Land Bill Is Not One-Stop Solution – Financial Chronicle – 27-Nov-2014

November 29, 2014 - Uncategorized

The Land Acquisition Bill, 2013, which replaced the century-old Land Acquisition Act, 1894, has a balanced share of proponents and the parties involved (industry and landowners / affected families) have ample arguments to justify their position. While it’s fair to say that the bill does require clarifications on the interpretation of certain clauses and it could easily do with simplification of the procedures outlined. It is hard to believe that the process of acquiring land has actually been tested on the ground and the stumbling blocks clearly identified. Against this backdrop, the government of India is looking to make changes in the act and based on media reports, an ordinance; if not, a process of amendments passed by Parliament (which is mandatory under the act) is being contemplated to provide an immediate solution.

One of the more publicised reason for declining investment activity in India has been land acquisitions, more specifically the amounts to be paid and the timelines associated with the same, necessitating urgency on the part of the government. However, this urgency may be unwarranted given the ground realities of demand slowdown, low capacity utilisation and high leverage of corporate India. This provides limited incentives for the Indian industry to start thinking about investing in additional capacities.

Even assuming the bill is simplified in the coming session of Parliament, it is unlikely that any benefits from investment activity pickup are likely to translate before the second half of FY16. If demand does receive a surprise boost in the interim, debottlenecking would be the first and obvious option. Given this time cushion available to the government, it may be worthwhile to have the changes routed through the legislative assemblies; an ordinance would only increase uncertainty of the final blueprint that would take shape at a later stage.

The general criticism from the industry on the bill is regarding the cost of land acquisition and the procedural layers that have to be adhered to. It is never easy to say what the right cost is; what needs to be looked at is the life-cycle cost of a project. A lower cost initially may make the project economics look better but the long-term costs of litigation/ delays and in extreme cases, of projects having to be completely shelved, could be substantial. There have been cases where the acquirer took the short cut and had to write off his entire investment over a period of time.

While there have been rightful criticisms of the earlier bill, even within that, there have been corporates that have acquired large parcels of land by following the basic tenants of what is incorporated in the new bill. What they ensured was complete transparency in dealings, information flow to the affected parties and, more importantly, provision of a post resettlement life, which is economically strong. They may have paid higher amounts initially and consequently, project costs increased, but once completed, it ensured sustainable and predictable IRRs for the project.

Compensation is important but the tenets of transparency, rehabilitation and resettlement that ensure a litigation free environmentfor the industry to prosper and generate returns for its shareholders are more relevant. In any case, the cost of land is normally not a make-or-break decision in the overall project cost for a manufacturing facility but the uncertainty factor is.

It is in this light that the demands for diluting the process of preparing the social impact assessment (SIA) report (especially, for smaller projects defined by size of land) without any alternate suggestions could prove counter-productive. The SIA may be difficult to prepare but its contribution to increase transparency is the key. As long as transparency is at the forefront, doing away with SIA for smaller project could make sense but the alternate should remain comforting for the affected families.

The process of land acquisition and the amendments that will follow will not be a one-stop solution for companies. In general, they will have to continue to address location-specific issues and the process will remain an iterative one for a long time to come. Following the letter may not be sufficient; it will be the spirit of land acquisition that will ensure sustainable investments for companies. That is a small price to pay for being the world’s largest democracy.

 

 

Financial Chronicle

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