I don't think many people want to take up new SEZs

Tata Realty and Infrastructure has invested in SEZs, but its CEO Sanjay Ubale tells Shashidhar Nanjundaiah why SEZs no longer offer a lucrative platform for investors.

How has your experience been with IT SEZs?
It has been quite mixed. The process that the Ministries have set up for approvals has been very good. Obtaining the In-Principle Approval has been done away with; getting the Special Economic Zone (SEZ) notified, the Processing and Non-Processing Zones approvals have been good experiences. The Ministry is trying to set up rules and delegate directly to the Development Commissioner.

SEZs have become a tricky issue because of the changes in policies; for example, our IT SEZ in Chennai came up when the government had clearly enunciated that there will not be any taxes payable. Now, the Minimum Alternate Tax (MAT) is proposed to be imposed subsequently, and then the dividend distribution tax.

Has MAT not already been imposed?
Yes; it has already been imposed under Finance Bill 2011. However, a few developers have gone to the court since these are huge investment projects. You will appreciate that the calculations are based on the kind of benefits that you have. If a huge amount of money goes into taxes due to a sudden change in policy, it makes a big dent and the planning goes for a toss.

How will MAT impact SEZ developers' business?
I would say MAT is single-handedly responsible for most of the SEZ developers to turn their back on SEZ. The Dividend Distribution Tax, introduced simultaneously with MAT, will have an impact on profitability as well. Shareholders' returns will go down to the extent of tax because of this new imposition.

Although you can get credit on MAT subsequently—maybe in 10 years—it will affect the cash flow. Plus, the Dividend Distribution Tax takes away the element of tax out of the proceeds. I would say overall impact would be close to about 15 per cent or so on average.

What kind of activities in an SEZ are typically the developer's responsibility?
Beyond land and (in the case of IT) built-up property, a developer can conduct “Non-Process” activities (in the Non-Process Zone), which the Ministry of Commerce approves: typically, these comprise residential, hospitals, etc. The developer makes investments and leases it out and the rental that he get gives you a return on the money he deployed.

What concessions do you typically receive?
Developers who get SEZ notified prior to 31 March 2012 will get certain benefits such as excise and tax concessions. After that date, they will have to paying regular taxes. That is a reason people are saying that particularly those have not been notified will have a problem in getting notified because the benefits will probably not approve to them.

Units that start their production and exporting by 31 March 2014 alone will enjoy tax benefits. This means, first of all, the developer needs to ensure that the SEZ is notified before March 2012, construct it quickly enough to see that the units start becoming operational there and they start getting their benefits before 2014.

Is it possible in, say, an IT SEZ?
It is not possible, because the total area that you develop is about 25 acre. Building approvals and construction would take more time than we have.

Then it is an unrealistic policy?
My own guess is that the government is probably expecting that all the SEZ developers who have obtained SEZ approvals would complete by 2014. The government may not even be looking at new SEZ to come in.

How will this impact your Gopalpur SEZ project?
The Gopalpur SEZ is more like an industrial park where we will create the structures: roads, water supply, sewage system, etc, and the units that will come up there. Tata Steel will set up a plant there and they will have to start manufacturing before 2014. This is multi-product SEZ on 25 acre. So for somebody to start now and complete construction and make the units operational by 2014 is difficult: In any city it takes a year or two to get permissions, and thereafter you have to see that the construction starts and the contractor is in a position to do it so efficiently that in the next two-and-a-half years' time he is able to do about 3-4 million sq ft of construction.

So even in an IT SEZ, we can pretty much forget start-ups to begin exporting by 2014? Start-ups will have no incentive to come in at all. Is the Exit Clause another hindrance in SEZs?
So in principle, a 100 per cent stake can be sold to somebody else—with a Ministry of Commerce approval beyond 49 per cent. But the difficulty investors face is that while the Government of India announced a policy of allowing a 100 per cent exit from the SEZ, the problem in practice is that the Ministry of Commerce has not given a single permission to exit to any investor with a holding of more than 49 per cent. (There is no requirement for the Ministry of Commerce approval for holders of equity under 49 per cent.)

Now this is what has created a lot of concern. Then the investors who come in at a certain point in time they will not be able to get an exit. Strangely, in certain other cases where In-Principle Approval was granted, they have been permitted in certain cases. In the case where the SEZ have been finally notified that permission has not been granted to anyone at all.

Any company would have some investors coming in and going out so there is always that churn that keeps happening. For example let us say there was an IT park which is not an SEZ, you would have 100 per cent investment by somebody and you can sell it to anybody. So a normal IT park has that flexibility. The SEZs do not have that. I do understand, however, the Ministry of Commerce has been grappling with this issue and we are hoping that some resolution will happen very soon.

Is there any stated reason for this non-approvals of exit?
The Ministry of Finance says that by selling a stake amounts to selling of real estate, which cannot be permitted. This means they are assuming the sale of every stake is a real estate sale.

I think even the Ministry of Commerce knows that if a company sells its shareholding, it does not mean it is selling land. The company may hold land, machinery, employees and a whole lot of other things, while the legal entity remains the same. I think there is some fundamental flaw in understanding this concept.

There are two major issues I need to highlight. One is the new tax regime, which will have serious repercussions on the IT SEZs, especially for those who had made investments prior to these changes. The second is the exit for the investors, a very serious issue. When we speak to the investors, they are not very sure that the stated policy at the time they invest on a particular asset whether there is going to be stability in that policy and that policy change is something that worries the investors; that could possibly affect the investments in this sector.
I will be surprised if they come up with new SEZs now. Generally as far as the new SEZs are concerned, people believe that the story is pretty much over. Amongst the real estate developers I do not think there would be too many people who want to take up new SEZs.

Do you think Ministry of Commerce understands this and is probably trying to levelise the playing field for exports inside and outside SEZ's?
We do not know whether the intent is really there to promote. Whether SEZs are good or bad there is still debate going on and it is a major cause of concern. But clearly we feel that in that confusion in any case nobody would want to invest.

TATA IN SEZ

Tata Realty and Infrastructure owns an IT SEZ project in Chennai, and helping Tata Steel develop a multi-product SEZ at Gopalpur, Orissa. The company is in the process of acquiring a third SEZ, a 40 acre, 7 lakh sq ft IT park deal that is at the desk of the Ministry of Commerce approval.