At a time when land acquired for the Tata Motors plant at Singur is in the headlines, here?s a surprise. With state laws setting a ceiling on how much land a single entity can acquire, companies developing special economic zones (SEZs) and large industrial projects are compelled to form hundreds of subsidiaries to buy the required tracts.
Corporate India prefers this multiple subsidiary route as it also helps keep costs down by masking the identity of the parent company. Direct entry by a large industrial group would invariably push up land prices dramatically in the area.
State land ceiling laws typically allow a single corporate entity to acquire at most 25 acre, although some states set a cap as low as 5 acre. So, in the case of a state with a 25-acre cap, a company developing an SEZ of 10,000 acre would need to form at least 400 subsidiaries. Consultants advising developers note that this is commonplace with most SEZs.
Although some states like Maharashtra adopt a more liberal policy, providing land ceiling exemptions based on the Centre?s in-principle approval to an SEZ project, others like Karnataka, Haryana and Uttar Pradesh insist on formal consent from the board of approvals for SEZs at the Centre.
But formal approval is granted only after an SEZ developer manages to buy the entire land for the project without any legal encumbrances. This, in effect, means the developer has no option but to buy the land first, subject to state ceilings.
This could be one of the reasons behind Karnataka being home to smaller SEZs in comparison with Maharashtra. The biggest in Karnataka so far is the 259-hectare engineering SEZ of Suzlon Infrastructure Ltd. In Maharashtra, the largest is the 1,224-hectare multi-product SEZ of Mukesh Ambani?s Navi Mumbai SEZ Pvt Ltd. Overall, Maharashtra has 95 formally approved SEZs while Karnataka has 48.
Some states like Punjab and Tamil Nadu have a single-window clearance system, by which a developer can sign an MoU with the state and obtain exemption from the land ceiling. Gujarat and Andhra Pradesh, on the other hand, exempt developers from such state land acquisition caps altogether. Gujarat has 45 formal approvals for SEZs, while Andhra has 94.
Not surprisingly, the distribution of large SEZs reflects the relative stringency on land acquisition.
Some of the largest projects include those of Kakinada SEZ Pvt Ltd at Kakinada in Andhra Pradesh (1,036 hectare), Reliance Infrastructure Ltd SEZ at Jamnagar in Gujarat (1,764 hectare), Indiabulls at Nashik in Maharashtra (1,023 hectare) and Mundra SEZ Ltd at Mundra in Gujarat (4,499 hectare).
Ajay Nijhawan, convener of the Export Promotion Council for Export Oriented Units & SEZs (Epces) panel of SEZ developers, told FE: ?All state governments should exempt SEZ projects with in-principle approval from the Centre from the purview of state landholding ceilings.? States insist on formal approval to ensure that land is not used for purposes other than that specified in the SEZ Act, a senior official said.
Real estate majors building SEZs typically create land banks through numerous subsidiaries. DLF, the country?s largest real estate company, has 68 direct subsidiaries, each of which in turn has its own subsidiaries, according to a draft red herring prospectus filed with Sebi. Similarly, Emaar MGF, which earlier put off its IPO due to a weak response, has over 350 subsidiaries.
?The existing regulations cause administrative inconvenience to investors. They have to handle many companies formed to acquire land within a states? jurisdiction. It?s clear that states have no intention of applying this law as they have already cleared the projects,? says Ajit Krishnan, partner, global tax advisory services, Ernst & Young. The commerce ministry estimates SEZ projects to attract investments worth Rs 2 lakh crore by 2009-end.