6925906 2 Jul 2007 India Special Economic Zone Report

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NorthBridge Capital

Global Investment Capital advisory

June 21, 2007

Research Analyst

Khanjana Vakil

Tel +91-022-66756612/13

Mobile +91-9869221538

Fax +91-022-66754249

Khanjana.vakil@northbridg

eindia.com

INDIA SPECIAL ECONOMIC

ZONE REPORT



India SEZ Report

Northbridge Capital 2

NorthBridge Capital

Global Investment Capital advisory June 21, 2007

INDIA SPECIAL ECONOMIC ZONE

(SEZ) REPORT



India SEZ Report


CONTENTS

Background 04

Current players & Size 10

Statistical Data 11

Evolution of the Market 12

- 3 year Scenario 13

- 5 year Scenario 13

Regulations and Foreign Ownership 13

Precedent Transactions 13

Entry Vehicles 15

Potential Opportunities 20

Entry Strategies & Models for foreign investors 21

Our Competency & Past Work 24



India SEZ Report


BACKGROUND

Special Economic Zone (SEZ) is a duty free area which is meant for the purposes of

trade operations, duties and tariffs for investors. SEZs are specifically demarcated

areas within the country where raw materials and capital goods can be imported duty

free from abroad or the domestic market and a special package of tax holiday and

incentives are given with a view to boost exports from the country. Manufacturing and

Services operations are allowed in an SEZ.

The Foreign Trade Policy of Government of India provides for setting up of Special

Economic Zones (SEZ) in the country with a view to provide an hassle free environment

for exports. Units may be set up in SEZ for manufacture of goods and rendering of

services. The units in SEZs have to be a net foreign exchange earner but they are not

subjected to any pre-determined value addition or minimum export performance

requirements.

SEZs could be set up in public, private, joint sector or by State governments. 100% FDI

is allowed in setting up of SEZs. The government of India has also converted existing

Export Processing Zones into SEZs.

The minimum size of the SEZs shall be 1000 hectares except in product specific and

port/airport based SEZs. Approval for setting up of new SEZs is given by Department of

Commerce, Government of India.

For setting up units in SEZs, all approvals are given by a Committee headed by

Development Commissioner of the concerned SEZ. For setting up a unit in SEZ,

application in prescribed format should be submitted to the development Commissioner.

A large number of new SEZs have come up in private sector in India including SEZs set

up by foreign companies.



India SEZ Report


Location of SEZ in India

At present there are 8 functional special economic zones located at:

Santacruz (Maharashtra)

Cochin (Kerala)

Kandla and Surat (Gujarat)

Chennai (Tamil Nadu)

Visakhapatnam ( Andhra Pradesh)

Falta (West Bengal)

Noida ( Uttar Pradesh)

Indore (Madhya Pradesh)

In addition, 18 approvals have been given for setting up of SEZ at

Positra (Gujarat)

Navi Mumbai and Kopata (Maharashtra)

Nanguneri (Tamil Nadu)

Kulpi and Salt Lake (West Bengal)

Paradeep and Gopalpur (Orissa)

Bhadohi, Kanpur, Moradabad and Greater Noida (U.P.)

Vishakhapatnam and Kakinada (Andhra Pradesh)

Vallarpadam/Puthuvypeen (Kerala)

Hassan ( Karnataka)

Jaipur and Jodhpur ( Rajasthan)



India SEZ Report


SEZ Institutional Framework - Overview

`

Special Economic Zone

Board of Approval

Approving proposals to set up SEZs

Approval of authorized operations in

an SEZ

FDI approvals to Developers, Units

Approvals for infrastructure provision

(through co-developers, etc)

Development Commissioner

Grant all local & State levelclearances, etc delegated byCentral/state Govt

Monitor such approvals, licenses,registrations,etc

Make town planning regulations

Approval Committee Approve imports of

goods & services intoSEZ

Approve proposals forestablishment of SEZunits

Monitor compliance bySEZ Developer, units

Township Authority

May be appointedby the state Govt,with powers &

functions as may

be rescribed

DeveloperPlanned development of SEZ

Prepare development plan Demarcate & Develop sites Allocate & transfer plots,

buildings, etc Regulate the erection of

bldgs in accordance with the

plan Develop,maintain,operate

infra Demarcate Zone boundar

SFZ Authority Monitoring of

infrastructureservices & exporterformance of SEZ

Proper Officer Customs

Administration

Co-Developer Provider of

infrastructurefacilities



India SEZ Report


Statewise Distribution of outstanding SEZ projects

State No of SEZs Investment (Rs bn)

Maharashtra 70 610.9

Karnataka 63 263.4

Andhra Pradesh 62 379.1

Haryana 50 1257.6

Gujarat 40 850.2

Tamil Nadu 30 86.5

Uttar Pradesh 23 66.2

West Bengal 21 153.4

Orissa 13 605.4

Rajasthan 11 0.3

Notified & Approved SEZs – Investment & Employment

( Land already in possession of Developer)

Type No Land

Issues

Investment (INR Crs)

As on Date Proposed

Employment

(persons)

Notified 100 No 15,000 53,561 25,000 15,75,452

Formal 234 No 3,00,000 4 mn addn



India SEZ Report


Fact sheet on special Economic Zones ( As on 01-05-2007)

SEZ Act 2005 Passed by parliament in May 2005 Recd Presidential assent on 23rd June 2005 Came into effect on 10th Feb 06 supported by SEZ

Rules

No of valid formalapprovals

234

No of notified SEZs 100

No of formal approvals

Pending notification

134

Land Requirement Ground Realities

Total Land in India :2973190 sq km

Total Agri land in India: 1620388 sq km (54.5%)

SEZs formally approved (234) 350 sq km

In principle approvals (162) 1400 sq km

Total area for proposed SEZs (FA+IP) -1750 sq km whichwould not be more than 0.047 of the total land area andnot be more than 0.086% of the total agri land in India.

234 Formal approvals:

Approx 33808 hectares Proposals from SIDCs/ St Govt Agencies :60

Land requirement for the 60 proposals : 17800hectares

Employment created in 100notified SEZs

25,000 persons



India SEZ Report


Expected investment andemployment from SEZs (by December 2009)

By the 100 notified SEZs as on 31.3.2007

Investment : Rs 53,561 crores

Employment : 15,75,452 additional jobs

If 234 SEZs becomes operational

Investment : Rs 3,00,000 crores

Employment : 4 million additional jobs

Exports in 2006-07 Rs 34787 crores (Rs 9301 crores by newgeneration SEZs)

Growth of 52% over Rs 22,840 crores in 2005-06

Exports projected by all119 SEZs (19 old + 100new) in 2007-2008

Rs 67,300 crores 200% increase in 2 years Exports from SEZs likely to cross 1,00,000 crores

by 2008-09



India SEZ Report


CURRENT PLAYERS

The central & state government with respect to policy formulation, rules &

regulations, issuance of approvals, permissions, etc.

Development Commissioner (DC) from the Govt of India for implementation of

policy, rules & regulations and monitoring of the performance in the zone.

Developer for providing infrastructure, facilities, logistics and all other supports

for the unit holders to enable them to set up and run their units successfully &

comfortably.

Unit owners / Unit holders: The parties who set up their factories / units who and

operate them in the zone.

The overwhelming response to the SEZ scheme is evident from the flow of investment

and creation of additional employment in the country. The SEZ scheme has generated

tremendous response amongst the investors, both in India and abroad, which is evident

from the list of Developers who have set up SEZs:

Nokia SEZ in Tamil Nadu

Quark City SEZ in Chandigarh

Flextronics SEZ in Tamil Nadu

Mahindra World City in Tamil Nadu

Motorola, DELL and Foxconn

Apache SEZ (Adidas Group) in Andhra Pradesh

Divvy's Laboratories, Andhra Pradesh

Rajiv Gandhi Technology Park, Chandigarh

ETL Infrastructure IT SEZ, Chennai

Hyderabad Gems Limited, Hyderabad



India SEZ Report


SIZE

234 SEZ projects were approved till April 5, 2007, of which 63 have been notified

and 171 are awaiting notification

The 63 notified SEZ projects would involve a total investment of Rs 53,561

crores (of which, investment of Rs 13,435 crores has been already made).

Exports projected by all notified SEZs numbering 82 so far (19 old plus 63 new)

in 2007-08 would be Rs 67,300 crores.

STATISTICAL DATA

SEZ is expected to attract investments of about Rs 25,000 crores.

The SEZ project will initially cover 2,000 hectares and gradually double its size to

spread over 5000 hectares.

Trend in export performance of SEZs

02000400060008000

1000012000140001600018000

2002-03 2003-04 2004-05 2006-07 2007-08

Year

Exports in SEZs ( Rs in Crores)



India SEZ Report


Contribution of SEZs in country’s total export

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

C o n t r i b u t i o n

i n

p e r c e n t a g e

2002-03 2003-04 2004-05 2005-06 2006-07Year

SEZs contribution in country's total export

EVOLUTION OF THE MARKET

In 2000, the government of India introduced a new special Economic Zone (SEZ)

scheme in the export & import policy, with a view to provide an internationally

competitive and hassle free environment for export production. Foundation of Indian

SEZ can be traced back to lay down of Export Oriented Units (EOUs) which were

industrial units specializing in manufacturing for the purpose of exports. These EOUs

which are specialized in exports later also switched into trading related activities. Since

they were open to such combined export activity, they came to be known as free trade

Zone (FTZ then came the need for support infrastructure & Logistics facilities for

efficient & smoothly functioning of these FTZZ). The integration of all of the above

came to be known as Special Economic Zones.



India SEZ Report


3 YEAR SCENARIO & 5 YEAR SCENARIO

Investments of $8 billion have already been made in SEZ and another $25 billion

investment is underway.

So far 31,000 people have got direct employment and this is expected to rise to

1,00,000 by the end of this calendar year and to 4 million by the end of 2010.

REGULATIONS AND FOREIGN OWNERSHIP FOR FOREIGN INVESTORS

FDI up to 100% is allowed through the automatic route for all manufacturing activities in

Special Economic Zones (SEZs), except for the following activities:

Arms and ammunition, explosives and allied items of defence equipment,

defence aircraft and warships

Atomic substances

Narcotics and psychotropic substances and hazardous chemicals

Distillation and brewing of alcoholic drinks

Cigarettes/cigars and manufactured tobacco substitutes

Sectoral norm as notified by Government shall apply to foreign investment in

services

PRECEDENT TRANSACTIONS

Bharat Forge Ltd (BFL) signed MOU with Government of Maharashtra to jointly

develop a multi-product SEZ in Khed Taluka of Pune District.

Bharat Forge will initially invest Rs1,500 -2,000 crores in the venture and

eventually scale up to 9,000 crores by next nine years.



India SEZ Report


Name of SEZ Name of the

developer

Type Year of

Operation

Area in

Acres

Investment on

Infrastructure

Manikanchan SEZ

(West Bengal)

West Bengal

Industrial

Corporation

Gems &

Jewellery

2004 5 Rs 25 crores

Jaipur SEZ

(Rajasthan)

Rajasthan State

Industrial

Development

Corporation

Gems &

Jewellery

2004 110 Rs 26 crores

Indore SEZ

(Madhya Pradesh)

MP State

Industrial

Development

Corporation

Multi-

product

2004 2600

(1st

phase in

132

acres)

Rs 100 crores

Salt lake

Electronic City

(Kolkata)

M/s Wipro Ltd Software

developme

nt & IT

enabled

services

2005 16 Rs 125 crores

Mahindra

city,Chennai

(Tamil Nadu)

M/s Mahindra

Industrial Park ltd

IT,

hardware

and bio-

informatics

2005 665.68

crores

Rs 100 crores

Jodhpur

(Rajasthan)

RIICO Handicrafts 2005 180.94 Rs 30 crores



India SEZ Report


ENTRY VEHICLES

Setting up of SEZ By Developer

Setting up of SEZ in the Public, Private, and Joint Sector or by the State Govt.:

With a view to augmenting infrastructure facilities for export production it has

been decided to permit the setting up of Special Economic Zones (SEZs) in the

public, private, joint sector or by the State Govt.

The minimum size of the Special Economic Zone shall not be less than 1000

hectares.

Minimum area requirement shall, however, not be applicable to product specific

and port/airport based SEZ. This measure is expected to promote self-contained

areas supported by world-class infrastructure oriented towards export production.

Any private /public/joint sector or State Govt. or its agencies can set up Special

Economic Zone (SEZ)

Minimum Area Requirements for various sectors

Sector Minimum Area

Required ( in hectare)

Multi product 1000

Green field 1000

Service sector 100

Biotechnology 10

Information technology 10

Gems & Jewellery 10

All other sectors 100



India SEZ Report


Administrative Set Up for SEZ

The functioning of the SEZ is governed by a three tier administrative set up:

a. The Board of Approval is the apex body in the Departmentb. The Unit Approval Committee at the zonal level dealing with approval of units in the

SEZs an other related issues and

c. A Development Commissioner, who is also heading the Unit Approval Committee,

heads each zone.

The Unit Approval Committee monitors the performance of the SEZ units annually and

units are liable for penal action under the provision of Foreign Trade (Development and

Regulation) Act, in case of violation of the conditions of the approval.

Incentives and facilities offered to the SEZs

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 under Section

10AA of the Income Tax Act 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 under section 115JB of the Income Tax

Act.

External commercial borrowing by SEZ units upto US $ 500 million in a year

without any maturity restriction through recognized banking channels.

Exemption from Central Sales Tax.

Exemption from Service Tax.

Single window clearance for Central and State level approvals.



India SEZ Report


Exemption from State sales tax and other levies as extended by the respective

State Governments.

Facilities and Incentives for Developers

Developers of SEZ may import / procure goods without payment of duty for the

development, operation and maintenance of SEZ.

Income tax exemption for a block period of 10 year in 15 years at the option of

developer as per Section 80IAB of the Income Tax Act .

Full freedom in allocation of developed plots to approved SEZ units on a purely

commercial basis.

Full authority to provide service like water, electricity, security, restaurants,

recreation centers etc. on commercial lines.

Foreign investment permitted to develop township within the SEZ with residential

area, market, play grounds, clubs, recreation centers etc.

Develop Standard Design Factory (SDF) building in existing SEZ.

Income Tax Exemption to investor's in SEZ's under Section 10(23G) of Income

Tax Act.

Exemption from Service Tax

Investment made by individuals etc. in SEZ Company also eligible for exemption

u/s 88 of the Income Tax Act.

Development promoted to transfer infrastructure facility for operation and

maintenance u/s 80-IA of the Income Tax Act.

Generation, Distribution and Transmission of Power in SEZs allowed.



India SEZ Report


How to Apply

For setting up a unit in an SEZ, three copies of the application in the specified

form may be submitted to the Development Commissioner (DC) of the SEZ

Concerned.

Proposals for setting up units in the SEZ other than those requiring industrial

Licence may be granted approval by Development Commissioner within 15

Days.

Proposals for setting up units in the SEZ requiring Industrial Licence may be

granted approval by the Development Commissioner after clearance of the

proposal by the SEZ Board of Approval and Department of Industrial Policy and

Promotion within 45 Days. Letter of permission (LOP) / Letter of Intent (LOI) issued to SEZ units by the

Development Commissioner would be construed as a licence for all purposes,

including for procurement of raw material and consumables either directly or

through canalizing agency.

The LOP/LOI shall specify the items of manufacture/service activity, annual

capacity, projected annual export for the first years in dollar terms, Net Foreign

Exchange Earning (NFE), limitations, if any, regarding sale of finished goods, by

products and rejects in the DTA and such other matter as may be necessary and

also impose such conditions as may be required.

Criteria for approval

Minimum size of the SEZ shall not be less than 1000 hectares. This would

however, not apply to existing EPZs converting into SEZs as such or for notifying

additional area as a part of such SEZ or to product specific port/airport basedSEZs.

The SEZ and units therein shall abide by local laws, rules, regulations or bye-

laws in regard to area planning, sewerage disposal, pollution control and the like.





India SEZ Report


It is foreseen that companies will simply relocate to SEZ to take advantage of tax

concessions being offered and little net activity will be generated. The act will lead to a

large-scale land acquisition by the developers, displacement of poor farmers and

meager compensation being handed over to them with no alternative livelihood. SEZ

will be built on prime agricultural land with serious implication of food security.

POTENTIAL OPPORTUNITIES

Sectors

IT / ITES

Multi-products Automobiles & Related Activities

Textiles

Pharma & Bio-technology

Others

Infrastructure

- Road - Labour

- Rail - School

- Water - Hospitals

- Power - Shopping Malls

- Airports - Multiplexes

- Ports - Theme Parks

- Warehouses - Hotels & Leisure

- Transport - Ancillary support



India SEZ Report


ENTRY STRATEGIES AND MODELS FOR FOREIGN INVESTORS

A foreign company planning to set up business operations in India has the following

options:-

AS AN INDIAN COMPANY

A foreign company can commence operations in India by incorporating a company

under the Companies Act, 1956 through

i) Joint Ventures

ii) Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the

requirements of the investor, subject to equity caps in respect of the area of activities

under the Foreign Direct Investment (FDI) policy.

Incorporation of Company For registration and incorporation, an application has to be

filed with Registrar of Companies (ROC). Once a company has been duly registered

and incorporated as an Indian company, it is subject to Indian laws and regulations as

applicable to other domestic Indian companies.

AS A FOREIGN COMPANY

i) Liaison Office/Representative Office

ii) Project Office

iii) Branch Office

Such offices can undertake any permitted activities. Companies have to register

themselves with Registrar of Companies (ROC) within 30 days of setting up a place of

business in India.



India SEZ Report


Liaison Office/Representative Office

Liaison office acts as a channel of communication between the principal place of

business or head office and entities in India. Liaison office can not undertake any

commercial activity directly or indirectly and can not, therefore, earn any income in

India. Its role is limited to collecting information about possible market opportunities and

providing information about the company and its products to prospective Indian

customers. It can promote export/import from/to India and also facilitate

technical/financial collaboration between parent company and companies in India.

Approval for establishing a liaison office in India is granted by Reserve Bank of India

(RBI).

Project Office

Foreign Companies planning to execute specific projects in India can set up temporary

project/site offices in India. RBI has now granted general permission to foreign entities

to establish Project Offices subject to specified conditions. Such offices can not

undertake or carry on any activity other than the activity relating and incidental to

execution of the project. Project Offices may remit outside India the surplus of the

project on its completion, general permission for which has been granted by the RBI.

Branch Office

Foreign companies engaged in manufacturing and trading activities abroad are

allowed to set up Branch Offices in India for the following purposes:

i) Export/Import of goods

ii) Rendering professional or consultancy services

iii) Carrying out research work, in which the parent company is engaged.

iv) Promoting technical or financial collaborations between Indian companies and

parent or overseas group company.



India SEZ Report


v) Representing the parent company in India and acting as buying/selling agents in

India.

vi) Rendering services in Information Technology and development of software in

India.

vii) Rendering technical support to the products supplied by the parent/ group

companies.

viii) Foreign airline/shipping Company.

A branch office is not allowed to carry out manufacturing activities on its own but is

permitted to subcontract these to an Indian manufacturer. Branch Offices established

with the approval of RBI may remit outside India profit of the branch, net of applicable

Indian taxes and subject to RBI guidelines Permission for setting up branch offices is

granted by the Reserve Bank of India (RBI).

Branch Office on “Stand Alone Basis” Such Branch Offices would be isolated and

restricted to the Special Economic zone (SEZ) alone and no business

activity/transaction will be allowed outside the SEZs in India, which include

branches/subsidiaries of its parent office in India.

No approval shall be necessary from RBI for a company to establish a branch/unit in

SEZs to undertake manufacturing and service activities subject to specified conditions.



India SEZ Report


OUR COMPETENCY AND PAST WORK

Northbridge Capital has been assisting its clients across Asia with advice on

Raising Equity and Debt capital at the lowest cost of capital

Cross Border Mergers & Acquisitions across Asia

Financial Advisory Services

Northbridge Capital has assisted a number of companies in fast growing Asian

economies to rise to world class and size in one of the most compressed periods of time

and at growth rates unprecedented in history

Northbridge is a leader in 4 key areas

Raising Capital Advisory – Our expertise lies in our excellent network of financial

intermediaries and the innovativeness of our solutions

Equity Capital – IPO’s in India, Asian or Global markets, Private Equity

Debt Capital – Debt offerings in India, Asian or Global markets

Northbridge leverages the “Power of Advice” to assist

a) Companies with enhancing shareholder value

b) Institutions with Returns

c) Individuals with Family Wealth Management Advisory

Our team’s networking, access and expertise the Institutional Advisory, Wealth

Management and Corporate domain ensures we find investment ideas and solutions

that enhance shareholder value over extended periods of time

Northbridge Capital assists companies in finding the right value for their capital. Our

expertise lies in innovative “out of the box” solutions to enhance shareholder value

including IPO advisory, takeover, merger, acquisition advisory, leveraged buyouts,

proxy fights, direct acquisition of stakes in companies, removal of slothful managements

and improving cost and revenue efficiencies in companies



India SEZ Report


We enhance our client’s value by bringing unique investment ideas to the table from

finding acquisition candidates to suggesting merger candidates to enhancing

shareholder value

Dutt Capital Advisors-Corporate works with listed and unlisted companies through the

entire cycle of preparing and raising capital

a) Equity Fund Raising (From Private Equity to IPO)

b) M&A

c) Investor Relations

Our Clients

- Generali

- Europe Assistance

- Blue Coast Hotels

- Pantaloon

- Vam Organics

- Indswift Labs

- Roman Tarmat- Glenmark Pharmaceuticals Ltd

- Surya Pharma Ltd

- Silverpoint press, etc.



India SEZ Report

DISCLAIMER

All rights reserved. All copyright in this publication and related works is owned by

Northbridge.

The same may not be reproduced, wholly or in part in any material form (including

photocopying or storing it in any medium by electronic means and whether or not

transiently or incidentally to some other use of this publication), modified or in any

manner communicated to any third party except with the written approval of

Northbridge.

This publication has been carefully prepared but it necessarily contains information in

the summary form and is therefore intended for general guidance only. The information

is collected from various publicly available sources and thus Northbridge is not liable for

decisions based on the research.

For more details please contact:

Khanjana Vakil

NorthBridge Capital

R-501, Remi Bizcourt

Shah Industrial Estate

Off Veera Desai Road

Andheri (west),

Mumbai 400053

India

Email: [email protected]

Website: www.northbridgeindia.com

6925906 2 Jul 2007 India Special Economic Zone Report

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