Intervening on SEZ exit rules

Last month, the commerce ministry allowed any unit in a Special Economic Zone (SEZ) to exit from there by transferring its assets and liabilities to another, subject to certain conditions. Despite fulfilling the stipulated conditions, some SEZ units have difficulty in getting out because they have to get a No Objection Certificate (NOC) from the developer of the zone.

For example, Diamond & Gem Development Corporation (DGDC), a SEZ developer at Surat, had entered into lease deeds with the units there. One condition was that a unit would take permission from DGDC to transfer sub-leased land with construction on it to any other eligible party, stating the price at which the deal had been struck. DGDC could either take back the land and the building at the price indicated or let the transfer proceed on payment to it of a transfer fee, of five per cent of the indicated price. Or, pay as a transfer fee the difference of land price paid by the unit at the time of allotment and the current price.

The lease deed also had a clause that allowed the developer to amend the bye-laws. Later, DGDC issued a circular dated June 14, 2011, stating in such cases, the SEZ unit should surrender the land, with the constructed building, to DGDC against payment of the cost of land at the price at which the unit had been allotted, and the cost of building at the price estimated by the consulting architect of the developer, based on the current market price of similar construction, the quality and the age of construction.

The Development Commissioner (DC) of the Surat SEZ, in a letter dated July 4, 2011, protested to DGDC that the change was detrimental for potential investment opportunities and new investors would be deterred from coming in. Citing the main guidelines for notifying an SEZ, he directed that provision be made in the lease deed agreement for 12 per cent interest on the amount deposited by the investor with the developer. He said the developer should not insist that the plot, once allotted to a unit, would return to them if the plot was no more required by the unit for whatever reason. The unit should be free to sell or transfer the plot to anyone, though the developer could claim transfer fees on such a transaction.

He directed the developer to keep these guidelines in mind while fixing an exit policy and entering into lease agreements with potential investors\buyers. His letter alleged the developer was acting with the sole purpose of real estate benefit, which was not the basic and ultimate aim in the SEZ policy.

Despite the specific directions, DGDC still refuses to give an NOC unless the SEZ units abide by the unilaterally revised conditions. That makes exit from the SEZ difficult, as the unit in question can't recover even the interest on the investments made.

The SEZ scheme has been controversial, because developers were seen to be acquiring vast lands with speculative motives. Here is a case where the DC has alleged speculative motives on the part of the developer. The commerce ministry should intervene to examine the issues at stake, not only in Surat but in SEZs all over the country.

e-mail: tncr@sify.com