NEW DELHI — Last week, both houses of parliament passed an amendment to the law governing the controversial Special Economic Zones (SEZ) amid substantial protests and criticism by opposition parties.
According to the Narendra Modi government’s official explanation, the law was amended to ensure that the kind of businesses permitted to set up shop in SEZs be widened to include trusts as well as any other entities the government may permit from time to time. “My own sense is that it is actually a small amendment which can have large impact on investment in jobs, economic growth,” commerce minister Piyush Goyal explained on 27 June as the Rajya Sabha debated the amendment.
Though the amendment is ostensibly small, it was passed only after parliamentarians from the opposition parties protested and criticised both the manner in which it was being done as well as the legal provision being amended. They questioned the urgency of bringing in the amended changes in the form of an ordinance a week before the 2019 general election was announced on 10 March, and the hurried manner in which the ordinance was now being converted into an amendment of the SEZ Act, 2005.
For instance, Jairam Ramesh, Congress MP in the Rajya Sabha, claimed there was one particular trust that would benefit from the amendment and asked Goyal, “Who is that trust?”
It is unclear what company or trust Jairam Ramesh was referring to. Indeed, no Member of Parliament specified any company’s name as a possible beneficiary of the legal amendment during the debates in either Houses, but these claims come in the backdrop of some reports on how changes to SEZ rules would benefit specific companies.
This report in January described how one rule was changed to benefit an Adani Group company’s power export business. If indeed any specific company or companies are to benefit from this legal amendment, it is so far unclear. Ramesh seemed to hint at something when he said during the debate, “It was very, very improper to issue such a far-reaching ordinance one week before the announcement of elections. I don’t know what the tearing hurry was. There is something that is not being disclosed, which will only come to light a few months from now.”
HuffPost India explains what the legal amendment to one of India’s most controversial laws means, the government’s rationale behind introducing it first as an ordinance in March and now law, as well as takes a closer look at the statements made by opposition parliamentarians against the legal amendment.
1. What are Special Economic Zones?
They are specially demarcated areas where companies, which engage primarily in export-related businesses, have to follow a different, more relaxed regime of taxes and clearances. While some SEZs are classified as such only based on a single product/service and company, there are others in which multiple companies and services exist.
The SEZs are designed to have economic laws and regulations different from other parts of the country. They enjoy tax holidays and relatively lesser and easier clearances of all kinds for setting up enterprises.
2. What was amended in the Special Economic Zones Act?
As per the statement of objects and reasons in the bill, clause (v) of section 2 of the SEZ Act 2005 defines the term “person” as “an individual, whether resident in India or outside India, a Hindu undivided family, co-operative society, a company, whether incorporated in India or outside India, a firm, proprietary concern, or an association of persons or body of individuals, whether incorporated or not, local authority and any agency, office or branch owned or controlled by such individual, Hindu undivided family, co-operative, association, body, authority or company.”
Though seemingly detailed, this definition does not include “trust or entity” and thus they are not eligible for permission to set up units in Special Economic Zones. The statement further notes that since “the trusts or entities are very common form of operating bodies in the financial sector, it has become necessary to amend clause (v) of section 2 of the Act.”
3. Why is the amendment significant?
When it was introduced, there was much speculation about why the legal amendment was introduced. The opposition believes it will only open the floodgates for tainted money to flow into India in the guise of genuine investment.
During the 27 June Rajya Sabha session, Jairam Ramesh raised doubts about the credibility of the trusts. “Are you going to check who is behind these trusts? Who are these trusts? Are they paper trusts; are they trusts set up for some form of tax evasion or are they actually going to be investor trusts that are going to invest in the SEZs?”
Goyal countered, “For your kind information, until now, we have 8 proposals from such trusts and all from reputed companies. The total investment potential out of these 8 applications is about Rs. 8,000 crores.” However, the minister also chose to avoid naming the “reputed companies” which would benefit from the legal amendment.
4. Why opposition MPs criticised It
Congress MP Shashi Tharoor, backing an allegation by Kerala MP NK Premachandran, said, “The Bill, by delegating large powers to the government to notify who may qualify for benefits under the Act, can also increase the scope for misuse of the law to benefit select individuals.”
He asked Goyal to explain “how and why the extent of legislative powers must be delegated to the Executive and how it will not be misused.” He pointed out that “we have already heard accusations of land grab under the guise of SEZ activity”.
Communist Party of India’s Rajya Sabha MP D Raja, who also opposed the bill in the upper house, further described his opposition to the bill in an interview with HuffPost India. “I asked how does the government define a trust and whether these trusts can buy electoral bonds and influence the political system? He only said that the RBI and SEBI regulate trusts but did not say anything about electoral bonds.”
Trinamool Congress’ Rajya Sabha MP Derek O Brien reiterated his party’s opposition to the SEZs and claimed the BJP was indulging in doublespeak about the idea.
“Today, most people agree that SEZs have failed the nation. They have become a tool in the hands of a few vested interests and the land mafia. That is the Trinamool manifesto. I am going to read three lines from another manifesto,” he said and went on to read from what was purportedly an extract from the BJP’s manifesto for the 2009 Lok Sabha election.
‘“The UPA government has approved 572 Special Economic Zones that cover 50, 000 aces, three times the size of Singapore. This is absurd. This spells disaster for the farm sector. We will not allow the conversion of fertile farmland for industrial, commercial projects or Special Economic Zones.” That was a disaster in 2009. This was the BJP manifesto of 2009. So what they say depends on where they sit,” concluded Derek O’ Brien.
5. Commerce minister Piyush Goyal’s defence
In his remarks to criticisms by the opposition, Goyal said when the SEZ Act was passed in 2005, trusts did not exist as an “investment vehicle”. They usually came in the form of “alternative investment funds” (AIF) in which several people pool in capital.
Describing the nature of a trust, the commerce minister said, it is an entity that “invests in any business or any venture and the returns from that go to the various stakeholders in the proportion of their investment.” Further, he added, that “there has been a thinking in the government for several years...that India should gradually promote International Finance Centres (IFC)”. In such centres, he reasoned, investments are carried through “newer and newer investment vehicles one of which is an entity called trust, and that is the AIF model”. All of these are compliant with SEBI and RBI norms, he informed.
Responding to criticisms on why the amendments were brought in a hurry through an ordinance first and as a bill this week, Goyal claimed that since the former Narendra Modi government “had a very small budget session (in February 2019) in which Vote-on-Account was done and largely Parliament was not able to function or approve any legislation or Bills” at the time, it was not possible to pass a law.
He said that with the sunset clause coming in for SEZs in 2020, further delay in “finalising this amendment bill and allowing trusts or AIFs” to come to India would have delayed the process by another 6-7 months, leading to an inability to give confidence to the international investor community that they could invest here through this route as well. He rejected what he termed as “insinuations” that the legal amendments will benefit one specific trust or company.
With this change, he claimed, “Our expectation is that the changes that are being proposed will result in about $3 billion. That is about Rs 20,000 crores plus annually, in terms of investment coming into the International Financial Services Centre.”