SEZ lending logic flawed, commerce ministry tells RBI

Monica Gupta / New Delhi October 10, 2006

The commerce ministry has taken strong exception to a recent Reserve
Bank of India (RBI) order to banks for treating lending for special
economic zones as exposure to commercial real estate.

This, it said, contradicted the RBI’s own Annual Report released just 20
days before the order, which had said that SEZs would lead to massive
investments and improvement in infrastructure.

Questioning the equating of SEZs with real estate, the ministry, in a
letter to the central bank last week, asked it to share with it any
instance where “SEZ development has taken place only as real estate
activity.”

The ministry said it was surprised that even the acquisition of SEZ
units had been treated as real estate activity by the central bank.

“The SEZ Act 2005 and SEZ Rules 2006 prohibit any sale of land in an
SEZ. A person intending to set up a unit in an SEZ has to get the
approval of the Approval Committee headed by the development
commissioner for SEZs, and only then they can get land on lease. Even
when a unit wants to move out of the SEZ, permission from the same
committee is needed. As such, there cannot be any acquisition of units
in the SEZ,” the ministry said.

Quoting the RBI’s Annual Report released on August 30, the ministry said
the central bank had said the “SEZ Act, 2005, which came into force on
February 10, 2006, is expected to facilitate a large flow of foreign and
domestic investment to SEZs, and contribute to improvements in
infrastructure and productive capacity, generation of additional
economic activity and creation of employment opportunities.”

The ministry went on to add, “However, the circular within the just 20
days reflects a complete reversal of stand by the RBI,” the ministry said.

It further pointed out that the SEZ Act had laid down clear-cut
guidelines to be followed by the Centre while notifying SEZs.

These included generation of additional economic activity, promotion of
exports of goods and services, promotion of investment from domestic and
foreign sources, development of infrastructure facilities and creation
of employment opportunities.
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