This week’s government decision to cancel the empowered group of ministers meeting, which was to take a final call on crucial decisions on special economic zones (SEZ), dented the ambitious plans of private equity (PE) firms to invest in these tax-free enclaves. Many PE firms plan to withdraw from their proposed SEZ investment plans as the frequent changes in the SEZ policy makes their investment look unviable.
Following nation-wide protests on alleged forced land acquisition for such tax-free enclaves and industrial projects, the government had in April 2007, capped the maximum area for a single multi-product SEZ at 5,000 hectares. Besides, the finance ministry suggested withdrawing such tax exemptions, though the commerce ministry pitched for commercial viability of SEZs.
The frequent changes by the authorities have affected investment sentiments, says Shiban Dudha, a chartered accountant advising SEZ projects. S Gayathri, partner, Grant Thornton said: “PE firms make investments on the basis of valuations and projections. Many SEZ developers had set up SPVs to attract PE funds too. But every now and then, the basics of the SEZ policy, which everyone has taken for granted, is overturned.”
Several PE firms, which were on the verge of making huge investments in SEZs, are having second thoughts now, K V Madhan, associate director, E&Y said. “They are, instead, looking at alternate options in other sectors where they can get good returns.”
PE investment is crucial for many of the SEZs since the debt is not easily forthcoming for such projects. The RBI treats SEZs as real estate ventures and has accorded high-risk weightage to these projects. This dries up sources of debt funding for SEZs. According to the commerce ministry, over Rs 52,193 crore have been invested in 194 notified SEZs. SEZs are expected to bring in investment to the tune of Rs 300,000 crore in the near future.
Source: Financial Express