The India Street Editor Musings – Deal Tracker

Readership at the India Street has grown tremendously thanks to all of you. In fact, we were recently mentioned by Digital Inspiration as one of Indian’s most widely read Finance Blog. We are soon going to bring entertaining investor related videos so that you can learn about Indian companies operating all over the world and by extension make money off the information. Stay tuned for these videos as they will be appearing in the next few weeks.

In interesting to note the discussions on a real estate bubble in India now and where real estate values are headed. I tend to examine the real world behavior of those closest to the situation. For example, DLF is focusing on Hotel and SEZ development in India. Rajiv Singh expects his revenue growth to strengthen in the short term from a thrust in middle-income housing. While prices paid are high compared to the past few years and will not likely go up in the double digits as in years past, we will still see price appreciation in Tier 1 cities and much higher price appreciation in Tier 2 and Tier 3 cities.

As I have said in past editorials, India needs to be completely rebuilt. It’s not practical to rebuild the older cities, so what is going to happen is that new city centers will appear alongside the old and you will see a large demographic shift happen as a result. You can bank on this prediction as it’s the only way to create modern cities without ripping up entire sections of India’s older cities.

Below, I have listed real estate deals for June 2007. The information was provided courtesy of Ernst & Young.

Completed Deals

Name of Entity	Nature of Deal	Value		Additional Details
Procter and Gamble	Sold its general offices at Gurgaon	Rs 727.5 million		Sold five to nine floors at Global Business Park, Mehrauli Gurgaon Road, Gurgaon
Plaza Centers, a European property developer	Acquired about 10.8 acres of land At Trivandrum, Kerala	Rs 1.1 billion		Acquisition was made through a 50:50 JV with an Indian property developer; the plot will be used to develop a mixed-use project totaling 2.1 msf, comprising shopping and entertainment centers, offices and a hotel
Alpha Tiger Property Trust	Entered into an agreement with Xansa, an outsourcing and technology firm, to purchase 40 acres of development land and for the sale and leaseback of Xansa’s real estate interests in India		Rs 1.9 billion	The agreement appoints Alpha Tiger as Xansa's preferred provider in India; the agreement is conditional on local and Central government approvals, including SEZ notification and is expected to be completed in phases
Reliance Industries	Acquired 16,100 sq. m plot from Sterlite Industries at Vidyavihar, a Mumbai suburb		Rs 1.1 billion	–
Hotel Leelaventure	Acquired a three-acre plot at Vinay Marg in Delhi from National Buildings Construction Corporation		Rs 6.1 billion	Intends to develop a 250-room premium luxury hotel, to be operational before the Commonwealth Games in 2010
Karnataka State Government	Auctioned 73 acres of land in Bangalore		Rs 295.3 million	–
Orbit Corporation	Acquired a two-acre plot at Kalina in the suburb of Santacruz, Mumbai, from Ambuja Cements		Rs 3.3 billion	Orbit plans to redevelop the plot

Name of Entity	Nature of Transaction	Additional Details
Alony Hetz Properties and	Tied up with Wearology Limited of Poddar	To develop 500 acres at Karjat, near Mumbai;
Investments Limited, Israel	Group and LJCB Investment Group of Australia	the initiative comprises a luxury holiday home project spread over 200 acres at an investment of US$ 160–200 million
Garnet Construction	Entered into a 50:50 JV with the Dubai-based Sternon Group	To develop properties in Europe, with a prime focus on Sweden and Mauritius, off the African coast
Trent, the retail arm of Tata Group	Tied up with global private equity investor Xander	To develop real estate properties for its various retail ventures
RMZ Corp, a real estate development company	Entered into a 50:50 JV with AIG Global Real Estate	To build commercial properties and to evaluate hospitality development projects across India
DLF	Entered into an agreement with Kolkata Metropolitan Development Authority	To develop an integrated township in Hooghly District, West Bengal, with an investment of Rs 330 billion
Deals In the Making?
Name of Entity	Nature of Transaction	Additional Details
Quantum Fund (promoted by George Soros)	Plans to acquire a 4% stake in Ansal API for Rs 2 billion	With this, George Soros’ stake in Ansal API will increase to 5%; in 2006, George Soros had acquired a 1% stake in the company for about Rs 250 million
JP Morgan	Plans to invest US$ 100 million in Prestige Group through equity placement or debt financing	Prestige Group would utilize these funds to develop projects across South India, as it plans to expand its footprint outside Bangalore
Godrej Properties	Is negotiating with private equity investors to raise Rs 2 billion for its real estate projects in Kolkata and Hyderabad	–
Infinite India, a real estate fund floated by JM Financial and Old Lane (the New York-based India-focused hedge fund)	Are in advanced negotiations with textile firm Wearology to pick up majority stake in two real estate projects	Wearology is in the process of developing over 500 acres of land in various parts of Mumbai
Carlson Group, a US-based	Plans to acquire a 26% stake in a new JV	The JV will introduce the Regent hospitality
hospitality company	(called Elbrus Builders) with the Unitech Group for Rs 26 million	brand in India and invest Rs 4.5 billion to develop a luxury hotel property in Greater Noida
Al Fajer Properties, Dubai	Plans to invest upto US$ 1 billion in India	To develop commercial and township projects through JVs
A consortium by Government of Singapore Investment Corporation, Dean Witter of Morgan Stanley and Quantum Fund of George Soros	Plan to acquire a stake in Anant Raj Industries for Rs 6.8 billion	–
IL&FS Investment Managers (IIML)	Intends to provide US$ 100 million to QVC Realty	QVC plans to take up township projects in Gurgaon and Bangalore; IIML has raised over US$ 500 million to invest in real estate

New Money
Arrived
Name of Entity	Fund	Size	Additional Details
Morgan Stanley Real Estate	Raised a property fund, MSREF VI, that would primarily invest in the Asian markets including Japan, China and India	US$ 8 billion	–
Ascendas	Launched Ascendas India Development Trust (AIDT), a real estate development fund with a term of eight years	S$ 500 million	The company plans to increase its asset size to S$ 1 billion and will invest in integrated development projects in India
Tanglin Development	Raised funds from Hypo Real Estate Bank International	Rs 3.8 billion	The fund will be used for financing and development of 2 msf of additional IT office space at Global Tech Park in Bangalore
Red Ribbon UK Fund, a UK-based property investor	Plans to invest £ 250 million in the real estate sector in India in the next 5 years	£ 250 million	Of this, the fund will invest £ 50 million in budget hotel chains, £ 50 million to develop resorts in Kerala, £ 50 million in student accommodation, and £ 100 million in commercial properties
Expected Capital
Name of Entity	Fund	Size	Additional Details
CapitaLand	Plans to launch a fund to invest in real estate projects in India	S$ 500 million	–

New Land Acquisition Act to disallow states to acquire land on behalf of private sector

By Vipin Agnihotri

It has come into the notice of The India Street that acquiring cheap land by piggy riding on government’s shoulders, thanks to the Land Acquisition Act, 1894, is set to end soon. In addition, private sector companies will now have to shell out higher prices as a new Act will ensure hiking circle lands by almost 10 times.

If experts are to be believed, the new overhauled Land Acquisition Act proposes to disallow states to acquire land on behalf on the private sector. Apart from that, it also seeks to tighten the definition of public purpose for which the state has the power to compulsorily acquire land from owners-by limiting it to just a handful of sectors.

Other issues including fixing compensation packages for the displaced because of commercial and public projects will also be tackled by the new Act. When the India Street asked government official about the new Act, he said, “There are plenty of issues related to acquisition of land to be dealt with that it may not be possible to address all through amending the existing Act. The government is, therefore, seriously considering replacing the existing Act with a new one.”

At this moment of time, state governments have their own definition of what constitutes public purpose. The ambiguity may go. The new Act is expected to define public purpose narrowly by including just strategic purposes related to defence and other work pivotal to the state and public infrastructure such as electricity, mining and public facilities. Initial signs are that the list may be expanded after interministerial discussions.

In my opinion, the new Act is going to be tough on the private sector. Not only will companies won’t be able to secure government assistance in acquiring land for industrial projects, market value of the land would be suitably increased by increasing the circle rates that are at present low. “Land prices may increase up to ten times once the new rates are fixed,” pointed out government official.

Suggested Reading

Lowering of Real Estate Prices in the Suburbs Likely Visit our India Resource Page The Latest India Real Estate Round Up Comprehensive Real Estate Report by India City India Real Estate is Surpassing India Stocks for Investors

India grants more SEZ Approvals

By Dhruva Jyoti Chowdhury

Kolkata, India: To consider proposals pertaining to the Special Economic Zones (SEZs), the The Board of Approval (BOA) of the Special Economic Zones (SEZs) met recently. The Board also approved other miscellaneous requests pertaining to SEZs. In this meeting, 53 applications for setting up SEZs were considered and 36 Formal approvals and 9 In-principle approvals were granted.

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Prominent among the Formal approvals are: Electronic Hardware SEZ by Foxconn India Developers Private Limited in Tamil Nadu; Aviation Sector SEZ by GMR Hyderabad International Airport Limited in Andhra Pradesh; One IT/ITES SEZ and one Gem and Jewellery SEZ by Omnibus Industrial Development Corporation of Daman & Diu and Dadra & Nagar Haveli; Three SEZs for Biotechnology, Light Engineering and Pharmaceuticals by Navi Mumbai SEZ Private Limited in Maharashtra; IT/ITES SEZ by Reliance Infocom Infrastructure Private Limited in Maharashtra and six IT/ITES SEZs by Electronic Corporation of Tamil Nadu in various Districts of Tamil Nadu and MAS Fabrics Textile SEZ in Andhra Pradesh which is being developed with 100% FDI.

Prominent In principle approvals granted are : Electronics and Electrical SEZ, Engineering Equipment & Components SEZ and a Multi Product SEZ by TIDCO in Tamil Nadu; Multi product SEZ by DLF Limited in Rajasthan; Aerospace related industries SEZ by KIADB in Karnataka.

With this set of approvals, the total number of SEZs granted formal approval is 339 i.e. 339 SEZs are there with land and of these 126 have so far been notified. Investment of 35145 Crores has taken place so far and current employment in new SEZs is about 33000 persons. It is expected that by end of the year additional employment in the new SEZs would cross 100,000.

The Chairman of BOA Shri G.K.Pillai, apprised the Members of the Board that the Central Government has issued certain instructions with regard to approval of SEZs and the land acquisition for SEZs and the Chief Secretaries of all the State Governments have been informed that the State Governments would undertake acquisition of land for SEZs only when 100% of the owners give consent. The State Government representatives were informed that if any proposal for compulsorily acquired land comes up, the same would not be notified as SEZ. It was also advised that to the extent possible, double crop and multiple crop lands should not be acquired.

Suggested Reading

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Pictures: New Chennai Airport

Good news for SEZ developers, used capital goods to be allowed in SEZs

By Dr Suvrokamal Dutta

Good news for Special Economic Zones (SEZ) developers, it has come into the notice of The India Street that very soon they will be allowed to transfer used plant and machinery of up to 20 per cent of their total capital goods requirement to SEZ they set up.

If experts are to be believed, this will mark a tremendous relaxation of the terms and conditions that at the present juncture prohibit developers from using second-hand capital goods in SEZs. Early indications are that the rules will be amended in coming days and will offer plenty of SEZ developers to leverage present units outside the zones for equipment, which can assist them in saving a large chunk of time and cost.

When The India Street asked a commerce ministry official in this regard, he said that ministry would be sending the proposed change in the rules to the law ministry for its clearance. It is worth mentioning in this regard that the proposal was originally introduced in the Income Tax Act in the 2007-08 Budget.

The main aim of the present rules prohibiting the use of old equipment in SEZs was to motivate fresh investment and ensure that units did not misuse the tax breaks allowed in SEZs by just relocating units.

To counter this scenario, the commerce ministry had modify the Special Economic Zone Rules last year, prohibiting the use of plant and machinery in SEZs that was previously used in domestic tariff areas.

SEZ industry executives are quite pleased with the government proposal, saying it will bring lots of advantages in the long run, especially to the Infotech and IT-enabled service and high-end engineering businesses.

Theoretically speaking, plenty of companies are interested in bringing expensive and custom-made equipment, including high-capacity servers and local area networks, to new units in Special Economic Zones. In my opinion, there is a genuine requirement in certain sectors to transfer some old equipment to the SEZ units. The pivotal factor here is that the relaxation would not lead to misuse since the permissible percentage of second-hand capital goods is not big.

Suggested Reading Visit our India Resource Page The Latest India Real Estate Round Up Comprehensive Real Estate Report by India City Pictures: New Chennai Airport

Videocon not Abandoning Plans for SEZs in Bengal

By Dr Suvrokamal Dutta

It’s quite clear that Videocon has started feeling the pinch of setting up Special Economic Zones (SEZs) in Bengal. In an exclusive interview to The India Street, Videocon chairman Venugopal Dhoot said the group has sought a one-year extension from the Board of Approvals (BoA) for acquiring land for three SEZs near Kolkata. In terms of statistic, the combined land requirement of these SEZs is 5,560 acres.

"We have applied to the BoA for an extension," pointed out Dhoot. Though, he did not disclose when the application was made. It is worth mentioning in this regard that Videocon Realty & Infrastructures, the group company slated to undertake the SEZ ventures, was originally supposed to complete land acquisition by September.

In the closing stanza of last year, Videocon Realty & Infrastructures secured 'in-principle SEZ' status for two multi-product SEZs at North 24-Parganas (on 2,700 acres) and Kolkata-Kharagpur stretch (on 2,500 acres), and an electronics and IT SEZ on 360 acres at North 24-Parganas. According to BoA terms and conditions, companies have to get land within a span of one year bagging the 'in-principle' nod.

When asked whether there are any plans of abandoning any of the SEZ ventures, Dhoot said that at this moment of time company had no plans of abandoning any of the SEZ ventures. The pivotal factor here is that Videocon has already announced that it would give shares and jobs to one member of every family who would give up land for India SEZs.

Not so long ago, Salarpuria Properties and SEZ Infrastructure Developers too had said they planned to approach the BoA for more time, as they would not be able to finish land acquisition by September. Interestingly, both Salarpuria and SEZ Infrastructure Developers had also obtained 'in-principle' SEZ status for their Bengal projects in October 2006.

Early indications are that Salarpuria intends to establish an electronics and services sector SEZ on 250 acres in North 24-Parganas. On the other hand, SEZ Infrastructure Developers' would set up an engineering SEZ at Howrah on 262.5 acres. The state's own SEZ panel, whose main responsibility is to screen all the proposals before recommending these to BoA, is scheduled to meet this month to take stock of the progress made by firms planning to establish duty-free trade hubs.

State commerce and industries secretary Sabyasachi Sen has already said in public that Ramky Infrastructure's proposed multi-product SEZ on 2,530 acre at Mahishadal near Haldia would be delayed due to land scarcity. In general, Ramky bagged 'in-principle' SEZ status for the project on June 22. It is worthwhile remembering that protests land acquisition has already forced the state to abandon its plan to develop a chemical hub on 10,000 acre at Nandigram.

TELECOM -The Making of India’s Shenzhen

Editor Note: China take notice, the 2469 acre Sriperumbudur SIPCOT SEZ and other SIPCOT SEZ's are well on their way to challenging Shenzhen as the world's manufacturing hub. The location's citizens are far more educated and the majority speaks English. The Chennai Government is pro-business and respects intellectual property laws. The India Street predicts the area will be an equal competitor to Shenzhen within 5 years. Once infrastructure is fixed including more rail, roads and the new Chennai Airport, this area has all of the important logistical ingredients to become the top industrial manufacturing area in Asia.

How Sriperumbudur is emerging as India’s telecom manufacturing hub. By ANUP JAYARAM

Flextronics plant in Sriperumbudur

The sprawling lime green building is visible from a great distance. As you come close, you see workers in white hard hats and luminous orange jackets swarming all over like ants on a giant carcass. Spread over 250 acres, this site will house a massive integrated manufacturing complex for the $15.3-billion Flextronics Industries, a Singapore-headquartered manufacturer of electronic products. Its general manager and director (India operations) Gururaj A. says some 1,500 are employed on the site currently, trying to make sure the complex will be ready by September.

T. Murugan, 35, a contract labourer has some idea of what’s actually going on. “Inge naraiya velioor company factory podaraanga,” (Many foreign companies are setting up factories here), he says. Last year, he had worked on the $150-million Nokia project, a few kilometres away. And he has heard that soon some other velioor (foreign) companies will also start work. He hopes to find employment there. His news is correct. The manufacturing units of both Motorola and Foxconn are slated to come up over the next few months.

It was barely 15 years ago that Sriperumbudur shot to fame. It was India’s Dallas, where its young, 47-year-old ex-PM was assassinated. The horrific images of death had seared the nation’s consciousness. Yet, it is perhaps a fitting tribute that the town where a PM who had spoken of India’s role in the 21st century, modernised the telecom infrastructure and believed in the transformational powers of IT, and laid down his life, should emerge as ground zero of electronic manufacturing in India.

Gururaj A. general manager and director (India operations) Flextronics Industries

Consider that by October, Flextronics will begin to make a million mobile phones a month from the Sriperumbudur complex. (Nokia already makes 2.5 million phones a month.) It will also make base stations. That’s just the beginning. By year end, a second building will be ready that will make set-top boxes, DVD players, automotive components and PCs. By December 2007, at least 10 component suppliers who are part of Flextronics’ global supply chain will have their plants up and running in the campus.

Says Gururaj: “We will use the land discreetly. The idea is to ensure that all the key suppliers, both Indian and international, have a presence here.” This campus will provide jobs to 7,000 people by December 2007. According to officials in the Department of Telecommunications, by 2008, over $1 billion will be invested in Sriperumbudur for telecom manufacturing facilities alone. Of this, around $250 million has already been invested, mainly by Nokia ($150 million) and Flextronics ($100 million). By end 2007, all the new companies will provide jobs to over 50,000 people.

There are three types of operations coming up at Sriperumbudur. One, the OEMs like Nokia and Motorola. Then the EMS’ like Flextronics and Foxconn, who supply to OEMs around the globe. Finally, there are the component suppliers who work either with the OEMs or the EMS’. They include Aspocomp (global turnover euro 154 million; printed circuit boards), Salcomp (euro 156 million; chargers), Perlos (euro 667 million; mechanics) and Sanmina-SCI ($12.2 billion; network components).

Each of these outfits will be housed within an SEZ. Apart from them, Velankani Information System (which has set up an IT park in Bangalore that houses Siemens, Elcoteq and Patni Computers) is setting up an ITES SEZ that will house a 5 million-sq. ft manufacturing facility for another set of 20 global telecom suppliers (see ‘Feeding Into The System’). Says Rajiv Kochhar, CEO, Avista Advisory, a financial services group: “Today, all the key plots in Sriperumbudur are gone.” It is already beginning to look like a patchwork of SEZs.

Predictably, the comparison with Shenzhen has already begun. In 1979, Deng Xiaoping used it as a test-bed for free market principles. It was then a town of 300,000 people, outside Hong Kong. Close to 80 per cent of Shenzhen’s revenue then came from agriculture. Today, Shenzhen covers 2,020 sq. km, much bigger than Delhi’s 1,483 sq. km, and has a population of 4.05 million.

This year, Chinese companies and global players like Foxconn, Philips and Samsung are expected to make 100 million mobile handsets in Shenzhen. That will account for close to 10 per cent of the mobile phones made globally.

NO BUREAUCRACY HERE: Jukka Lehtela director Nokia (India)

Going by calculations, during 2007, Sriperumbudur should make close to half of what Shenzhen will make this year — 50 million handsets, of which more than 30 per cent will be exported, much like what happens in Shenzhen.

Sure, Shenzhen isn’t about handsets alone. A whole range of items like computers, set-top boxes and laser printers are made there. Over the last two decades, it has seen investments of $30 billion. Moreover, it accounts for 9 per cent of China’s GDP. (SEZs collectively contribute 35 per cent of China’s GDP.) Clearly, therefore, it will be a while before Sriperumbudur can reach those levels. However, as Gururaj argues: “It has everything in place to emerge as India’s answer to Shenzhen in the next few years.”

Towards end 2004, shortly after he had taken over as communications and information technology minister of the UPA government, Dayanidhi Maran had persuasively argued with BW that while IT did put India on the global economic map, it was manufacturing that provided the jobs. Maran also figured that telecom and other allied electronic goods companies would perhaps be most open to persuasion given the opportunity India provided.

Consider that in 2005, Indians bought electronic goods worth $22 billion, making it the world’s seventh largest market. Again, during 2005, Indians bought 36 million mobile phones. That makes India the third largest market after China and the US for mobile phones. This year, demand for mobiles is expected to touch 50 million.

Little wonder, one of the first things Maran did as minister was convince Nokia’s then CEO Jorma Ollila to set up the company’s tenth bulk manufacturing plant in Sriperumbudur. Though by then Nokia had decided to set up a plant in India given the roaring business it was doing here, it hadn’t decided on the location. Maran was instrumental in convincing Nokia to choose Sriperumbudur over Bangalore, Hyderabad and the National Capital Region (NCR).

While this helped Maran politically — his constituency happens to be in nearby Chennai, barely 40 km away and Sriperumbudur has begun sourcing a lot of talent from there — Nokia did emerge as the pivot around which many of the other investments were centred. (The first ever investment in Sriperumbudur was Hyundai setting up its factory there in 1999, but between then and 2004, little else happened.)

Maran did a few other things. One, he made it a precondition for all equipment suppliers that were keen on participating in the big BSNL and MTNL expansion tenders to manufacture 30 per cent of the order in India. This would force them to manufacture in India, he reasoned. Companies like Nokia and Motorola have already participated in BSNL’s 60-million line expansion tender worth $5 billion.

He was also able to align the interests of the Tamil Nadu government with his own. Though till early this year, Tamil Nadu was ruled by the AIADMK, political opponents of Maran’s DMK — after the 2006 elections Maran’s uncle M. Karunanidhi was voted back to power — Maran was able to convince politicians (and therefore, bureaucrats) of the benefits of positioning Sriperumbudur as an electronics manufacturing hub.

Indeed, one of the reasons most companies say they have invested in Sriperumbudur is because of the state’s bureaucrats. Says Jukka Lehtela, director (India operations), Nokia: “The entire process from start to finish in Tamil Nadu was much faster than expected.” Nokia, which identified Chennai as its plant location in April 2005, had it up and running eight months later in January 2006. That compares with the best anywhere in the world.

Bureaucrats like Tamil Nadu industries secretary Shaktikanta Das say that presentations by potential investors are attended by an inter-departmental group of secretaries. Typically, Das convenes these meetings. They are attended by secretaries from the departments of finance, IT, energy, water supply, and taxes, along with officials from State Industries Promotion Council of Tamil Nadu

(SIPCOT) and the Industrial Guidance and Export Promotion Bureau. “At one meeting the investor gets a clear idea of all that needs to be resolved. The same panel also does a review meeting every month. All this makes things a lot easier for the investor,” says Das.

Bureaucrats like Das, unlike investors like Gururaj, haven’t yet begun comparing Sriperumbudur with Shenzhen. But they do buy into the idea that if properly managed, Sriperumbudur could turn out to be something really big.

Investor Friendly: Shaktikanta Das Tamil Nadu industries secretary

Das points to fresh investments being made to develop the state’s infrastructure, which he believes will keep the FDI flowing in. Though Tamil Nadu is one of the few states with surplus power (current installed capacity at 10,011 MW, higher than maximum peak demand of 8,600 MW) close to 2,000 MW of fresh capacity will be commissioned over the next three years. This includes 1,000 MW at Tuticorin and Jayakondam.

Luckily for Das, private entrepreneurs have also spotted the Sriperumbudur opportunity, and have begun pitching in. Consider that real estate prices there have gone up by 20 per cent in the last one year — a rise that is comparable to Chennai’s. Two leading Mumbai-based builders are looking at housing projects there and have already begun asking Nokia and Flextronics on salary details of their executives. Again, global hotel chains from the US are looking at properties there, which should be up by next year. Says a consultant: “What hotels are looking at is to provide affordable rooms. It will save them the bother of commuting up and down from Chennai daily.”

Nokia’s Lehtela argues that Sriperumbudur will need to ensure that it stays easily accessible. (Currently, there is a four-lane highway that connects it to the nearest port and international airport in Chennai.) “The nature of the mobile phone business is such that you need very good logistics. It is not just the flow of goods into the factory that matters. Equally important is the flow of finished goods from the factory to the rest of India and abroad,” says Lehtela.

Telecom analysts say that for India to be seen as an alternative to China in telecom equipment manufacturing, costs have to be at least 4 per cent lower here. (Margins in this business are wafer thin.) Typically, materials account for 80-85 per cent of costs. Companies like Flextronics and Nokia, therefore, prefer to either have their vendors within the same compound (as is evident in Sriperumbudur) or manufacture in locations where it is logistically easy to source components.

BY all accounts, Sriperumbudur is showing the signs of an industrial cluster in the making — a few pioneer investors at first, a somewhat rough and ready ecosystem to support them and then the others start coming in, in a virtuous cycle of events. Also, the fact that the state churns out 2.5 lakh engineering graduates is a big plus.

While it is still premature to draw lessons from Sriperumbudur, it will still be worth watching how events unfold there. After all, there aren’t any high-tech manufacturing clusters in the country — and this one could just be the beginning of a new wave.

Who cares about Agriculture Economic Zones in India?

By Vipin Agnihotri

In the run for getting maximum Special Economic Zones (SEZs) sanctioned, the Indian government seems to have lost its sight on the Agriculture Economic Zones (AEZs). It is worth mentioning in this regard that the export figure from 60 AEZs in the past six years stands only at Rs 5316.31 crore against the target of Rs 11821.47 crore.

Such a dismal growth of AEZs in India punctures the UPA government claims over putting the best possible efforts to increase agricultures contribution to gross domestic product (GDP). According to Associated Chamber of Commerce and Industry (ASSOCHAM) report, there is a decline in exports and investment proceeds of over 50 per cent in all the 60 notified AEZs spread across 20 states.

Theoretically speaking, such agriculture zones were notified in 2001 to enhance export and investments in the farm sector. When this correspondent analyzes all the agriculture zones, 54 are performing very poorly.The ASSOCHAM report is of the opinion that these AEZs could attract only Rs 820.08 crore worth of investment against the envisaged investment limit of Rs 1717.95 crore. “54 AEZs have not been able to make any export or investment because of the non cooperation of agencies involved by their promoters. It is true that AEZs are not doing so well. Plenty of them have mot been able to cope with the teething issues. As a matter of fact, it is only six years ago that majority of them were notified. They would pick up in years to come effectively,” pointed out an official in Agriculture Ministry.

Interestingly, Indian government is in receipt of 34 additional proposals for setting up of AEZ in the last two years. Though, the final approval has not yet been granted. If one takes into consideration the latest Government figure, it clearly pinpoints the fact that the agriculture production has plummeted to an all time low to 1.5 per cent. In other word, the production of rice, coarse cereals and oilseeds has dipped by 1.1, 8.3 and 18.2 per cent respectively.

On the other side of the coin, the Central Statistical Organization (CSO) puts the growth in agriculture at 1.5 per cent in gross domestic product against 8.7 per cent during the last corresponding period. Furthermore, in 2007-08 budget, the UPA government has allocated Rs 8558 crore under the plan outlay for agriculture sector as against Rs 7391 crore spent last year to give a boost to the farm sector, widely regarded as the backbone of Indian economy.

There is no doubt that the wrong policies and continuous neglect has made agriculture subservient to other sectors in India, which is very unfortunate. There is stagnation in productivity. The time has come for Indian government to take charge of agriculture. It cannot be left at the mercy of States. The investment on irrigation has to be increased adequately.

Investment in AEZs meant for premium products like Basmati Rice is negligible and Darjeeling tea is zero. Incidentally, India is the leading producer of tea, but has only one zone attributed to tea in Darjeeling. It was approved three year ago but because of lack of consensus between the central and the state government, MoU is still awaited.

DLF gets IPO nod

By Dhruva Jyoti Chowdhury Kolkata, India: The real estate giant are now coming up with a bang. DLF has got the nod from Securities & Exchange Board of India (SEBI) for its Initial Public Offering (IPO), which is expected to raise a record Rs 13,600 crore.

If all goes well, DLF’s market capitalisation is expected to be around Rs 1,05,00 crore, equivalent to $25 billion, which will place DLF at seventh position in market capitalization rankings in the world. And after the IPO, DLF Universal’s promoter KP Singh will be among the richest Indians.

The approval, which will make a way for the DLF plan to put its fist on the capital market. It is worthwhile to mention here that the company had filed a new prospectus in January this year after its first attempt came to a stand still due to certain objections over the complaints by the minority shareholders'.

DLF owned by KP Singh proposes to enter the capital market with a public issue of 17.5 crore equity shares of Rs 2 each. The post-issue dilution would be over 10% of the equity capital of DLF. While he will continue to own 87.5 per cent stake in the company. "The company could raise more than or equal to Rs 13,600 crore," a company official had said in January. The fund would be deployed to meet construction cost, land acquisition and repayment of debt.

When asked when the issue would open, the company official said: "We are on the job." Merchant bankers, however, said it would take at least a month as the issue size is big. In its second attempt, the DLF plans to raise about Rs 13,600 crore but with lesser shares being offered through the IPO, reflecting the company's increased valuation over last year. DLF last year, proposed to offer 20.2 crore-equity shares, but the prospectus containing that offer was withdrawn.

Despite the severe beating, reality stocks have taken in the secondary market, the price band for the DLF issue was expected to be between Rs 550 and Rs 600 a share, said an investment banker on the condition of anonymity. As the face value of the equity is Rs 2, according to SEBI guidelines, the issue cannot be priced less than Rs 500 a share. “Since the minimum price cannot be below Rs 500, the price band is expected to be at around Rs 550-600, and the final price could be at the upper limit,” said the banker.

DLF executive claimed the Reserve Bank of India had allowed foreign institutional investors (FIIs) to invest in the company’s IPO, and the real estate major was expecting good response from institutional investors, including mutual funds, banks and insurance companies. Depending upon the success of the DLF issue, investment bankers said, another realty company, Omaxe, could enter the market.

DLF will use its IPO proceeds in part to acquire land, complete on going projects and retire debts. The company's vice chairman Rajiv Singh says that land acquisition programme will cost Rs 6,500 crore (Rs 65 billion), while the completion of on-going projects will cost about Rs 3,100 crore (Rs 31 billion). The company, at present, has loans worth Rs 4,000 crore (Rs 40 billion).

DLF Vice Chairman Rajiv Singh said that the IPO proceeds will be utilized for land acquisition, which will cost about Rs 6,500 crore and the DLF hopes to complete the construction of some on-going projects, which will take about Rs 3100 crore within a few months from now.

Singh further said that DLF retains the rights to prepay loans that the company holds to the extent of about Rs 4,000 crore. This is an overall statement of objectives. It will be decided after the exact issue size is finalized. The deployment will be decided thereafter. Principally the money is for acquisition and for completion of our projects.

When asked about the Special Economic Zones three special economic zones, which are multi-product ones in Ludhiana, Amritsar and Manesar, Singh said that. DLF have received approval to set up four special economic zones of a very large size. Three are going to be a multi purpose special economic zone and one is going to be a collection of product specific zones in Amritsar.

According to Singh, as far as the investment programme goes, no exact number is quantified as yet. The land acquisition proceedings still need to take place. DLF do estimate the total investments processing would be of Rs 40,000-50,000 crore (Rs 400-500 billion). But DLF's investment in this would be restricted to much smaller amount, which will be known after the projects are specifically conceptualized.

The start is due in Amritsar not in Ludhiana. Amrtisar is the first one, which will get off the block. We do hope that we will be able to start something physically on the ground in a few months time. We should be up and running in terms of marketing.

The DLF is also targeting 100-125 hotels in the next five-eight years while some in the next few months. But Vijay Singh declined to comment on them and said that future forecast at this juncture in an IPO process is something business hotels should be the first ones to take off. But said that substantial sites for the location of such hotels. As and when our partnership gets finalized, we will implement these projects rapidly. Some of them are going to be independent sites and many of them are going to be co-located with the other development projects of the company, whether in retail space or in IT park space.

Singh further added that there has been some kind of trouble between the Delhi Development Authority as well as the Delhi high court regarding the joint venture of the company with Indiabulls which is just a co-investment into a particular project.

When asked about the Foreign Investment Promotion Board (FIPB) clearance for the FIIs to come into the pre-IPO placement, Singh said that in pre-IPO placement, we are not contemplating any FIIs. The pre-IPO placement will only be for the domestic investors and institutions. We may be able to give you some details about this in a few days time. Only one thing I can say is, unfortunately, we are constrained in terms of making a projection at this moment in the IPO process.

India slides back on SEZ

By Dhruva Jyoti Chowdhury Kolkata, India: Land is a life long asset to the poor rural people an immovable asset that never undergoes depreciation. The plan of the government to withdraw intervention from this process of land acquisition may bring even worse affect for the society. Since India cannot afford to invest a huge amount of money to develop the infrastructure of the whole India, setting up Special Economic Zone (SEZ) is the only viable option to match Chinese economic development to attract Foreign investment as well as from the residential industrial community. But due to lack of home work to built up infrastructural facilities for the land owners the Indian Government has gone on the back foot is at present is moving at a snails pace in this regard. The Chinese started their liberalization and industrialization with the formation of SEZs in late 70s and early 80s. But in india, the liberalisation process started after about a decade from China. But still the land acquisition process for the SEZs still a dream for the Government as hasty decisions and lack of home work pre acquisition of land for setting up SEZ are turning into a source of societal conflicts and revolts. The basic concept of the Indian government is to promote Special Economic Zone in India to generate additional economic activity, promote exports, promote investments, create employment opportunities and develop infrastructural facilities.

A 19 member inter-ministerial SEZ Board of Approval (BoA) has also been formed as a single window SEZ approval mechanism. Very recently, the BoA has put a limit on the maximum land acquisition by a SEZ project to 5000 hectare. It has also laid down compulsory export business for such projects. Apart from this, it has been made mandatory to provide employment to at least one member of the displaced land owner’s family. However, these Suez’s are expected to generate 50,000 direct jobs by the end of financial year 2007-2008. Currently, more than one lakh seventy thousand people are employed in these SEZ’s, 40% of which are women. As a matter of fact, SEZ is being incorporated 15 years after the start of liberalization process. Comparing China, the process of acquiring land and laying down infrastructure was a slow process. The Government convinced the land owners how beneficial it will be for the development of the country. The Chinese Government had a Master Plan and an economic framework on how to build and proceed with SEZs, most probably inspired by the success of Asian Trading Hub, Hong Kong. The Dragons started building massive cities for manufacturing and industrialization under their SEZ framework. Dragons also rolled out red carpet for foreign companies to build and operate from these SEZs. Now the question arises how the Government wants to facilitate the Indian and Foreign companies through SEZs ? Well, the answer is that lots of incentives are being provided to the businesses operating under SEZ’s, some of which are duty free imports or domestic procurement of goods for development, operation and maintenance of SEZ units, exemption from minimum alternate tax, exemption from central sales tax, 100% IT exemption for the first 5 years, 50% during the next 5 years and 50% of the ploughed back export profit for the next 5 years. But the real answer is quite different from the above. These mega projects ask for hundreds and hundreds hectare of land which are normally bought from respective rural land owners at a rate fixed by the government. In the past too, people have given away their land much below the then market price. All those projects could not also generate expected level of employment for the local residents due to their financial structure and lack of any formal training. Witnessing this situation, the group of ministers has come out with a provision that will ensure direct dealings between the farmers and the land acquirers. There is also a fair chance of overlooking the issues and problems of the weaker section of the country regarding acquisition of land for setting up Special Economic zones as after ‘massacre’ in Nandigram in West Bengal, the Government is fearing of violent protests all over the country against the forcible acquisition of fertile agricultural land which will lead to penury for the landless farmers Even the journalists were not spared by the hooliganism by the ruling party cadre but even by the police force. Few incidents in the past and current, like Nandigram incident have brought a great deal of uncertainty in implementation of SEZ plans towards industrialization of the nation, where many people died in police firing while opposing the acquisition of their land for a proposed SEZ by a Indonesian company, The Salem Group. The West Bengal government's decision to put on hold the proposed special economic zone at Nandigram has sent the Orissa government on the back foot forcing the Naveen Patnaik government to cancel a proposed project by the Orissa Industrial Infrastructure Development Corporation (IDCO) at Kalinga Nagar. The state-owned IDCO had earlier proposed to establish a sector specific metallurgical-based engineering and downstream industry for manufacturing stainless steel spread over 250 acre at Kalinga Nagar Industrial Complex The cancellation took place in order to avoid any violence over land acquisition which will profusely hold up many foreign companies who have already been invited for setting up industry in Orrisa. Though the Orissa government does not want to express its apprehensions over the SEZ issue, ruling BJD-BJP alliance insiders admitted that the administration does not want to have a repeat of the Kalinga Nagar blood spill. The state government has so far received proposals for setting up 17 SEZs. The center has announced hundreds of SEZ plans all across the nation, but their future seems to be uncertain. Recently, another such social revolt has been registered in the state of Maharashtra, where Reliance Group has declared to acquire 10,000 (approx) hectare of land for building up two mega SEZ projects.

Dr. J J Irani, former CMD of Tata Steel and currently one of the powerful Directors on Tata Son's is of the opinion, "India should also go slowly like China has done".

Mohandas Pai, Executive Director, Infosys Technologies said,"We should look at entire districts, with a port and a hinterland for SEZ. We should make large-scale investments in that so there is synergy, and we should ensure that manufacturing has priority, followed by services, but the vision has to be much larger. The way it is today, the vision is too myopic, and too small, and I am afraid we will not get the benefit that China did".

It`s a Real Estate hunt

With experts concurring that India and China are lucrative markets for real estate, a comparison between the two countries is inevitable, writes Ravi Teja Sharma.

India and China are similar in many ways. Rapid GDP growth, huge urbanisation, growth in middle-class spends, a boom in housing, organised retail malls and a growing choice of products.

Most macro-economic factors are similar for the two but China is ahead in some developments by at least two-four years — and real estate is one of them. India, however, is fast catching up and most international companies wanting to invest in real estate consider both China and India top markets.

It is true the Indian economy only began to open up after 1990 and should not be compared to China, where free-market systems began to take hold after 1978. Only now are the effects of Indian reforms beginning to become evident. Nevertheless, a comparison is always imminent when one is talking about real-estate developments in the two large countries.

While China began to allow overseas businesses to mainland China in 1978, it took them 10 years to allow private ownership of real estate. Prior to that all housing was owned by the government, says CY Leung, chairman, Asia Pacific, global property adviser, DTZ Debenham Tie Leung.

In fact, Leung was one of the first to help the Chinese government sell the first parcels of land in Shanghai in 1988-89. Since then, he says, the country has invested heavily in building infrastructure, roads and tunnels. State governments that sold land in their cities plowed back the money into large infrastructure development projects.

Some experts feel that India’s story is better than that of China. While India’s story is based on IT and knowledge, China’s is manufacturing-based. Growth for India is comparatively easier with less infrastructure required for IT as compared to manufacturing, which needs large, complex infrastructure including huge highways and machinery.

Still, a lot of what of the infrastructure projects and real estate scale we’re seeing in India today has also happened in China a few years ago. Take SEZs, for example, which in India are sprouting up almost everywhere. If all of these are approved, we might see hundreds of SEZs, big and small, in the next couple of years.

The Chinese model, though, is different from ours. An SEZ in China is not a small affair. There, entire cities are part of these zones, which is why there are only four SEZs in China — Shenzhen just across the border with Hong Kong, Zhuhai, Shantou and Xiamen. Apart from these, there are enterprise zones at a subsidiary level.

The manner in which projects are financed is different too. In India, the IPO market for real estate developers has just opened up. “There was a phase in the ’90s when there were several IPOs in the Chinese real estate market. After that, till 2003, it was dry and, since 2003, the size of transactions has been growing. A typical IPO in 2005 would be valued at $200-215 million while in 2007 it has gone up to even $1 billion-plus. The size of transactions has more than doubled in 12 months,” says Anthony Ryan, head of real estate and investment banking at JPMorgan.

“China is more an IPO and pre-IPO market, and real estate funds are starting to come in now. In China it is possible, today, to do corporate level debt equity financing or pre-IPO financing to get a push to raise funds for new projects,” says Ryan.

“In India, pre-IPO financing is limited and the pressure to go into an IPO is stronger, which is why we see many companies hitting the market today,” adds Kaustubh Kulkarni, ED, investment banking, JPMorgan.

In 1988, the Chinese government took some very bold steps. It removed all restrictions on foreign money coming into the country, and saw investors from all across — Singapore, Hong Kong, Japan — moving in.

Foreign investment got in a lot of expertise and modern techniques into the real estate sector. That is what is likely to happen in India now, says Leung, with FDI flowing into India’s real estate sector.

One of the apprehensions about allowing foreign investment in the sector is the fear that they will overshadow domestic real estate investments by local companies. Leung clears the point by saying that real estate investments are mostly domestic.

In Hong Kong, most investment is local. Of the hundreds of cities in China, there are no foreign investors in 600 cities. Of the ones that do have foreign investment, they make no more than 15 per cent of the market.

“Even if India opens up further, the situation is going to be pretty much the same. No market will ever be dominated by foreign investors. An open door policy, in turn, will allow competition and better expertise,” he says.

Ryan feels the scale of development might end up a lot larger in India than even China. The ability to get large tracts of land is limited in China. All land in China is owned by the government, every inch of it, with the exception of a cathedral in Hong Kong that is on a long-term lease.

In communist China, most developers are pretty new. There are no traditionally wealthy families who got into the real estate business leveraging family land banks, which is the case with many companies in India.

The scale and number of developers, though, is larger in China. There are a huge number of real estate developers. India is a two-speed market with small and large players. In China, the size of companies is more uniform and there is huge competition. No developer dominates more than 2-3 per cent of any market.

According to reports, in China, for every $1 being invested, there is $12 of investment waiting to be invested. In India, for every $1, there $8-10 of investment waiting.

For the moment, there are chances that investors will prefer China over India. In the near term, there is a chance that the Chinese currency (RMB or Yuan) will appreciate and over the next few years investors would want to invest equity to get additional appreciation.

Apart from the growth in real estate prices, an investor will be able to benefit through currency appreciation. “Since India’s political system is more defined, investor appetite in India is longer term — 6-10 years, says Kulkarni. In China, equity investors are more likely to commit to three years,” says Ryan.

Overall, net and gross profit margins are lower in China and profitability is higher in India. Net profit in China for listed companies ranges from 15-25 per cent while in India it could be 30-40 per cent or, in some cases, even higher.

Some experts feel that corporatising in India is at a nascent stage and as the market matures, as it has in China, profit margins will come down.

There are more margins to be made with larger developments but the Chinese government regulates how much land it gives out and at what price. There is also increased regulation on how much affordable housing needs to be provided.

Vincent Lottefier, country head, Jones Lang LaSalle, says the Chinese government has started implementing land policy initiatives that provide the first steps toward the creation of a national land use planning and sustainable development policy framework for managing urban growth.

These include adoption of local comprehensive plans, zoning maps, integrated land development reviews and also distribution of various types of land uses.

“Some first tier cities have their own urban planning bureaus that are responsible for their master planning and even more detailed planning (area or precinct based). For instance, the Shanghai government has its Shanghai master plan 1999-2020. As for land-use, the government pre-specifies the use of each plot which will be transferred in the following years (at least five years),” he says.

Whether the Chinese real estate sector will sustain itself in the long run will depend on several factors. The environment will be one of the biggest of them. Beijing and some cities don’t see clear skies for days on end.

Environmental pollution is massive owing to the large manufacturing hubs. India’s IT buildings doesn’t pollute as much, actually not even close to the kind of pollution there is from manufacturing units in China, say developers here.

Why, there is also a plan to shut down factories around Beijing for weeks before the Olympic Games in 2008 for participants to enjoy the blue sky!

Will Property boom sustain in India?

By Dhruva Jyoti Chowdhury

Kolkata, India: Presently, there is no asset bubble, so nothing to worry for people possessing property in the Indian Real Estate segment. After a bullish run for two years, the graph of the booming real estate market seems to have begun to slide. This has resulted in a virtual meltdown in the real estate segment which was considered to be overheated until a few months back. Now the realtors are setting their sight on sub urban areas for development due to the competitive land prices pushing themselves away from the metropolitan high ends. The experts in this segment suggest that in the three primary segments of the real estate development; primarily residential, commercial and retail, the strong growth with sustainability is achievable by the year 2010. Despite of the graph sliding down, ranking fifth in the retail sector from amongst 30-emerging global retail markets, the Indian real estate segment is being predicted to witness an investment of Rs 100 billion the next two financial years. And if the corporate survey is to be believed, the country will also see a steep rise of 1.19 lakh job opportunities in the real estate segment in the next financial year. The good news for investors and developers is a survey conducted by Knight Frank, a global real Estate consulting group. It states that the real estate segment in India is growing at an annual rate of 30% on the overall basis while a 20% growth rate for the organized retail segment by financial year 2012 is in the offing indicating the retail industry witnessing over a Rs. 100-billion investment up to financial year 2010. Industry feedback and business associations indicate that a large number of firms have evinced interest in setting up special economic zones (SEZs). In the commercial space segment, business opportunity is led by the unprecedented outsourcing activity in the country that in turn is driven by Information Technology (IT) or IT-enabled services. Many global firms are setting up back offices and outsourcing their work to India. According to research carried out by Knight Frank, as the trend gathers pace, commercial space requirement will expand to 100-million sq. ft. by financial year 2008. Of this, almost 75% to 80% will be contributed by the IT / ITES industry. Growth in this sector is being fuelled by incentives given by the Government of India, which has attracted huge Foreign Direct Investment. For example, the Dubai-based real estate major Emmar group is busy setting up SEZs in Haryana at an estimated investment outlay of $1.5-billion. Now days, developers are not risking their moolahs on high priced lands and are under heat at this point of time. The main problem persisting in the real estate market is the affordability. With the prices of all the three segments Sky rocketing, affordability has become a cause of concern for the realtors. This is also because of the high interest rates applied on the developers which are virtually passed on the consumers when they buy properties. Another reason for the realtors for backtracking is the increasing prices of not only land but also allied purchases including cement. The developers are feeling the heat as they are also not finding if feasible to control the labour problem at this point of time. The static income level of the middle income grade individuals who are the real investors in the market, has also added to the woes of the developers. Developers feel that the time is ripe when the Government should step in and introduce salt pans for development to woo the foreign investors who are looking forward to invest in the country. After the strict guidelines by the Reserve Bank of India to the banks directing them to only approve loans selectively and to those only with proper approvals for the land, the business has further being held up. While, investment in the residential segment is estimated to cross the Rs. 9,000-billion mark in the next five years, the number of households that are estimated to be built in the next five years stand at over 5-million. And, all this real estate construction is expected to create a surge in the growth for demand of raw materials, such as cement. Presently, 30-million sq. ft. of available mall space in India is expected to increase to 100-million sq. ft. by financial year 2010. Of the total mall space to be developed, around 75% is in cities like Mumbai, Pune, Bangalore and Hyderabad and National capital Region (NCR). The rest will be in Tier-II and Tier-III cities of Nagpur, Ahmedabad, Chandigarh and Ludhiana. And over the next three years, 300 malls are to be developed in the country including those in the sub urban areas. Reliance Industries announced its retail venture with pan-India footprint covering 1500-cities and towns that will involve an investment outlay of Rs. 25,000 Crore.

Merrill Lynch in its report on real estate trends predicts that the number of malls in these five cities - Mumbai, Bangalore, New Delhi, Hyderabad and Pune will to reach up to 250 by the financial year 2010.