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SEZ rules tweaked to allow real estate stakes for foreigners


SEZ rules tweaked to allow real estate stakes for foreigners

Last updated: December 2 2011
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  • SEZ rules tweaked to allow real estate stakes for foreigners

    It was quietly done, without any publicity. A group of senior bureaucrats, presumably at the behest of their political masters, recently chose to reinterpret rules governing the sale of assets in Special Economic Zones (SEZs) in a manner which will greatly benefit foreign investors by enabling them to acquire real estate.

    While the recent decision to allow FDI in retail will allow foreign parties to own urban real estate as part of the business, the SEZ decision will enable further transfers of developed land to foreign parties — in violation of the laws of the land in letter and spirit. In the process, it will also bail out Indian real estate firms like DLF which are heavily in debt.

    This reinterpretation of rules relating to the acquisition of land and property in SEZs by foreign firms is being perceived as a major policy turnaround that has taken place through the backdoor. It is tantamount to a significant policy change that has been done through executive fiat without the approval of either the Union Cabinet or an Empowered Group of Ministers (eGoM), leave alone the Parliament of India.

    After the law governing the establishment of SEZs was enacted in 2005, the government’s policies were criticised on the ground that enterprises set up in these zones with generous tax concessions would not really spur exports but would degenerate into real estate rackets. The government responded by stating that adequate safeguards will be put in place to prevent this from taking place.

    However, six years later, the fear that assets in SEZ would be freely traded primarily to benefit foreign companies and not significantly enhance the country’s exports seem to be coming true.

    The rules have so far been “bent” for three companies. Two of these have already found foreign buyers for their SEZ assets. Reuters
    The rules have so far been “bent” for three companies. Two of these have already found foreign buyers for their SEZ assets. There is now an apprehension that the floodgates have been opened for trading in SEZ land and properties promoted by Indians in a way that would largely help multinational concerns.

    Here’s the full story of what happened and how.

    On 19 September, a meeting of the SEZ Board of Approvals (BoA) was held under the chairmanship of Dr Rahul Khullar, secretary, department of commerce, at 10.30 am in Room Number 47 in the stately Udyog Bhavan that houses, among various government ministries and departments, the commerce and industry ministries.

    This meeting of the BoA – comprising senior officials from various ministries and state governments — had been postponed twice. A supplementary agenda item (No 48.10) was included in the final hour. This agenda item read: “Clarification of issues relating to dilution of equity in the developer company, transfer of promoter’s equity etc.”

    It was stated that there were a number of cases of companies seeking clarity on the government’s position on dilution of equity stakes of promoters and developers of SEZ properties, transfers of shares in joint ventures, amalgamations, mergers and so on. Three specific cases were thereafter cited: DLF Ackruti Info Parks (Pune) Ltd., Aachvis Softech Pvt Ltd and Sterling Addlife Mundra Hospitals Pvt Ltd.

    The minutes pointed out that similar requests were considered at an earlier meeting of the BoA held on 25 March. However, these requests were not approved as representatives of the department of revenue in the finance ministry “reiterated their objection that these transactions would amount to sale of the land, which is not permissible under the SEZ Act/Rules”.

    Thereafter, on 22 July, at another meeting of the BoA, the board 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 (of) rights over land and/or built-up property.

    The issue was whether a change in the equity structure of such a company through share transfers/sales/amalgamations 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”. This issue was subsequently referred to the department of legal affairs (DLA).

    The DLA then “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 19 September meeting of the BoA stated: “… 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…”

    (Incidentally, the minutes of the 19 September meeting were disclosed on 11 November and are available on the official website of the ministry of commerce and industry.)

    SEZ rules tweaked to allow real estate stakes for foreigners
    Paranjoy Guha Thakurta Dec 2, 2011

    #HowThisWorks #realty #SEZ

    The government recently changed Special Economic Zone rules to allow foreigners to buy stakes in these zones. They look suspiciously like real estate deals. Reuters

    The question then arises as to how the reinterpretation of rules has effectively changed the extant policy that disallows promoters of enterprises in SEZs to dispose of their equity stakes in part or full to other promoters, including foreign companies.

    The new interpretation given to Rule 11(9) of the SEZ Rules has to be seen in the context of the principles laid down in Press Note 2 issued by the Secretariat of Industrial Approvals (SIA), Department of Industrial Policy and Promotion (DIPP) in the ministry of industry and commerce on 3 March 2005.

    This note, which is supposed to specify official policy on foreign direct investment (FDI) in housing, built-up infrastructure and construction projects, clearly mentions that 100 percent 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 size of the township and the minimum quantum of investment, among others).

    Press Note 2 states that “the government has decided to allow FDI up to 100 percent under the automatic route in townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure), subject to the following guidelines:

    “(A) Minimum area to be developed under each project would be as under:

    i. In case of development of serviced housing plots, a minimum land area of 10 hectares;

    ii. In case of construction-development projects, a minimum built-up area of 50,000 square metres;

    iii. In case of a combination project, any one of the above two conditions would suffice;

    “(B) The investment would further be subject to the following conditions:

    i. Minimum capitalisation of US$10 million for wholly-owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the company;

    ii. Original investment cannot be repatriated before a period of three years from completion of minimum capitalisation. However, the investor may be permitted to exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB);

    “(C) At least 50 percent of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor would not be permitted to sell undeveloped plots.”

    Given the above conditions in Press Note 2, the question arises as to whether by allowing foreign firms to buy completed commercial buildings or developed real estate in SEZs, the BoA has provided “succour to beleaguered real estate companies in India,” as a source claims. It needs to be emphasised here that information technology enterprises in SEZs are little more than office buildings.

    The BoA on 19 September placed certain conditions for transfer/sale/amalgamation of assets in SEZ units to ensure that activities continue seamlessly and to ensure that the new controllers of the management of the company fulfill all eligibility criteria, including security clearances.

    A retired senior bureaucrat of the commerce ministry, who was responsible for framing the earlier sets of rules, wondered if, after a change in managerial control, new promoters of units in SEZs will have to obtain fresh clearances from a slew of government agencies such as the Intelligence Bureau (ministry of home affairs), the Research and Analysis Wing (Cabinet Secretariat), the Enforcement Directorate (ministry of finance) and the ministry of environment and forests.

    The government claims that the decision to allow foreign firms to acquire built-up assets in units in SEZs will enable their promoters to “consolidate” their businesses. Critics of the government, on the other hand, believe that the permission granted to the promoters of three companies in SEZs to dispose of their equity stakes to other corporate entities, including foreign firms, will have far-reaching implications by facilitating the trading in assets of companies in SEZs.

    The assets of the DLF group’s SEZ in Pune are going to be soon owned by the US-based investment advisory group Blackstone, while control over the Aachvis SEZ in Noida near Delhi is expected to move from the Delhi-based upmarket real estate developer, The 3C Company, to a foreign firm.
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