A special economic zone is an area in which the business and trade laws have been liberalized, as compared to other parts of the country. The fact that it is duty-free and has separate business and commercial rules, primarily to encourage investment and job creation, makes it appealing to investors. India's first SEZ policy came out in the year 2000, this policy was introduced to overcome the administrative challenges which could stymie the success of SEZs in India. In 2005, the Parliament passed the Special Economic Zones Act ("SEZ Act") with simplified procedures to develop, set-up, operate and maintain SEZ units. The SEZ Act provides for exemptions and concessions from taxes and duties to SEZ units to enhance business and trade which is the principle objective of the SEZ Act as held by the Delhi High Court1. A single-window clearance to set up SEZ and to further set up a unit in an SEZ has become possible. Simplified compliance procedures and documentation with a focus on self-certification was implemented along with minimum land approval requirements for Special Economic Zones.

Setting up and establishment of units in SEZ Zone:

The procedure of setting up of an SEZ unit has been provided under section 15 of the SEZ Act. The developer has to submit the proposal to the respective State Government. The State Government forwards this proposal to the Board of Approval along with its recommendation, the developer or applicant can also directly submit the proposal to the Board of Approval. The Board, which has been constituted by the Central Government is a 19-member Board and takes decisions considering the merits of each proposal. All decisions taken by the Board are by general consensus of the quorum (one third members of the Board). The Board is chaired by the Secretary of the Dept. of Commerce, Ministry of Commerce and Industry. The other members are from various bodies and ministries such as the Central Board of Excise and Customs (CBEC), the Central Board of Direct Taxes (CBDT), Department of Economic Affairs, Dept. of Commerce, Ministry of Science and Technology, Ministry of Home Affairs, Ministry of Law and Justice, Ministry of Urban Development, etc. Once the Board of Approval gives its approval, and the Central Government notifies the area of the SEZ and subsequently, upon approval of the Unit Approval Committee constituted under the SEZ Act, the Development Commissioner shall grant such approval to the unit/developer to establish units (land and/or building) and operate the same inside the SEZ. It may be noted that, such units in SEZ are accorded to the developer on a leasehold basis only and in addition to the above approval, a separate lease deed / sub-lease deed (as applicable) must be executed between the concerned parties.

The State Governments shall endeavor to exempt the proposed SEZ unit and developer from state and local taxes, levies and duties, including stamp duty, and taxes levied by local bodies. It may be noted here that, while Part III of the SEZ Act provides an amendment to the Indian Stamp Act, 1958 exempting from stamp duty any instrument executed, by, or, on behalf of, or, in favor of the developer, or unit or in connection with the carrying out of purposes of the Special Economic Zone. However, this is usually presumed to also mean and include exemption from payment of applicable registration fees and registration of the documents which is not exempt under the provisions of the SEZ Act and the documents/lease deeds (as applicable under the Registration Act, 1908) are required to be registered in order to be enforceable and admissible in evidence in any Court of Law.

Letter of Approval and cancellation:

Letter of Approval ("LOA") is a core requirement for operating units in SEZ and is issued by the Development Commissioner appointed under the SEZ Act. It encompasses facilities, entitlements admissible to a unit in SEZ. The LOA is only valid subject to certain terms and conditions which are communicated to the applicant once proposal has been made to the Development Commissioner. It is valid for one year from the date of issuance and within this year the unit/developer must commence activity for which it has obtained LOA. This period may be extended by the Development Commissioner for up to two years. Once production activities or service activities commence, units/developer needs to intimate the same to the Development Commissioner office. After receiving a confirmation from the Development Commissioner's office, such LOA becomes valid for a further period of 5 years from the first export date. When this period of five years is coming to an end, the unit/developer must apply to the Development Commissioner for its renewal.

The Approval Committee may, at any time, if it has any reason or cause to believe that the unit/developer has persistently contravened any of the terms and conditions or its obligations subject to which the LOA was granted to it, cancel the LOA after providing the unit/developer reasonable opportunity to be heard as held by the Gujarat High Court2. The Unit shall not from the date of such cancellation, be entitled to any exemption, concession, benefit or deduction available to it on account of being a Unit, under SEZ Act. Additionally, such unit/developer whose LOA has been cancelled shall remit, the exemption, concession, drawback and any other benefit availed by him in respect of the capital goods, finished goods lying in stock and unutilized raw materials relatable to his unit, in such manner as may be prescribed. Any person aggrieved by such cancellation, may prefer an appeal before the Board of Approval. Rule 77 of the SEZ Rules (and its amendments), 2006 ("SEZ Rules") provides for detailed consequences of such cancellation including removal of goods from the SEZ unit.

Change in constitution, exit and transfer:

The SEZ Act is silent on the change in shareholding pattern or any re-organization of the unit holder or developer in SEZ. Section 10(10) of the SEZ Act empowers the Board to promote export or to protect the interests of units or in the public interest issue such directions or formulate such scheme as it may consider necessary for operation of the SEZ. In furtherance of such power vested in it the Ministry of Commerce, Government of India laid down guidelines for reorganization including change of name, change of shareholding pattern, business transfer arrangements, court approved mergers and demergers, change of constitution, change of directors, etc. of SEZ developers/ co-developers as well as SEZ Units vide Government Instruction No. 109 dated 18th October 2021 which supersedes the previous instructions with respect to reorganization provisions.

The decision to allow reorganization may be undertaken by Unit Approval Committee subject to the condition that the developer/co-developer/unit shall not opt out or exit out of the SEZ and continues to operate as a going concern. All liabilities shall remain unchanged upon such reorganization. The Government Instruction No. 109 further provides various terms and conditions for effecting such change in constitution which are required to be adhered to by the unit holder/developer contemplating the reorganization as the case may be.

Rule 74 of the SEZ Rules that, in order to opt out of SEZ, the approval of the Development Commissioner is required and such exit shall be subject to payment of applicable duties on the imported or indigenous capital goods, raw materials, components, consumables, spares and finished goods in stock: Provided that if the unit has not achieved positive Net Foreign Exchange, the exit shall be subject to penalty that may be imposed under the Foreign Trade (Development and Regulation) Act, 1992.

Any unit/developer may also opt out of the SEZ by transferring its assets and liabilities to another person by way of transfer of ownership including sale of Special Economic Zone units subject to the conditions stipulated under Rule 75A of the SEZ Rules:-

  1. the unit has held a valid Letter of Approval as well as lease of land for not less than a period of five years on the date of transfer;
  2. the unit has been operational for a minimum period of two years after the commencement of production as on the date of transfer;
  3. such sale or transfer transactions shall be subject to the approval of the Approval Committee;
  4. the transfer fulfils all eligibility criteria applicable to a unit and;
  5. the applicable duties and liabilities, if any, as calculated under rule 74 as well as export obligations of the transferor unit, if any, shall stand transferred to the transferee unit which shall be under obligation to discharge the same on the same terms and conditions as the transferor unit.

Further, while the Unit Approval Committee and Development Commissioner's approvals are required as stipulated above, the unit holder/developer having leasehold rights may also require the lessor's approval if contractually stipulated under such lease deed.

In light of the above and upon interpretation of the other provisions of the SEZ Act and SEZ Rules, it appears that, if the approval for change in constitution is not procured, the same could lead to cancellation of the LOA procured by the unit/developer (for being in breach of the SEZ Act and SEZ Rules). The consequences would entail cancellation of any exemption, concession, benefit or deduction available to the unit prospectively including, remittance of any past exemption, concession, benefit or deduction availed by the unit/developer as provided above.


It is pertinent to note that, due to the various exemptions and benefits available to units operated in the SEZ, the same is exponentially beneficial to the IT and ITES Sectors. However, the SEZ Act read with the SEZ Rules, and Government Instructions should be carefully perused and followed in relation to any transaction involving SEZ units, re-constitution, exit, transfer, etc. to avoid adverse consequences including cancellation of LOA and remittance of benefits and exemptions availed.


1. Jindal Stainless Limited and Others vs. Union of India and others [W.P. (C) 4452/2008]

2. Cambay SEZ Hotels Pvt. Ltd. Vs. Board of Approval for SEZs [C/SCA/10376/2018]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.