New rules of the game

MUMBAI: The new SEZ policy will separate the heavyweights from the bantamweights, but delay the planning process by at least six months. “I am glad we are back on track with the freeze off. The doubling of the processing area means that only serious players will go ahead,” says real estate PE fund Starwood Capital MD Balaji Rao.

While the clarity and transparency is welcome, the cap of 5,000 hectares means that the SEZs’ ability to contribute to infrastructural effciencies will take a setback. While earlier SEZs could recover costs by spreading across a larger area, the new ruling will mean that the state governments will have to rethink the floor space index (FSI) for the non-processing area.

This means that the amount of construction on the same amount of square feet will have to increase, leading to vertical density. “For all multi-product SEZs, the promoters will have to go back to the drawing boards and redesign the entire master plan that will invoke serious energy, time and financial effort,” says infrastructure consultancy firm Feedback Ventures president Mukesh Khandelwal.

The introduction of the SEZ policy in its early days was envisioned across the country, leading to an equitable distribution of employment. With the new cap of 5,000 hectares, SEZs are more than likely to geographically concentrate closer to urban areas. According to Khandelwal of Feedback Ventures, the thumb rule for an SEZ is that for every 1,000 hectares of SEZ land, 60,000 processing jobs are created. So, with an equal mix of processing and non-processing zones, the new SEZs will be able to provide housing for only 40% of the jobs created.

The foreign direct investment (FDI) and the investment rate of return (IRR) are not expected to change. “I believe the change in policy will have no impact on FDI and IRR as one economic activity will be replacing another,” says PricewaterhouseCoopers (PwC) executive director Prashant Deshpande. So what of the numerous real estate funds that have set up shop in the country?

“It will be easier for us to raise funds as the fair amount of nebulousness that existed has been cleared. SEZs always have to run on the steam of their economic activity and we will continue to invest looking at the overall perspective,” says Saffron Asset Advisors director (investments) Ritesh Vohra.

In India, the easiest judging parameter for SEZs is China. The Chinese model is different, with only six large, concentrated and government-backed SEZs. India, on theother hand, has 162 scattered SEZs with the help of private partnership.

However, with the new policy being introduced and the state government withdrawing land acquisition support, the promoters face an uphill task. “Free market forces will come into play, leading to a frustrating and costly land acquisition process for the promoters,” adds Rao.