SEZ Zones

Before and after the law to set up Special Economic Zones (SEZs) was enacted in 2005, there was considerable opposition to the government’s move to establish export-promoting areas with superior infrastructure facilities on the basis of generous tax concessions. One important criticism was that the government’s SEZ policy would be misused for real estate development rather than for generating exports. In response, the government said it would put in place adequate safeguards to prevent this from happening. Six years down the line, some of the worst apprehensions of the critics of the SEZ policy have come true.

In a quiet executive decision, which has hardly been publicised and which has been taken without reference to the Union Cabinet or a Group of Ministers, the ministry of commerce and industry has changed the policy, allowing promoters of SEZs to dilute their equity stakes in part or full to other promoters, including foreign companies, which apparently violates existing rules on foreign direct investment (FDI) in housing, built-up infrastructure and construction projects. While the move is ostensibly aimed at enabling SEZ promoters to “consolidate” their businesses, the permission granted to the promoters of three companies — DLF Ackruti Info Parks (Pune) Ltd, Aachvis Softech Pvt. Ltd. and Sterling Addlife Mundra Hospitals Pvt. Ltd. — to dilute their equity stakes could open the floodgates to similar mergers and acquisitions. This is how the development of SEZs is degenerating into a real estate racket.

On September 19, 2011, a meeting of the SEZ Board of Approvals (BoA), held under the chairmanship of Dr Rahul Khullar, secretary, commerce, decided to allow the promoters of the three companies mentioned to change/transfer/sell their equity shares to other companies, including foreign firms. The minutes of this meeting, disclosed on November 11, provide an interesting backdrop to what took place.

It points out that similar requests for dilution of equity, which were considered by the BoA at its meeting on March 25, 2011, were not approved as representatives of the department of revenue in the ministry of finance “reiterated their objection that these transactions would amount to sale of the land, which is not permissible under the SEZ Act/Rules”. The issue of whether a change in the equity structure of such a company through share transfer/sale/amalgamation is in the nature of “sale of land” which is barred by Rule 11(9) of the SEZ Rules or “sale or transfer of business” was subsequently referred to the Department of Legal Affairs (DLA).

The DLA “clarified” that the identity of a company does not change with any change in its management or its pattern of shareholding. This is what the minutes of the BoA meeting state: “Further, a share is not a sum of money; it represents an interest measured by a sum of money. Therefore, change in equity structure through transfer/sale/amalgamation etc. and consequent change in the management cannot be said (to be) transfer or sale of land. Land would continue to vest in the company…”

The BoA has reportedly put certain conditions for such transfer/sale/amalgamation cases to ensure that the activities of the SEZs continue seamlessly and that the new controllers of the management of the company fulfil all eligibility criteria, including security clearances.

A retired former bureaucrat of the commerce ministry told this correspondent that this should mean that fresh clearances will now have to be obtained from bodies like the Intelligence Bureau in the ministry of home affairs, the Research & Analysis Wing in the Cabinet secretariat, the Enforcement Directorate in the finance ministry, the ministry of environment & forests and so on. The big question is whether this will happen or not.

The way in which the laws of the land are being interpreted is truly startling to certain knowledgeable sources. Besides the meeting of the BoA in March, at another meeting on July 22, the board had disallowed the sale/transfer of shares to co-developers of SEZs on the ground that this would be tantamount to sale of land by providing a change in the irrevocable assigning rights over land and/or built-up property. The September 19 meeting of the BoA was postponed twice and the supplementary agenda item (No. 48.10), pertaining to allowing the three companies to dispose off their equity shares, was included at the last minute. Thereafter, the meeting of the group of bureaucrats approved what is considered a “major policy somersault” by changing its interpretation of existing rules, a change that has far-reaching implications for trading in assets in SEZs.

The new interpretation given to Rule 11(9) is evidently in contradiction of the principles enunciated in Press Note 2 issued by the secretariat of industrial approvals, department of industrial policy and promotion, ministry of industry and commerce on March 3, 2005. The note clearly mentions that 100 per cent FDI is allowed only in new assets and not for trading in completed assets and that too on meeting certain prescribed criteria (relating to the size of the built-up area, the township and minimum quantum of investment, among others). These rules are apparently now being given the go-by. The DLF group’s SEZ in Pune is going to be now owned by the US-based investment advisory group Blackstone, while control over the Aachvis SEZ in Noida near Delhi is expected to move to the Delhi-based up-market real estate developer, 3C. What should be noted in this context, a source points out, is that information technology SEZs are little more than office buildings. This source argues that by its new interpretation of rules, the BoA has changed existing policy through the “backdoor”, allowing foreigners to buy developed real estate.

“By allowing foreign firms to buy completed commercial buildings in SEZs, the BoA has provided succour to beleaguered real estate companies in India,” the source claimed, adding that by effectively allowing trading in SEZ properties, the government would lose direct and indirect taxes (given to all units in SEZs) without increasing exports.

Critics of the government’s SEZ policy have described it as the “biggest land grab movement in the history of modern India”. Whereas earlier movements were led by the poor to acquire land held in excess of official ceilings by the affluent, this time round it is the rich in India and abroad who have been allowed by the government to trade in properties built on land that once belonged to the underprivileged.