SPECIAL ECONOMIC

ZONES

EXPORT PROMOTING ZONES

India established its first EPZ in 1965 in Kandla

(Gujarat) followed by the Santa Cruz Electronic
Export Processing Zone (SEEPZ) in Bombay (now
Mumbai) in 1972.
In 1984 EPZs were established in Cochin (Kerala),
Falta (Calcutta, now Kolkata), Madras (now
Chennai) and NOIDA (Uttar Pradesh). The
Visakhapatnam EPZ (Andhra Pradesh) was
established in 1989 and the Surat EPZ (Gujarat) in
1997.
These eight EPZs were distributed over India such
that there were three each in the south and west
of India, but only one each in the north and east.

EXPORT PROMOTING ZONES

Various problems:
Limited scale and overcrowding of EPZs;
Insufficient logistical links with airports and
seaports;
Poor infrastructure in areas surrounding the
zones (e.g., unpaved roads and poor physical
security);
Government ambivalence and red tape regarding
inward foreign direct investment;

SPECIAL ECONOMIC ZONES

With a view to overcome the shortcomings

experienced on account of the multiplicity of
controls and clearances; absence of worldclass infrastructure, and an unstable fiscal
regime and with a view to attract larger
foreign investments in India, SEZs Policy was
announced in April 2000.
The Special Economic Zones Act, 2005, was
passed by Parliament in May, 2005 which
received Presidential assent on the 23rd of
June, 2005.
173 operational SEZs in the country.

The main objectives of the SEZ Act are:

(a) generation of additional economic activity
(b) promotion of exports of goods and services;
(c) promotion of investment from domestic and
foreign sources;
(d) creation of employment opportunities;
(e) development of infrastructure facilities

A Special Economic Zone (SEZ) can be defined as a deemed

foreign territory with special rules for facilitating FDI for
export oriented production, and for purposes of trade and
custom duties.

The key implication of being deemed foreign territory is

that individual units within the SEZ are allowed operational
freedom in routine activities and not supervised by customs
authorities.

Of the 585 SEZs approved, 381 have been notified of which

143 SEZs are already exporting. SEZs now export in excess
of Rs. 3,00,000 crore accounting for over 28% of the
country's total exports. With an investment of Rs. 2,00,000
crore, SEZs today provide direct employment to over
7,00,000 persons.

THE PROCESS

A Single Window SEZ approval mechanism has been

provided through a 19 member inter-ministerial SEZ
Board of Approval (BoA). The applications duly
recommended by the respective State
Governments/UT Administration are considered by
this BoA periodically. All decisions of the Board of
approvals are with consensus.

The SEZ Rules provide for different minimum land

requirement for different class of SEZs. Every SEZ is
divided into a processing area where alone the SEZ
units would come up and the non-processing area
where the supporting infrastructure is to be created

Minimum area requirements for setting up a SEZ are as

follows:
Multi Sector SEZ

1000 hectares

Sector Specific SEZ

100 hectares

Free trade and Warehousing Zone

40 hectares

IT/ITES/handicrafts SEZ/ Biotechnology/non-conventional

energy/gems and jewellery Sector

10 hectares

Source: Ministry of Commerce and Industry

THE PROCESS

The developer submits the proposal for

establishment of SEZ to the concerned State
Government.
The State Government has to forward the
proposal with its recommendation within 45
days from the date of receipt of such
proposal to the Board of Approval.
The applicant also has the option to submit
the proposal directly to the Board of
Approval.

THE ADMINISTRATION

The Board of Approval is the apex body and is headed by the

Secretary, Department of Commerce.
The Approval Committee at the Zone level deals with approval of
units in the SEZs and other related issues. Each Zone is headed by
a Development Commissioner, who is ex-officio chairperson of the
Approval Committee.
Once an SEZ has been approved by the Board of Approval and
Central Government has notified the area of the SEZ, units are
allowed to be set up in the SEZ.
All the proposals for setting up of units in the SEZ are approved at
the Zone level by the Approval Committee consisting of
Development Commissioner, Customs Authorities and
representatives of State Government.
All post approval clearances including grant of importer-exporter
code number, change in the name of the company or
implementing agency, broad banding diversification, etc. are
given at the Zone level by the Development Commissioner.

The major incentives and facilities available

to SEZ developers include:

Exemption from customs/excise duties for

development of SEZs
Income Tax exemption on income derived from
the business of development of the SEZ
Exemption from minimum alternate tax
Exemption from dividend distribution tax
Exemption from Central Sales Tax (CST).
Exemption from Service Tax

The incentives and facilities offered to the units in SEZs

for attracting investments into the SEZs, including
foreign investment include: Duty free import/domestic procurement of goods for
development, operation and maintenance of SEZ units
100% Income Tax exemption on export income for SEZ
units for first 5 years, 50% for next 5 years thereafter and
50% of the ploughed back export profit for next 5 years.
Exemption from minimum alternate tax
External commercial borrowing by SEZ units upto US $ 500
million in a year through recognized banking channels.
Exemption from Central Sales Tax.
Exemption from Service Tax.
Single window clearance for Central and State level
approvals.
Exemption from State sales tax and other levies as
extended by the respective State Government

Export Performance
Year

Value (Rs.
Crore)

Growth Rate

2003-2004

13,854

39%

2004-2005

18,314

32%

2005-2006

22 840

25%

2006-20007

34,615

52%

2007-2008

66,638

93%

2008-2009

99,689

50%

Source: Ministry of Commerce and Industry

THE CRITIQUE

Labor condition
Burden on exchequer
Land related issues
Land use issues
Unbalanced regional growth

FOREIGN DIRECT
INVESTMENT

BASICS

Foreign direct investment (FDI) constitutes three

components; equity; reinvested earnings; and other
capital.
Equity FDI is further sub-divided into two
components, viz., greenfield investment; and
acquisition of shares.
Reinvested earnings represent the difference
between the profit of a foreign company and its
distributed dividend and thus represents
undistributed dividend.
Other capital refers to the intercompany debt
transactions of FDI entities.

BASICS
Portfolio investment by Foreign Institutional
Investors
An FII may invest in the capital of an Indian
Company under the Portfolio Investment Scheme
which limits the individual holding of an FII to
10% of the capital of the company and the
aggregate limit for FII investment to 24% of the
capital of the company.

MOTIVES AND MODES

FDI vs FIIs
Motives for FDI: Horizontal and Vertical investment;
Market seeking vs efficiency seeking; Avoid tariff.

Different modes of serving foreign country

FDI vs Exporting: transportation cost; tariffs
FDI vs Licensing: technology transfer; no control over
manufacturing marketing; competitive advantage due
to management, marketing and manufacturing skill.
Relevance of investment climate: macroeconomic
stability, regulations, infrastructure, political
stability, IPRs, taxation exchange rate policy etc.

HISTORICAL CONTEXT

In 1858, foreign firms that had become industrial

after a relatively short period in trading entered
India. Examples of such firms included Andrew Yule
in tea, jute and coal, McLeod Russell in tea, Balmer
Lawrie in engineering and coal, and Bird Brothers in
jute and coal.
In 1914, India was ranked eighth (behind the U.S.,
Russia, Canada, Argentina, Brazil, South Africa, and
Austria- Hungary) in terms of inward FDI.
In 1929, India ranked third, only behind Canada and
the United States.
By 2002, according India had fallen way behind as a
destination for inward FDI, with only 0.4 percent of
the world total FDI.

HISTORICAL CONTEXT

On April 6, 1949, Indian Prime Minister Jawaharlal

Nehru released a policy statement on foreign
enterprise in the Constitutional Assembly of India,
stating, As a rule, the major interest in ownership
and effective control of an undertaking should be in
Indian hands. . . . Government will not object to
foreign capital having control of a concern for a
limited period if it is found to be in the national
interest. e.g. the licensing of oil refineries like
Burmah-Shell during the early 1950s where 100
percent foreign ownership was granted.

Majority ownership by foreign enterprise was rare.

HISTORICAL CONTEXT

The first Five-Year Plan (19511956) outlined that foreign

investment was allowed where the nation needed new
production lines; where special skills not available locally
were required; and where the domestic production volume
was insufficient to meet demand and there was no
expectation that indigenous industry could expand quickly.
In 1961, the government also released a list of industries
where foreign investment was particularly welcome,
noting the gaps in production capacity of the nation. The
list included extremely profitable industries, such as
pharmaceuticals, aluminum, and fertilizers.
In 1970, India was home to forty-six foreign
pharmaceutical companies.
Though the operation of such MNEs was under very
restrictive regime

FDI POLICY: PHASES

Phase I: 1950-67: Non-discriminatory treatment, no

restriction on remittance of profits and dividends,
ownership and control with Indians
Phase 2: 1967-1980: Restriction on FDI without
technology, Above 40% stake no allowed, only in
priority areas, controlled by Foreign Exchange
Regulation act (1973), discretionary power in
sanctioning projects.
Foreign Exchange Regulation Act was passed by an
act of Parliament in 1973 and came into effect on
January 1, 1974. The act had a provision to cap the
foreign investment in all companies operating in
the nation, and foreign companies had to dilute
their shareholdings to 40 percent.

FDI POLICY: PHASES

Violations

of FERA would incur criminal

charges.
Fifty-four companies applied to exit India by
19771978 and nine companies applied to exit
in 19801981.
IBM, Coca cola, Eastman Kodak exited.
HLL, BAT continued
Patent Act 1970

FDI POLICY: HISTORY

Phase 3: 1980-1990: Higher foreign equity in EOUs.

Fast channel for FDI clearance.
Phase 4: 1991 onwards: liberal policies, encouraging
FDI in infrastructure, transparent procedures, FDI
through M&As.
FERA was repealed in 1999 and replaced by Foreign
Exchange Management Act made all violations
regarding foreign exchange civil, not criminal,
offenses, making it more investor friendly.
Indian patent system underwent a number of reforms
starting in 1999.

FDI POLICY
Current Policy of Negative list:
1.
FDI Not allowed e.g. in lottery, chit funds, real estate,
rail transport, cigars, and atomic energy.
2.
FDI permitted till specific limit: defense production, air
transport services, ground handling services, private
sector banking, broadcasting, commodity exchanges,
credit information companies, insurance, print media,
telecommunications and satellites
3.
100 % FDI
Entry Route
1. Automatic approval
2. Government/Foreign Investment Promotion Board Approval
e.g.

FDI FLOWS

2007-2008
2008-2009
2009-2010
2010-11
2011-12
2012-13 (H1)

FDI Net
15,893
22,372
17,966
11,834
22,061
12,812

US$ Million
Portfolio Investment
27,433
-14,030
32,396
30,293
17,170
5,796

Source: Economic Survey 2012-13

Average annual FDI rose from $100 million in the mid-1980s to around $2
billion in the mid-1990s.
The stock of FDI rose from less than $2 billion in 1991 to almost $39
billion in 2004.
FDI stock at 7.7% of GFCF in 2011 and 10.4% of GDP.

ISSUES

Composition of FDI

Home country: Unemployment, technology

transfer, tax avoidance

Host Country: Dominance over local industry,

effect on culture and tastes, R&D in Home
country, exploitation of natural resources

NEW TRENDS

Private as well as state-owned enterprises are

increasingly undertaking outward expansion through
foreign direct investments (FDI).
According to UNCTADs World Investment Report
2011, the stock of outward FDI from developing
economies reached US$ 3.1 trillion in 2010 (15.3 per
cent of global outward FDI stock), up from US$ 857
billion (10.8 per cent of global outward FDI stock) 10
years ago.
NTPC, GAIL, ONGC and NALCO
Tata motors, steel, tea, Hindalco, Bharti Airtel
IT firms like Tata Consultancy Services, Infosys,
WIPRO, and Satyam have oversees offices

Yearwise position of actual outflows in respect of outward FDI

Period
2000-2001
2001-2002
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
2011-12*
Total

(in million US Dollar)

Total
677.67
1000.07
1848.38
1566.58
1995.16
7856.49
13309.9
18506.48
18578.7
13714.07
16843.37
8861.46
1,04,758.3

* April 2011 to February 22, 2012