ABSTRACT:
In the dynamic landscape of global business, Global Capability Centers (GCCs) emerge as strategic powerhouses, reshaping how organizations operate, innovate, and scale. This article unravels the multifaceted journey of GCCs within the Indian context, where India’s leadership shines brightly. From inception to execution, this article aims to delve into the intricate steps involved in running GCCs on Indian soil, emphasizing legal compliance, talent fusion, and strategic autonomy.
The canvas extends to various metropolitan cities and states in the subcontinent., encompassing rural ecosystems and equitable growth. As data guardians and cultural bridge-builders, GCCs navigate complexities, leveraging innovation and safeguarding sensitive information. This study attempts to shed light on the complex web of myths and beliefs surrounding the GCCs by evaluating the historical background, legal provisions, investigation difficulties, and prosecution barriers.
KEYWORDS:
GCCs, Global Capability Centres, India, Innovation, Technology, Legal Compliance, Regulatory Authorities, Data protection, Expansion of business, MNCs, Corporate Structure, Diversification, Legalities.
INTRODUCTION
India has established itself as a centre for innovation and R&D in recent years. An increasing number of international corporations are considering looking to India as a means of propelling their corporate growth into the next phase, given its well-established reputation as a hub for outsourcing and offshore, particularly in the technology industry.
The nation is leading the way in tech-driven innovation because to the fast changing services industry, which has made global capability centres essential hubs for business strategies, new technologies, and transformation. These hubs enable organisations to remain flexible in a very dynamic setting.
EMERGENCE AND EVOLUTION:
In order to reduce costs and meet the operational needs of a foreign organisation (referred to as a “Foreign Entity”) in its service offerings, global capacity centres, or “GCCs,” were first established in the Indian banking sector as offshore global in-house centres, or “GICs.” India’s knowledgeable workforce (large potential base) and reasonable operating expenses have helped it become recognised as a desirable location. With 1.66 million1 workers as of FY 2022–2023, India employed roughly 1,580 GCCs, and this figure is rising quickly.
By generating excellent job opportunities and boosting the GDP of the nation, these centres have been crucial to India’s economic development. These global corporations in India, known as GCCs, are present in a variety of industries, such as technology, engineering, consulting, and many more. Indeed, India has become the go-to location for many of these innovation clusters due to its abundance of highly trained and bright workers, affordability, and government regulations that encourage them.
The most sought-after locations are Bengaluru, Hyderabad, Delhi NCR, Mumbai, Pune, and Chennai; with their strong infrastructure, talent pool, and encouraging climate, these cities provide an ideal setting for global capabilities centres in India. The majority of the operational GCC footprint in India’s top 6 cities is made up of US-headquartered companies, with European companies making up the remaining 35%2. With the support of local unicorns, the percentage of GCCs with an APAC base is now very low but is rapidly increasing. Furthermore, the total amount of office space occupied by GCCs in the top six cities has surpassed 200 million square feet and is increasing quickly over time.
INDIA’S CONTRIBUTION TO GLOBAL COMPETENCE CENTRES:
The development of global captive centres in India has been influenced by a multitude of growth drivers, both past and present. They consist of:
- ABILITY: The presence of highly skilled labour in India’s global capability centres is one of their main advantages. Every year, millions of people graduate from India, with a large percentage having studied business management, computer science, or engineering. These graduates have a strong sense of motivation, outstanding technical proficiency, and a solid grasp of global business procedures. As a result, multinational corporations operating in India can take use of this talent pool to offer a broad range of services to their clientele worldwide.
- AFFORDABLE FACILITIES: An additional benefit of global capability centres in India is their cost-effectiveness. Compared to industrialised nations like the US and the UK, running a captive centre in India is far less expensive. This is because of better exchange rates, lower real estate expenses, and lower salaries. Thus, by setting up a GCC in India, multinational corporations can drastically cut their operating costs. Indian towns entice multinational corporations to establish their global inhouse centres because they provide occupiers with comparatively lower rentals for Grade A workplaces, and institutional landlords are pushing for better services and higher-quality real estate.
- GOVERNMENT SUPPORT: In an effort to draw in international investment, the Indian government has supported the establishment of global competence centres by offering a number of programmes and incentives. Businesses can establish their GCCs in special economic zones (SEZs) created by the government, where they can also take advantage of a number of additional advantages and tax breaks. Additionally, the government has put policies in place to support R&D and innovation, which has assisted captive centres in India in creating cutting-edge services and technology.
ENACTING OR RUNNING A GCC IN INDIA: LEGAL AND REGULATORY ASPECTS:
Every federal, state, and municipal law that a foreign entity intends to establish a GCC in India must be complied with. Compliance with contract laws to regulate the GCC’s contractual relationships (such as intergroup agreements and vendor/supplier contracts), corporate structuring, regulatory interventions, dispute mitigation techniques, etc., are all included in this.
Additionally, compliance with corporate laws specifies the type of legal entity that must be established in order to incorporate the GCC. In addition, the GCC would be exposed to some legal risks due to the fact that different jurisdictions may have different legal positions on matters like as minimum compensation, non-compete agreements, data protection, permanent establishment, and reporting structure.
These include various factors like:
INITIAL STAGE: COMPLIANCES AND SETTING UP-
Prior to incorporating the GCC in India, the foreign entity would need to decide what kind of legal entity to create. It could be an office, a partnership, a limited liability partnership, a business, or a joint venture. It would next have to decide on the corporate structure for the GCC.
This could fall into one of two extremes in terms of the ownership and control that the Foreign Entity has over the GCC in India: Choose the conventional or “do-it-yourself” model (also known as the “DIY Model”), in which the foreign entity establishes the GCC while maintaining total ownership and management. Specialised jobs requiring local assistance or advice are then outsourced. Adopt the “build-operate-transfer” model (also known as the “BOT Model”), in which a third-party service provider establishes the GCC/GIC, runs the centre, and then progressively hands over ownership and control to the foreign entity.
Getting to the section on compliances, The standards for compliance before and after setup vary based on how the GCCs are set up in India. For example, the GCC would have to adhere to a number of requirements if it were to become a company under the Companies Act, 2013, as well as its regulations. These would include deciding on reporting lines, reviewing and preparing company policies and charter documents, preparing routine and event-based reporting and filings, and more.
SECOND STAGE: GEOGRAPHICAL AREA-
The special economic zones (SEZs) and international financial services centres (IFSCs) are the two tools that regulate GCCs and GICs established in controlled territories; nevertheless, there is no specific legislation or regulation that governs GCCs generally. GCCs and GICs established in Special Economic Zones (SEZs) are subject to regulations outlined in the Special Economic Zones Act, 2005 (“SEZ Act”).
Any “GIC” setup at an international financial services centre (IFSC) is governed by the International Financial Services Authority (Global at-House Centres) Regulations, 2020 (“GIC Regulations”). To maximise “ease of doing business,” SEZs and IFSCs provide regulatory exemptions to businesses operating within its borders. These exemptions include non-fiscal (such as simplified licencing) and fiscal (such as labour legislation and tax relaxations).
THIRD STAGE: RESOURCING-
Due to the centre’s operations in India, employment and/or labour regulations in India would apply to anyone hired or recruited to work for the GCC, regardless of their citizenship. One of the main reasons foreign entities establish GCCs in India is because of the availability of diverse “human capital.”
Therefore, the centre must ensure proactive compliance, which includes, but is not limited to, putting in place the required policies and systems to prevent and handle employee-related grievances at work. In addition to hiring foreign nationals, the GCC is permitted to hire Indian people, but it must carefully manage the extra compliances associated with doing so. Recruiting from the Indian labour force appears to be a goal, based on the current enormous and heightened recruitment activities3.
STAGE 4: TAXES-
Evaluating various corporate proposals requires constant assistance on transfer pricing, GST-related issues, and taxation (including employee incentives, property, etc.) due to India’s strict tax system and the GCC’s global servicing model.
Since the Indian tax department would review and evaluate the GCC in terms of its control, supervision, and management by the foreign entity—specifically, how employees in India report to the employee at the foreign entity—the foreign entity should also take precautions to avoid any risks from being classified as a “permanent establishment.”
From a theoretical perspective, this is the last or “final” stage overall. To survive in this fiercely competitive market, there are still numerous steps to take. Maintaining the regulatory authorities is the primary goal.
OUTSOURCING OF GCCs:
To elaborate on the previously mentioned point, there are two strategic models available for setting up a GCC in India: (1) the traditional or do-it-yourself model (also known as the “DIY Model”), wherein the foreign entity establishes the GCC (by incorporating an entity in India) and maintains full control and ownership (while outsourcing specialised tasks requiring local support/advising); and (2) the build-operate-transfer model (also known as the “BOT Model”), wherein a third-party service provider either fully or partially establishes the GCC, runs the centre, and gradually transfers ownership and control to the foreign entity4.
A service agreement with a professional employer organisation (PEO) or employer on record (EOR) is one of the numerous hybrid models. In this arrangement, the foreign entity enters into a contract with an EOR/PEO to engage employees who will work directly for the foreign entity under the EOR/PEO’s supervision and execute services that the foreign business would typically expect from the GCC. This usually lasts only temporarily, until the foreign company establishes procedures for directly onboarding staff and incorporates its GCC in India.
BENEFITS:
- TALENT: Having access to a global talent pool allows businesses to customise their dream team by finding experts with specialised knowledge and abilities. Combining creativity, problem-solving, and operational excellence in this way yields optimal results.
- AFFORDABLE: Capitalising on areas with reduced labour costs is a wise financial decision for GCCs. Because of the large savings in infrastructure, salaries, and operating costs that result from this, firms are better able to manage their resources for improved financial health and competitiveness.
- FLEXIBILITY: GCCs offer businesses the amazing capacity to instantly scale up or down in response to market conditions. Therefore, GCCs maintain organisations competitive and nimble, whether it’s managing unexpected demand spikes or taking on exciting new projects.
- SCOPE FOR INNOVATION: GCCs enable businesses to concentrate on innovation and core competencies. By assigning regular duties to these centres, organisations can free up resources for things like product development, market expansion, and strategic projects. This emphasis strengthens the company’s competitive advantage, fosters a culture of continuous innovation, and moves the business in the direction of steady growth and adaptation.
DRAWBACKS:
Although they have numerous advantages, Global Capability Centres (GCCs) also have some difficulties and disadvantages. Let us investigate a few of these:
- Lack of Executive Sponsorship: Strong executive sponsorship is frequently necessary for GCCs to form and grow successfully5. Delays in decision-making and operational inefficiencies could occur in the absence of high-level support. Insufficient comprehension of expenses, ROI, and the operational framework may impede the efficacy of the Gulf Cooperation Council.
- Complex Setup and Resource Intensiveness: Legal compliance, infrastructure preparation, and hiring talent are just a few of the many tasks involved in establishing a GCC. Budgeting, coordinating resources, and ensuring they are in line with corporate objectives may all be challenging.
- Cultural Differences: There are difficulties while working in multicultural environments. It takes extra work to effectively communicate, grasp local customs, and bridge cultural divides.
- Data Privacy and Security Risks: Adherence to data protection rules is crucial when managing confidential information. Making sure there are strong security protocols and privacy protections is crucial.
- Legal and Regulatory Compliance: It can be difficult to navigate local tax laws, labour legislation, and intellectual property rights. Legal ramifications and reputational harm could result from noncompliance.
CONCLUSION:
GCCs are strong promoters of innovation and growth in the complex world of international business. They do face some legal challenges along the way, though. Under the guidance of strategic foresight and legal caution, organisations must use caution when they create and maintain these centres. Global Capability Centres (GCCs) facilitate innovation and progress in the complex world of global business. But they also have to deal with issues including complicated setup, cultural disparities, and privacy concerns pertaining to data.
Ensuring compliance with labour regulations, data security, and contractual accuracy are all critical aspects of legal compliance. Strategic independence, talent fusion, and a global vision are essential as GCCs traverse these boundaries. Under the direction of a peaceful future and superior legal standards, India’s position as a leader among the GCC states keeps changing.
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Written by Riddhi S Bhora.
