Data Centres

The “Investing in India” programme is curated for existing and prospective foreign investors and their advisors to enhance their understanding of key issues when doing business in India. This session focused on the data centre sector, which has emerged as a priority asset class for domestic and international capital. The sector’s attractiveness is driven by long-term structural trends, rapid data consumption, enterprise migration to cloud platforms, and the expansion of 5G networks. The webinar provided an overview of the growth opportunities, regulatory frameworks, land title considerations and investment structures relevant to participating in India’s booming digital economy.

The session was moderated by Harsh Parikh, Partner, Real Estate practice group, and led by Deepak Jodhani, Partner, Corporate & Commercial practice group.

Set out below is a summary of the key points discussed during the webinar. The views expressed during the webinar are those of the individual panel members and not those of Khaitan & Co, and are subject to the disclaimer set out in the webinar recording.

The recording can be viewed here: Data Centres | Investing in India

Key Points

The India Opportunity & Growth Drivers

India generates approximately 20% of the world’s data but houses only 2-3% of global data centre capacity. Capacity has grown from approximately 597 MW in 2020 to around 1.6 GW today and is projected to reach 5 GW over the next 4-5 years. This growth is being fuelled by:

• Low Costs: India offers some of the lowest data costs globally, at approximately USD 0.16 per GB compared with a global average of USD 2.59, alongside highly competitive construction and power costs.
• Digital Infrastructure:Government-led digitisation initiatives, including UPI, Aadhaar and DigiLocker, and industry drivers such as streaming, artificial intelligence, e-commerce and automation are generating significant storage and processing demands.
• AI & 5G: The rollout of 5G and the IndiaAI Mission, including its support for GPU infrastructure, are expected to further increase demand for hyperscale and edge data centres.

Regulatory Framework & Incentives

The sector benefits from a relatively light-touch regulatory framework, with no dedicated central legislation governing data centres. Key regulatory drivers include:

• Data Localisation: While the Digital Personal Data Protection Act, 2023 focuses on data privacy rather than imposing blanket data localisation requirements, sector-specific regulators, such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), require certain categories of financial data be stored locally.
• Infrastructure Status:Data centres housed in a dedicated building with at least 5 MW of IT load capacity qualify as “infrastructure”. This status unlocks benefits such as priority sector lending, external commercial borrowings and access to the Foreign Venture Capital Investor (FVCI) route.
• Tax Holidays & State Incentives: The government has introduced a 20-year tax holiday (until 2047) for eligible foreign cloud providers using Indian data centres to service offshore clients. The exemption is not automatic: the provider must be notified by the government and use an Indian entity that owns the data centre. India-facing services, which must be routed through a reseller, remain taxable. Various state governments also offer incentives such as stamp duty reimbursements, single-window clearances and electricity duty exemptions.

Land Title & Power Sourcing

The Indian government does not guarantee land title, making rigorous title diligence essential. Land is typically available as freehold, requiring independent title diligence for the preceding 30 to 50 years, or government leasehold, generally involving leases of 30-60 years or more and offering greater comfort on title. Title diligence can be complicated by incomplete digitisation, vernacular records, and land being a state subject. Title insurance and warranty and indemnity (W&I) insurance are available, although coverage is generally limited to around 1x the insured value. Power can be sourced from the grid or through captive power purchase arrangements, enabling operators to procure green energy (even from another state) on a fixed or market-linked pricing basis.

Foreign Investment Routes: FDI vs FVCI

Foreign investors can invest up to 100% under the automatic route via two channels:

1. Foreign Direct Investment (FDI): Open to any non-resident investor, but subject to pricing guidelines and generally limited to equity or compulsorily convertible instruments. Assured returns are prohibited.
2. Foreign Venture Capital Investor (FVCI): Requires SEBI registration, which typically takes 3-4 months, and infrastructure qualification. The route offers greater pricing flexibility, the ability to invest through optionally or non-convertible instruments, and structured exits.

Key Setup Considerations

Key factors to consider when selecting and developing a data centre site include connectivity, power supply and proximity to cable landing stations; state-by-state variance in land and construction costs; scalability and availability of additional space; power and water availability; access to skilled workforce; approval timelines and state-level incentives; and risk factors such as seismic zone classification and flood exposure.

Market Deal Structures

Several deal structures have emerged in the Indian data centre market, reflecting the complementary capabilities of international operators and domestic developers:

• Joint Ventures / Platform Deals: The most common structure, combining an international operator’s design, operational and client-relationship expertise with a domestic developer’s land acquisition and regulatory navigation capabilities (e.g., Colt–RMZ, AdaniConneX and Digital Edge–NIIF / AGP).
• Self-Development: Developers or operators independently establish data centres, typically by hiring specialist teams (e.g., the Hiranandani group’s YOTTA).
• Minority Investments: Financial investors acquire minority stakes in existing data centre businesses (e.g., TPG’s investment in TCS’s data centre arm).
• Strategic Buyouts: An investor acquires a majority or full stake in a domestic operator (e.g., Iron Mountain’s acquisition of Web Werks).
• Bare-Shell Delivery: Developers construct and hand over a bare-shell facility to operators or hyperscalers, which then fit out and operate the facility (e.g. Reliance–Meta arrangement).
• Data Embassies: An emerging structure under which a foreign sovereign stores its data in Indian data centres as an extension of that country’s sovereign territory (e.g., proposed arrangements involving the UAE).

Structuring & Documentation Considerations

Operators typically choose between a company, which is generally preferred by lenders and investors, and a limited liability partnership (LLP), which can avoid dual-layer taxation but is less favoured for capital raising.

Investments may be structured through a holding company above multiple special purpose vehicles (SPVs), which can facilitate capital raising and a potential initial public offering (IPO), but care must be taken to avoid inadvertent classification as a non-banking financial company (NBFC) or core investment company (CIC). Alternatively, investors may invest directly into individual SPVs, which avoids NBFC / CIC-related risks but can complicate capital calls and requires restructuring before an IPO, typically taking 6-8 months.

A separate operating company typically provides services to each SPV, housing employees and, in many cases, customer contracts, while the SPVs hold the underlying real estate. During an initial 18-24-month ramp-up phase, partners may provide development management and operational services to the platform, with core functions subsequently brought in-house within the platform. Governance rights, exclusivity and non-compete provisions are heavily negotiated in joint ventures (JVs), particularly given the difficulty of defining meaningful geographic exclusivity for data centre services.

Key Takeaways

For international operators, entering the Indian market through a platform JV with a reliable domestic partner can significantly streamline the establishment and operation of data centres. Exhaustive title diligence is absolutely critical, given the lack of state-guaranteed land titles and the limitations of title insurance. The holding structure should be aligned with the financing and exit strategy from the outset, as restructuring at a later stage can be time-consuming and may incur heavy stamp duty or tax costs. Reliable power and water supplies should also be secured before commencing any project.

Conclusion

The Indian data centre market presents a compelling, high-growth opportunity for foreign investors, underpinned by robust digital consumption and supportive government policies. Success requires careful alignment with local regulations, rigorous due diligence, and strategic structuring.

While the regulatory environment is favourable and the new data protection laws do not impose blanket data localisation, commercial negotiations in JVs, particularly around exclusivity, non-compete clauses and exit rights, require meticulous attention.

The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up, please contact Khaitan & Co at editors@khaitanco.com.