SEZ Backgrounder 2012

The Associated Chambers of Commerce and Industry of India
ASSOCHAM Corporate Office:

1, Community Centre, Zamrudpur, Kailash Colony, New Delhi-110048
Tel: 011 46550555 (Hunting Line) | Fax: 011 46536481/82, 46536498
Email: assocham@nic.in | Website: www.assocham.org
Study on
How to Revive the
Attractiveness of
SEZs in India?
July 18, 2012
Knowledge Partners:
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Tel.: +91 22 798900 Fax: +91 22 2712008
E-mail : Website : www.ows.net.in infoows.net.in
Introduction .................................................................................................................. 1
Policy Design & Operational Framework ................................................................... 5
- Salient Features ....................................................................................................... 5
- Accepted SEZ Formats ............................................................................................. 6
- Benefits to SEZ Units & Developers ......................................................................... 7
- Guidelines for SEZ Development ...............................................................................
- The Approval Process ............................................................................................... 8
SEZ Landscape in India ............................................................................................. 10
- Geographical Distribution ....................................................................................... 12
- Industry Distribution ................................................................................................ 14
- Size Distribution ...................................................................................................... 15
- Developers Profile .................................................................................................. 15
Macro Review ............................................................................................................. 17
- Location Trends ...................................................................................................... 17
- Format Trends ........................................................................................................ 18
- Investment Trends .................................................................................................. 18
- Export Trends ......................................................................................................... 19
- Employment Trends ................................................................................................ 20
- Outlook ................................................................................................................... 20
Policy Review- key challenges/ issues .................................................................... 22
- Challenges before SEZs ......................................................................................... 22
- Unit-level issues ...................................................................................................... 23
- Developer-level issues ............................................................................................ 23
- Issues common to Unit & Developer ...................................................................... 26
SEZ Questionnaire & Responses Received ............................................................ 28
- Cumulative Response Sheet .................................................................................. 28
- Analysis of responses received .............................................................................. 31
Conclusion .................................................................................................................. 39
Coughing Up Hairballs Tackling Corporate Inefficiencies ........................................43
Mr. Vineet Sharma, Director, Oil Field Warehouse & Services Limited
Integrated Business City ................................................................................................46
Mahindra World City Jaipur Ltd.
Andhra Pradesh Industrial Infrastructure Corporation Limited ...................................48
Oil Field Warehouse & Services Ltd. .............................................................................53
Contents
Study on how to revive the attractiveness of SEZs in India?
1
IntroductIon
C
onceptually, Special Economic Zones (SEZs), are specifically earmarked geographic
regions focused on creating world class business infrastructure, enhancing exports,
earning foreign exchange, creating employment opportunities and augmenting the economic
activities, and which enjoy liberal economic laws as compared to those applicable to the rest
of the country with a view to attract foreign as well as domestic investors. The SEZs exist
world-over albeit known by different names, viz., Special Customs Zones, Free Trade Zones,
Duty Free Zones, etc.
In India, the Special Economic Zone (SEZ) Policy was first introduced in April 2000 as a part
of the Export-Import (Exim) Policy of India. The Policy regarded the Special Economic Zone
as specifically delineated duty free enclave, deemed to be foreign territory for the purposes
of trade operations and duties and tariffs. The SEZ Policy envisioned the need to enhance
foreign investment and to promote exports from the country, keeping in mind that a level
playing field must be made available to the domestic enterprises and manufacturers to be
globally competitive.
In order to instill further confidence in the investors and signal the governments commitment
to stable policy framework, the Government enacted the Special Economic Zones Act, 2005
(the SEZ Act or the Act) in June 2005 to create specifically delineated duty-free enclaves,
which are deemed to be foreign territories for the purposes of trade operations, duties and
tariffs. In addition, the SEZ Act provides for establishing Free Trade and Warehousing Zones.
Subsequently, Special Economic Zone Rules, 2006 (SEZ Rules) were notified on 10th
February 2006, from which date the SEZ Act became operational.
The FDI Policy permits 100 percent foreign ownership in the development and establishment
of SEZs and infrastructure facilities therein. Special Economic Zone provides a business
friendly environment wherein it not only attracts foreign companies looking for economic and
efficient location to setup their offshore businesses, but it also seeks to enhance the business
competitiveness of the unit by providing various fiscal concessions and incentives. The SEZs
aim to create more public-private partnerships and thereby resulting in the development of
world class infrastructure, augmenting economic activity, enhancing exports and creating
employment opportunities. In essence, these zones are self-contained and self-integrated
zones having their own infrastructure and support services.
SEZ Policy At a glance
India was one of the first countries in Asia to recognize the effectiveness of the Export
Processing Zone (EPZ) model in promoting exports, with Asias first EPZ set up in Kandla in
2
1965. The EPZ Scheme existed till the year 2000. With a view to overcome the shortcomings
experienced on account of the multiplicity of controls and clearances, absence of world-class
infrastructure, unstable fiscal regime and to attract larger foreign investments in India, the
Special Economic Zones (SEZs) Policy was introduced.
With a view to provide an internationally competitive environment for exports, the Government
of India announced the SEZ Policy in April, 2000. The objectives of the SEZ Policy included
making available goods and services free of taxes and duties supported by integrated
infrastructure for export production, expeditious and single window approval mechanism and
a package of incentives to attract foreign and domestic investments for promoting export-led
growth. This policy intended to make SEZs an engine for economic growth supported by
quality infrastructure complemented by an attractive fiscal package, both at the Centre and
the State level, with the minimum possible regulations.
SEZs in India functioned from November 1, 2000 to February 9, 2006 under the provisions
of the Exim Policy/ Foreign Trade Policy and fiscal incentives were made available through
the provisions of relevant statutes. This system however didnt lend enough confidence for
investors to commit substantial funds for development of infrastructure and for setting up of
the Units in the zones for export of goods and services. In order to give a long term and stable
policy framework with minimum regulatory regime and to provide expeditious and single
window clearance mechanism, a Central Act for Special Economic Zones was, therefore,
found to be necessary. in line with international practices.
In order to instill further confidence in the investors and signal the governments commitment
to stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby
generating greater economic activity and employment through the establishment of SEZs, a
comprehensive Special Economic Zones Bill, 2005 was introduced in the Parliament.
The SEZ Bill, 2005 was passed by the parliament in May 2005 and after having received the
Presidential assent on June 23, 2005, it became the Special Economic Zones Act, 2005. After
extensive consultations, the SEZ Rules were notified on 10th February 2006, from which date
the SEZ Act became operational.
The SEZ Act/ Rules provides for the drastic simplification of procedures. It provides single
window clearance mechanism on matters relating to Central as well as State Governments.
For different classes of SEZs viz., sector specific SEZs or multi-product SEZ, there are different
requirements relating to land and investment. Every SEZ is divided into processing and non-
processing area. While the processing area is to be used exclusively for setting up of SEZ
Units and carrying out the authorized operations, the non-processing area is used for setting
up of the supporting infrastructure.
3
The SEZ Act 2005 envisages key role for the State Governments in export promotion and
creation of related infrastructure.
The fiscal concessions and duty benefits allowed to SEZs have been provided into the SEZ
Act. Consequential amendments/ modifications were carried in various fiscal laws (including
Income Tax Act, Central Excise Act, Customs Act, Finance Act, etc.) to provide for the fiscal
concessions and duty benefits to special economic zones, as envisaged in the SEZ Act.
Objectives of the SEZ Policy
The SEZ Act supported by the SEZ Rules aims to fulfill the following objectives:
promotionofexportsofgoodsandservices;
promotionofinvestmentfromdomesticandforeignsources;
creationofemploymentopportunities;
developmentofinfrastructurefacilities;and
generationofadditionaleconomicactivity.
Salient features of the SEZ Policy
Some of the pertinent features of the SEZ Policy have been highlighted herein below:
Availabilityofpackageoffiscalincentivesandconcessions.
Simplifiedproceduresfordevelopment,operation,andmaintenanceoftheSEZsandfor
settingupunitsandconductingbusinessinSEZs;
Single-windowclearanceforsettingupofSEZs;
Single-windowclearanceforsettingupunitsinSEZs;
Simplifiedcomplianceprocedures/documentationwithanemphasisonselfcertification,
etc.
Three tier administrative mechanism
The functioning of the SEZs is governed by a three tier administrative set up.
TheBoardofApproval(BOA)istheapexbody.AsinglewindowSEZapprovalmechanism
was provided through the constitution of the BOA, which is an inter-ministerial body
comprising of representatives from different concerned Ministries and State Governments.
BOA is headed by the Secretary, Department of Commerce. The applications duly
recommendedbytherespectiveStateGovernmentsareconsideredbytheBOA.Generally,
allthedecisionsoftheBOAaretakenwithconsensus.
Next in the hierarchy are the Zonal Development Commissioners (ZDCs) for ensuring
coordination and compilation of issues with State Government.
4
EachzonehastheUnitApprovalCommittee(UAC).EachzoneisheadedbyaDevelopment
Commissioner (DC), who is the ex-officio chairperson of the UAC.
OnceanSEZhasbeenapprovedbytheBOAandtheCentralGovernmenthasnotifiedthe
areaasSpecialEconomicZoneintheOfficialGazette,unitsareallowedtobesetupinthe
SEZ. All the proposals for setting-up of units in the SEZ are approved at the zone level by the
UAC consisting of DC, customs authorities and representatives of State Government.
All the post-approval clearances relating to trade operations are given at the zone level by
the DC. The performance of the SEZ units is periodically monitored by the UAC and units are
liable for penal action under the provision of Foreign Trade (Development and Regulation)
Act, in case of violation of the conditions of the approval.
5
I
ndia was one of the first in Asia to recognize
the effectiveness of Export Processing
Zone (EPZ) model in promoting exports,
with Asias first EPZ set up in Kandla in 1965.
In order to overcome the shortcomings
experienced with respect to controls and
clearances, lack of adequate infrastructure,
unstable fiscal regime and with a view
to attract larger foreign investments, the
Special Economic Zones (SEZs) policy was
announced in April 2000 which was later
legislated into the SEZ Act in the year 2005
with the following objectives:
a) Generation of additional economic
activity.
b) Promotion of exports of goods &Servic-
es.
c) Promotion of investment from domestic
and foreign sources.
d) Creation of employment opportunities.
e) Development of infrastructure facilities.
Special Economic Zone (SEZ) is a
geographical region that has economic
and other laws that are more free-market-
oriented than a countrys typical or national
laws. Such a region is treated as a deemed
foreign territory for various purposes such
as tariffs, trade operations and duties.
Usually the goal of such a structure is to
increase foreign direct investment, enhance
exports, create employment opportunities
and increase the overall pace of economic
development in a country.
A Special Economic Zone (SEZ) is
a specifically delineated, duty-free
enclave set up within the geographical
boundaries of a country and is deemed
to be a foreign territory for the purpose of
trade operations, duties & tariffs.
Salient Features
SEZs are anticipated to provide premiere
infrastructure services and sustenance
services, besides permitting for the tariff free
import of merchandize and raw materials.
Hence, SEZs emerge as models of industrial
townships providing support infrastructure
such as housing, roads, ports and
telecommunication. To promote the same,
the law specifically differentiates between
area used for export oriented activities and
the area supporting such export oriented
activities i.e. the processing and non-
processing areas respectively. Whereas
the processing area aims to generate
business activity for which an SEZ has
been approved, the scope of usage within
the non-processing area has been clearly
defined by the SEZ Act 2005 (Table 1).
The other features and facilities of Indian
SEZs units are:
PolIcy desIgn and oPeratIonal Framework
chaPter 1
6
The Indian SEZ policy offers equal
opportunities to both Indian and
international private developers for
development of these zones in the
government, private or joint sector.
Theyareexemptedfrompayingcustoms
duty when they import raw materials,
spares, consumables, and capital goods,
and enjoy 100% exemption from income
tax on export profits.
Theunitsareallowed100%foreigndirect
investment.
Thecentralsalestaxonthepurchaseof
domestic products is reimbursed.
SEZ Formats
An SEZ maybe approved by the SEZ Act
2005 depending upon the specific industry
type in which the SEZ has to operate. The
various SEZ formats identified by the SEZ
Act 2005 are as follows:
Multi Product: These SEZs are
expected to generate the required scale
of operations in the economy. Under this
type, a unit maybe set up for:
- Manufacture of two or more goods
in a sector or goods falling in two or
more sectors
- Trading and warehousing
- Rendering of two or more services in
a sector or services falling in two or
more sectors
Sector Specific: Such SEZs cater to
development needs of individual sectors.
Under this type, a unit maybe set up for:
- Manufacture of one or more goods in
a sector
- Rendering of one or more services in
a sector
SEZs for Free Trade and Warehousing
ASSOCHAMs recommendation:
Keeping in mind the non-availability
of such a large contiguous land and
other practical difficulties, ASSOCHAM
recommends downwardly reviewing the
land area requirement, as suggested
in the Discussion Paper on SEZs
released by the Ministry of Commerce
& Industry.
The minimum land area requirement
for different SEZ formats and ASSO-
CHAMs recommendations are as follows
(Table 2):
7
Benefts to SEZ Units and
Developers
The SEZ Act provides various incentives
to both the developers and units in terms
of various fiscal (tax-based) and non-fiscal
incentives:
Fiscal benefits: The fiscal benefits
available to the SEZ Developers and
Units relate to the direct income tax
exemption when the unit starts making
profits and various other benefits on
the indirect tax front for both capital
goods and consumables. These fiscal
benefits are available at all three
stages, i.e. Development, Operation
and Profit. In case of processing zones,
the activities get these benefits at all the
three stages, unlike the non-processing
zones where the activities get these
benefits at only the Development and
Operation stage because NPA is not
expected to generate any economic
activity (Table 3).
8
Non-fiscal benefits: The government
provides other non-fiscal concessions to
the units operating under SEZs and the
developers of SEZs in order to push for
the growth of SEZs in the country.
These relate to the ease of registration of
SEZs/ units and their setting up, permission/
ease of set up guidelines with respect to
foreign investment, opening of external
commercial borrowings, setting up of off-
shore banking units, power and infrastructure,
land availability, environmental clearance
and single window clearance.
The benefits can, hence be summarised as
under:
Reducedcostofinfrastructure;
Reducedcostofutilities;
Reducedcostofrawmaterial;
Reducedcostofcapital;
Reducedcostofmanpower;
Operationaleaseenabled;and
Baskets of benefits leading to global
competitiveness.
The procedure for setting up a zone starts
with submitting the application for approval
of proposal to the BoA. The approval process
is divided into three specific stages, starting
with In-principle approval stage moving
to Formal approval stage and finally the
Notification of the SEZ. Each of these stages
is based upon details of land acquired by
the developer and are discussed as below:
In Principle approval is the first stage
in the approval process and is given for
projects where land is not in possession
of the developer; only suitable land is
identified for developing the SEZ.
The Approval Process
Formal approval stage succeeds the
in-principle approval stage and is given
when the land is in the possession of the
developer to set up the SEZ. A formal
approval once granted is valid for three
years within which time the developer
needs to implement the project.
Notification is the final stage in the SEZ
approval process, wherein the identified
area is granted the status of an SEZ for the
purpose of all exemptions, drawbacks and
concessions. All the benefits under the
SEZ Act are effective only after the Special
Economic Zone has been notified.
9
The following flow chart enlists the approval process in each case, i.e. a Developer and Unit:
In conclusion, though the concept of Export
Oriented Zones in India started more than
45 years ago, it is only post the regulatory
push that the concept started making its
business impact. SEZs span across various
industry sectors, each with limitations
on land area and use of processing and
non-processing zones, stipulated by the
government. Fiscal and non-fiscal benefits
are accorded to both the SEZ developers
and units as incentives for development
as well as to make operations from within
SEZs globally competitive.
HHH
10
P
ost the implementation of the SEZ Act,
2005, setting up of SEZs became the
hottest trend in the Indian economy and the
same was witnessed by a large number of
developers applying for SEZ approvals. Touted
as engines of growth, SEZs became quite a
stir in the country in 2006 and 2007. However,
after that, there has been a significant decline
in the interest towards development of SEZs.
After a head start in 2006-07, there has been
a significant dip in the number of SEZs
being notified for operations (Figure1).
The developers of SEZs claim the liquidity
crunch, reduced tax benefits, and constant
changes to the fiscal policy governing SEZs
as major reasons for their inability to execute
their SEZ plans.
The phenomenon of denotification has been
constant from 2009 onwards. It has led to
many of the leading SEZ developers to exit
the market.
In the current year, there has not been
any new notification till date and on the
contrary, 3 of the existing SEZs have already
been denotified. This shows a trend of the
decreasing interest of developers to set
up new SEZs, and the existing developers
opting for denotification due to the reduced
benefits available to the SEZs (Figure1).
The percentage of operational SEZs out of
the total formal approvals has gone down
drastically in the years 2010, 2011 & 2012
when compared to the previous years of
2008 & 2009 (Figure 2).
seZ landscaPe In IndIa
chaPter 2
11
There has been a drastic fall in the number
of proposals for setting up new SEZs after
2008. Also, the proportionate requests for
withdrawal of proposals before the stage of
implementation have gone up since 2008.
(Figure 3).
Some Signifcant Trends in SEZ
Sector Growth
1
An analytical assessment of the SEZ growth
pattern since enactment of the SEZ Act,
2005 reveals certain distinct trends, which
perhaps are pointers to shortcomings in
the conception and implementation of
the SEZ policy framework. On a more
constructive note they are also indicators
of the opportunity that exists to build on
the significant achievements of the sector
through suitable reform. The key trends are
as follows:
1. Geographical Concentration of SEZs:
Six States, Andhra Pradesh, Kerala,
Maharashtra, Gujarat, Karnataka
and Tamil Nadu, account for a major
proportion of SEZs and 92% of total
exports from them.
2. Urban centric growth of SEZs: Even
within these six States, SEZs are largely
concentrated around existing urban
agglomerates, leaving the hinterland
virtually untouched.
3. Sectoral Dispersion of SEZs: There is a
pre-dominance of IT SEZs in the sector,
and multi sector SEZs are few and far
between. Of the 143 operational SEZs,
only 17 are multi product SEZs.
4. Skewed Export Pattern: IT/ITES SEZs
and Petroleum sector contribute to the
roughly two-thirds of SEZ exports. Non-
petroleum manufacturing contributes the
balance minority share.
5. Inadequate progress of Manufacturing
activity: As reflected in 3 and 4 above, the
SEZ sector has not fully addressed the
concern of boosting the manufacturing
sector in India.
6. Limited number of Operational SEZs:
While 583 SEZs have been formally
approvedason31stOct2011,only381
have been notified, of which only 143
SEZs are exporting i.e. only 24.53 % of
the approved SEZs.
1
Source: Discussion Paper released by the Ministry of Commerce & Industry on Potential Reform of the SEZ Policy and
Operating Framework
12
Geographical Distribution
Different states in India have different stories
to tell with respect to the SEZ policy. While
some have done exceedingly well, others
seem to be going nowhere. The development
of SEZs is more evident along the southern
and western belt which has some of the
oldest SEZs operations. This attracts new
SEZ developers to set up their SEZs along
the already operational SEZs as it provides
them with well-established infrastructure
facilities. Hence, the Central government
can, by providing additional relaxations and
incentives, promote the growth of SEZs
even in the economically less developed
states, like Jharkhand and Nagaland. This
will help in making such zones an urban
phenomenon, hence bringing investment
and creating employment.
The following section further highlights the
SEZ activity of key states and districts/cities
across each zone:
Zone 1: South
STATE Notified Formally
Approved
In
principle
Approved
Total
Andhra Pradesh 76 110 6 192
Tamil Nadu 55 71 6 132
Karnataka 38 61 1 100
Kerala 20 29 0 49
Source: Ministry of Commerce & Industry, DTZ Research
The Southern region of India is way ahead
of other regions in encashing on the tax-free
SEZ scheme accounting for approximately
47% of all approvals coming through, till
date. The most dominant state in the region
is Andhra Pradesh which accounts for nearly
20% of total notifications in India. The major
districts in the state which pocket maximum
activity are Hyderabad and Visakhapatnam,
which together have almost 50% of all
notified projects in the state. The state also
has the maximum number of operational
13
SEZs all over India, witnessing the fact that
it was one of the earliest proponents of the
SEZ concept. The strong state government
support is also evident from the State level
SEZ Act that was instituted in the year 2005
to give effect to the provisions of Central
SEZ Act. The state of Tamil Nadu accounts
for approximately 15% of all notified SEZs in
India. Major SEZ hubs in Tamil Nadu include
the districts of Chennai, Kancheepuram
and Coimbatore. Chennai alone accounts
for nearly 45% of all notified and formally
approved SEZ projects in the state.
Zone 2: West
Approved
In principle
Approved
Total
Maharashtra 63 103 16 182
Gujarat 30 47 6 83
Rajasthan 9 10 1 20
Goa 3 7 0 10
Besides the southern region, the west zone
has also been pro-active in the development
of SEZs with nearly 30% of total SEZ
approvals coming through. The state of
Maharashtra has been the most dominant
in the region with nearly 62% of all formal
approvals and in principle approvals,
notifications in the region accounted by
the state alone. Mumbai (primarily Navi
Mumbai) and Pune are on a fast growth
trajectory with emergence of large number
of SEZs. Together they account for an
impressive 60% of the formally approved
SEZs in the state. Maharashtra also
houses the countrys best performing SEZ
till date SEEPZ Santa Cruz Electronics
Export Processing Zone with a reported
export turn over of INR 9,859 crores in the
year 2010-11. Next to Maharashtra is the
state of Gujarat, where SEZs are spread
across multiple cities such as Ahmedabad,
Gandhinagar, Mundra and Surat.
Zone 3: North
Approved
In principle
Approved
Total
Haryana 35 46 3 84
UP 21 34 1 56
Punjab 2 8 0 10
Uttarakhand 1 2 0 3
Chandigarh 2 2 0 4
Delhi 0 3 0 3
Unlike, the southern and western region,
the concept of SEZs in the northern region
is comparatively new and the entire zone
currently accounts for approx. 16% of all
SEZ approvals and subsequent notifications.
Majority of the projects are located at Gurgaon
and Noida (NCR region) which together
accounts for nearly 76% of all upcoming SEZs
in the northern region. A number of formal
approvals have been given in the districts of
Ludhiana and Amritsar in the state of Punjab.
Zone 4: East
Approved
In principle
Approved
Total
West
Bengal
11 21 3 35
Orissa 5 10 0 15
Jharkhand 1 1 0 2
Nagaland 1 2 0 3
Not many SEZ developers have shown
interest in setting up SEZs in the eastern
region which accounts for as low as 5% of all
14
the approved SEZs in the country, of which a
majority are in West Bengal (Kolkata district).
ThenextSEZhubintheregionisOrissawith
select approvals being given in districts near
Bhubaneshwar. Majority of the other regions
in the east are largely untouched by the SEZ
phenomenon. Though many states in the
region are treated as Special States by the
government requiring smaller land piece to
set up SEZs, even this incentive has failed
to attract developers to set up SEZs in many
of these less densely populated, poor and
remote areas.
Zone 5: Central
Approved
In principle
Approved
Total
Madhya
Pradesh
5 15 2 22
Chattisgarh 1 2 1 4
The region primarily comprising the two
states of Madhya Pradesh and Chhattisgarh
accounts for only 3% of the total SEZ pie.
Indore, in Madhya Pradesh, is the major hub
where a number of SEZ developments have
been proposed and formally approved. The
region as a whole has not very successfully
surfaced on the SEZ development front.
On the whole, the above analysis shows
that the strength, comprehensiveness and
effectiveness of the SEZ Policy is an important
determinant of the SEZ notifications in the
state. The SEZ growth in a particular state
is also driven by the level of industrialisation
and the level of investment in industrial
infrastructure in that state.
Industry Distribution
The industry distribution of majority of
medium and large SEZs (50 hectares and
15
above) shows that nearly three- quarters
of all such approved SEZs are located
around relatively well-developed states with
industrial capacity and which are highly
urbanised. As a result of this, the investment
by new SEZs is channelized to areas of high
levels of industry and investment which
further propels these states to showcase
their success further.
The sectoral dispersion of SEZs shows that
there is a pre-dominance of the IT/ITES sector
and it is significantly present in the states of
Andhra Pradesh, Tamil Nadu, Karnataka,
Maharashtra, pockets of Uttar Pradesh and
Haryana, which account for more than 60%
of notified projects are IT/ITES SEZs.
Besides IT/ITES SEZs, other industries in
the sector-specific SEZs include gems and
jewellery, chemicals and pharmaceuticals,
automobiles, biotechnology, among others.
Multiproduct / Multiservices SEZs in select
Indian states, though limited in number,
have generated benefits perpetuating to
multifarious economic sectors.
Size Distribution
One of the major points of differentiation
of the Indian SEZ Act of 2005 from its
competitors, such as the Chinese Model is
in terms of the scale of operations. Unlike
China, the Indian SEZ Act 2005 specifies
extremely low minimum size requirement in
order to establish an SEZ. As a result of this,
nearly one half of the projects in India are
being developed on less than 30 hectares of
land, majority of which belong to the IT/ITES
sector. Many of these small format IT/ITES
SEZs include captive units of industry majors
like Wipro, Infosys, Mahindra Satyam, HCL
Technologies, TCS, etc.
In contrast, the multi-product SEZs have
minimum area requirement of 1000 hectares
and as a result of this, account for only 10%
of the total notified projects in the country.
The rest are spread across sector specific
projects broadly falling in the range of 100-
300 hectares, with average size of approx.
150 hectares.
The government is considering to further
reduce the minimum land requirement for
sectors which require huge pieces of land, in
order to attract developers to invest in those
SEZs (e.g., Multiproduct SEZs). This move
by the government has been a result of the
constant social unrest due to difficulty in
acquiring land for the development of SEZs.
SEZ Developers Profle
The SEZ Act, 2005 extended the responsibility
of SEZ development to the private developers
which were earlier limited only to the Central
government. This led to partnerships
between Private-sector promoters and
government entities. However, by far the
greatest share of the investment capital
in SEZs is coming from the private sector.
Currently, 70% of all notified SEZs are being
promoted by private sector. This indicates a
shift in the role of government from being a
controller to being a facilitator in the entire
process of development.
Around 70 percent of all private sector
promoted projects belong to the category of
non-captive promoters who create substantial
real estate opportunity in India where SEZ
units can readily shift their operations. Such
16
developers construct the space for SEZs and
then lease them out to SEZ units. The other
category of promoters is the private sector
captive users that account for the rest 30
percent and includes IT majors like Infosys,
Wipro, HCL, Satyam, TCS etc.
One drawback of handing over the charge
of SEZ development to the private players
is that they develop SEZs located in areas
that are already developed. Almost all SEZs
approved by BoA are in the vicinity of major
cities, like Ahmedabad, Chennai, Gurgaon,
Hyderabad, Kolkata, Mumbai, Pune etc. This
creates disparity in the overall development
of the entire country as the cities that are
already developed get additional benefits
and those which lag behind in industrial
development become even worse without
development.
For this reason, state agencies like AIIPC,
MIDC, GIDC etc play an important role in
the development of many large format SEZs
which help in the development of the entire
state and attracts other small format SEZs
alongside.
HHH
17
Location Trends
With the expiration of STPI and
imposition of MAT and DDT, the future
of SEZs in India is in jeopardy. After a
head start in 2006-07, there has been a
significant decline in the interest towards
development of SEZs.
The development of SEZs is reflected
by a high percentage of approved SEZs
going into the stage of operations or a
controlled increase in the number of new
approvals or notifications. This reflects
the States commitment towards the
growth of SEZs.
On the basis of the above mentioned
criteria, Andhra Pradesh and Tamil
Nadu have been the best performing
with growth in the number of notified
SEZs during 2009-11 being lower than
the average growth of 19% and the
percentage of SEZs currently operational
higher than the average of 37% for the
top 10 SEZ states. They are followed by
Gujarat and West Bengal (Figure 4).
The character of SEZ growth in the
two top-performing states is skewed in
favour of small IT/ITES SEZs. In contrast,
Gujarat has demonstrated an impressive
performance with large manufacturing
led multiproduct SEZ formats. Three
multiproduct SEZs (notified after 2005),
namely Mundra, Reliance Infrastructure
and Dahej, are currently operational
in the state, the highest number in the
country.
Haryanahastheminimumpercentageof
operational SEZs (at 8%) out of the total
notified SEZs in 2011, whereas the rate
of growth of additional approvals has
remained at the average level of 19%. The
service oriented ITES led character of the
geography has provided a demand pull
for IT SEZs only. The expiration of STPI
and imposition of MAT has most severely
affected the IT/ITES sector which is one
possible reason for such a low number
of operational IT SEZs in Haryana.
The states of Andhra Pradesh, Tamil
Nadu, Gujarat, West Bengal and
macro revIew
chaPter 3
18
Karnataka may maintain the pace of
SEZ performance only in the short run.
However, there is an urgent need on the
part of the government to make the fiscal
policy more stable in order to keep up
the attractiveness of SEZs.
Format Trends
Although the IT/ITES sector accounts
for highest number of operational SEZ
projects, the trend for the years 2009-
11 reveals that multi-service and FTWZ
SEZs have attracted more interest, which
is reflected by a higher percentage
growth in approvals/notifications and a
higher proportion of already approved
SEZs reaching the stage of operations.
The multi-product SEZs, though have
not increased substantially in terms of
notifications, however, the percentage
of operational SEZs has drastically
increased in this category.
FTWZ SEZ approvals have grown at
67% during the past two years, which
is higher than the average rate of 24%
for all formats together. The proportion
of multiproduct SEZ projects currently
operational (94%) is much higher than
the average proportion of operational
SEZs (42%) for all formats together
(Figure 5).
Though IT/ITES (including electronics)
still accounts for a sizable proportion of
SEZ growth, the current changes in the
fiscal policy have severely impacted many
small and medium IT firms which are
finding it difficult to continue operations
amidst the imposition of MAT.
In the past two years, there has been
increase in the sectors like engineering,
gems & jewellery with high proportion of
SEZs reaching the stage of operations.
One of the reasons for growth in these
sectors is the competitive advantage that
India enjoys in these sectors (Figure 6).
Investment Trends
Since the enactment of the SEZ Act,
2005, developers and units started
heavily investing in the SEZs and this
fact is witnessed by the investment
performance of SEZs over the past
years, which shows that more than 90%
of the investments new SEZs (notified
19
under the SEZ Act 2005) (Figure 7).
As on March 31, 2012, over INR
2,01,874.76 crore have been invested
in the SEZs.
Inordertopromotemoreinvestmentsin
SEZs, even the RBI made lending norms
for the sector easier by treating loans to
SEZs as infrastructure loans in place of
real-estate loans which were considered
more risky and hence, banks refrained
from lending to the SEZs.
However, the governments move to
impose MAT proved to be a big dampener
for the units & developers. This is evident
from the increasing denotifications of the
SEZ projects and slower space uptake
by SEZ units. Companies have either
stopped or slowed down their expansion
plans in SEZs in the absence of any clear
policy framework.
Theeverchangingregulatoryframework
in the SEZ front may severely impact
the pace of future investments in SEZs
as investors invest with a long term view
and regular changes to the policy makes
investments less profitable. Hence, the
government must, on urgent basis, give
clarity on the SEZ matter as to what
would be its stand going forward and
that must be followed in full spirit.
Export Trends
Indian economy has witnessed
tremendous growth in last one decade. To
further promote exports, the government
enacted the SEZ Act, 2005.
Since2006,consequentuponthecoming
of SEZ Act (2005) and SEZ Rules (2006),
there has been a rapid growth in SEZs
and subsequent rise in the export levels.
The overall SEZ export performance
looks impressive, with the contribution
from new SEZs out of the total SEZ
exports increasing over time. Whereas
the exports from new SEZs accounted
for only 20% of the total SEZ exports in
the year 2008-09, the contribution has
increased to 60% in the year 2010-11
(Figure8).
20
During the financial year 2011-12, total
exports to the tune of INR 3,64,477.73
crore have been made from the SEZs
registering a growth of about 15.39%
over the exports during 2010-11.
Atpresent,thereare143operativeSEZs
in the country and these are contributing
significantly to the expansion of
Indias exports, both services and
merchandise.
Onthepartofthegovernmentalso,there
is a need to take necessary actions along
with strategic and decisive planning to
help drive the true spirit of SEZs and help
in the countrys economic growth.
Employment Trends
One of the basic objectives of an SEZ
policy is the creation of employment
opportunities in the country.
The employment in new SEZs has
almost doubled during 2009-11 and
accounts for more than 80% of the total
estimated employment in all SEZs at
present (Figure 9). This reaffirms the
government objective to create additional
employment through the SEZ model.
The employment propensity of new
SEZs is far higher than the old SEZs
due to their service oriented character
(Table 2).
As on March 31, 2012, direct
employment of 8,44,916 persons has
been generated in the SEZs.
Sufficient employment generation
is in relation to stabilised policies &
regulations, single window clearance
facility, proper industrial infrastructure,
all accounting for a desirable investment
climate where the absence of even one
of the factors will negatively impact the
employment opportunities available in
SEZs.
Outlook
The current scale of SEZ activity has
considerably gone down from what
was envisaged three years ago. Due to
certain policy changes by the government
(imposition of MAT/ DDT), the future of
SEZs now appears to be uncertain with
fewer requests from developers and units to
make investments in SEZs. It is, therefore,
imperative that the attractiveness of SEZs
is retained to ensure that the SEZ policy
delivers to its true potential.

21
Table 2
Operational performance of notified SEZs in India
Status updated as on
December 2011
(No.)
Notified
SEZs
Operational
SEZs
No. of
Operational
IT/ITES SEZs
[% of Total]
Units
approved
in SEZs
Employment
Average
Employment
Intensity per
unit
Old SEZs
(Central Government SEZs &
SEZs set up prior to SEZ Act)
19 19
2
[11%]
1850 1,35,000 73
New SEZs
(Notified under the SEZ Act)
381 154
80
[52%]
583 6,81,000 1168
Total 400 173
82
[47%]
3,400 8,16,000 240
HHH
22
S
EZs aim to overcome barriers that hinder
investments in economy, including
restrictive policies, poor governance,
inadequate infrastructure and problematic
access to land. However, uncertainties
relating to the policy framework, regulatory
bottlenecks and operational issues have
hampered the growth of SEZs. Changes
made by the government in the incentives
offered to SEZs have caused huge decline
in the setting up of new SEZs and have
also triggered many exits and dissuaded
many investors from entering the industry
at all.
As a part of the study, an effort was made
to find out some of the key policy issues
facing the industry, measures taken and
their implications. The issues have been
addressed from the perspective of two
key stakeholders, developer and unit
occupier.
Challenges before the SEZs
A number of challenges as outlined in the
Discussion Paper released by the Ministry of
Commerce & Industry on Potential Reform
oftheSEZPolicyandOperatingFramework
explain some of the adverse trends qua
SEZs as under:
a) Issue of availability of primarily non-
double cropped, contiguous and vacant
land for SEZs and difficulties involved in
procuring/ acquiring land.
b) Issue of maintaining attractiveness of the
SEZ scheme in face of changed fiscal
regime e.g. imposition of MAT/ DDT;
possible changes through DTC.
c) Issues related to effectiveness of
the Single Window Mechanism and
coordination across departments at the
Central and State Government level.
d) The issue of a large number of States
not having an SEZ Policy / Act to enable
provision of the benefits envisaged under
the SEZ Act and Rules.
e) Issue of constraints leading to slow pace
of development of infrastructure within
the SEZs and their operationalisation,
as also inadequacies in the timely and
adequate provision of external support
infrastructure related to connectivity,
provision of public utility services, etc.
f) Increasing unattractiveness of the SEZ
incentive package vis-a-vis DTA units
receiving benefits under schemes
such as Focus Product Scheme, Focus
Market Scheme, DPEB, Duty Drawback,
VKGUY etc., which are unavailable to
SEZ units.
Besides the above mentioned challenges,
the apparent lack of political determination/
state of indifference both at the central
and state level is also a matter of great
concern.
PolIcy revIew- key challenges/ Issues
chaPter 4
23
Unit-level issues
A. Transition issues for IT/ ITES
units
Issue: To encourage fresh investment,
the SEZ Act does not permit the transfer
of second-hand capital assets to the SEZ
units (permissible limits capped at 20%),
thereby prohibiting any direct migration
or relocation of units from STPI/DTA to
SEZs. Also, guidelines are not explicit
about the transfer of manpower from
existing STPI/DTAs to SEZs. This
has created operational issues, with
companies trying to find loopholes and
consultants advising ways of transition
through the creation of new legal entities
or advising migration in phases.
Measures taken: According to the
Government notification in 2010, the
units have been allowed to bring in to
SEZs as many used/ second-hands
goods as they want, subject to approval.
However, a unit would not be eligible
for an income tax holiday (of 15 years)
under the Income Tax Act if the ratio of
used equipment exceeds 20% of the
overall capital investment. For manpower
transfer, there is no limitation from the
existing STPI units to new SEZs.
Implications: It offers only limited relief
as most of the companies evaluate SEZs
to avail a income-tax holiday and other
fiscal benefits contribute only a small
proportion of net savings. On the other
hand, no limitation on manpower transfer
is beneficial for IT/ITES
firms which have major resources in the form
of Man Power and limited machinery.
Outlook: The ruling encourages the
companies seeking consolidation spaces
to improve business and operational
efficiency to do so through SEZs. Also, it
is lucrative for manufacturing companies
as SEZ operations would offer access to
better infrastructure/ working conditions,
while entitling them to other fiscal
benefits, such as custom duties and
service tax, which DTA/ IT Park may not
offer.
Developer-level issues
B. Land availability
Issue: Land availability for SEZs has
become a constraint in the recent past.
Presently, there is a significant gap in
the area requirements between the
sector specific and multi sector SEZs
i.e. 100 Ha and 1000 Ha, respectively.
There is considerable difficulty in
acquiring 1000 Ha of land meeting the
criteria of contiguity, vacancy, etc.
Measures taken: The government has
proposed decreasing the minimum area
requirement for certain sectors in SEZs
(multi-product, multi-service, sector-
specific SEZs) in order to make them
attractive to the developers.
Implications: The situation of land
availability is accentuated by fairly
onerous requirements of minimum
size, contiguity, vacancy, pre-
dominantly non-double cropped nature
of land used for SEZs, non-compulsory
acquisition/ procurement etc. This is
one of the reasons that most of the SEZ
developers acquire land for developing
IT/ITES since the land requirement is
24
less as compared to multi-product
SEZs.
Outlook: These factors call for a review of
all land related aspects of the SEZ policy
so as to assess their underlying rationale
and reasonableness. This would include
aspects like minimum area criteria for
SEZs, vacancy and contiguity norms,
processing /non-processing Zone
stipulations, permissible broad-banding
within sectoral SEZs etc. This assessment
would require adoption of a scientific
basis that gives primacy to techno-
economic considerations like scale of
operations, work force strength and
nature, nature of input and infrastructure
requirements, nature of emissions /
effluent treatment requirements of the
units etc.
C. State level commitment and
support
Issue: Coordination issues between
departments of the Central Government
(DOR and MOEF etc.) and between
the Centre and the State Governments,
which undermine the objective of having
a Single Window Mechanism. Inordinate
delay in getting approvals for setting up
the SEZs results in inconvenience for
developers as they have to get approvals
from many state departments. Also
the State governments have failed to
provide certain facilities like exemption
from state levies and taxes, provision of
water, electricity and basic infrastructure
in most of the States.
Measures taken: The States have been
directed to enact State level SEZ Act &
Rules so as to enable developers for
smooth implementation of SEZ projects.
A formulation in this regard was circulated
to all the State Governments and Union
Territories in January 2008. However,
only a few States like Gujarat, Haryana,
West Bengal, Madhya Pradesh, Uttar
Pradesh, Tamil Nadu etc. have put such
mechanisms in place.
Implications: State Governments
are important stake holders in the
implementation of the SEZ policy
since it enables the States/UTs to
gain significantly by way of increased
investment, employment and overall
development. The single-window
mechanism would help to reduce the
gestation period of the project and
improve overall business confidence
in the SEZ framework. However, the
states commitment to facilitate enabling
infrastructure remains a key concern.
Outlook: Though the SEZ Act contains
provisions that give it an overriding
effect over inconsistent provisions in
other legislations, it has not translated
at the ground level in terms of providing
an effective single window mechanism
at the State level. Effective steps in
this regard can reduce the inter-state
disparities in the success of the SEZ
program, and enable less developed
States to catch up.
D. Norms for non-processing zones
Issue: The non processing zone
is used by the SEZs for creation of
support infrastructure. The guidelines
for development and disposal of
infrastructure created in non-processing
zones have not been outlined, leaving
25
room for ambiguity and interpretation.
Due to the absence of clear norms and
guidelines in this regard, the development
of infrastructure in non-processing
zones has not been undertaken by many
developers on the grounds of not being
focused on the SEZs.
Measures taken: The government
has proposed various measures and
guidelines for developing infrastructure
in non-processing zones. It came up
with norms and draft development
guidelines for building infrastructure in
non-processing zones. The guidelines
specify an overall ceiling on land
utilization among various activities
(infrastructure, open spaces and
circulation) and floor space utilization
within each category of infrastructure
development- residential, commercial
and other facilities. Furthermore, it
clarifies that the construction of a non-
processing zone could be allowed in
a phased manner, wherever possible,
linked with the actual level of activities
generated in the processing area.
Implications: This has reduced the
ambiguity about the utilization pattern
and probable phasing of non-processing
zones. However, the conformity to overall
ceilings has limited developers flexibility
to decide about the product mix as per
their own business plans.
Outlook: The clarification and guidance
towards overall physical planning
should encourage more developers to
earmark non-processing areas within
their projects. Also, it should provide a
thrust toward a balanced product mix of
components of support infrastructure, in
line with an integrated/self-sustainable
development, rather than a developers
tendency to maximise value through
focus on a single high-yielding asset.
E. Imposition of Dividend
Distribution Tax
Issue: With the government ruling, the
SEZ Developers are liable for DDT @ 15%
(plus applicable surcharge and cess) on
dividends paid, declared or distributed.
This move has given a severe hit to
the tax relief exemptions given to the
developers of SEZs who will no longer
get 100% tax deductions.
Measures taken: Under discussion, no
action has been taken yet.
Implications: Due to the imposition
of DDT and MAT, there has been a
considerable slowdown in growth of
exports from SEZs. Most of the SEZ
developers are either seeking more time
from the government to execute their
projects or surrendering the projects
altogether.
Outlook: The imposition of MAT and DDT
will not only affect exports from SEZs and
job creation but also discourage the inflow
of foreign and domestic investments into
them. The government will have to come
out with new sets of guidelines to revive
SEZs which have lost their sheen after
imposition of certain levies and proposal
to take away tax incentives.
F. Exit Strategy
Issue: The SEZ Act does not allow the
sale of land by the developers in the SEZ
(processing and non-processing zone).
26
The dilutions in tax benefits over the
years, including the introduction of MAT
and DDT, have made SEZs less attractive
for developers. The restrictions which
deny the developers an exit option,
would add to their woes.
Measures taken: The government
has allowed developers to sell their
stake partly or fully to other promoters
and firms, including foreign real estate
players, who will now be able to own
SEZs in India. A request for transfer
or dilution of equity by the developers
has also been approved subject to the
seamless continuation of SEZ activities.
The aim was at helping developers in
debt, unable to develop projects in the
wake of a slowdown in SEZ activity and
uncertainty over tax incentives.
Implications: The purpose is to help
developers exit the SEZ business in case
of rising debt and other uncertainties.
SEZs are increasingly becoming less
attractive for developers, investors and
companies and the number of fresh
proposals being considered by the BoA
has also seen a visible decline. This is
due to long gestation period associated
with commencing SEZ projects and
shortage of funds available with the
developers due to the recessionary
economic conditions. With the new
move, the SEZ will stay intact, only the
ownership changes. It does not change
the core business of the SEZ.
Outlook: A clear but a tighter exit strategy
would encourage sizable foreign and
domestic investments in SEZ projects in
the medium to long term, while ensuring
that transfers are made to entities of
comparable or higher order in terms
of their net-worth or capability, in our
opinion.
Issues common to unit and
developer
G. MAT implication on SEZs
Issue: The MAT of 18.5 per cent on the
book profits of Special Economic Zone
developers and units has adversely
affected the sector. Under the proposed
Direct Tax Code (DTC), SEZ units set up
till 2014 will continue to get profit linked
tax exemptions. However, imposition of
MAT with an effective rate of nearly 20
per cent, nullifies the impact of any such
incentive. It has proved to be a deterrent
for small companies, especially IT
companies, in tier II and III cities, which
are looking at expansion in SEZs. IT
companies have been migrating to
SEZs as tax breaks under the Software
Technology Parks of India (STPI) scheme
have been abolished.
Measures taken: The government has
extended MAT to developers of SEZs
and units operating within them. There
has been a hike in MAT to 18.5% from
existing 18% in order to ensure equal
sharing of the corporate tax liability after
reducing the surcharge on corporate
taxes to 5% from 7.5%.
Implications: This move by the
government will severely impact small
and medium enterprises operating in the
SEZs. It will take away the attractiveness
of SEZs since the primary objective of
the SEZs is to provide tax free trade in
order to promote exports.
27
Outlook: The levy of MAT on SEZs
will have a significant negative impact
on these tax-free export zones as it
diminishes the benefits that SEZs offered
for developers over other commercial real
estate asset classes. It is a major setback
for both developers and units in the SEZs
which would discourage investments
in the sector. The government will have
to consider roll-back of MAT in order to
keep SEZs buoyant.
H. Proposed DTC bill
Issue: The DTC Bill proposed to change
the scheme of direct tax incentive available
to an SEZ developer from profit linked
incentive to investment linked incentive. It
also provided for a transition provision to
the effect that all SEZ notified on or before
31 March 2012, shall be entitled to profit
linked incentive. Thus, deductions to SEZ
developers notified after 31 March 2012
and SEZ units commencing operations
after 31 March 2014 are proposed to be
investment-linked and not profit-linked,
which suggested evading all the benefit
granted to SEZ units or developers of the
same.
Measures taken: The government will
bring up the DTC bill in the monsoon
session in order to get the approval of
the Cabinet, after which the bill will be
finally implemented.
Implications: It will regress the growth
of SEZs because the shift to investment-
based deductions will demoralise the
low capital intensive projects, particularly
in the IT/ITES sector, since they require
lesser investments as compared to other
SEZs.
It will also impact the large size SEZs
which follow a policy of leasing and only
act as infrastructure provider, since cost
of land will not be considered as capital
expenditure, as a result of which the SEZ
developers will never be able to claim
tax relief on land cost. Hence, overall,
it will be a dampener to the investment
sentiment of the investors in SEZs.
Outlook: The shift from profit-linked
incentives to investment-linked incentives
will be beneficial to SEZ developers and
manufacturing based units in SEZs which
require huge initial capital investment and
a long gestation period as compared to
non-capital intensive IT/ITES units. The
companies operating in captive SEZs
would benefit as they invest in creation
of infrastructure.
HHH
28
I
n order to understand the concerns of
various stakeholders of the SEZ policy in
India, such as developers, co-developers
and units amongst other interested parties,
an effort was made to accommodate their
opinions on different aspects of the SEZ
scheme, probing them on how to revive the
attractiveness of the concept of SEZs.
For this purpose, a common questionnaire
was prepared and circulated to all the
necessary stakeholders including but not
limited to the SEZ Developers, Co-developers,
Units, Researchers, Academicians, etc. by
the Chamber. Subsequently, a cumulative
response sheet was prepared in order to
analyse the responses.
Cumulative Response Sheet of Developers/ Co-developers and Units
S.
No.
Question Sub-question Answer
1. Since the setting up
of your SEZ or, as
the case maybe, SEZ
unit, how has your ex-
perience been about
the SEZ scheme, with
respect to the follow-
ing parameters:
Real Estate cost benefits
(i.e. cost of acquiring land
at cheaper rate)
The policy
has fully
delivered
The policy
has sub-
stantially
delivered
The policy
has failed
to deliver
Not Ap-
plicable
Customs/ Excise duty
Sub-contracting facility
EaseofOperations
FDI investments
Repatriating export ben-
efits
No licensing requirement
for imports
seZ QuestIonnaIre & resPonses receIved
chaPter 5
29
2. Please give your
opinion:
Whether the SEZ Act has
been able to provide the in-
tended stable policy frame-
work for development of
SEZs in India?
Most Con-
vinced
Somewhat
Con-
vinced
Least
Con-
vinced
-
Whether the SEZ policy
has been able to generate
additional economic activ-
ity?
has been able to promote
investment from domestic
and foreign sources?
has been able to create
sufficient employment op-
portunities?
has been able to create the
desired infrastructure facili-
ties?
3. Please rank the fol-
lowing (give your
opinion):
Whether the operational
SEZs have been able to
create desired industrial
infrastructure in the coun-
try?
Most Con-
vinced
Somewhat
Con-
vinced
Least
Con-
vinced
-
Whether the operational
Single Window mechanism
should be a pre-condition
for State Governments, for
approval of SEZ projects in
that State?
4. Whether uninterrupt-
ed availability of tax
incentives has been
the single most im-
portant factor for the
growth of SEZs?
_ Most Im-
portant
Moderate Somewhat
Important
-
30
5. The Government
should consider ex-
tending the income
tax benefits to the en-
tire value chain in an
SEZ instead of only
the end exporter.
Likewise, inter-SEZ
transactions should
qualify for income-tax
incentives.
_ Most Con-
vinced
Somewhat
Con-
vinced
Least
Con-
vinced
-
6. Concerning the op-
erations of SEZs, do
you agree that the
Government should
follow the duty fore-
gone concept and
that there should not
be any customs duty
on value addition
made in the SEZs?
(In other words, while
effecting sale in DTA,
the customs duty to
be levied on such
products should be
equal to the duty ex-
emption availed on
import of inputs and
not the customs duty
applicable on finished
goods.)
_ Most Con-
vinced
Somewhat
Con-
vinced
Least
Con-
vinced
-
7. Whether changing/
amending any of the
fiscal incentive for
SEZs should be done
through the amend-
ment of SEZ Act
followed by amend-
ment in the relevant
fiscal statue, and not
vice versa?
_ Most Con-
vinced
Somewhat
Con-
vinced
Least
Con-
vinced
-
31
8. What are the impor-
tant factors frustrat-
ing the growth of the
SEZs?
Instability of SEZ policy In-
sofar as the imposition of
MAT/ DDT is concerned?
Most Im-
portant
Somewhat
Important
Least Im-
portant
-
Non-availability of single
window mechanism at
State Government level (in
many States)?
Policy and laws relating to
land acquisition?
Lack of political determina-
tion/ state of indifference,
both at central and state
level.
AnyOther-pleasespecify
9. What could be the
important factors to
revive the growth of
the SEZs in India?
Availability of a stable poli-
cy framework
Most Im-
portant
Somewhat
Important
Least Im-
portant
-
Better coordination between
the ministries at central level
(more particularly between
the Ministry of Finance and
Ministry of Commerce)
Better coordination be-
tween the Centre and the
State Governments
Putting into action effective
single window mechanism
at State Government level
Providing uninterrupted
tax incentives- Abolition of
MAT/ DDT.
10 Should the Govern-
ment review the poli-
cy relating to SEZs?
If yes, what are the impor-
tant aspects, which need to
be re-looked?
Yes No - -
See various Suggestions conforming to the re-
sponses of the SEZ questionnaire
Following the questionnaire, various
concerns and important aspects required
to revive the attractiveness of SEZs in India
were highlighted. In all 265 responses
were received, out of which 40% were by
SEZ developers, another 40% were by the
units operating in SEZs and remaining 20%
were from other interested p[arties, such as
consultants, researchers, etc.
Analysis of Responses
Received
1. Overall effectiveness of the SEZ
policy
To fully understand the overall stability and
effectiveness of the SEZ policy in India, the
32
very first question asked to the respondents
was to rate the SEZ policy on account of the
following important parameters:
Real Estate cost benefits (i.e. cost of
acquiring land at cheaper rate)
Customs/exciseduty
Sub-contractingfacility
Easeofoperations
FDIinvestments
Repatriatingexportbenefits
Nolicensingrequirementforimports
Onacumulativefront,theresponsescollected
reflects that majority of the stakeholders
were of the opinion that the policy has
delivered substantially (or moderately) on
most of the above-mentioned parameters.
However, a high percentage of nearly 30% of
the constituents have also claimed that the
policy has failed to deliver on the parameter
of FDI investments.
On further segregation of the responses, it
was found out that nearly 46% of developers/
co-developers have claimed that the
policy has fully delivered on exemption of
Custom/ Excise duty, while nearly 30% of
the developers/ co-developers have claimed
that the policy has failed to deliver on the
parameter of attracting FDI investments to
India.
From the point of view of units operating in
SEZs, it was found out that approximately
30% of the units have claimed that the policy
has failed to deliver on the parameter of
Real Estate cost benefits, whereas 46%
are of the opinion that the policy has fully
delivered on the aspect of Custom/ Excise
duty exemption. Similar trends were also
observed in the responses collected from
SEZ advisors, consultants, researchers, etc.
Hence, it can be concluded that the overall
effectiveness of the SEZ policy for most of
the stakeholders has been below average or
moderate. As per the industry experts, one
reason for such state of SEZs in India is that
the policy was brought into existence in haste,
without understanding the imperfections in
our country.
As of now present controversies about SEZs
are dominated by issues of land acquisition
and displacement of cultivators and others
dependent on land for their livelihood. As
a result, these commercial hubs have now
become a bone of contention where farmers
fear loosing their only means of livelihood.
Considering the social unrest being
experienced across various States, different
States are required to adopt a pragmatic
and scientific approach while developing
SEZs in India.
2. Intended stable policy frame-
work for development of SEZs in
India
The next question enquired as to whether
the SEZ Act has been able to provide
the intended stable policy framework for
development of SEZs in India and achieve
the desired objectives of:
Generation of additional economic
activity
Promotion of investment from domestic
and foreign sources
Creation of sufficient employment
opportunities
33
Creation of desired infrastructure
facilities
Though the launch of SEZ policy in India
was done amidst various fiscal incentives
and promises including a stable and hassle-
free operating environment, the same has
been subject to constant revamps which
has tarnished Indias attractiveness as an
investment hub.
Overall,thestabilityofthepolicyisamajor
concern, with almost 57% of the stakeholders
merely convinced about the intended stable
policy framework of the SEZ policy.
Onfurtherscreeningofeachofthedesired
objectives of the scheme, 50% of the
stakeholders are moderately convinced
about the generation of additional economic
activity and creation of sufficient employment
opportunities through the SEZ policy. As
high as 46% of the stakeholders are of the
opinion that the SEZ policy has not been able
to create the desired infrastructural facilities
and 40% consider that the policy has been
unsuccessful in promoting investments from
domestic and foreign sources.
Though the SEZ policy has been a huge
contributor to enhancing Indias exports, the
lack of stability of the policy has rendered
the policy unworthy to the investors. With
the implementation of the SEZ Act, 2005,
though the policy guidelines relating to SEZs
became transparent, removing bureaucratic
hurdles, giving the concept of SEZs a defined
structure, however, SEZs still face several
contentious issues that need to be resolved
by policy makers to attract domestic and
foreign investors who are wary of committing
to such high stake projects.
3(a). Creation of industrial
infrastructure
The next question was whether the SEZs
have been able to create the desired
industrial infrastructure in the country. The
SEZ Act, 2005 was implemented with the
expectation of facilitating large flow of foreign
and domestic investment to the SEZs, and
hence, contributing to improvements in
infrastructure. The SEZs were envisaged to
act as catalysts for growth. The simplification
of the procedures for development,
operation and maintenance of the SEZs and
the fiscal incentives offered were expected
to spur investment and promote industrial
activity.
Cumulatively, almost 50% of the stakeholders
stated that they were somewhat convinced
that the desired industrial infrastructure has
been created in the country. In addition,
nearly 30% were not at all convinced about
the creation of industrial infrastructure.
Only,20%havecommendedthattheywere
most convinced about with the level of
infrastructure created by the SEZs.
Keeping in mind the development of SEZs in
far off areas and the infrastructure facilities
provided there, it can be concluded that
the SEZ policy has been instrumental
in the creation of necessary industrial
infrastructure. However, constant changes
to the SEZ policy resulting in inadequate
support from the government, has degraded
the situation. Hence, the government needs
to provide stable policy framework overtime,
in order to attract new investments in the
sector.
34
3(b). Single Window Mechanism
In order to keep the functioning of SEZs
smooth and avoid inordinate delay in
the approval process, the single window
mechanism was adopted for setting up
and development of SEZs. However,
the effectiveness of the single window
mechanism has been under the scanner for
a long time now. Till date, only a few states
have adopted the approach of single window
mechanism. The SEZ Act, 2005 provides that
developers get their clearances not only at
the central level but also in states at a single
place. It is with this intent that single window
mechanism was included in the question.
A staggering 70% of the respondents are
most convinced that the single window
mechanism should be a pre-condition for
State governments for approval of SEZ
projects in that State. This would rid the
investors of all the delays in the process
of setting up or development of SEZs and
hence, would promote the SEZ policy in a
strong way.
4. Uninterrupted availability of tax
incentives
One of the main reasons of investing in an
SEZ is the availability of various tax incentives
and other fiscal advantages. Hence, it can
be stated that uninterrupted availability of
tax incentives is the single most important
factor for a SEZ Developer/ Co-developer
and a unit. The proposed DTC bill and
inconsistencies of Union Budget 2012-
13 with regard to the promised tax breaks
and incentives for SEZs, has hampered the
credibility of SEZ scheme.
The cumulative responses from all the
stakeholders reveal that almost 70% of the
respondents believe that uninterrupted
availability of tax incentives has been the
single most important factor for the growth
of SEZs.
5. Extension of income-tax benefts
The income tax benefits provided by the
SEZ policy are available to only the end-
exporters and not the entire value chain,
35
thereby, imposing significant cost on others.
A total of 74% of the respondents are of the
view that the income-tax benefits should be
made available to the entire value-chain.
This aspect gains importance because there
are many integrated plants where different
SEZ units supply goods to other SEZ units,
however, only the last unit in the value chain
gets the income tax exemption, which is
effecting exports out of India. This does not
provide a just and fair method of giving tax
exemptions and hence, a more uniformed
approach should be adopted.
6. Duty Foregone Concept
The goods sold from SEZ to DTA are
considered import by DTA and full import
duty is levied on such sale, which causes
the value addition done by the SEZ unit to
be charged to import duty as well. However,
ideally the customs duty to be levied on
goods sold should be equal to the duty
exemption availed on import of inputs and
not the customs duty applicable on finished
goods. The responses collected reveal that
65% of the stakeholders support the fact
that the concept of duty foregone should be
made available to all SEZs.
There have been arguments whether the
internationally accepted duty foregone
concept should be made applicable for sale
of goods from SEZ to DTA units. However,
till date SEZ units are required to pay duty
for the value addition and thus, the issue
remains a major concern.
7. Amendment in fscal incentives
available
Many of the developers/ units are unsure of
investing in India due to its political instability
and instability in the policies relating to the
SEZs in India. An amendment to the SEZ
Act and a subsequent amendment in the
corresponding fiscal statue will ensure the
investors clarity and boost their confidence.
Overall,76%ofthestakeholdersbelievethat
the amendment should be first introduced
in the SEZ legislation and subsequent
amendments should be done in the relevant
fiscal statutes to give effect to the amendment
made to the SEZ Act. This would provide
more credibility and stability to the law
relating to SEZs.
36
8. Factors frustrating the growth of
the SEZs
An attempt was made to analyse the various
important factors that are responsible for
frustrating the growth of the SEZs. The
following mentioned factors frustrate the
growth of SEZs in India:
8.1 Instability of the SEZ policy insofar as
the imposition of MAT/DDT is concerned:
Nearly 80% of the respondents have stated
this to be the most important factor which
reflects the foremost importance of the
stability of the policy.
8.2 Non-availability of the single window
mechanism at the State Government
level: Another 74% of the respondents have
stated this to be the most important factor in
frustrating the growth of SEZs in India, while,
26% consider it to be somewhat important.
8.3 Policy and laws relating to land
acquisition: Nearly 60% of the constituents
are of the opinion that ineffective policies
and laws relating to land acquisition is one
of the most important factors circumventing
the growth of SEZs.
8.4 Lack of political determination/ state of
indifference both at the central and state
level: Time and again changes made to the
policy framework relating to SEZs has raised
serious doubts regarding the stability of SEZ
policy and the state of indifference reflected
by the State and Central government. As
high as 80% of the respondents are of the
view that this is one of the major reasons
frustrating the growth of SEZs in India,
17% have rendered this to be somewhat
important and 3% have claimed this to be
the least important factor.
9. Important factors to revive the
growth of the SEZs in India
The final question in the questionnaire
related to the important factors to revive the
growth of the SEZs in India:
9.1 Availability of a stable policy
framework: An astonishing 91% of the
respondents have stated this to be the most
important factor required to revive the growth
and attractiveness of SEZs in India.
9.2 Better coordination between the
ministries at the Central level (particularly
the MoF and MoC): To this question, another
91% of the constituents have stated this to
be the most important factor in reviving the
growth of SEZs.
9.3 Better coordination between Centre
and State governments: As high as 82% of
the constituents have stated that this is one
of the most important factors for the growth
of SEZs in India.
9.4 Putting into action the effective
single window mechanism: 85% of the
constituents have stated that this is one of
the most important factors in reviving the
attractiveness of SEZs to the investors.
9.5 Providing uninterrupted tax incentives
Abolition of MAT/DDT: Since availability
of tax incentives is one of the major
attractiveness of investing in SEZs, 88% of
the respondents have stated this as the most
important factor in regaining the lost sheen
of SEZs.
37
Suggestions conforming to the
responses of the SEZ questionnaire
Various respondents were asked their views
on whether the government should review
the SEZ policy and if yes then, what are
the important aspects which need to be
relooked. Some of the suggestions made
by the respondents have been discussed
below:
Having a stable policy framework
is of prime importance to majority
of the stakeholders. The proposed
implementation of Direct Tax Code
has hampered the interests of
various stakeholders who view such
changes as a hindrance to the overall
interest of a stable, long term, policy
framework.
Issues conforming land-related
aspects such as minimum area
requirement, contiguity norms,
processing/ non-processing zone
stipulations etc. The government
should be more liberal in issues
relating to the land requirement and
provide developers the flexibility to
expand across all sectors. This will
help in having balanced growth of all
SEZ sectors rather than dominance
of one particular sector.
The SEZ policy should focus on
providing benefits which would
help in creating better infrastructure
facilities. Hence, the SEZ policy
should encourage investments by
providing better interest rates than
banks so as to make the sector more
attractive to the investors. Loans
should be made available to SEZ
developers and units at cheaper
rates which would lead to increased
spending in the economy
There should be broad-banding of
SEZs by way of clustering of similar
units to achieve economies of scale
in creating and operating common
facilities. However, the similarity of
units should be achieved through
including sectors that have similar
characteristics and not necessarily
units from the same sector.
The SEZ policy remove hurdles
in setting up facilities in the non-
processing area. The BoA should
provide relief to developers by being
liberal in approving such facilities.
The effective implementation of
the Single Window Mechanism. As
discussed earlier, till date, only a few
states have fully implemented the
Single Window Mechanism. All the
States must implement it in totality so
as to speed up the process of setting
up of SEZs and to avoid red-tapism.
The fiscal incentives made available
to investors in the SEZs should be
retained as per the original SEZ Act.
Investments in SEZs are done with a
long-term perspective and changes
to the fiscal incentives hamper the
sentiments of the investors who
become wary of making any new
investments.
The SEZ policy should have a
dispute-redressal mechanism.
38
Such a mechanism would help in
addressing the issues of developers
more quickly and efficiently.
ThegoodssoldfromSEZtoDTAare
sold at full custom duty. As a result of
this, the buyers in DTA are either (i)
not willing to buy from SEZ, or (ii) ask
for lower tariff value for procurement
from SEZs. On the contrary, these
DTA units avail the custom duty
concessions on procurement from
countries with which India has Free
Trade Agreement (FTA). Hence, the
government needs to address this
issue.
TheSEZpolicyshouldbere-looked
towards giving thrust to other sectors
such as manufacturing so as to have
a uniform growth across the various
sectors.
Last, but not the least, there should
be periodic review of the SEZ policy
by way of regular interaction with the
Industry.
HHH
39
I
ndia has a well established track record of
its own successful experience with EPZs
and export oriented units. The development
of SEZs is of great importance to our
economy in order to support Indias target
of becoming a developed nation. Though
a look at the past performance of SEZs in
India supports the fact that SEZs have been
able to increase exports with each passing
year, provide employment to a large number
of people, however, there is a need for more
rational and balanced approach towards
keeping the overall policy framework of
SEZs stable over time.
The sector-wise distribution of SEZs reveals
that there has been an inclination towards
setting up IT/ITES SEZs out of the various
otherformatsavailable.Onereasonforthis
is the small land requirement for such an SEZ
whichisonly10hectares.Ontheotherhand,
multiproduct SEZs which have large land
requirement account for less than 5% of the
total notified SEZs. There is a need to promote
multiproduct SEZs as they act as catalyst for
export growth, employment generation and
income creation, infrastructure development
and ultimately, economic progression. In
long run the competitiveness of SEZs can
be sustained only with balanced dispersal of
investment across all sectors and states. In
this regard, the government has proposed
reducing the minimum area requirement for
large-scale SEZs. When implemented, this
move will help in making the distribution
of SEZs more balanced across various
sectors.
Moreover, there have been regular disputes
over the issue of land acquisition. Time
and again, we have witnessed protests
from farmers alleging that the government
has grabbed their land pieces. In order to
overcome this problem, the Land Acquisition
Bill (2011) was introduced which provides
just and fair compensation to the displaced
farmers and also makes it compulsory for
80% consent of people of any area where
land is to be acquired. Along with this
initiative of the government, there is a need
to educate people and create awareness
among them about the benefits they can
derive from the development of their region
by setting up of SEZs.
Often, there have been coordination
issues between Ministries of the Central
government. Every now and then, concerns
have been raised by the MoF regarding
loss of revenue to the Government by way
of providing tax exemptions/ concessions
to SEZs. As a result, the Finance Ministry
through the Finance Act, 2011 imposed
MAT on SEZ developers/ units and DDT
on SEZ developers. In addition to this, the
proposed DTC bill has further reduced the
attractiveness of SEZs where the income
tax incentive available to SEZ developers is
conclusIon
chaPter 6
40
going to change from profit-linked incentive
to investment-linked incentive. The impact is
going to be higher in case of IT/ITES sector
SEZs which require less capital investments
as compared to the other sectors. All these
fiscal policy changes together have caused
a significant decline in the interest towards
development of SEZs in last 2-3 years after a
head start in 2006-07. Companies have either
stopped or slowed down their expansion
plans in SEZ in the absence of any clear
policy framework. With the majority of IT/
ITES sector firms finding it difficult to continue
operations in the SEZs due to the imposition
of MAT and the proposed DTC bill, we may
expect the focus to shift to multi-product and
sector-specific manufacturing-based SEZs
which require huge capital investment and
have a long gestation period.
All of the above mentioned issues have not
only adversely affected the future prospects
of SEZs, but have also raised doubts on the
governments promise to provide a stable
policy framework for the smooth functioning
of SEZs in India.
Till date, only 39% of notified SEZs have
reached the operational stage. With the
number of new proposals falling drastically
post-2008 and the demand by developers
also going down, there needs to be an
increase in the benefits offered by SEZs in
order to keep them attractive.
To facilitate wrinkle-free functioning of SEZs,
there is a need to integrate the various
departments involved such as customs,
sales tax, and environment and pollution
control. Such integration is possible only if
a forward-thinking policy is put in place, like
effective implementation of single window
clearance scheme.
However, despite all odds, the SEZs in
India have played a very important role in
promoting and diversifying exports, creating
employment and attracting investments,
and hence in the overall progress of the
economy.
Generally, there has been misconception
about the SEZs either on account of either
(i)landacquisition;or(ii)labourlaws;or(iii)
fiscal incentives. This perception is largely
due to there being lack of education or
awareness about the SEZs amongst the
larger section of political system and other
concerned. For instance, compulsory land
acquisition for SEZs is not allowed. Likewise,
there is no relaxation to SEZ Developers or
Units from labour laws. Further, there have
been numerous amendments made to the
SEZ Rules based on the concerns from
different quarters and other exigencies.
Having said that there have been concerns
raised by the Ministry of Finance time and
again that the Government is foregoing
huge revenue by providing tax exemptions/
concessions to the SEZs. Given the fact that
the SEZ scheme could evoke interest of the
investors mainly because of the incentives
offered by the scheme, the concerns of the
Ministry of Finance appears to be unfounded.
The SEZ Act 2005, which provides the fiscal
incentives, was passed by the Parliament
after a long consultation process with the
stakeholders. It is therefore imperative
that the legislative intent is respected and
implemented in spirit. Any scheme would
require reasonable time to deliver on
41
expectations. Needless to say, whosoever
commits investments in a scheme based on
thepromisesmadebytheState;onewould
righteously hold legitimate expectation that
the State would fulfill its promises.
It is in this context that the imposition of MAT
on SEZ Developers/ Units and imposition of
DDT on the SEZ Developers introduced by
the Ministry of Finance through the Finance
Act, 2011 have not been received well by
the SEZ stakeholders. This has not only
adversely impacted the prospects of SEZs
considerably, but also has led to erosion of
trust and faith in the Governments credibility
to provide a stable policy framework.
Difference of views between the two
Ministries, namely Ministry of Finance and
Ministry of Commerce & Industry has led to
great uncertainty about the stability of fiscal
policy/ tax regime for SEZ Developers and
Units. Stability of policy has gone for a toss
time and again. This has, on the one hand,
left the existing investors jittery, and other the
other hand, has kept the potential investors
at bay. There ought to be concerted efforts
by all the arms/ ministries of the Government
to keep the credibility of the Government
intact.
In order to keep their attractiveness
intact, there must be some relaxation in
the norms to help investors view SEZs
positively. The following are some of the
recommendations:
Proactive measures on the part of the
Government in order to maintain a fine
balance between relaxations of laws
and preventing creation of monopoly or
exploitation.
Setting up of SEZs in under-developed
regions and building of social
infrastructure should be encouraged.
In case of land acquisition disputes,
proper rehabilitation plan and its effective
implementation should be chalked out
by the government while finalizing the
SEZ plan.
Theremustberationalizationofincentives
offered by implementing clearer rules
and procedures to attract investors.
Clarity, transparency and greater
awareness are required across various
socio-economic groups for confidence
building about the future prospects and
outcomes of such projects.
Based on past experience, should there
be any need to have greater checks and
balances, the Government should do it on a
constant basis. At the same time, depending
on the ever dynamic internal and external
environment and business scenario, the
Government should be proactive enough
to make quick progressive adjustments to
benchmark our laws vis--vis best global
practices.
SEZ Policy has contributed significantly in
fostering the desired objectives of the SEZ
Act, and given the stable policy framework,
holds tremendous potential to further
contribute in a big way.
The onus of reviving the attractiveness of
SEZs, therefore, lies on the Government by
providing a stable policy framework and an
enabling business environment.
HHH
42
CONTACT - KNOWLEDGE PARTNERS
Mr Rohit Kumar
Head of Research, India
DTZ
#804 Time Tower
Mehrauli-Gurgaon Road
Gurgaon 122 002 - INDIA
Tel: +91 124 459 7500
Mobile: +91 98736 92967
Mr Hitender Mehta
Partner
Vaish Associates Advocates
803, Tower A, Signature Towers
South City-I, NH#8,
Gurgaon 122 001 (India)
Phone: +91 124 4541000
Fax: +91 124 4541010
www.vaishlaw.com
43
O
n a recent flight from Houston to Dubai,
while indulging my customary flight
rituals of avoiding eye contact with co-
passengers who look like they are in a chatty
mood, browsing through the nowmemorized
list of movies on offer, and catching up on
some general reading, I came across a very
interesting article about the mission at 3M to
remove hairballs from its supply chain.
Hairballs is apparently a term coined by
George Buckley, former CEO of 3M, to
describe the large complexities that are
built into the supply chain at 3M. The main
example quoted in the article was about the
adhesive picture hooks manufactured by 3M
that travel a total of 1300 miles and make 4
pitstops along the route before the simple
hook is born. Now depending on who you
are this revelation has different implications
for you.
A financial investor will look at it as a large
inventory carrying cost which obviously
eats away at the margins. A marketing
professional may link this to the added
complexity of the marketers job at 3M to be
able to identify not just present trends, but to
be able to predict what will be appealing to
the consumer 150 days down the line when
the first batch rolls out. An accountant may
perhaps lose sleep over the treatment of
the work in progress inventory when filling
annual returns its not difficult to imagine
that if a company has an annual revenue of
almost 30 billion dollars, and if its products
have a production lifecycle of 120 days on
average, then the most prudent accounting
treatment of the WIP can mean the difference
of a few hundred million dollars! A consultant
would of course find the article to be a good
business opportunity and immediately try to
figure out means of establishing contact with
Jim Welsh, the present lead at 3M who has
been assigned the task of removing these
hairballs.
As a logistics professional and closet
academic, I have my own observations
on the article. For example, I am most
fascinated by how such a complex
production system came into existence in
the first place. I would imagine that it was
not the result of a deliberate attempt by the
3M management to sabotage its own supply
chain. Perhaps these complexities are not
the result of a single incorrect decision
but a culmination of smaller iterative events
perhaps an adhesive factory was started
for industrial adhesives in place A, that
later had underutilized capacity which got
diverted towards making these now (in)
famous hooks. Of course, this is not the
only hairball being combated by the supply
chain professionals at 3M. Quite possibly,
the iterative processes creating high levels
of complexity are small events that though
unnoticeable and insignificant on their
own, snowball into large hairballs choking
a supply chain worth billions of dollars. Yet
coughIng uP haIrballs tacklIng
corPorate IneFFIcIencIes
Mr. Vineet Sharma, Director, Oil Field Warehouse & Services Limited
44
some of these may be a result of financial
analysis and are deliberate decisions. For
example, an adhesive factory comes up for
sale because the previous management has
gone bankrupt. Buying the factory would
add 500 miles to your product supply chain.
But when you compare the savings from
acquiring this bankrupt factory (compared
to market price) with the present value of the
future costs of shipping over the additional
500 miles, the savings may well outweigh the
costs, making the purchase of the factory a
financially viable decision.
But all this is mere speculation and not the
real reason for writing this article.
My two key take aways from the article
were:
1. Even the biggest and most successful
companies are not operating in the most
efficient and cost effective manner
2. In order to remain successful, you need
to have the strength to admit when you
have made a mistake and pool in all the
resources at your disposal to fix it The first
point indicates the immense potential of
unidentified opportunities that exist in all
businesses.
At a time when managers globally face
growing challenges to deliver growth, the
identification and elimination of hairballs
can drastically add to the companys bottom
line.
The second point is equally important. It is
human nature to be corrupted by power and
success. An American study on the major
lottery winners in the past two decades had
found that a large majority of winners had
lost all of their winnings due to large financial
gambles that they did not fully understand.
The underlying cause in all of these cases
was that winners somehow began attributing
their success to some intrinsic capability
instead of extrinsic luck. They thought they
had become financially smart overnight.
I am not suggesting that humility is the key
to business or professional success. The
obvious lesson is this: do not accept the
status quo, even if it has been in place for
years without the system breaking down.
This translates into different actionable
items, if you may, depending on who you
are within your organization.
At the corporate level it means that a company
needs to keep re-visiting its strategies, as well
as capabilities in order to ensure that the two
are in line with each other. A company should
be able to formulate a strategy that leverages
its capabilities. At the same time, it needs to
grow capabilities to support its strategy. The
frequencies of these reviews may vary not
too commonplace to lose their importance
but not too sporadic or far apart so as to
be caught by surprise. What is important is
that these reviews need to become a core
part of the corporate strategy. Agility and
response to change is sometimes not given
due importance and our modern computer
age has ample examples of giants that have
fallen because they were caught sleeping.
At an operational or executive level,
managers need to cultivate an environment
that allows all employees to challenge the
status quo freely. This statement has greater
implications than may be obvious at first
glance. If the smallest member of your team
is to truly participate in a meaningful dialogue
45
challenging the status quo of the company,
he first needs to have at least some insight
into the overall functioning of the company.
Lack of cross-functional communication
within an organization can lead to creation of
silos of information that never get converted
to knowledge.
Lastly, a companys ability to challenge the
status quo does not need to be directed
inwards alone. Eliminating internal hindrances
can always add to an organizations bottom
line. However, a companys ability to identify
unnoticed inefficiencies for its customers
will allow it to add to its top line. Admittedly,
this can be challenging. You may not have
much access to your customers internal
operations. Sometimes a customer may not
appreciate a vendor doing the fault finding
for him. But remember, at the end of the
day, your success is directly linked to your
customers success.
For example, OWS was invited to bid for
a tender for sea transportation for coated
pipes from UAE to Oman. The prospective
customer had completed similar projects
in the past and the tendering process was
quite straight forward. While we did submit
a bid for transportation by sea, we attached
a cover letter that respectfully outlined that
it was an inefficient means of transportation
for this particular job. We made the case that
there was a 400% increase in probability
of damage in case of sea transport when
compared to the alternative we had in mind.
This caught the clients attention who called
us to pitch our idea instead. We demonstrated
that besides the inherent risk all sea going
cargo is exposed to, in this case the coated
pipes were undergoing 6 different instances
of handling and each instance presented a
potential risk for damage. From past data
they were able to verify that whenever a
pipe was damaged, it was damaged during
one of these 6 handlings. We made the
case for transportation by road, suggesting
that the operation would be much simpler,
economical and eliminate 4 of the handling
points in addition to excluding the risk of sea
transport. The customer decided to scrap
the sea transport tender and awarded the
road transportation job to us on a nomination
basis. We were also able to introduce added
flexibility in our customers supply chain as
they did not have to stockpile for a month
before they had enough cargo to ship. Their
inventory carrying cycle was reduced from 30
days to just one day we were transporting
the pipes the same day that they were
produced. At the end of the 6-month long
project, we had transported 25000 tons of
coated pipes across two national borders
without a single incident of loss or damage.
We thus see that in spite of our best efforts,
gaps exist between the actual and ideal
performances of all organizations. There is
a real need to identify and eliminate these
gaps. So take a cue out of the 3M story, and
when you get back to work after reading this
article, ask yourself which is the next hairball
you are going to tackle.
HHH
46
Integrated busIness cIty
M
ahindra World City Jaipur Integrated
Business City is an ambitious project
by US $15.4 billion Mahindra Group which
enunciates the success of Mahindra World
City, Chennai Corporate Indias first fully
operational Multi Sector SEZ.
Perfectly positioned just off NH 8 Mahindra
World City, Jaipur is a joint venture between
MahindraGroupandRIICO,Governmentof
Rajasthan. Spread over 3000 acres Mahindra
World City has been master planned by
Jurong Corporation, Singapore.
Mahindra World City, Jaipur is planned to
boost an all-round industrial growth across
different segments of industry. There are
dedicated SEZs for the following sectors:
IT/ITeS (Corporate Indias Largest IT
centric development in 750 acres)
Engineering&RelatedIndustries
Handicraft
Gems&Jewellary
Warehousing&Logistics
Apparel&Furnishing
DomesticTariffArea
SocialInfrastructure
Mahindra World City, Jaipur offers world-
class infrastructure like wide-road network,
stable power supply, relatively lower cost
of operations, seamless data connectivity,
amenities like food court, ATM, jogging tracks,
amphitheatre, etc, professional operations
& maintenance, scenic landscaping and
more.
Mahindra World City, Jaipur is being
developed to meet the highest benchmark of
infrastructure development with a keen focus
on Sustainability. It has been identified
as part of a list of 16 projects globally and
of those only 2 projects in India by the
Clinton Climate Initiative (CCI), a foundation
promoted by Former US President Bill
Clinton for sustainable development.
Spread over 750acres, the IT/ITeS SEZ at
Mahindra World City, Jaipur is Corporate
Indias largest IT centric development. On
16 December 2006 it witnessed two of the
biggest names in Indian IT Industry - Infosys
& Wipro sharing the same dais and signing
the MoUs to set up their operations at
Mahindra World City, Jaipur.
Due to large availability of commerce
professionals Jaipur is also emerging as a
Financial Processing Hub. The sentiment
is echoed by the fact that when three of the
industry stalwarts i.e. State Bank of India,
ICICI Bank & Deutsche Bank decided to
set up their Back End / Data Center Captive
Operations at Jaipur, they had only one
nameontheirminds;Mahindra World City,
Jaipur.
The Manufacturing zone of Mahindra World
Mahindra World City Jaipur Ltd.
411, Neelkanth Towers, Bhawani Singh Marg, C-Scheme, Jaipur-302001
Board No: +91 141 3003455 | Fax No: +91 141 2243060
E-Mail jaipurinfo@mahindraworldcity.com| Website: www.mahindraworldcity.com/jaipur
47
City would be spread over 750acres. Leading
companies in the sphere of auto components,
wire & cables, farm implement manufacturing
and other machinery manufacturing are
already part of Mahindra World City, Jaipur.
To support the manufacturing activity a
dedicated warehousing and logistics zone
is also planned inside Mahindra World City
campus.
41 companies have already signed-up
with MWCJ in various zones viz. IT/ITeS,
Engineering & Related Industries and
Handicrafts, which include names like
Infosys, Wipro, Tech Mahindra, Deutsche
Bank, State Bank of India, ICICI Bank,
EXL, Nucleus Software, Nagarro Software,
Truworth, Girnar Soft, QH Talbros, Dynamic
Cables, Poly Medicure, Gravita India, Knit
Pro, Ratan Textiles etc.
At the full capacity occupancy & operations
level it is expected to attract investment of
over Rs.10,000 crores and would create
direct employment for approximately
100,000 people and indirect employment for
150,000 people.
We invite organizations to partner us in our
vision of creating a world class business
ecosystem.
HHH
48
A
ndhra Pradesh Industrial Infrastructure
Corporation, an arm of Govt. of
Andhra Pradesh, is a premier organization
in the State, vested with the objective of
providing industrial infrastructure through
development of Industrial Parks, and Special
Economic Zones. Over 325 Industrial
Parks are established throughout the State,
covering an extent of over 1,30,000 acres.
The Industrial Parks and Special Economic
Zones are playing a pivotal role, in attracting
investments to the State both domestic &
foreign, by providing multiple incentives.
The Governments investor-friendly policies,
state-of-the-art infrastructure, educated
manpower, attractive incentive schemes etc.,
make Andhra Pradesh a choicest destination
for Industrial Investment, particularly in the
manufacturing sector.
APIICs core functions:
- Acquires land for Industrial Parks
- Develop Industrial Parks and arrange
other basic infrastructure for industry.
- Performs the role of facilitator for industrial
investment
- Plans and develop projects under Project
Development Promotion Partnership
- Promotes infrastructure projects in
public-private-partnership(PPP) mode
- Nodal agency for all industrial projects
including IT Parks, Biotech Parks,
Apparel Parks, Special Economic Zones
in the State
In addition to providing infrastructure to
industry, APIIC has promoted projects
under Joint Venture and PPP mode, L & T
Infocity, Mindspace, Integrated Township
and Convention Centre, Golf Course in
Hyderabad, L & T Hitech City at Vijayawada.
Industrial Water Supply Project, to carry water
from river Godavari to Visakhapatnam city,
to cater the needs of Industry and Greater
Visakhapatnam Municipal Corporation,
Krishnapatnam International Leather Park,
etc to name a few. The State is contributing
1/3rd of bulk drugs production in India.
The Jawaharlal Nehru Pharma City in
Visakhapatnam, for manufacturing bulk drugs
and Formulations SEZ in Green Industrial
Park Jadcherla, would place the State in the
forefront in bulk drugs manufacturing, in the
country, in the near future.
To bridge digital divide and take Information
Technology to Tier-2 Cities, IT SEZs are
promoted in Visakhapatnam, Vijayawada,
Tirupati, Warangal, Kakinada and Kadapa.
APIIC is the nodal agency for establishment
of Petroleum, Chemicals and Petrochemicals
Investment Region(PCPIR) covering a
sprawl of 603.58 sq.km with an investment of
Rs.3.43 lakh crores between Visakhapatnam
Kakinada Region and Special Economic
Zones in the State. Andhra Pradesh State has
highest number of notified Special Economic
Zones (76 out of 380) in the country creating
environment for rapid industrial growth in the
State, thereby generate gainful employment.
andhra Pradesh IndustrIal InFrastructure
corPoratIon lImIted
49
Andhra Pradesh Special Economic Zone,
Brandix Apparel City, Jawaharal Nehru
Pharma City in Visakhapantam, Apache
Footwear in Nellore District Aerospace &
Precision Engineering SEZ, in Hyderabad IT
SEZs in Hyderabad, Visakhapatnam etc., are
making strides in the industrial development
of the State.
To maximize utilization of gas for expeditious
economic development of state APIIC
and Andhra Pradesh Power Generation
Corporation Ltd., a Special Purpose
Vehicle Andhra Pradesh Gas Infrastructure
Corporation (APGIC), APGIC has successfully
secure 4 blocks (3 shallow and 1 deep water
block) in KG basin covering 4,587 sq. mtrs
auctioned under NLEP VIII and is in the
process of developing State Gas grid and
gas distribution to meet the requirements of
industry and domestic.
To promote the Semiconductor industry,
which has a cascading effect on the
electronic Hardware sector a dedicated
SEZ Fab City, the first world class Solar PV
Cluster in India, was developed by APIIC, in
an extent of over 1072 acres near Hyderabad,
close proximity to Rajiv Gandhi International
Airport, Hardware Park and Electronic SEZ for
manufacturing of water fabs, photo Volataic
films. The project envisages investment of
USD 10 bn. and direct employment potential
of over 35,000 and four times of its as indirect
employment in the next 10 years.
Growth initiative to develop industrial parks
in very revenue division, in coherence with
the locational advantage for specific sector
are on the anvil. APIIC has plans to upgrade
infrastructure in the existing industrial parks
and to provide Environmental Management
initiatives for setting up eco- friendly industrial
parks. Plans to have gas based captive power
units in all the major industrial parks in the
coming years. More focus on setting up of
clusters in Food Parks, Automobile, Apparel/
Textile, Aerospace, EMS other than the
established sector Adequae support would
be extended to encourage SMEs in setting
up their units in the State. The Corporation
had over 500 employee Corporation playing
a pivotal role in achieving the objectives of
the Corporation, having its operations from
every district of the state. APIIC has taken
many initiatives to digitalize and to bring
automation of the systems. Enterprises
Resource Planning (ERP ) was implemented
to ingrate and to provide quality service to
the entrepreneurs and existing occupants
in the industrial Parks/Special Economic
Zones.
SPECIAL ECONOMIC ZONES
IN ANDHRA PRADESH
APIIC is the nodal agency for the Special
Economic Zones in the State of Andhra
Pradesh. Andhra Pradesh has the distinction
of having highest number of Notifies SEZs
i.e., 75 against 114 approved SEZs
Name of the
Developer
Noti-
fied
For-
mal
In Prin-
cipal
Total
APIIC 17 0 0 17
APIIC JVs 6 0 0 6
Assisted by
APIIC
20 6 2 28
Private Devel-
opers
31 13 4 48
Urban Dept.,
Authority
2 14 0 16
TOTAL 76 33 6 115
50
Hectares Acres
The extent covered under the above 115 Sezs 17,285.52 42,694.46
Notified SEZs 76 12,275.81 30,321.25
Formal Approval 33 2,500.03 6,175.00
In Principle Approval 06 2,509.68 6,198.90
TOTAL 115 17,285,52 42,694.46
Out of 76 notified SEZs in the State, APIIC has developed 17 SEZs at its own and also
taken up 6.
SEZs as a Joint Venture with private sector. Details are:
SL.NO. LOCATION TYPE OF SEZs EXTENT
(ACRES)
EMPLOYMENT
GENERATED
1. APSEZ, Atchutapuram,
Visakhapatnam
Multiproduct 5449.00 2227
2. Madhurawada, Hill No.2,
Visakhapatnam
Information
Technology
39.52 600
3 Madhurawada, Hill No.23
Visakhapatnam
Information
Technology
88.92 1600
4. Karkapatla, Mulugu Mandal,
Medak District
Biotech 100 -
5. Nanakramguda,
Serilingampally, R.R.Dist
Information
Technology
50.71 8507
6. Rajapur and Pollepalli
(V), Jedcherla (M),
Mahaboobnagar Dist
Formulations 250.00 305
7. Maheshwaram, R.R.District Hardware 275.00 -
8. Sarpavaram, Kakinada Information
Technology
25.71 -
9. Madikonda, Hanumakonda,
Warangal
Information
Technology
35.00 -
10. Kurukalva, Renigunta, Tirupati Information
Technology
809.45 -
11. Putlampalli, Kadapa Information
Technology
52.76 -
51
12. Adibatla, Ibrahimpatnam, RR
District
Aerospace and
Precision Engg
250.00 200
13. Naidupet, Nellore District Multiproduct 2550.05 500
14. Gambheeram, Visakhapatnam Information
Technology
50.00 -
15. Pulivendala, Kadapa Biotech 77.00 -
16. Maddipadu,Ongole,
Prakasam District
Buildding
Products
262.71 3750
17. Shameerpet(M), RR District Biotech 50.49 175
JOINT VENTURE
18. Fab City Maheswaram(M), RR
Dist
Semi Conductor
Faciity
1114.41 2110
19. Ramky Pharmacity, Lemarthi
Village, Visakhapatnam
Pharmaceuticals 611.05 3860
20. L & T Hi-tech city Ltd,
Gannavaram, Vijayawada
Information
Technology
30.00 198
21. Bharatiya International SEZ,
Tada, Nellore
Leather Product 250.30 -
22. K.Raheja IT Park Information
Technology
35.74 19,705
23 Emaar Hills Township(P) Ltd Information
Technology
28.98 -
TOTAL 43, 737
Employment Generated in Notifed SEZs:
NAME OF
THE DE-
VELOPERS
NOTIFIED FORMAL IN PRIN-
CIPLE
TOTAL OPERA-
TIONAL
SEZs
EMPLOYMENT
GENERATED
SO FAR
APIIC 17 0 0 17 8 19,188
APIIC JVS 6 0 0 6 4 20,076
Assisted by
APIIC
20 6 2 28 6 87,545
Private De-
velopers
31 13 4 48 10 38,352
Urban Dept,
Authority
2 14 - 16 - 00
TOTAL 76 33 6 115 28 1,65,161
52
The projected direct employment generation
is at 16,39,349 and created employment is
1,65,161 so far.
The projected investments is at Rs.1,05,447
crores and so far achieved Rs.14,267.43
Crores.
The details of the exports from out of SEZs is
narrated as follows:
Exports for the year 2008-09 Rs.8021.00 Ct.
Exports for the year 2009-10 Rs.5554.00 Cr
Exports for the year 2010-11 Rs.13334.69 Cr.
SOME OF THE APIIC SEZs:
Andhra Pradesh Special Economic Zone,
Visakhapatnam
LargestMulti-ProductSEZinanextentof
5,595 acres in Atchutapuram & Rambilli
Mandals in Visakhapatnam District.
Located50KMSouthofVisakhapatnam
Port.
EnvironmentalClearancebyMoEF
World-Classinfrastructureinplace
Excellent connectivity by road, rail, air
and ports
Well developed industrial parks at door
step
Availability of large talented pool of
manpower and social infrastructure
Hub of Petroleum, Chemicals and
Petrochemicals Investment Region (AP
PCPIR)
MultiProduct SEZ in Naidupeta,
SPS Nellroe District :
Located in Menakur Village Approx 5
km from NH-5
Spreadoverinover2500acres
Proximity to Chennai Port 100 KM ;
Krishnapatnam Port (SPS Nellore Dist) :
70KM;TirupatiAirport:45KM
World-classinfrastructure
M/s. Greentech Industries ( a Taiwan
based company) started operations
Information Technology Parks in
Tier II Cities
1) IT SEZ in Madhurwada Hill No: 2 in an
extent of 39.52 acres; hill No: 3 in an
extent of 88.92 acres in Visakhapatnam:
SEZ is operational
2) IT SEZ in Gambheeram, Visakhapatnam
in an extent of 50 acres
3) IT SEZ in Sarparavaram, Kakinada, East
Godavari District in an extent of 25.71
acres
4) IT SEZ in Gannavaram near Vijayawada
(MEDHA) in an extent of 50 acres and
the SEZ is opetrational
5) IT SEZ in Madikonda, Hanumakonda,
Warangal in an extent of 35 acres
6) IT SEZ in Kurukalva, Reinigunta, Tirupati
in an extent of 80.45 acres.
HHH
53
oIl FIeld warehouse & servIces ltd.
A MATERIAL MANAGEMENT COMPANY
OWS Group
Oil Field Warehouse & Services Ltd.
Establishedin2005,OWSprovidescomplete
support from the Special Economic Zone
(SEZ) right from picking up of goods from
any part of the world, storing them in SEZ and
delivering them to the clients in India and the
subcontinent as per their requirements. After
completion of contract, OWS brings back
the equipment into the SEZ, does preventive
maintenance and repairs to make it ready for
the next job.
Our Services
MaterialManagement&Warehousing
CustomClearance
RoadTransportation
SupplyofManpower
Advisory on Customs & regulatory
matter
ExportPacking&Crating
FacilitateTravel&Hospitality
Distribution
Benefts
Youcanholdgoodsforunlimitedperiod
Vs restriction in the bonded warehouse
Noworryofinterestpaymentatthetime
of home consumption from SEZ
You can plan your cash flow for duty
payment as and when the material is
required
You can send the material directly to
foreign countries in case you get any
order from abroad
NoVATincaseofsellingdirectlytoyour
customer from SEZ
Your customer can use any duty free
instrument like DEEC, DEPB, PEC, EC etc
for importing under duty concessions.
OWS Freight Systems Pvt. Ltd.
(India), OWS Freight Systems
(Italy) S.R.L. & Ultimate Freight
Systems LLC (UAE)
OWSFS&UFSareprofessionallymanaged
freight forwarding companies with their focus
on creating innovating Shipping / Logistics
solutions catering to customer demand. It
offers expertise in handling Air & Sea cargo
shipment at major ports & airports.
Our Services
Airfreight
Projectcargohandling
Doortodoorlogistics
Domestictransportation
SeaFreight
Chartering-Aircraft/Vessel
Customsclearance
Heavy-ODCMobilization
54
Benefts
Common entity for catering South east
Asia & Gulf region
A single point of contact for all
communication & shipments to end from
across the globe.
Daytodayreportingforallshipments.
Completelogisticssolutionssupport.
Direct communication with individual
coordinators for day matters.
Expert in handling heavy, out of gauge,
break-bulk & project cargo.
ExpertinhandlingHazardouscargo.
Oil Field Warehouse &
Services (USA) LLC
Determinedtoextenditsnetwork,OWShas
established a wholly owned subsidiary in
Houston, USA. In a short span of 6 Months
OWS,USAhasestablisheditselfasavendor
ofchoiceforsomeofthemostreputedOil&
Gas contractors in the US.
Our Services
FreightForwardingandLogistics
Doortodoorlogistics
Transportation
Procurement
Benefts
EaseofOperationsforIndiancompanies
looking to procure goods from the US.
Specializesinhandlingprojectcargo.
Oil Field Warehouse &
Services LLC (Oman)
Having successfully implemented the ideas
of providing warehousing and other services
from the free zone in India, OWS has
starteditsoperationsinOmanSoharfree
zone under the name of OWS LLC where
it has replicated its Vizag SEZ model. The
company has been set up with an objective
ofprovidingthesameservicestoOil&Gas
companies from Free Zones outside India.
Our Services
Warehousingfacility
Shore Base/Project Management
Services
FreightForwardingandLogistics
Benefts
Dutyfreeimport&storagewithinSohar
Free zone
Enjoylowoperationalcost&overheadin
Oman
Ease of operation with single window
clearance
Taxfreeoperations
OWS Technical Services :
Set up to provide manufacturing, repair and
maintenance services within the VSEZ thus
saving time and money on the back and forth
movement of the equipments while sending
them for repair outside India.
Our Services
Manufacturing
Fabrication
55
Stubbing,Re-build,Redress,Gascutting,
Re-furbish.
Reconditioning,Equipment.
Overhauling&Maching
Boring,machiningjobs
Calibration&Re-certificiation
Inspection and Certication of various
Equipment and Tools.
Beneft to users
Eliminatehasslesforsetupofcompany
& factory.
No license required for production/
services of good
Noworryforcomplianceforanyactivity
it is taken care by us
Exempt from service tax & VAT for
domestic purchases.
NoImportdutyforrawmaterials&Capital
goods
Noliabilityaftercompletionofcontract
Planet SEZ Pvt. Ltd.
Planet SEZ is the most ambitious project
of OWS till date its objective is to set up
anOil&GassectorspecificSEZwhichwill
be a dedicated supply base for oil & gas
industries, there by attracting manufactures
/ supplier of equipment, fixtures and fitting
for setting up their units.
Our Services
SEZDeveloper
Benefts
Thefirst&onlymanufacturingfacilityof
its kind in India for fabrication of heavy
engineering structures.
Duty-free! Exemption from all kind of
duties.
5 years Tax holding, next 5 years only
50% income tax.
Exemption from payment of local taxes
for purchase from domestic market for
SEZ.
Dutyfreeimportofgoodsforsettingup
of the SEZ units.
SectorspecificSEZwillprovidearobust
eco-system to facilitate manufacturing.
Hassle-free re-export regulatory/ duty
implications.
Treatedasforeignenclave.
Singlewindowclearance.
HHH

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