A deal in Kerala

The Kerala government signs an agreement with a Dubai-based company to build a `smart city' in Kochi.

ON May 13, television images of open-jawed excavators digging into the foyers of upmarket hill station resorts at Munnar mingled repeatedly with those of a modest deal-making ceremony at a government-owned hotel in Thiruvananthapuram, where the State government signed an agreement for establishing "Smart City, Kochi" with the Dubai-based TECOM Investment FZ-LLC.

The PR cue was unmistakable. Crusading Chief Minister V.S. Achuthanandan, much maligned by his political rivals as the "symbol of the policies that create bottlenecks for the development of the State", was trying to prove an oft-repeated point: he was for development but only if it was beneficial to Kerala.

At the signing of the agreement, Achuthanandan said: "Obviously, the negotiations were not smooth at all points of time. It took almost a year to reach here, and in between, the negotiating process witnessed many ups and downs. But, as all of you will agree, what is important is the result. It should be emphasised that the final agreement, which is scheduled to be signed today, is eminently acceptable and advantageous to both the parties."

Later, while facing a death threat over the telephone and unprecedented criticism against his hand-picked official team's time-bound drive against over 10,000 illegal encroachers, including about 500 resort owners, at the ecologically fragile hill station, the Chief Minister quoted Deng Xiaoping: "It doesn't matter if the cat is black or white as long as it catches mice."

That message could also be read in the context of the deal for the Information Technology project. Nearly three years after the idea for Smart City township at Kochi was proposed by the then ruling Congress-led United Democratic Front (UDF) government with controversial terms that were then seen by Achuthanandan and the Left Democratic Front (LDF) as being disadvantageous to the State, a LDF government under Achuthanandan has signed the deal, albeit under different terms.

Significant among the terms discarded were the most controversial ones, including the proposal to transfer the existing State-run Infopark and the 2.57 acres ( 1 acre = 0.4 hectares) where it is situated to the Smart City (for Rs.109 crore) and the condition that the government should not sanction any other IT project in Ernakulam district where the Smart City project is to be established.

Asked repeatedly why TECOM had agreed to change the terms, which it said were "non-negotiable" during the UDF rule, its executive chairman, Ahmad Abdulla Juma BinByat, said, "We are dealing with a new government" - an indirect compliment, perhaps, to the Achuthanandan government or an indirect admission that the deal was even otherwise advantageous to the promoters, despite the changes.

The project that is proposed to come up on a 8.8 million sq ft area, is to be one of India's biggest Special Economic Zone industrial parks, offering employment to 90,000 people - a hub of excellence in knowledge-based industries. Construction is to start within a year and the project is to be completed in 10 years. Roadshows to attract the best companies are to begin soon all over the world, and a master plan with details of the investors will be ready within a year. Besides IT and allied services, the project is expected to create employment opportunities in the areas of construction, administration, hospitality, consultancy, tourism, retail and logistics.

According to Ahmed BinByat, the project would be an important link in the network of Smart Cities being developed globally. He said growth and investment in Smart City, Kochi would be an ongoing process. "It is not proper to expect immediate returns since the mega project is intended to be a long-term player at a location of TECOM's choice."

The State government will have a 16 per cent share in the project and the rest will be held by TECOM through its permitted affiliates. The government can increase its shareholding to 26 per cent after five years, and the price of such "call shares" is to be determined by an independent valuer appointed on mutual consent.

The State government will initially have two directors in the 10-member board of directors (BoD) of the Smart City (Kochi) Infrastructure Private Limited (SPV). If it increases its share to 26 per cent, it will be able to nominate three directors to the board. The chairman of the board will be a government nominee, and each director is only eligible for one vote. The initial authorised share capital of SPV is to be Rs.68 0 crore and the initial paid-up share capital Rs.120 crore.

According to the terms of the framework agreement, TECOM "shall make best efforts" to generate "at least 90,000 jobs in ten years" from the date of completion of the project. The SPV is also required to designate at least 70 per cent of built-up space for IT/Information Technology-enabled services (ITeS) and related facilities. The utilisation of built-up space beyond 70 per cent should be done "after approval by the BoD with the concurrence of the GoK [Government of Kerala] nominee in the BoD".

The land (initially 246 acres) is to be transferred to SPV on lease for a term of 99 years at a one-time lease premium of Rs.104 crore and "irrespective of the compensation which may ultimately become payable by GoK for its acquisition". The land can be transferred in two instalments, but the two transfers should take place within six months. The lease period can be extended further "on mutually agreed upon terms". An additional 167 acres (described in the agreement as "future land") is to be leased "at acquisition price and on terms and conditions prescribed by the State government". The rent for the leased land shall be Re. 1 an acre a year, payable annually in advance.

The company will be free to mortgage its leasehold rights of the land "as security or for creating any lien or charge on the leasehold rights of the land" or sub-lease the land or the constructed buildings "for the purpose of development as per the development plan". Upon completion of the development plan, the agreement says, the company can convert an area not exceeding 12 per cent of the total land area "at any point of time as freeholds".

The agreement also allows TECOM or the State government to transfer the whole or part of its shareholding after an initial lock-in period of five years or the completion of the project (whichever is later) "to any other party at any price". But, in such an event, both parties will have the right of first refusal at the offered price and then the sale to a third party shall not be at a price less than the offered price.

TECOM or its permitted affiliates shall also be entitled to sell 40 per cent of their shares to a strategic partner, but such sale can take place only with the approval of the State government if it happens before TECOM completes the project according to the development plan or 10 years from the closing date after which SPV attains "developer status" (whichever is earlier).

SPV would attain developer status only after the creation of minimum infrastructure, including roads, power and water facilities, the receipt of SEZ notification and statutory approvals for construction in its favour, execution of the lease deed, completion of land acquisition and transfer, and transfer of 16 per cent share in SPV in favour of the State government.

But the agreement also says that such approval shall not be withheld unreasonably, and if the State government does not respond to a request from TECOM for such a transfer of its shares within 30 days, then "the request will be deemed to have been approved by the State government."

The agreement also requires both parties to contribute the necessary equity capital as may be necessary from time to time to fund the cost of the project in a manner that their 16-84 percentage shareholding structure is maintained. However, if any one party is unable to contribute the funds necessary to subscribe to the equity shares, then its shareholding will stand diluted beyond the 16-84 percentage structure. Further, the shares that were offered to the defaulter could then be offered to a third party at the same value at which they were offered to the defaulting party.

The SPV can raise the money for funding the project through debt funding, which TECOM is "to assist it in arranging, on the best commercial terms as reasonably as possible"

The agreement allows TECOM to buy out the entire shareholding of the State government (at a price to be decided by an independent valuer) if the State government fails to acquire and transfer land to the SPV within a specified period or fails to complete the minimum infrastructure within six months of the execution date or to fulfil its commitments regarding helping the company obtain SEZ status or fails to assist and cooperate in matters crucial to the implementation of Smart City, including obtaining statutory approvals for construction. TECOM can also then decide instead/also to abandon the project, in which case the State government will have to acquire the entire shareholding of TECOM "at a consideration which is the same amount as any sums paid to the Kerala government in cash by the SPV till the date of such acquisition."

Similarly, if TECOM fails to construct built-up space according to the agreement (8.8 million sq ft out of which 6.21 million sq ft will be specifically for IT-ITeS/allied services) or create 90,000 jobs, the State government will have the option of terminating the lease and buying out the entire shareholding of TECOM at a price to be determined by an independent valuer (taking the value of land as Rs.91.52 crore, the advance lease premium paid by the SPV to the government). The agreement also allows the government to abandon the project and the development of Smart City in which case TECOM shall acquire the entire shareholding of the government in SPV at a consideration to be fixed by an independent valuer.

The UDF has already pounced on the agreement since the project originally proposed by it was now being portrayed as adding to the glory of the Achuthanandan government.

On the eve of the Assembly elections in 2006, the then Chief Minister (now Opposition Leader) Oommen Chandy tried to deliver a political blow to the LDF by announcing that despite a High Court order favouring it, the UDF government would not sign the controversial deal with TECOM to set up the Smart City because the Communist Party of India (Marxist), which leads the LDF, had opposed the signing of the deal just before the elections. "Let the people now decide whether they want the project or whether they support the negative approach of the CPI (M) in opposing all such development proposals," he then said.

Oommen Chandy, among others, has said that several terms in the new agreement were not in the State's interest. Among them were the proposal to create "90,000 employment opportunities" (the UDF-drafted agreement had said 33,000 "direct" job opportunities), the price under which the land is being transferred, the decision to agree to the government acquiring 10 per cent more shares only after five years when the price of the shares would go up, and the proposal to allow the company to convert an area not exceeding 12 per cent of the total land area at any point of time as freeholds.

Despite the obvious advantages of such a long-awaited IT mega project in Kerala, the State is eagerly waiting to see whether the cat is really up to catching the mice, after all.