DTZ Insight

Special Economic Zones in India

Expanding Contours

3 June 2010 • As government support for the old regimes of Software Technology Parks
of India (STPI)/Export Oriented Units (EOU) nears expiry, we believe
Special Economic Zones (SEZs) are the way forward for export led
companies planning to expand in or enter India.

Contents • Relocation and consolidation in SEZs are likely to continue to face

multiple operational challenges due to regulatory impositions on the
Executive summary 1 migration from STPI/EOUs to SEZs.
Introduction 2
Macro review 3 • The markets are in a readjustment mode as the economic recession has
City reviews triggered many exits, and we expect only the proactive states, suitable
Delhi NCR 7 locations, right formats and capable players to emerge stronger in the
Bengaluru 8 SEZ space in the short to medium term.
Mumbai 9
Chennai 10 • We believe the states of Karnataka, Andhra Pradesh, Tamil Nadu,
Pune 11 Maharashtra and Gujarat are likely to set the pace in the short term for the
Kolkata 12 future SEZ landscape. We expect ‘the others’ in the race to ride the
Hyderabad 13 momentum in the medium to long term.
Policy review 14
Conclusion 18 • While the IT/ITES format should continue to account for a sizable amount
Definitions 19 of activity, we expect multiproduct and sectoral SEZs (comprising
Contacts 20 engineering and pharma) to add to the pace of SEZ growth.

• As funding in SEZs remains constricted, we expect development activity

Author
Priyankar Bhikshu
Head of India Research
+91 (0)124 459 7500
priyankar.bhikshu@dtz.com
Shveta Mahajan
Assistant Research Manager
+91 (0)124 459 7500
shveta.mahajan@dtz.com
Contacts
in the short to medium term to be limited to SEZs that are captive in
nature, government supported or those promoted by developers who are
in sound financial health, with proven execution capabilities.
• Landlocked cities such as Bengaluru, Delhi, Pune and Hyderabad with
SEZs nearer to their existing economic clusters are likely to remain more
active in terms of occupational demand from the IT-ITES industry. We
believe coastal cities such as Mumbai and Chennai with SEZ locations
away from city centres are better placed for manufacturing led SEZ
growth.
• Only 25% of the notified SEZs have reached the operational stage. With
only modest additions proposed for the next two years and demand
signals being affirmed, the short term supply demand gap may put upward
pressure on SEZ prices.

David Green-Morgan
Head of Asia Pacific Research
+61 (0)2 8243 9913
david.green-morgan@dtz.com
Hans Vrensen
Global Head of Research
+44 (0)20 3296 2159
hans.vrensen@dtz.com
• Some of the key policy issues of the SEZ debate in India are the
implications of a proposed Direct Tax Code, inconsistencies between the
SEZ and income tax acts, a lack of state commitment and support, and
limited clarity on an exit strategy. We expect the clarification of these
issues to be instrumental in shaping the character of this new tax haven.
• As policy ambiguities continue to limit growth and expansion for investors
and potential incumbents, we expect a stable and clear policy regime to
provide a much needed impetus for expanding the contours of SEZs in
India.

www.dtz.com 1
Introduction

• After a head start in 2006-07, there has been a Figure 1

significant decline in interest in SEZ1 development,
SEZ activity, 2006-09
with incidences of denotification (exits) and
(SEZs notified under SEZ Act 2005)
downsizing surfacing. Members of the development
140
community have cited the economic slowdown and (No. of SEZs
notified)
131

liquidity crunch as reasons for their inability to 120

execute their SEZ plans, but we believe the downturn
100
has helped differentiate the speculative interests from 84
the projects planned on fundamental business 80 76

models. 55
60

• The acceleration in SEZ approvals during 2007 was 40

followed by a year on year (y-o-y) decline of nearly
25% during 2008-09. The phenomenon of 20
4
denotification led to many of the leading and some of 0
the earliest SEZ entrants exiting the market. With the 2006 2007 2008 2009 2009
(Denotif ied*)
government not raising any serious concerns over
these exits, subject to a complete refund of all fiscal *Requests for 8 more SEZs approved; denotification to be given on refund of all duties availed

benefits availed to date, what we see now is a Source: Ministry of Commerce & Industry, DTZ Research

balancing act of markets. From here, we expect the

markets to move to a state in which only serious Table 1
players with definite intent or the capability to
execute projects in the medium to long term would Status of SEZ approvals
be left (Figure 1). (Year End) 2007 2008 2009
• By not addressing the extension of the STPI/EOU Notified SEZs* 205 289 365
scheme, the 2010 budget signalled a likely end to the Formal approvals
existing tax regimes. This would mean a direct 232 278 224
(pending notification)
demand fillip for SEZs, which would be the only tax
Valid In-principle approvals 165 141 147
haven for IT/ITES and export-led manufacturing
companies in India. Operational SEZs 30 58 105

• Amid these economic uncertainties and positive * This Includes Old SEZs (19 zones that have been notified prior to SEZ Act, 2005)
demand signals, the markets are becoming more Source: Ministry of Commerce & Industry, DTZ Research
definite in terms of locations, formats and players that
should take the SEZ growth story to its next level in
Figure 2
the short to medium term.
Status of non-captive IT/ITES SEZs in key cities
• This report, which is the second in a series on
Special Economic Zones, corroborates the data with 8.0

opinions of various stakeholders, including

Supply (2010-11, m sq ft)

developers, investors, occupiers and financiers to 6.0

Delhi NCR Pune
analyse these emerging trends in SEZs and the
opportunities they hold. This study takes a closer 4.0 Hyderabad
Bengaluru

look at the on-the-ground progress of SEZs and key

policy issues that would be instrumental in shaping Chennai
2.0
the character of the SEZ regime in India. Mumbai
Kolkata
• This study provides a macro view of all major SEZ 0.0
formats and geographies, and a detailed review of 0.0 1.0 2.0 3.0 4.0

the development status of IT/ITES SEZs across the Vacancy (m sq ft)

key Indian cities (Figure 2).

Source: DTZ Research *The size of the circle represents existing stock
1
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 and tariffs. The economic laws and revenue
regulations of the Domestic Tariff Area (DTA) are not applicable within a SEZ. The
basic objectives of setting up SEZs in India have been to promote exports, earn
foreign exchange and generate additional employment in the country.

www.dtz.com 2
Macro review

Location trends
• We thus expect the five states of Karnataka, Andhra,
• Some states have exhibited a commitment to the
Tamil Nadu, Maharashtra and Gujarat to lead the
development of SEZs, reflected in a more
scale and pace of SEZ growth in the short term (next
controlled/lower percentage growth in
two years). With many of the proposed projects now
approvals/notifications and higher percentage of
operational or in advanced stages of implementation,
already approved SEZs reaching the stage of
these states have set precedents that should create a
operations.
demand pull in their favour over other states.
• Based on these evaluation criteria, Karnataka and Moreover, with their state-level SEZ policies and
Andhra Pradesh have been the best performing to enabling acts in place, these states have taken a lead
date, with growth in the number of notified SEZs in creating a conducive environment for an SEZ
during 2007-09 being lower than the average growth occupier. Other promising states, including Haryana,
of 100% and the percentage of SEZs currently Uttar Pradesh and Kerala, are likely to catch up in the
operational higher than the average of 25% for the top medium term, in our opinion.
10 SEZ states. They are followed by Tamil Nadu and
Maharashtra (Figure 3).
Figure 3
• While the character of SEZ growth in the four top-
performing states is skewed in favour of small Performance of notified SEZs by state
IT/ITES SEZs, Gujarat has demonstrated an (SEZs notified under SEZ Act 2005)
impressive performance with large manufacturing led
multiproduct SEZ formats. Three multiproduct SEZs (No. of 0 10 20 30 40 50 60 70 80 (No. Operational) (% Operational)
Notified SEZs)
(notified after 2005), namely Mundra, Reliance 73 + 43%
Andhra Pradesh 20 27%
Infrastructure and Dahej, are currently operational in 51

the state, the highest number in the country. Maharashtra

57 + 148% 14 25%
23

• The rate of growth of additional approvals has Tamil Nadu

54 + 93% 14 26%
28
remained high in Haryana, however on-the-ground 31 3 10%
implementation to date has been abysmal. The Haryana
14
+ 121%

geography is characterised by a high percentage of Gujarat

30
+ 173% 7 23%
11
vacant non-SEZ stock, resulting in developers
29
holding/shelving their SEZ plans until the uncertainty Karnataka
20
+ 45% 15 52%

subsides. Also, the state, unlike its southern Uttar Pradesh

16
+ 100% 4 25%
8
counterparts, is not backed by demand for campus-
15
style IT SEZ developments, further limiting its scale Kerala
8 + 88% 4 27%

and pace of supply addition. The service oriented 11

West Bengal + 120% 2 18%
ITES led character of the geography would provide a 5

demand pull for IT SEZs. However, the real uptick in Rajasthan

4
7
+ 75% 1 14%
development activity in the short term would be
2009 2007
confined to the players that have already taken off or
are prepared to do so in the near term. Together with
the adjoining state of Uttar Pradesh, the state of Source: Ministry of Commerce & Industry, DTZ Research

Haryana would augment its SEZ infrastructure in the

medium term.

www.dtz.com 3
Macro review

Format trends Figure 4

• While IT/ITES accounts for a maximum share in Growth of notified SEZs by class
(SEZs notified under SEZ Act 2005)
notified and operational SEZ projects, a closer look
at the performance of SEZ classes reveals that (No. of 0 50 100 150 200 250 300
(No. Operational) (% Operational)
multiproduct and sectoral SEZs have attracted more NotifiedSEZs)
206
59
interest during the last two years. This is reflected in IT/ITES
117
+ 76% 29%

higher percentage growth in approvals/notifications 115

and a higher proportion of already approved SEZs Sector Specif ic
56
+ 105% 21 18%

reaching the stage of operations during the same

15
period. Multi-product
9
+ 67% 6 40%

• Sectoral SEZ approvals have grown at 105% during Multi-service

8
+ 100% 0 0%
the past two years, which is higher than the average 4

rate of 87% for all formats together. The proportion 3

FTWZ 0 0%
of multiproduct SEZ projects currently operational 0

(40%) is higher than the average proportion of 2009 2007

operational SEZs (25%) for all formats together

(Figure 4). Source: Ministry of Commerce & Industry, DTZ Research

• While IT/ITES (including electronics) should continue

to account for a sizable proportion of SEZ growth, we Figure 5
believe multiproduct and sectoral SEZs (comprising
engineering and pharma) would also emerge as the Growth of notified SEZs by sector
key drivers, going forward. Furthermore, we expect (SEZs notified under SEZ Act 2005)

manufacturing-led zones to drive growth in the SEZ

0 5 10 15 20 25 30
space in locations such as Chennai and Mumbai, (No. of
NotifiedSEZs)
(No. Operational) (% Operational)

where SEZs have been established away from the Engineering

7
18
+ 157%
5 28%

key economic clusters. Service-led SEZs located Pharma

18
4 22%
closer to city centres should take off much faster 11 + 64%

(Figures 4 and 5). Biotech

4
17
+ 325%
1 6%

12
Electronics
• We observe that there is a natural progression of 9 + 33% 4 33%

those industries/sectors towards the SEZ model, for Textiles

7
12
+ 71% 1 8%

which India has a competitive advantage and which 7

Food & Agro Based
have grown in the country due to their export 4 + 75% 1 14%

oriented/outsourcing character. What we do not Gems & Jewellery

2
5
+ 150% 1 20%
expect in the short to medium term is the growth of
2009 2007
any major new industries through the SEZ model.

• The overall investment and operational performance Source: Ministry of Commerce & Industry, DTZ Research

of SEZs during 2007-09 looks encouraging. However,

a closer evaluation of the additional economic activity
that has come by way of investments, exports and
employment through new SEZs (SEZs notified under
the SEZ Act 2005) reflects the real activity and interest
in SEZs, as analysed in the sections below.

www.dtz.com 4
Macro review

Investment trends Figure 6

Cumulative growth of investments in SEZs

• A look at the investment performance of SEZs during
2007-09 reveals that more than 90% of the (INR crores)
investments that have come during the period have 140000
Old SEZs New SEZs
been channelled into new SEZs (notified under the
120000 114,640
SEZ Act 2005). However, the investments mobilized
in new SEZs during 2007-09 is nearly 60% lower 100000
than projected in 2007 (Figure 6). 80000
81,093

• Foreign direct investment (FDI) accounts for only 60000 47,158

10% (INR10,983 crores) of the total cumulative 40000
investments that have come to SEZs during 2007-09.
20000
Amid the recessionary market conditions, uncertainty
on the policy front has further limited the foreign 0
investment community’s interest in investing in SEZs. 2007 2008 2009

With payoff periods becoming longer than expected, Source: Ministry of Commerce & Industry, DTZ Research
some of the private equity investments during
2007-09 are also being re-evaluated.
Figure 7
• The banking community’s interest in funding SEZ
projects is at an all-time low, with very limited Y-o-Y export growth in SEZs
proposals being evaluated during the last year and a
negligible proportion being approved. SEZs are (INR crores)
currently not considered a lucrative asset class for Old SEZs New SEZs
120,000
debt funding, from a security and performance point
99,689
of view. Demand viability is becoming more difficult to 100,000
prove for developers as many of the projects are 80,000
ahead of time or are currently unviable due to 66,638
inadequate demand or location disadvantage. This is 60,000

worsened by the states’ lack of commitment in 40,000 34,615

provisioning support infrastructure at project sites.
20,000
• With longer gestation periods and uncertain demand, 0
alternate asset classes such as residential and 2007 2008 2009
infrastructure projects like ports/bridges are more
lucrative to private/foreign investors and financiers.
Source: Ministry of Commerce & Industry, DTZ Research
This indicates a situation in which the following
category of promoters is likely to populate the SEZ
space in the short to medium term:
Figure 8
– Captive SEZs Cumulative growth of employment in SEZs
– SEZs Led by large developers in good
financial health and proven execution   (No. of people)

capabilities on sites located near existing 600000 Old SEZs New SEZs
clusters 488,000
500000
– Government promoted/backed SEZs in which
the government initially invests in 400000
349,209
infrastructure/utilities to create an enabling
300000
environment. 235,053
200000

100000

0
2007 2008 2009

Source: Ministry of Commerce & Industry, DTZ Research

www.dtz.com 5
Macro review

Export trends Outlook

• While overall SEZ export performance looks
impressive, the additional economic activity by way of
contribution from new SEZs remains far lower.
Exports from new SEZs account for only 20% of total
SEZ exports, with the remainder accounted for by the
old economic zones (Figure 7). Although the on the
ground implementation of projects is lower, the
performance is reflective of the low take-up within
SEZs that are operational. Until 2009, nearly 850 units
had been approved for operations through 86 new
zones, compared with 1,200 units operating through
just seven old government zones (Export Processing
Zones converted into SEZs). This reflects on the
market supply-demand gap for SEZs, even within
projects that have managed to successfully take off.
• The current scale of SEZ activity is visibly small
compared with what was envisaged three years ago.
The pace, spread and period of SEZ growth has been
far more optimistic and belied by speculative models,
rather than being due to the right timing, real demand,
preparedness and fundamental capabilities to execute.
As the markets readjust and government support for
old regimes such as STPI/EOU nears an end, the pro-
active states, suitable locations, right formats and
capable players should survive the race. While
industry stakeholders are uncertain about the
character and future form of the SEZ framework, they
believe in the long-term sustainability of the concept,
which has proven its success worldwide. The
consensus is, “SEZs are here to stay.”

Employment trends • The next section takes a closer look at the

performance of SEZs in the key real estate markets of
• Employment in new SEZs has grown fivefold during India, with a focus on IT/ITES SEZs.
2007-09 and accounts for nearly half of the total
estimated employment in all SEZs at present (Figure
8). However, the current level of employment is less
than 10% of the total employment projected through
new-generation SEZs. But, noticeably the employment
propensity of new SEZs is far higher than the old
SEZs due to their service oriented character (Table 2).
This reaffirms the government objective to create
additional employment through the SEZ model.

Table 2

Operational performance of notified SEZs in India

No. of Average
Status updated as on
Notified Operational Operational Units approved Employment
December 2009 Employment
SEZs SEZs IT/ITES SEZs in SEZs Intensity per
(No.)
[% of Total] unit
Central Government SEZs 0
7 7 1200 2,00,000 167
(EOUs converted into SEZs) [0%]

State/Pvt. SEZs 2
12 12 650 61,000 94
(Set up prior to SEZ Act) [17%]

New SEZs 59
346 86 850 2,27,000 267
(Notified under the SEZ Act) [69%]

Total 365 105 61 2,700 4,88,000 181

[58%]
Source: Ministry of Commerce & Industry, DTZ Research

www.dtz.com 6
City reviews – Delhi NCR

• By the end of 2009, as many as 48 SEZ notifications Figure 9

and 29 formal approvals (pending notification) had
been given in NCR, the highest among all major cities. Status of approvals and implementation
IT/ITES SEZs accounted for a significant 80% of the
proposed SEZ developments in the region, with (No. of SEZs) 0 10 20 30 40 50

biotech, multiservice and engineering SEZs

accounting for the rest. In terms of geographical
spread, nearly 60% of these developments are Notified 39 9
concentrated around Gurgaon, 38% around Noida,
including Greater Noida, and only 3% in Delhi
(Figure 9).
• Despite being one of the highest in terms of number of Formally Approved 23 6
approvals, on the ground implementation of SEZs in
NCR has remained much lower than its counterparts
in the southern and western parts of the country. Only
nine, or 19%, of notified SEZs are operational to date,
of which three are captive campuses and one is an old Operational 7 2
EPZ (NEPZ). Due to the supply glut created in the
non-SEZ IT space, together with the IT demand IT Non IT
uncertainty that surfaced during the recession,
Source: Ministry of Commerce & Industry, DTZ Research
developers either kept their SEZ development plans
on hold or shelved them. There have been incidences
of developers vouching for potential buyers to sell their
stakes at project (SPV) level.
Table 3
• Supply addition in the SEZ space to date has been
modest, with SEZs accounting for 12% of total IT Market summary of IT office space
office space inventory in the region. Most of the Parameters
IT SEZs
IT Non SEZ
construction activity has been a result of pre- (Non-Captive)
commitments made in 2007-08. As a result, more than Existing Stock (mn sq ft) 4.0 28.8
80% of the existing IT SEZ stock is currently absorbed.
Vacancy (%) 18% 36%
The major developers in the region, namely DLF,
Unitech and 3C, are among the earliest and are the Supply 2010-11 (mn sq ft) 5.7 17.5
key players with existing marketable IT/ITES SEZ Rentals (INR per sq ft pm) 40-55 40-60
stock. Almost all others are at the land stage and are Key IT SEZ Occupiers Bank of America, Accenture, Genpact
thus unlikely to enter the market before 2012. At
Source: DTZ Research
present, 5.7 million sq ft of supply is scheduled for
completion by the end of 2011 (Tables 3 and 4).
• After a year of active occupational interest, SEZ Table 4
activity in 2009 remained slow. At 0.7 million sq ft,
SEZ absorption in 2009 accounted for 15% of the Key IT/ITES SEZ projects
total leasing reported. As a result, quoted rentals in IT SEZs (Non-Captive) Location Status
SEZs remained nearly comparable or at a discount to
the non-SEZ IT office rentals in the vicinity. Further, DLF Cyber City SEZ Gurgaon Operational
the SEZ rentals in 2009 were nearly 20-25% lower DLF IT SEZ @ Silokhera Gurgaon Operational
than the average transacted price in 2007. Unitech Infospace Gurgaon Operational
• However, as IT SEZ demand triggers in the region have Unitech Infospace Noida Operational
already started to come through, the existing or near 3C’s Oxygen Boulevard Noida Operational
completion projects should benefit in terms of take-up.
Source: DTZ Research
Also, with most of these projects located near the
existing activity hubs, they could have a price advantage
over their non-SEZ counterparts in the vicinity. We
believe a major supply glut is unlikely at least until 2012,
indicating the possibility of SEZ prices strengthening
during the period.

www.dtz.com 7
City reviews – Bengaluru

• By the end of 2009, 18 SEZ notifications and 15 Figure 10

formal approvals (pending notification) had been
granted in Bengaluru. IT/ITES SEZs account for Status of approvals and implementation
more than 85% of the proposed developments in the
(No. of SEZs) 0 5 10 15 20
region, with the remainder being biotech and airport
based multiproduct SEZs. Most of the upcoming
projects are located around the existing IT hubs of
the city, namely Outer Ring Road (Sarjapur/Hebbal) Notified 16 2

and Whitefield (Figure 10).

• Nearly 70% of the notified SEZs have reached the
stage of operations, the highest among the key
Indian cities. This can be attributed to the fact that Formally Approved 13 2
the market is guided by a demand led supply
phenomenon, with campus-style/BTS developments
being a key demand driver for SEZs to date. In
addition, players such as Wipro, HCL and Biocon
have set up private captive facilities. Operational 11 1

• The supply and demand of SEZs in Bengaluru has

maintained a healthy balance. At 13.5 million sq ft,
IT Non IT
the IT SEZ (Non-Captive) stock of Bengaluru is
currently the highest among the seven key Indian Source: Ministry of Commerce & Industry, DTZ Research
cities. This accounts for nearly 20% of total IT office
inventory in the region. The supply pipeline for the
next two years (2010-11) also indicates a modest Table 5
addition. Unlike Delhi NCR, the existing SEZ space
in Bengaluru is interspersed between a number of Market summary of IT office space
developers, including Divyasree, Embassy Group, IT SEZs
Parameters (Non-Captive)
IT Non SEZs
Prestige Group, Primal group, Gopalan Enterprises,
Bagmane Developers and Tanglin Developments Existing Stock (mn sq ft) 13.5 57.1
(Tables 5 and 6).
Vacancy (%) 23% 28%
• A sizable volume of the existing stock is pre- Supply 2010-11 (mn sq ft) 4.0 3.6
committed by industry players such as Cisco,
Rentals (INR per sq ft pm) 35-45 24 - 55
Accenture and IBM, with only 23% currently lying
vacant. After showing healthy activity in 2007-08, the Key IT SEZ Occupiers Cisco, Accenture, IBM
SEZ take-up slowed during 2009. At 1.35 million sq ft, Source: DTZ Research
SEZ absorption still accounted for nearly 30% of the
total absorption reported in 2009. After the budget in
2010, the market has again observed an upsurge in Table 6
occupational queries.
Key IT/ITES SEZ Projects
• Despite correcting 20-25% from its peak in 2007-08, IT SEZs (Non-Captive) Location Status
there are incidences of SEZs commanding a
marginal premium compared with their non-SEZ Manyata Tech Park ORR Hebbal Operational
counterparts in the same micro markets. With market Divyasree Tech Park Whitefield Operational
sentiment turning positive, SEZs appear to be the Prestige Cessna ORR Sarjapur Operational
way forward for many companies looking at
expansion or fresh entry into the market. Also, many Global Axis Whitefield Operational
companies in the region that have enjoyed a 10-year Global Village Mysore Road Operational
tax holiday under the STPI scheme are looking for Vrindavan Tech Village ORR Sarjapur Operational
options and ways to migrate/consolidate within SEZs.
With demonstrated execution and precedents of World Tech Centre ORR KR Puram Operational
successful operational SEZs, Bengaluru is likely to Pritech SEZ ORR Sarjapur Operational
witness healthier SEZ growth among the seven key Source: DTZ Research
cities of India, in our view.

www.dtz.com 8
City reviews – Mumbai

• Over the last two years, the number of notified SEZs Figure 11
in Mumbai has increased to 16, with an additional 15
projects currently formally approved (pending Status of approvals and implementation
notification). Compared with other cities, IT/ITES
contributes a relatively low proportion of 60%, with (No. of SEZs) 0 5 10 15 20

the remainder accounted for by multiproduct,

multiservice and sectors such as biotech,
engineering, and gems and jewellery. Due to land Notified 8 8
paucity and high land prices in and around Greater
Mumbai, most of these SEZs have come up in far-off,
peripheral locations such as Navi Mumbai and Thane.
Almost all of the proposed developments are non-
captive (Figure 11). Formally Approved 11 4

• Only three projects are currently operational, of

which one is an old EPZ (SEEPZ). On a relative
scale, Mumbai is at a nascent stage of SEZ
development compared with its counterpart cities, Operational 2 1
including Delhi NCR. Most of the developments in
Mumbai have been proposed in remote locations,
putting the more conveniently located non-SEZ IT Non IT

projects on the preference radar of companies. There Source: Ministry of Commerce & Industry, DTZ Research
are incidences of developers seeking SEZ
denotification in distantly-located projects.
• At 2.1 million sq ft, SEZ stock accounts for 8% of IT Table 7
office inventory in Mumbai, the lowest among tier I
cities. Limited IT SEZ supply has been created in Market summary of IT office space
Mumbai through two projects, one developed by IT SEZs
Parameters IT Non SEZs
Hiranandani and the other by K Raheja. The others, (Non-Captive)
including the one in Navi Mumbai which is one of the Existing Stock (mn sq ft) 2.1 25.2
largest proposed SEZs in the country, are in proposal
Vacancy (%) 5% 23%
stages. We see limited speculative supply in the
pipeline for the next two years (Table 7 and 8). Supply 2010-11 (mn sq ft) 0.6 10.3
Rentals (INR per sq ft pm) 32-35 40-75
• Most of the existing SEZ stock is currently absorbed,
of which a significant proportion had been pre- Key IT SEZ Occupiers TCS, Wipro, Accenture
committed in 2007. A sizable development potential Source: DTZ Research
exists in SEZs. However, with sufficient options
available for IT occupation at better locations,
demand for SEZs that are located at farther locations
Table 8
is insignificant at present. With supply closely
following demand, the region is characterised by a Key IT/ITES SEZ projects
negligible supply-demand gap in SEZ space at
IT SEZs (Non-Captive) Location Status
present. SEZ developers in the region prefer to enter
into pre-commitments over adding any speculative Hiranandani’s IT SEZ Powai Operational
SEZ space. Raheja’s Mindspace Airoli Operational
• Quoted SEZ rentals have corrected by nearly 20% in Navi Mumbai SEZ Kalamboli Proposed
peripheral locations. SEZ rents are lower due to Royal Palms – I Palm Goregaon Proposed
location dynamics, rather than an oversupply Source: DTZ Research
situation. However, with a limited supply pipeline, any
demand momentum that is likely post-STPI expiry
would strengthen the SEZ prices in the region.

www.dtz.com 9
City reviews – Chennai

• By the end of 2009, 37 SEZ notifications and six Figure 12

formal approvals (pending notification) had been
given in Chennai, one of the highest in the country. Status of approvals and implementation
IT/ITES SEZs accounted for a relatively lower
proportion of 58% in these developments, with (No. of SEZs) 0 10 20 30 40 50

manufacturing SEZs creating another major thrust in

SEZ space. Electronics, engineering footwear,
Notified 22 15
automotive and logistics (Free Trade Warehousing
Zones) are some of the sectoral SEZ formats
emerging in the region. However, most of the SEZs
are located in suburban/peripheral locations such as
Manapakkam, OMR and GST, extending further to Formally Approved 3 3
the Kancheepuram district (Figure 12).
• With 17, or 46%, of the notified SEZs reaching the
stage of operations, Chennai currently accounts for
the highest number of operational SEZs among the Operational 9 8
key cities. Many of them are manufacturing led or
captive in nature, either in the form of private IT Non IT
developments or government-promoted (SIPCOT or
ELCOT) SEZs with land allotted to companies for Source: Ministry of Commerce & Industry, DTZ Research
campus-style developments. Most of the non-captive
IT SEZs have been proposed in distant locations,
limiting demand viability.
Table 9
• The current IT SEZ stock (non-captive) in Chennai,
estimated at 9.6 million sq ft, is heavily contributed to Market summary of IT office space
by seven projects, accounting for 25% of total IT IT SEZs
space inventory in the region. Located far from city Parameters (Non-Captive)
IT Non SEZs

centres, many others have either not picked up or Existing Stock (mn sq ft) 9.6 27.7
have slowed their construction activity. The proposed
supply addition for the next two years, estimated at Vacancy (%) 34% 27%
2.2 million sq ft, remains conservative Supply 2010-11 (mn sq ft) 2.2 6.6
(Tables 9 and 10). Rentals (INR per sq ft pm) 28 – 45 20 – 40
• Most of the current absorbed stock was pre- Key IT SEZ Occupiers TCS, Accenture
committed during 2007-08. Fresh absorption in 2009 Source: DTZ Research
remained much lower, at approximately
0.5 million sq ft, accounting for 20% of the total
activity recorded during the year. The demand Table 10
response for more conveniently located projects,
such as DLF IT SEZ, has been much healthier. Key IT/ITES SEZ projects
IT SEZs (Non-Captive) Location Status
• SEZ prices have corrected by 30-40% from their
peak in 2007-08. IT SEZs, which took off with a lot of DLF IT SEZ Manapakkam Operational
positive sentiment in this region, are currently facing ETL Chennai One Pallikaranai Operational
a market challenge of location trade off, and are
Shriram Gateway Tambaram Operational
hence limited in their ability to offer an absolute
advantage to occupiers. SEZ activity in the region is ETA Technopark Navalur, OMR Operational
likely to be guided by demand from large-space Mahindra World City GST Operational
occupiers over small enterprises, as the latter prefer E Platinum Navalur, OMR Existing
to be near city centres.
L&T Estancia Vallenchery Existing
Source: DTZ Research

www.dtz.com 10
City reviews – Pune

• The number of notified SEZs in Pune reached 15 in Figure 13

2009, with an additional 18 projects in the formal
approval stages. A sizable 80% is concentrated in Status of approvals and implementation
the IT/ITES category, with pharma/biotech, 0 5 10 15 20
(No. of SEZs)
multiproduct and engineering SEZs accounting for
the rest. Most of these projects have come up near
the established IT corridors, interspersed among Notified 13 2
locations such as Hinjewadi, Hadapsar and Kharadi
(Figure 13).
• Nearly 65%, or 10, notified projects are currently Formally Approved 13 5
operational in Pune, including four private captive
developments and one government promoted MIDC
SEZ in Hinjewadi. Sizable development in the IT Operational 9 1
space in Pune has been guided by SEZ formats, with
some of the earliest IT SEZs of India, such as EON,
coming up in this region.
IT Non IT
• At 7.8 million sq ft, SEZ stock accounts for more than Source: Ministry of Commerce & Industry, DTZ Research
35% of the current IT inventory of Pune. Most of this
space is being developed by leading regional and
national developers. A modest amount of SEZ space Table 11
is under construction, in addition to nearly 37% of Market summary of IT office space
existing stock currently lying vacant
(Tables 11 and 12). IT SEZs
Parameters (Non-Captive)
IT Non SEZs

• At 0.3 million sq ft, SEZ absorption in 2009 Existing Stock (mn sq ft) 7.8 15.1
accounted for 15% of the total leasing reported
during the year. Most of the activity was recorded in Vacancy (%) 37% 17%
the already-established SEZ in the region, namely Supply 2010-11 (mn sq ft) 4.5 1.0
EON. Of the remainder, most of the currently Rentals (INR per sq ft pm) 30-35 35-40
absorbed stock has been an offshoot of the pre-
commitments given in 2007-08. Demand activity at Key IT SEZ Occupiers Cognizant, TCS, Accenture
present is slow. Source: DTZ Research

• With substantial supply options available in the

market and a limited demand response triggered by Table 12
recessionary conditions, SEZ prices in 2009
corrected by 30-40% from their peak in 2007-08. At Key IT/ITES SEZ projects
present, SEZ prices are marginally at a discount to IT SEZs (Non-Captive) Location Status
non-IT SEZs in the vicinity. The city has taken a lead Magarpatta City SEZ Hadapsar Operational
in the development of SEZ spaces in the country and
is poised to offer sufficient options in the near to Panchshil’s EON Kharadi Operational
medium term to absorb any demand trigger that may SP Infocity Hadapsar Operational
arise due to the expiry of STPI clauses. As the SEZ DLF Akruti IT SEZ Hinjewadi Operational
supply market of Pune has already intensified with
sufficient marketable surplus, we believe substantial Embassy Tech Zone Hinjewadi Operational
price growth is unlikely in the short to medium term, Paranjape’s Blue Ridge Hinjewadi Under Construction
even when SEZs begin to offer an absolute product International Tech Park Hinjewadi Proposed
advantage.
Source: DTZ Research

www.dtz.com 11
City reviews – Kolkata

• With 11 notified SEZs and eight formal approvals, Figure 14

Kolkata is lagging its counterparts in SEZ
development. IT/ITES accounts for 80% of the Status of approvals and implementation
projects in this category. The remainder includes (No. of SEZs) 0 5 10 15
sector-specific formats such as leather, electronics,
and gems and jewellery. Most of these projects have
been proposed in Rajarhat or the even farther Notified 8 3
peripheral district of Parganas (Figure 14).
• Of five operational SEZ projects, three are old SEZs
(notified prior to 2005). In the wake of limited demand
potential, DLF recently denotified its SEZ in the Formally Approved 7 1
region. Moreover, other than TCS, most of the
proposed projects are non-captive in nature.
• The market at present is devoid of any competing
supply, with only one IT SEZ option available for Operational 3 2
occupation. In the Bantala SEZ developed by ML
Dalmiya and Co., companies such as Patni,
Cognizant and Tech Mahindra have taken up land for
IT Non IT
captive campus-style developments. The pace of
SEZ development is slow because developers have Source: Ministry of Commerce & Industry, DTZ Research
not foreseen any major occupational demand, and
social disruptions and land acquisitions issue remain
Table 13
a concern (Tables 13 and 14).
• Genpact had pre-committed nearly 0.7 million sq ft in Market summary of IT office space
2007 and nearly 0.45 million sq ft of leasing has been IT SEZs
Parameters IT Non SEZs
reported in 2009. No other substantial leasing or (Non-Captive)
pre-commitments have been reported in SEZ space. Existing Stock (mn sq ft) 1.7 9.5
The pace of IT SEZ absorption is linked to the growth
Vacancy (%) 35% 28%
of IT activity in the region. Although market activity
has picked up over the last two quarters, we believe Supply 2010-11 (mn sq ft) 0.6 7.1
the scale and potential for growth is limited to Rentals (INR per sq ft pm) 34-37 34-38
mandate any substantial scaling up of SEZ
Key IT SEZ Occupiers Capgemini, Genpact, TCS
development in the short to medium term.
Source: DTZ Research
• Quoted SEZ prices have corrected by 18-20%
compared with the peak quoted rentals in 2007-08. Table 14
However, SEZ prices are nearly comparable with
their non-SEZ counterparts in the vicinity. With no Key IT/ITES SEZ projects
supply competition, prices may exhibit an upward IT SEZs (Non-Captive) Location Status
bias over the next two years. However, we believe
any sizable market additions or announcements are Unitech Infospace Rajarhat Operational
unlikely during the period due to limited potential for Bantala IT SEZ Parganas Operational
growth in demand for IT space in the region. Source: DTZ Research

www.dtz.com 12
City reviews – Hyderabad

• With 38 notified SEZs and 14 formal approvals, Figure 15

Hyderabad is next to only Delhi NCR in terms of
potential development activity. IT/ITES accounts for Status of approvals and implementation
75 % of the proposed developments, with aviation-
led engineering and biotech being the other (No. of SEZs) 0 10 20 30 40 50

prominent formats. Most of the SEZs are coming up

in peripheral locations such as Shamshabad,
Madhapur and Gachibowli or further inside Ranga Notified 31 7

Reddy District, west of Hyderabad (Figure 15).

• With nearly 13, or 35%, of notified SEZs reaching
the stage of operations, Hyderabad has been one of
Formally Approved 8 6
the early entrants in SEZ development. A substantial
25% of the notified projects are captive projects of
players such as Wipro, CMC, Genpact, Infosys and
TCS, along with government agencies such as APIIC
(Andhra Pradesh Industrial Investment Corporation) Operational 11 2
playing a vital role in provisioning SEZ spaces to
potential occupiers. The non-captive developments
are interspersed among players such as L&T, IT Non IT
Rahejas, DLF, Tishman Speyer, Divyashree and Source: Ministry of Commerce & Industry, DTZ Research
Indu developers.
• Like its other southern counterparts, Hyderabad Table 15
already has a sizable SEZ stock, with projects such
as Hitech City and Mindspace operational since 2007. Market summary of IT office space
With nearly 8 million sq ft of stock, IT SEZs account IT SEZs
for 50% of existing IT office inventory. In addition to Parameters (Non-Captive)
IT Non SEZs
the existing space, a modest supply pipeline of 4.7 Existing Stock (mn sq ft) 7.9 8.1
million sq ft is gearing to surface over the next two
years. Most of the existing SEZs are near existing Vacancy (%) 10.3% 26.3%
clusters, some of them also planning to offer smaller Supply 2010-11 (mn sq ft) 4.7 1.7
floor plates to accommodate demand from small and Rentals (INR per sq ft pm) 30-35 36-38
medium-size enterprises (Tables 15 and 16).
Key IT SEZ Occupiers Cognizant, HCL
• Supply is closely following demand. Nearly 90% of Source: DTZ Research
the existing SEZ stock has been absorbed, a sizable
proportion of which had been pre-committed in
2007-08. Nearly1.2 million sq ft of absorption was Table 16
reported in 2009, which was much lower than that Key IT/ITES SEZ projects
recorded in 2007-08.
IT SEZs (Non-Captive) Location Status
• SEZ prices have corrected by 20% from their peak
DLF Cyber City Gachibowli Operational
rentals in 2007-08. With a marketable supply surplus
and demand slowdown in the preceding quarters, L&T Hitech City 2 Madhapur Operational
SEZs are currently being quoted at a discount over Raheja’s Mindspace Madhapur Operational
non-SEZs in the vicinity. With sufficient SEZ supply
Tishman’s Wave Rock Gachibowli Operational
maturing over the next two years and options
available from multiple developers, the markets are Divyasree’s Orion Raidurga Under Construction
likely to remain fairly competitive, arresting any major Point Indu Shamshabad Under Construction
price hike even when activity gains momentum. Source: DTZ Research

www.dtz.com 13
 Policy review – Key issues
• While the recessionary conditions and demand
uncertainty have slowed the pace of SEZ
development, policy uncertainties, regulatory
bottlenecks and operational issues have kept
industry confidence low, triggering exits or dissuading
investors and potential incumbents from entering
SEZs in the first place. SEZ regulations are evolving
and few clarifications have already been given.
Awaiting judgement, however, are many issues that
are likely to be instrumental in shaping the SEZ
regime in India, affirming industry confidence,
attracting investments, increasing development and
stimulating demand (Figure 16).
• Although the SEZ Act contains a lot of grey areas in
its current form, DTZ spoke to stakeholders 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. As
most of the SEZ projects are in nascent stages of
development, we believe, both, supply or demand
side inhibitors would be detrimental to the momentum
of SEZ growth in India.
Figure 16
Some of the key policy issues
(By level of criticality and stage of address)
High
• Provisions of Direct • Inconsistencies between
Tax Code SEZ Act and Income Tax
Act
• State Commitment
and Support • Transition Issues
Level of Criticality
• Exit Strategy for Developers
• Norms for Non-Processing
Zone
• Provision for Small Scale
Units
Low
Low
Stage of Address
Source: DTZ Research
www.dtz.com
Unit-level issues
A. Sunset clause of STPI/EOU
• Issue: The STPI/EOU scheme under which the
fiscal benefits are currently available to export-
oriented IT/manufacturing units has been
extended for the past two years, from its
scheduled expiry in March 2009 to March 2010,
then to March 2011. The uncertainty and policy
leeway (on account of global recessionary
conditions) have been impeding the development
pace of and demand pickup at SEZs in India.
• Measures taken: By not addressing any further
extension of the STPI/EOU scheme in the current
budget (2010), the government has given clear
signals regarding the likely end of the STPI/EOU
regime and its full commitment to the growth of
SEZs.
• Implications: The STPI/EOU expiry would mean
a direct demand fillip for SEZs in the short to
medium term, which would then be the only tax
haven for IT/EOU units in India.
• DTZ outlook: With SEZs providing an absolute
fiscal advantage over alternate space options in
IT Parks/Domestic Tariff Area (DTA), both the
development pace and pricing dynamics of SEZs
could undergo a major change over the short to
medium term.
B. Transition issues
• Sunset Clause of STPI /
EOU
• SEZ Financing • 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 (which
High
otherwise is not mandated in the SEZ Act; –
separate books of accounts are sufficient) or
advising migration in phases.
14
Policy review – Key issues
• Measures taken: As per the recent notification,
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.
• Implications: It offers only limited relief as most
of the companies evaluate SEZs to avail an
income-tax holiday and other fiscal benefits
contribute only a small proportion of net savings.
Any explicit guidance on transition of manpower
is still awaited, which is currently being
benchmarked against the similar permissible
limits (20%) as applicable for capital goods.
• DTZ outlook: The ruling may encourage the
companies seeking consolidation spaces to
improve business and operational efficiency to do
so through SEZs. Also, it may be 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.
C. Small and medium-size IT units
• Issue: STPI scheme gives the flexibility to set up
a unit anywhere, with no minimum space
requirement. The minimum land requirement of
10 hectares mandated for IT/ITES SEZs, current
floor space provisions (typically large floor plates)
and cost of real estate occupation within non-
captive private SEZs is unfavourable for start-ups
as well as small and medium-size enterprises.
• Measures taken: The government has instructed
IT/ITES SEZs to set up incubators of a minimum
size of 200 seats and earmark a minimum 10%
of the space in the SEZs to encourage start-ups
and accommodate demand from Small Scale
Industries (SSI). Also, the developers have been
allowed to lease space in IT/ITES SEZ on a shift-
to-shift basis, which means the same space
being leased to multiple users.
www.dtz.com
• Implications: The supply character and SEZ
demand over the last two years have been driven by
large IT companies through captive campus-style
developments, such as Infosys and Wipro etc, or
through non-captive BTS style developments,
including IBM, Accenture and Cisco, primarily to
cater their expansion needs. As developers are now
required to accommodate SMEs, they would also
need to provision for small floor spaces (smaller floor
plates).
• DTZ outlook: While the smaller IT spaces/incubation
spaces would mean an additional demand fillip from
start-ups and small entrepreneurs, the developer has
to strike a balance between the product portfolio and
tenant mix to maximise overall returns (in the form of
achievable rentals and subsequent tax exemptions)
from the activity of development.
D. Inconsistencies between SEZ Act and Income Tax
Act
• Issues: Under the Income Tax Act, an SEZ unit
supplying to another SEZ unit does not get any
income tax benefit on account of existing definition of
export, which only includes ‘physical exports’ outside
the country. However, such supplies, popularly called
‘deemed exports,’ are counted towards NFE
performance under the SEZ Act.
• Measures taken: Under discussion; no action has
been taken as yet.
• Implications: This does not encourage the ancillary
industries/vendors/support manufacturers of the main
industry to house themselves in the SEZ as the SEZ
unit (vendor) supplying to another SEZ unit (the main
manufacturer) does not get any income tax benefit on
account of the existing definition of exports under the
Income Tax Act.
• DTZ outlook: Once implemented, this would lead to
a cluster growth model in India, resulting in the
development of an entire eco-system/value chain
comprising research and development, component
suppliers, assembly, testing and product delivery,
giving a good fillip, especially to the manufacturing
SEZs.
15
Policy review – Key issues
Developer-level issues
E. State commitment and support
• Issues: Developers face inordinate delays in
taking approvals from the respective state
authorities. In many states, there are no enabling
provisions for implementing SEZ projects. Single
window clearance has not been practically
implemented to date, resulting in inconvenience
for developers as they have to get
approval/clearances from many state
departments. Also, states have not met their
commitments in providing infrastructure and
utilities such as water and power to project sites.
• Measures taken: The BOA has suggested that
no new proposal should be submitted by state
governments that have not put in place the
system of single-window mechanisms. Also, the
states have been directed to create enabling
mechanism for implementing SEZ projects by
operationalising their state level SEZ acts.
• Implications: The single-window mechanism
would help to reduce the gestation period of the
project and improve overall business confidence
in the SEZ framework. We believe this would
also help to trigger investments from serious SEZ
developers. However, the states’ commitment to
facilitate enabling infrastructure remains a key
concern.
• DTZ outlook: The sooner the measures taken up
by the centre synergise with that of the state, the
sooner we could see on-the-ground
implementation of SEZs. At the current pace of
redressal by BOA, we foresee that the
ambiguities related to the SEZ Act would subside
and a more transparent regime could evolve in
the next two years. Also, during this period, as
more SEZ projects reach the stage of completion,
sufficient on-the-ground evidence would be
established to guide the future activity.
www.dtz.com
F. SEZ financing
• Issues: Low-cost financing options have not
been available for the development of SEZs.
Loans for SEZ development were treated as
exposure to the commercial real estate sector.
Commercial real estate loans attract nearly 2%
higher interest rates than infrastructure loans,
and low cost funding options such as External
Commercial Borrowing (ECBs) were not
permissible for the development of SEZs.
• Measures taken: In 2009, the development of
infrastructure facilities in SEZs, such as industrial
parks, roads, water supplies, power supplies and
telecommunications, excluding the development
of integrated townships and commercial real
estate, were brought under the eligibility net of
infrastructure lending and ECB funding.
• Implications: While we believe the changes are
positive, no immediate gains are visible. With the
project viability of many SEZs being a major risk,
financial institutions are channelling funds into
more promising asset classes, such as highways,
power projects and bridges. On the other hand,
the opening of ECB route is not helping much
due to the absence of sufficient liquidity and risk
aversion in foreign markets since the recession.
• DTZ outlook: While the opening of additional
avenues for low-cost funding would augment
developers’ financial strength to execute SEZ
projects, it may take at least 6-8 months to
witness gains. The measures would see
developers with insufficient funds but viable SEZ
projects taking off in the short to medium term.
G. Norms for non-processing zones
• Issue: The guidelines for development and
disposal of infrastructure created in non-
processing zones have not been outlined, leaving
room for ambiguity and interpretation. In the
absence of clear guidance, developers have
either not earmarked any area for non-
processing zones or, as in most cases, have not
planned/commenced any activity on it.
16
Policy review – Key issues
• Measures taken: In 2009, the government came
up with the 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.
• DTZ 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
developer’s tendency to maximise value through
a focus on a single high-yielding asset.
H. Exit strategy
• Issue: The act as it stands today does not
provision for a clear exit strategy for SEZ
developers due to the treatment of land under the
SEZ Act. SEZ developers are not allowed to ‘sell’
any land or built-up space created in the zone
(processing as well as non-processing zone); the
land or built-up space can only be ‘leased’ to
units or a co-developer.
• Measures taken: The government has permitted
the denotification of SEZ projects (subject to
complete refund of all exemptions availed to
date), thus channelizing an exit at the land stage
itself (or pre-operation stage). However, there are
no clear provisions to exit from a notified SEZ
after the SEZ has become operational. The
promoter can dilute its equity only up to 49%;
anything beyond this is subject to the prior
approval of the BOA.
www.dtz.com
• Implications: Over the last year, many SEZ
developers have applied for denotification, citing
the economic slowdown and liquidity crunch as
baseline reasons. We believe such early exits
are helping to remove the glut from the market,
leaving in the market only serious players with
definite intent or the real capability to execute
these projects in the medium to long term.
• DTZ 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
I. Proposed Direct Tax Code
• Issue: The new Direct Tax Code, proposed by
the Ministry of Finance, Government of India, to
replace the Income Tax Act of 1961, discourages
income tax exemptions to SEZ units, while SEZ
developers’ benefits are proposed to be linked to
investment-based expenditures. Also, there is
uncertainty over the availability of Dividend
Distribution Tax (DDT) and Minimum Alternate
Tax (MAT) exemptions under the new regime.
• Measures taken: The Ministry of Commerce
continues to make assurances that benefits
prescribed by the SEZ Act cannot be withdrawn
under any circumstances, and says that SEZ-
related benefits would supersede all other acts of
the government. We await a concrete decision
through a written instruction or clarification.
• Implications: The conflicting signals from the
Ministry of Finance and the Ministry of
Commerce have taken the SEZ regime into
another realm of uncertainty. This is resulting in
further delays in the decisions of potential
incumbents or dissuading domestic and foreign
investors from entering into long-term
commitments through SEZs.
• DTZ outlook: The character of a newly-modified
regime would be instrumental in defining the way
forward for many stakeholders currently in wait-
and-watch mode. While the Direct Tax Code may
have some implications regarding the structure of
benefits currently available under the SEZ
scheme, government assurances and market
sentiment signal to us that the key fiscal benefits
would remain broadly intact.
17
 Conclusion

• Five years since the inception of the SEZ Act, having
traversed the best and the worst of market shifts, the
journey of Special Economic Zones in India has
entered a second phase. With sufficient development
potential in hand and some activity already in place,
we believe the time is ripe to capitalise on this new
tax haven. While a stable and successful policy
regime is still in the making, the risks are more
clearly established than before, which should lead to
an arrest in speculative interests.
• The states, cities, formats and promoters that have
taken the lead in SEZ market activity to date, amid
uncertainties, are set to define the pace and scale of
development in the short term. We expect a stable
and clear policy regime to provide a much-needed
impetus for expanding the contours of SEZs, which
should see many more geographies, promoters and
funding vehicles emerging and establishing
themselves in the medium to long term (Figure 17).

Figure 17

Expanding contours of SEZs in India

Time
Medium Term

• Haryana • Delhi NCR

• Uttar Pradesh • Mumbai
• Kerala • Kolkata
• Multiproduct
• Pharma
• Engineering

• Foreign Developers
• Andhra Pradesh
• Bangalore • Local Developers
• Karnataka
• Pune
• Tamil Nadu
• Chennai
Short Term

• Maharashtra • IT/ITES
• Hyderabad • Electronics
• Gujarat
• Captive SEZs
• Leading Regional
Developers • Bank Finance
• Government • FDI
• Internal
Accruals

SEZ Dimensions

Source: DTZ Research

www.dtz.com 18
Definitions

Stock NSEZ
Total accommodation in the private sector, both occupied Noida Export Processing Zone
and vacant.
SEEPZ
Absorption/Take up Santacruz Electronics Export Processing Zone
Floor space acquired for occupation including the
following: SIPCOT
1. Offices let to an eventual occupier State Industries Promotion Corporation of Tamil Nadu
2. Developments pre-let or sold
ELCOT
Prime rent Electronics Corporation of Tamil Nadu Ltd
Represents the attainable prime rent that could be
expected for a building/unit of the highest quality and MIDC
specification in the best location. Maharashtra Industrial Development Corporation

Vacancy In-principle approval: Given for the project where land is

Total floor space in existing properties (ready for fit-outs not in possession of the developer, only a suitable land
and being actively marketed). site is identified for developing SEZ. Approval is given
based upon the financial and management capability of
New supply the developer/promoter and industrial viability of the
Total floor space that has reached practical completion project. The approval is valid for one year within which
(ready-for-fitouts) during the survey period. suitable proposal for formal approval has to be submitted
with the state government.
Prelet/pre-commit
A development leased or sold prior to completion. Formal approval: Given only when the promoter has the
land (free from all encumbrances) to set up an SEZ.
Q-o-Q Developers having the land parcels with clear land titles
Quarter on quarter can also directly file for formal approval. Valid for three
years within which the developer shall implement the
Y-o-Y project.
Year on year
Notification: Marks the final stage in the SEZ approval
NCR process wherein the identified area is granted the status
National Capital Region of a special economic zone for the purpose of all
exemptions, drawbacks and concessions. All benefits
BFSI under the SEZ Act are effective only after the SEZ has
Banking, Financial Services and Insurance been notified.

IT-ITES Operational SEZ: According to the current practice, an

Information Technology-Information Technology-enabled SEZ is deemed operational even if at least one unit starts
Services exporting goods from the SEZ.

BTS New SEZs: All SEZs that came up in and after 2006 and
Built to Suit notified under the SEZ Act of 2005.

SEZ Old SEZs: 19 SEZs which were notified prior to SEZ Act
Special Economic Zone of 2005 (including eight EPZs that were converted into
SEZs)
EPZ
Export Processing Zones

SPV
Special Purpose Vehicle

www.dtz.com 19
Contacts

Management Team - India

Anshul Jain +91 99993 33900 anshul.jain@dtz.com

CEO – India

Occupational and Developments Markets

Hugh Hamilton +91 99809 11651 hugh.hamilton@dtz.com

Project Management
David Parsley +91 96322 03377 david.parsley@dtz.com

Investment Advisory
Ambar Maheshwari +91 98200 40025 ambar.maheshwari@dtz.com

Press Contact
Divya Pall +91 99990 33480 divya.pall@dtz.com

www.dtz.com 20
 Disclaimer
This report should not be relied upon as a basis for entering into transactions without
seeking specific, qualified, professional advice. Whilst facts have been rigorously
checked, DTZ can take no responsibility for any damage or loss suffered as a result of
any inadvertent inaccuracy within this report. Information contained herein should not,
in whole or part, be published, reproduced or referred to without prior approval. Any
such reproduction should be credited to DTZ.

© DTZ June 2010

www.dtz.com