Global Capability Centres (GCCs) have emerged as enablers of effective operations and management for multi-national companies – augmenting their value chains and serving key operational, innovation and strategic objectives.
Reports suggest that over 1,580 such centres have been established by MNCs in India, driving various functions ranging from business processing and shared services operations to R&D and innovation across sectors, including pharmaceuticals, technology, BFSI and automobiles.
Amidst the phenomenal rise and expansion of GCCs in India, the real estate absorption in metropolitan cities such as Bengaluru, Gurugram, Hyderabad, Chennai, and Pune have witnessed a sharp up-tick due to a multitude of factors, including the rent arbitrage in comparison to other Asian markets, availability of Grade ‘A’ buildings, access to captive talent pools, expansion of social and public infrastructure with better accessibility, and the increasing optimism globally around India’s growth story.
Here are five crucial factors to consider when evaluating commercial real estate leasing options for setting up GCCs in India:
1. Sub-leasing and Assignment:
Under Indian law, in the absence of terms to the contrary, a lessee may transfer or sub-lease whole or part of the premises they take the lease, which will continue to be subject to any of the liabilities attached to the lease. That said, negotiated leases typically provide for restrictions on sub-leasing, such as the requirement of prior consent of the lessor or prior intimation to the lessor on granting sub-leases, prohibition on sub-leasing to third parties, and sub-leasing for no commercial gain. Further, the assignment of leases by lessees is typically permitted only in favour of affiliates of the lessee and may be subject to the prior approval of the lessor and the assignee may continue to be subject to liabilities under the lease.
For GCCs, which may have corporate restructuring considerations or special business considerations arising out of a flexible workforce or operational efficiency, it is important to carefully address these terms upfront while negotiating leases with brokers/landlords.
2. Force Majeure:
For an entity looking to take up office space on lease to set up a GCC, it is prudent to contemplate events, at the threshold, which would be construed as ‘Force Majeure’ for the purpose of the lease. Force majeure is not a codified principle in India, and therefore, the possibility of invoking Force Majeure must be analysed based on the contract language itself. A typical Force Majeure clause can have any or all of the following components – (i) a definition of Force Majeure; (ii) a threshold for causation; (iii) manner in which the clause is to be invoked; (iv) consequences upon invoking Force Majeure; and (v) other attendant obligations of the parties in case of a Force Majeure event.
It is also preferable to contemplate the effect of such Force Majeure events, including whether any particular, or all, Force Majeure events would result in suspension, or waiver of the right/performance obligation on part of the parties, including the obligation of the lessee to make payment of rent/maintenance charges/utilities charges. This approach is especially sage in the light of unforeseen events, including the COVID-19 pandemic, which raised questions about whether the lockdown imposed pursuant to the COVID-19 pandemic would entitle tenants to claim waiver/exemption from the obligation to make payment of rent or even suspension of rent.
3. Special economic zones:
Special economic zones (SEZs) play a significant role in GCC economies by reducing the cost of exporting services from the GCC entity to its parent counterpart. In India, SEZs are established under the aegis of the Special Economic Zones Act, 2005, under which a letter of approval from the development commissioner is required for any ‘unit’ to conduct business out of an SEZ. Such letters of approval comprise various obligations applicable on an ongoing basis.
Setting up GCCs in SEZ may be preferred due to the economic incentives such as exemptions on stamp duty, taxes, excise, and export and import-related duties. Therefore, businesses looking to take spaces on lease in SEZs will consequently have to keep the above requirements in mind. They are required to build suitable provisions into their leasing documents to accommodate SEZ-related conditions and obligations and ensure that ongoing compliance requirements are met.
4. Stamp duty and registration:
Lease deeds, leave and license agreements and agreements to lease are all susceptible to payment of stamp duty – a tax payable to the State Government for the enforcement of these agreements. The lessee is ordinarily liable in law to make payment stamp duty, unless agreed otherwise between parties. The amount of stamp duty payable can vary from jurisdiction to jurisdiction and is typically a factor of the average annual rent payable under the lease. Inadequately stamped instrument(s) are not admissible in evidence for any purpose unless the requisite stamp duty is paid along with a penalty, which may, in certain jurisdictions, be ten times the proper duty, as applicable. Further, in a few jurisdictions, executing instruments chargeable with duty without the same being duly stamped may also be punishable with imprisonment.
It is also to be noted that leases are generally required to be compulsorily registered with the public registry (i.e., the jurisdictional sub-registrar of Assurances) within four months from the time of their execution, and registration fees are also required to be paid for such execution. A document which is required to be compulsorily registered does not affect the immovable property unless it is registered. Therefore, non-registration of the lease deed within the prescribed period would render the document ‘void’, i.e., non-existent in law. The requirement for registration of leases may also stem from state-specific tenancy laws and hence vary from one jurisdiction to the other.
Therefore, these requirements should be considered and met at the time of finalising any lease arrangements.
5. Government incentives:
Various State Governments have announced competitive policies and initiatives to spur the growth of IT/ITES businesses within their jurisdictions. GCCs which are set up for providing IT/ITES-related services would also be eligible for incentives under such schemes, including lease/rental reimbursements and stamp duty exemptions. For example, the Karnataka’ Information Technology Policy, 2020-2025′ provides for lease/rental reimbursement at a rate of INR 10 per square foot up to a maximum of 3 lakhs, or at INR 1000 per seat up to a maximum of 6 lakhs for IT/ITES entities set up outside Zone 3. Under the ‘New Information Technology and Information Technology Enabled Services Policy of Maharashtra State 2023’, stamp duty exemptions ranging from 50% to 100% are available for IT/ITES, AVGC, Data Centre and Emerging technology units on various transactions related to new units in IT Parks, including leases. Further, reports also suggest that in a first of its kind, the Government of Karnataka will be announcing a policy and incentives programme tailored for GCCs.
The Indian commercial real estate market is presently at an inflexion point, witnessing a surge in the growth across all the verticals of office, residential, retail and logistics and expansion into Tier II and Tier III cities, with a preponderance of such spaces being occupied by GCCs. Industries/businesses stand at a unique vantage to leverage upon talent pool, skill and innovation capital, local infrastructure, state interventions and cultural and geographical influences. By making conscious decisions around geographic advantages, availability of skilled and unskilled talent pools, and key terms to be negotiated, to safeguard the usage rights and various incentives offered by the Government, GCCs can drive growth, minimise costs and risks and maximise value. The growth and transformation of real estate in Tier II and Tier III cities, catering to the requirements of the GCCs, will be an interesting development to witness in the backdrop of the Indian growth story.
The contents of this microsite/repository are intended for informational purposes only and are not in the nature of a legal opinion. Readers are encouraged to seek legal counsel prior to acting upon any of the information provided herein. For further information, please visit www.trilegal.com
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