Bangalore/New Delhi: Companies that proposed to set up units to manufacture semiconductors, solar cells and other advanced technology products under the Indian semiconductor policy, which expired March-end after receiving a cold response from investors, have been given time until 31 December to tie up finances for the projects.
The Department of Information Technology (DIT) received 26 project proposals involving a total investment of Rs2.29 trillion under the so-called Special Incentive Package Scheme (SIPS) unveiled in 2007, but only six have so far been able to demonstrate financial viability, officials said.
Companies such as Sterlite Industries India Ltd, Moser Baer Photovoltaic Ltd, Tata BP Solar India Ltd, PV Technologies India Ltd and KSK Surya Photovoltaic Venture Pvt. Ltd had proposed setting up units under the scheme.
The government has offered to underwrite 20-25% of the capital expenditure the projects under SIPS will require.
The deadline for financial closure expired with the policy in March, but there had been many requests from companies for an extension of the date, said DIT joint director N. Ravi Shankar.
“The global downturn hit soon after the policy was announced, which put a spanner in the investment plans of many companies,” he said. The new deadline will apply to all 26 companies that had submitted proposals under SIPS; the six that had already demonstrated financial viability will be allowed to review their plans.
Financial closure is a critical part of the approval process under SIPS because it ensures that companies undertaking such capital-intensive projects have the wherewithal to execute them smoothly and see them through to completion. Projects proposed under SIPS were hurt by the global financial and economic crisis that took hold in 2008.
“The (global) downturn really impacted the business cycle because of which most of the earlier projects got shelved,” said Vinnie Mehta, former executive director of the Manufacturers Association for Information Technology, an IT hardware industry lobby group.
Some industry experts say that despite the deadline extension, the semiconductor policy aimed at turning India into a chip production hub had been largely inadequate—and ill-timed as well.
China and Taiwan offer comparatively more favourable incentives, they say, noting that some thresholds specified under the policy were unreasonable.
“The minimum limit for setting up an ATMP (assembly test mark packaging) facility to avail of the policy is Rs1,000 crore,” says Deepa Doraiswamy, industry manager (South Asia and Middle East), automation and electronics practice, Frost and Sullivan. “But a company typically needs an investment of only Rs250 crore. This discouraged many firms from applying.”
The high thresholds proved to be the biggest hindrance to the effectiveness of the policy as many companies couldn’t tie up financing from banks because of the credit crunch that followed the collapse of Wall Street investment bank Lehman Brothers Holdings Inc. in September 2008.
While semiconductor fabrication units in an SEZ with a minimum investment of over Rs2,500 crore get a 20% incentive (which means 20% reimbursement of the capital expenditure), those outside SEZs get a 25% incentive along with exemption from countervailing duty.
Under SIPS, manufacturing of semiconductors, displays such as liquid crystal displays (LCDs) and organic light emitting diodes (OLEDs), storage devices, solar cells, photovoltaic and assembly and test units are eligible for the incentives.
Doraiswamy says India also lags behind China and Taiwan in offering support infrastructure such as electricity, water and roads, besides tax subsidies for manufacturing, depreciation benefits, easy access to capital, and research and development funding.
Customs duties on essential raw materials for electronic products manufacturing are also too high to facilitate local manufacturing, adds Doraiswamy.
“The biggest roadblock in the way of India becoming an electronics manufacturing hub is the lack of adequate infrastructure and incentives to attract investments from global firms,” says Mehta.
Electronics hardware manufacturing is a key thrust area of the government. A task force was set up by the ministry of communications and information technology in August 2009 to suggest measures to stimulate the growth of IT, IT-enabled services and electronics hardware manufacturing.
The industry also says that while the policy is primarily for encouraging semiconductor fabrication, incentives for design are important.
“It could include early stage start-up funds for entrepreneurs in systems design, support to patent filing, and such other select, high-priority electronic systems design and manufacturing proposals,” says Poornima Shenoy, president of the Indian Semiconductor Association.
The final list of proposals under SIPS has been heavily skewed towards solar photovoltaic manufacturing. Out of the 26 project proposals, 22 were for solar photovoltaic projects, two for semiconductor fabrication units and another two for LCDs.
While a big reason for this is the growing demand for energy and the recently launched National Solar Mission that aims to generate 20,000MW for the national grid by 2022, Doraiswamy says that the primary objective of encouraging semiconductor fabrication is far from being met.
“Solar photovoltaic cells’ manufacturing doesn’t really qualify as semiconductor fab,” says Doraiswamy, “because most of the value-add work for this happens abroad.”
The two semiconductor fabrication proposals were by Videocon Industries Ltd and Moser Baer. Rajiv Arya, chief executive officer of Moser Baer Photovoltaic, confirmed that the company’s proposal to set up a semiconductor manufacturing and packaging unit in Greater Noida, on the outskirts of New Delhi, had been cleared by DIT. Moser Baer has already invested around Rs1,000 crore in the facility, he said.