With no option to exit, failed SEZs risk loss of capital

New Delhi, Aug 29 | Updated: Aug 30 2006, 05:30am hrs
Investors who plan to pump in Rs 33,00,000 crore in about 150 special economic zones approved so far are in for a big risk since the SEZ Act does not provide any exit options if the project fails.

The developer cannot sell the SEZ and the land gets locked as the SEZ status cannot be de-notified, according to infrastructure consulting firm Feedback Ventures. The SEZ Act envisages no mechanism for de-notification of unsuccessful zones. Even if such a mechanism is put in place, de-notification will put a question mark on the fate of units functioning located in such zones, said Feedback Ventures MD Gopal Sarma at a seminar on SEZ development on Tuesday.

The SEZ Act 2005 states that units not fulfilling the required criteria as specified in the Letter of Approval may be required to exit. The future of fixed assets created by the unit in such a situation is undefined. This is likely to discourage the establishment of capital-intensive operations within the SEZ. Banks will be wary of lending to units inside SEZ, Sarma said.

At present, 267 SEZs have received in-principle and final approval. Of this, 128 SEZs are related to IT-ITeS and electronic hardware manufacturing. About 91 IT SEZs have been given final nod. IT SEZs, by virtue of being situated in smaller areas (literally buildings), will face less difficulty. But multi-product SEZs which require larger area will face problems, adds Sarma.

About 67 multi-product SEZs have been granted approval. At least 1,000 hectares is required to set up an MPSEZ. Assuming an average of 2,000 acres per MPSEZ, about 1,34,000 hectares will be under threat if the SEZs units fail.