A Paradigm Shift SEZ Sector Shows Green Shoots

SEZ sector

The recent policy initiatives of the government to boost the sagging interest of developers in special economic zones (SEZs) have started showing green shoots of a resounding revival. In a changed scenario, the developers who have put their SEZ projects either on the backburner or seeking de-notification, are currently busy in reworking their SEZ strategies and the trend is that the board of approval is not just receiving applications for setting up new SEZs but existing players are also applying for change of status to put their multi-product SEZ projects back on the developmental track. In fact, the SEZ sector has taken the revival route only after the reversal of over-all country's economic scenario including strong showing by the core sector, factory output, IIP production, exports and imports and also the implementation of 99 stalled infra projects worth Rs.3.5 lakh crore by the CCI. The import compression not just helped containing trade deficit and curtailing the current account deficit to $56 billion but also inflated foreign exchange reserve to $25bn and this in its entirety resulted in restoring the investors' confidence in the country's SEZ projects. Reports Jeet Singh.

Relax Rules

In a renewed attempt to boost the interest of investors in the SEZ project, the government has recently revisited the entire gamut of SEZ policy ensuring smooth land acquisition by relaxing the minimum area requirement and identifying agro-processing SEZs as the main thrust area and slashed minimum land requirement from 100 to 10 hectares for agro-processing SEZs. Among other policy initiatives recently introduced included halving of space requirement for setting up multi-services SEZs to 50 from 100 hectares earlier. Multi-services SEZs have been considered at par with single-product SEZs. As per the new changes, SEZ developers will also be able to add another sector on additional contiguous 50 hectares on multi-product SEZs. Apart from this, the government in its attempt to push exports also reduced the minimum area requirement for single-product SEZs to 50 hectares and that for multi-product SEZs to 500 hectares. While the minimum land requirement norm for IT SEZs was scrapped but left unchanged for multi-services SEZs.

SEZ Development

In addition, the government has recently granted upfront service tax exemption for all SEZ developers and units which in turn would mean an additional savings of Rs.1,500cr per annum for these units, as they no longer have to wait for refunds. The service tax incidence (the tax paid on input services) for SEZ developers and units is over Rs.8,000cr annually and the move would improve liquidity of the SEZ developers and units even more substantially as they don't have to pay the tax in the first place and wait for refunds. That apart, adding further luster to the smooth functioning of manufacturing units in SEZs, the government has recently allowed developer to sub-contract work for up to three years, instead of just one year earlier. The latest move will boost shipments from special economic zones. In this connection, the request for relaxation came from large manufacturing units which have stated that the move would help facilitate manufacturing processes and augment exports. New policy enables the sub-contracting of production or any production process by large manufacturing SEZ units to domestic tariff area (DTA) for a period of up to 3 years at a time but relaxation would apply to only those manufacturing units that have substantial exports with average annual shipments of Rs.1,000 crore or more in at least two out of four years. The units should have an annual average export of not less than 51% of its total turnover in the block of 5 years and they should have an un-blemished track record and incurred no penalties against the unit for any violations. The relaxation came with a rider that DTA unit outside SEZ to which the sub-contract is to be awarded should be registered with the central excise department.

Cascading Impact

The relaxation norms of governing the SEZ projects have not just put break on the developers planning to dispose off their SEZs projects, but also led global players to strike mega buyout deals with the local developers. In an instance, the US-based global infrastructure and real estate building giants, private equity firm Blackstone has recently sealed a buyout deal with Unitech for its Gurgaon SEZ project entailing an investment of Rs.2,700 crore. In another instance, the Singapore's sovereign wealth fund GIC, investor Xander group, Canada's pension fund CPPIB, Kotak Group and Maple Tree have also placed their bids to bag the mega project. Likewise, the US-based Aon Hewitt has recently signed an Rs.800-crore deal with Unitech for the acquisition of an 800,000 sqft plot located in the Gurgaon's Infospace Tikri special economic zone (SEZ). The offshore player, which offers human resources solutions and other consultancy services, has reportedly inked the lease for about 15 years. On completion of the SEZ, spread across 25 acres, the total leasable area would be 3.32 million sqft. It may be recalled that in the said SEZ about 700,000 sqft of area is already operational housing tenants including Genpact, Colt, Cognizant and NTT. Unitech's SEZ is located near its under-construction residential township Uniworld Resorts. That apart, the lax SEZ norms have also prompted property developer HDIL to scrap its plan to sell the 70-acre land parcel at Kochi Special Economic Zone, the player has decided to construct IT infrastructure itself. The renowned risk investor Xander is acquiring an IT SEZ in Chennai from the developer arm of Shriram Group involving an investment of Rs.690 crore.

In a related development, the board of approval (BoA) has already received applications from players including one for a multi-product zone by Adani Ports in Mundra District, Gujarat, IT/ITES SEZ by Transcendent Developers in Pune and an Electronics/ITES SEZ by iGate Global in Navi Mumbai. Shapporji Pallonji, which operates large number of SEZ projects including the information technology parks under the SP Infocity brand in IT and IT-enabled services (ITeS) at Software Technology Parks and Special Economic Zones. The player has SEZs projects in Chennai, Gurgaon, Manesar, Mohali, Nagpur and Pune, with 4.6 million sqft of space has started the process of taking up its SEZ projects. The company witnessing a revival of demand in its projects, said Chief Executive of Shapporji Pallonji Real Estate, Kekoo Colah, adding that as demand for SEZs space is improving the availability of such space is limited and if developers have taken permission, they have to launch such properties to avoid lapsing of approvals. Of the total demand for commercial properties, 80 to 85% consists of demand for IT/ITeS spaces. However, developers have expressed their resentment over the Government's refusal to reduce the Minimum Alternative Tax and Dividend Distribution Tax imposed on SEZs because it is making SEZ operations financially unviable.

SEZ Construction Sector

That apart, making the most out of the available sops and easier norms, more small and medium enterprises (SMEs) from countries like Japan, Korea, China, and the US are showing keen interest to invest in the country's SEZs to set up their manufacturing facilities for electronics and automobile components. While the US and Japan have no SEZs in their countries, South Korea has only six, set up between 2004 and 2008. These investors will benefit from the rupee's depreciation along with cheap land and labor availability in India, besides getting a 20% rebate on capital expenditure if the investments happen in electronics through the Modified Special Incentive Package Scheme (MSIPS). It may be recalled that India has approached offshore players to invest in hardcore manufacturing in the country as SEZs have a consolidated and well-developed policy for land and infrastructure besides a single-window approval mechanism and wants small companies to invest in these projects across the country. As per the existing policy 100% foreign direct investment (FDI) is allowed in manufacturing SEZ units under the automatic route and there is no cap on foreign investment for small-scale industries' reserved items. The MSIPS provides 25% of the capital investment in non-SEZ area and 20% in SEZ area as financial incentive for the electronics system's designing and manufacturing (ESDM).

A Boost to Construction Sector

The lax norms have also prompted certain SEZ developers to convert a part of their SEZ space to build residential and commercial buildings. In a recent move, Mukesh Ambani's Reliance Industries has decided to set up an Integrated Township Project (ITP) on 1,200 acres of prime land in its SEZ in Jhajar district of Haryana bordering Gurgaon. It has already secured a no-objection certificate from the state government, which has recently unveiled new policy for setting up the ITPs injecting a major booster to the real estate sector. In yet another initiative, the DDA is granting permission to building residential units in areas earmarked for industrial zones, a move that could help ease the national capital's housing supply pressure as the city is expanding at an alarming pace, which in turn injected major booster to the country's construction sector. The industrial zones like Okhla Industrial Estate, Mayapuri, Naraina and Mohan Cooperative, which were on the outskirts of national capital when they were set up in the 1950s, '60s and '70s, are now surrounded by prime residential areas. The DDA, which looks into realty development in the city, is considering allowing group housing on about 20% of the land set aside for such clusters. In yet another move, both the Urban Development Ministry and DDA agreed to set up an exhibition and commercial zone by the side of the Indira Gandhi International Airport entailing an investment of Rs.40,000cr. The complex, which will be linked to the Metro and will house hotels, a convention centre and a cargo hub, has been structured by the side of the Delhi Mumbai Industrial Corridor Development Corporation (DMICDC). DDA has reportedly agreed to transfer land to the commerce and industry ministry and the project is being bid to private developers.

Conclusion

Unfolding trends indicated that sweeping changes are taking place in the entire SEZ sector. The government in its resolve to revive the segment is currently showering sops and has also announced innumerable relaxations. Developers are also responding with the same alacrity and are willing to revive their blocked (SEZ) projects. In an encouraging development as many as 29 developers have sought extended timelines to develop their projects and the Board of Approvals (BoA) readily granted extension to them. Going ahead, the government is also in the process of providing quicker grievance redress mechanism pertaining to complaints of special economic zones (SEZ) for which the commerce ministry is drafting orientation modules for officials in customs and allied departments to streamline the entire functioning of the department by imparting orientation training on the overall economy and the broad role of exports especially SEZs and export oriented unites (EOU). It is also working with the Export Promotion Council for EOUs and SEZs and preparing EPCES Online'system, where SEZ developers and units can post their operational grievances for quicker redressals. Alongside there is a ground swell of foreign investors in favor of Indian market on account of the current macro-economic pressures creating umpteen opportunities for foreign players vying for a greater role in the Indian economy. Sectors like automotive, technology, life sciences and consumer products have the highest level of anticipated deal-making potentials and the entire situation will improve very shortly. Indian companies also reflect a concerted focus on job creation as well as optimizing operations to deliver cost reduction, and after two years, European countries (UK and Germany) have made a comeback on the potential investment destinations list for Indian companies which again indicate that investors' outlook for India remains positive despite the challenges. In totality, the recent government policy initiatives like fast tracking project delivery and implementation of mechanism, relax FDI rules and easier financing norms have already resulted in the strong recovery of core, manufacturing and exports sectors. The developments further indicated that the SEZ sector is also getting set to bounce back on its growth trajectory bringing blooming buoyancy and ensuring brisk business in coming months.
NBM&CW December 2013
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