RBI gets reminder on SEZs’ core status

RBI gets reminder on SEZs’ core status
The Financial Express, May 21, 2009, Page 3

Arun S, New Delhi

Referring to an empowered Group of Ministers’ (eGoM) decision that conferred the coveted ‘infrastructure’ status on Special Economic Zones (SEZ), the commerce ministry has reminded the Reserve Bank of India (RBI) that even six months after the eGoM move, the central bank had not issued a notification to that effect.

‘Infrastructure’ status to SEZ projects will help developers access external commercial borrowings (ECBs or foreign funds at lower interest rates) and cheaper domestic credit.

But RBI treats lending to SEZs on a par with loans given to the commercial real estate (CRE) sector, which carries much higher risk weightage than the infrastructure sector and therefore makes credit costlier. RBI fears that granting core sector status to SEZs would only make it a pure-play real estate business, resulting in a realty bubble in the country.

But in its letter to the RBI earlier this month, the commerce ministry pointed out to the RBI that SEZs also perform the same functions as industrial parks and integrated townships, which have already been classified as infrastructure projects by the central bank.

Citing the ongoing financial crisis, the commerce ministry has also informed the RBI about the difficulties being faced by SEZ developers in completing their projects on time and the need for access to funds at lower interest rates. The recent fall in property prices in the realty segment and high interest rates have adversely impacted several real estate majors. Due to this, realty majors developing SEZs are mulling surrendering the SEZ status of their land.

In October last year, in a big boost to the SEZ development in the country, the eGoM on SEZs had decided to grant infrastructure status to all activities concerning these tax-free enclaves, except ‘purchase of land.’ Sources said the RBI’s objection regarding SEZs becoming a pureplay realty business was the reason for keeping out ‘purchase of land’ from the ‘infrastructure’ status.

According to SEZ developers, the central bank’s reluctance in notifying the same is denying them the ability to access these cheaper funds.Late last year, the RBI had issued draft guidelines on ‘classification of exposures as CRE'. In the guidelines, the central bank acknowledged the demands of the developers and commerce ministry by treating exposure towards purchase of land for setting up SEZs and its development as “Infrastructure Lending". But, the RBI also issued a rider saying that financial exposure to the tax-free enclaves is CRE.

Classifying SEZs as CRE exposure prevents them from accessing ECBs. According to ECB guidelines, CRE is not entitled to such funds. SEZ developers and the Export Promotion Council for SEZs and EOUs had taken it up with the commerce ministry saying SEZs should be treated as infrastructure projects to enable its developers to access cheaper credit.

The SEZ Act and Rules came into operation in February 2006. At that time, thanks to the booming economy, the country received massive foreign and domestic funds. Several companies, realising the huge potential of SEZs, were beginning to take the development of such zones seriously.

But fearing that SEZs would end up as a real estate business, the RBI in September 2006, in a circular said exposure to SEZs should be treated as exposure to CRE. However, in November 2007, the central bank issued a circular giving a list of projects that are entitled for the facility of infrastructure lending. In this SEZs also found a place along with industrial parks. Then in its subsequent annual report, the RBI clarified that the exposure to SEZs should be treated as CRE.

While the government—particularly the prime minister and other ministries like commerce and IT—has been bullish about these tax-free enclaves boosting investment and exports, the finance ministry and the RBI have been wary about SEZs right from the beginning.

The finance ministry has been peeved about the revenue losses due to the tax sops enjoyed by the SEZs, while the RBI has been wary about the zones becoming a pure play realty business and thereby pushing up inflation beyond permissible limits. RBI is also worried that bursting of the realty bubble would trouble those in the financial services sector with exposures to SEZs.