Do we need Laws to regulate Outsourcing in India By CS Annu Sharma

By the end of this article, the reader will be able to differentiate whether we actually need laws to regulate Outsourcing in India or not since Presently, India does not have any specific laws that deal with business process outsourcing.

Before starting the actual point discussion, we must understand firstly What is Outsourcing exactly and how it helps business to run in effective and efficient manner and also to consider the importance of Outsourcing.


The term outsourcing, which came from the phrase outside resourcing,Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally and sometimes involves transferring employees and assets from one firm to another.

Outsourcing is a business practice in which services or job functions are farmed out to a third party which is much advantageous in terms of following mentioned benefits.

  • lower costs (due to economies of scale or lower labour rates)

  • increased efficiency

  • variable capacity

  • increased focus on strategy/core competencies

  • access to skills or resources

  • increased flexibility to meet changing business and commercial conditions

  • accelerated time to market

  • lower ongoing investment in internal infrastructure

  • access to innovation, intellectual property, and thought leadership

  • possible cash influx resulting from transfer of assets to the new provider.


There are multiple factors that demands laws to regulate an activity or transaction but the major part is risk and the loss of business due to such risk that create need of an hour to make laws on particular subject, since the law act as protection guard in terms of risk.

Here is some major risk associated with Outsourcing of any business process.

  • slower turnaround time

  • lack of business or domain knowledge

  • language and cultural barriers

  • time zone differences

  • lack of control

Aforementioned factors require some rules and regulation to prevent business from these risk factors. The practice of outsourcing is subject to considerable controversy in many countries. Those opposed argue that it has caused the loss of domestic jobs, particularly in the manufacturing sector. Supporters say it creates an incentive for businesses and companies to allocate resources where they are most effective, and that outsourcing helps maintain the nature of free-market economies on a global scale.

In India, Scenario is almost same but no specific body is there for supervision of outsourced companies. India is one of the leading destinations for outsourcing transactions, both in the manufacturing sector and service sector. The country experienced a surge in business process outsourcing (BPO) in early 2000. However, over the years BPO has declined due to policy changes by foreign countries, where several companies had either set up their own BPOs or engaged the services of BPOs to service their customers from India due to lower costs.

Initial teething and some operational issues raised initial concerns that outsourcing was not going to be a walk in the park. Outsourcing had the tendency to get messy with mounting volumes of work, cultural and language barriers, and the pressure to keep costs down. The situation has significantly changed and the Indian outsourcing industry has addressed more or less all the challenges. Concerns are predicted well in advance, and with help of appropriate planning; issues and risks are resolved effectively and in time.


 A list of the major pieces of legislation that govern business transactions in India are as follows:

1. Indian Contract Act 1872 (ICA).The provisions of the ICA are applicable to any contractual arrangement between Indian parties (and between an Indian and overseas party, in the event Indian laws have been chosen by the parties as the governing law). Therefore, an outsourcing contract may be governed by the principles and provisions of the ICA. The ICA stipulates the elements needed for a valid contract and contains provisions that deal with remedies for the parties in case the contract has been breached or has been considered void. Further, it also deals with special types of contracts like contracts of indemnity, contracts of guarantee and agency contracts.
2. Specific Relief Act 1963 (SRA).
 The SRA contains provisions for the granting of specific relief in respect of contractual arrangements rather than general relief (that is, damages or compensation as specified in the ICA). Therefore, in the case of breach of contract, if the remedy of monetary compensation is not adequate, and it is not possible to determine the damages, specific performance of the contract may be granted in order to ensure justice. Specific relief is a remedy by which a party to a contract is compelled to specific performance of the contract.

3. Foreign Exchange Regulations. Transactions between an Indian resident and non-resident parties are governed by the Foreign Exchange Management Act 1999 (FEMA) and its supporting rules, regulations and policies. The Department of Industrial Policy and Promotion (DIPP), the Ministry of Commerce & Industry, the Government of India, and the Reserve Bank of India, from time to time, amend these regulations.

4. Foreign Trade (Development Regulation) Act 1992 (FTDR). The FTDR Act provides for the development and regulation of foreign trade by facilitating imports into, and strengthening exports from, India. The FTDR also states the licensing requirements for undertaking any import transactions.

5. Department of Telecommunications (DoT) policies and guidelines. The DoT issues guidelines relating to market players in the telecommunications sector. Companies providing call centre and other information technology-enabled services (commonly referred to as ITES) by using telecom resources are required to register as "other service providers" (OSP).

6. Information Technology Act 2000 (IT Act). The IT Act deals with online transactions, data protection and cyber offences. The IT Act provides legal recognition to electronic commerce, which facilitates commercial e-transactions. It recognises alternatives to paper-based methods of communication and storage of information. It also provides legal recognition to digital signatures which need to be duly authenticated by the certifying authorities.

7. Companies Act 2013. The Companies Act governs, among other things, the incorporation of companies, corporate governance matters, the responsibilities of a company and the rights and duties of stakeholders. It regulates related party transactions, transactions involving deposits, loans and advances, the manner of drawing up of financial statements and board and shareholder approvals.

8. Intellectual property laws. The intellectual property laws of India are framed in accordance with the Agreement on Trade-Related Aspects of Intellectual Property Rights 1994 (TRIPS). India has complied with its obligations under the TRIPS by enacting the necessary statutes and amending the existing statutes. There is a well-established statutory, administrative, and judicial framework for safeguarding intellectual property rights (IPRs) in India. Some of the major intellectual property laws relevant to outsourcing transactions are as follows:

a) Indian Patents Act 1970;

b) Trademarks Act 1999;

c) Copyrights Act 1957;

d) Designs Act 2000;

e) Semiconductor Integrated Circuits Layout-Design Act 2000.

9. Labour laws. India has an extensive labour law regime. The applicability of labour laws in India depends on various factors such as the nature of the industrial/commercial activity, the number of employees and the nature of the work done by the employees (such as whether they are manual workers or skilled workers), among others.

In particular, the Industrial Disputes Act 1947 and state-specific shops and establishment laws are relevant to outsourcing, as these laws provide security of employment to employees and specify procedures which must be followed on the termination of employment (such as a mandatory notice period before termination). There are other labour laws stipulating working conditions, overtime payments, holidays, leave and employment benefits.

10. Transfer of Property Act 1882. This statute deals with the general principles of the transfer of immovable property and the rights relating to this. For entities setting up physical operations in India, this law would be relevant for matters relating to leases, mortgages, and sales.

11. Competition Act 2000. This regulates trade practices by prohibiting any kind of anti-competitive agreements which causes, or is likely to cause, an appreciable adverse effect on competition within India, in order to promote and sustain competition in India. The Act also provides merger control and combination regulations. Restrictive provisions like "most favoured customer" and "mandatory procurement or supply" provisions throughout the supply chain could lead to implications under the Competition Act.

12. Tax laws. Tax laws in India are broadly divided into direct tax and indirect tax categories. Direct tax relates to taxes on income, governed by the Income Tax Act 1961. The Income Tax Act 1961 provides for, among other things, taxation of income earned or accrued by a "person" through its business operations in India, withholding tax requirements on payments, including to a non-resident, payment of taxes on the distribution of dividends, and so on.


Over the last few years, India has emerged as a leading destination for companies wishing to outsource their software development, and business process requirements. International companies have either entered into contracts with Indian service companies or set up their own facilities through Joint Ventures and Indian subsidiaries, this demands unified code for Outsourcing in India as the same scattered under various laws as discussed above.

With the rise in outsourcing and with more and more global organizations outsourcing business processes and IT services to India, there has been a number of legal issues in outsourcing. A unified law for Outsourcing in India will open up a smooth path for Export -Import outsourcing services in India.

One can opine that remedy available under one act can be challenged under any other law if outsourcing activities in India are governed through numerous laws present in India which create complexity for right justice.

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