Alienation of Property in SEZ Notified Areas: Legal Framework and Practical Difficulties

Introduction

A Special Economic Zone (“SEZ”) is a specially identified and notified area[1] under the Special Economic Zones Act, 2005 (“Act”) for establishment, growth and management of such zones to promote exports, investment, and economic growth in India. The Central Government framed the SEZ Principal Rules, 2006 (“Rules”)[2] to implement and regulate functioning of the Act. The Act provides multiple statutory routes for the establishment and notification of an SEZ, as follows:

(a) where the Central Government, a State Government either jointly or severally, or any person.”[3]

(b) where a private person intends to establish a SEZ, the person must first identify the area and submit a proposal, either to the concerned State Government or directly to the Board of Approval[4], subject to obtaining the State Government’s concurrence within the prescribed period.[5]

(c) where the State Government proposes to establish the SEZ, it may forward the proposal directly to the Board of Approval.[6]

Once the Central Government approves the proposal and notifies the area as an SEZ, the approved developer[7] undertakes the development and management of the SEZ in accordance with the Act and the Rules. This article examines the legal framework and judicial precedents in respect to the alienation of SEZ lands.

Restriction on Alienation and Judicial Interpretation

(a) Sale of SEZ notified lands

After the issuance of the Letter of Approval to the Board and notifying the SEZ in the Official Gazette under the Act, the developer will not be allowed to convey the SEZ notified land as a freehold land[8]. Rule 11(9) of the Rules mandate that the developer[9] shall not sell the land SEZ land, consequently, in SEZ parlance, the concept of alienation should be interpreted in the confines of the Act and Rules i.e., lease, sub lease, transfer of developer/ co-developer status and not the freehold sale of such lands.

In DLF Limited vs., the Additional Commissioner of Income Tax, New Delhi[10], developer developed an IT/ITES SEZ and entered into a Board approved co developer agreement with its group entities, under which it granted a long term lease of SEZ land and transferred bare shell buildings for agreed “development consideration”. The Tribunal clarified that Rule 11(9) of the Rules provides that the developer shall not sell the land in a SEZ. The arrangement entered into by the assesse in this case by granting long-term leasehold rights over the SEZ land to the co-developer cannot be regarded as a sale of land. Also, the prohibition under Rule 11(9) of the Rules is only against sale of SEZ land andand does not prohibit leasing or grant of leasehold rights in furtherance of authorised operations.

(b) Mortgage of SEZ Leasehold Rights & SARFAESI Enforcement

Rule 11(7)[11] of the Rules provides that any transfer by way of sub-lease or any other mode by the co-Developer shall only be effective to the extent that it is transferred to a person to whom a valid letter of approval has been issued by the Development Commissioner. The Act and Rules permit licences arrangements to be brought in as permissible forms of alienation, so long as they do not involve transfer of title or violate permitted use restrictions.

In Cambay SEZ Hotels Private Limited v. Board of Approval[12], Cambay SEZ Hotels Private Limited, an approved co-developer[13] in Dahej SEZ (multi-product), held an area under sub-lease from Dahej SEZ Limited and mortgaged its leasehold/superstructure rights to Small Industries Development Bank of India (“SIDBI”). Upon default, SIDBI invoked provisions of the SARFAESI Act, 2002, took possession via section 14 (through Collector), auctioned the SEZ property, and issued a sale certificate to the auction purchaser, who sought co-developer recognition.

The petitioner challenged the Board’s grant of Co-developer status to the action purchaser, arguing that as per the Act it requires a prior suspension/transfer procedure with notice for co-developers. The Gujarat High Court held that section 10 of the SEZ Act[14] did not apply post-SARFAESI enforcement, because of the overriding effect[15] of SARFAESI which extinguished the defaulter’s proprietary/co-developer rights upon confirmed auction/sale certificate, leaving the purchaser with title under operation of law. The Court ruled that the Board’s approval merely recognised this statutory transfer without the need for separate SEZ suspension/hearing, since the petitioner no longer qualified as “co-developer”[16] after divestment of SEZ property. The Court upheld substitution through enforcement without SEZ specific procedure and dismissed the petition.

Comptroller and Auditor General of India Report

It is to be noted that neither the Act nor Rules restrict mortgaging leasehold SEZ land to banks/financial institutions for raising finances and the Department of Commerce lacks jurisdiction over such financial arrangements. It is mentioned in the Comptroller and Auditor General Performance Report on SEZs (2012-13) (“CAG Report”) that “At present there is no restriction in SEZ Act or Rules for the mortgage of leasehold lands with banks or other financial institutions for raising loans. Raising loans is the subject matter of the financial institution and DoC has no explicit jurisdiction over them; in case of any default, banks have the right to proceed under SARFAESI Act”[17].

Denotification and Cessation of Restrictions on Alienation

When the above-mentioned restrictions effect the smooth operation of business activities, for instance, in cases involving underutilised SEZ-notified land or where developers seek to withdraw from SEZ notification for enabling free business movement, the de-notification under Rule 8 [18], provides a structured mechanism to facilitate the process . But this involves repaying all the tax benefits (with interest) along with the State’s approval to revert the land to normal use. Upon denotification, prohibition of sale of land under Rule 19 of the Rules is not applicable, paving the way for freehold transfers or outright sales under conventional property laws, subject only to local revenue and registration norms.

Conclusion

The Act permits alienation of notified lands primarily through leases and sub-leases to units with valid Letters of Approval, as supported by Rule 18(2)[19] of the Rules for occupancy rights, while outright sales/transfers remain barred under Rule 11(9) of the Rules. Mortgages over leasehold interests are also viable, as stated in Cambay SEZ Hotels Pvt. Ltd. v. Board of Approval and finding in the CAG Report. For flexibility, denotification under Rule 8 of the Rules serves as a structured exit route, allowing freehold sales after repayment of tax benefits and effectively aligning SEZ regulatory objectives with practical commercial requirements.

References

[1] Section 3, of the Special Economic Zones Act, 2005
[2] Section 55, of the Special Economic Zones Act, 2005
[3] Section 3(1) of the Special Economic Zones Act, 2005
[4] Section 2(e) of the Special Economic Zones Act, 2005
[5] Section 3(2) and 3(3) of the Special Economic Zones Act, 2005
[6] Section 3(4) of the Special Economic Zones Act, 2005
[7] Section 2(g), of the Special Economic Zones Act, 2005
[8] Rule 11(9) of the SEZ Principal Rules, 2006
[9] Rule 11(9) of the SEZ Principal Rules, 2006
[10] I.T.A. No. 2126/DEL/2013
[11] Rule 11(7) of the SEZ Principal Rules, 2006
[12] R/Special Civil Application No. 10376 of 2018, Gujarat High Court
[13] Section 2(f) of the Special Economic Zones Act, 2005
[14] Section 10 of the Special Economic Zones Act, 2005
[15] Section 35 of the the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
[16] Section 2(f) of the Special Economic Zones Act, 2005
[17] Para 25, Performance of Special Economic Zone (SEZs), Fortieth report, Public Accounts Committee (2021-22), Ministry of Commerce.
[18] Rule 8 of the SEZ Principal Rules, 2006
[19] Rule 18 of the SEZ Principal Rules, 2006

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