017, to explain what it had done to implement the refund, the Delhi government stated that with nine per cent interest, the schools now owe Rs 164 crore. Of the 103 schools, 102 have challenged the order to refund fees. Only in 17 of those cases has the court stayed any coercive action. In 10 cases, schools have already refunded Rs 36 crore.

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