June 22, 2011

Land Acquisition in India : A novel approach

Given the current confrontational mood between industry and agriculture in the matter of acquisition of scarce land for industrial development it is imperative that we look at totally new or untried models. But before we do so let us first define some boundary conditions -- the Lakshman Rekha -- that cannot be transgressed.
  1. No land must be taken by force even by invoking the principle of Eminent Domain by the State unless it is to  be used for a clear public purpose. Land for industry does not fall into the category of public purpose.
  2. Land owners, farmers or otherwise, must be paid fair market rates and must be allowed to benefit from the appreciation of prices
  3. Industry must not be penalised by extortionary, black mail practices when they decide to move into a region and seek to acquire land for legitimate economic purposes.
  4. The role of the Government is to kept to a very minimum since there is no guarantee against a move by politicians and bureaucrats to bend rules and make money at the expense of both farmer and industry ( as has been the case in Rajarhat )
The biggest challenge facing industry is that it needs large contiguous chunks of land but whenever word gets out that someone has bought some land in an area, land prices go up. It is not only that individual owners raise prices, but more often than not, land sharks get in, use strong arm tactics to buy land and then holds industry to ransom.

The saddest thing for a small land owner is to have to sell his land at low prices and then seeing a  huge appreciation of the land that he does not benefit from.

In this context the following approach can be adopted
  1. Government must legalize the existence of Land Aggregator Companies (LACs) who will have the right to buy, own, develop and lease/sell  large chunks of land in the country, both in the urban as well as in the rural areas.
  2. The LACs will identify land in the state and go about negotiating with individual land owners and acquiring the land for an appropriate price. This can be cheap land at remote, arid regions or relatively more expensive land in fertile well connected regions -- this is a business decision.
  3. Once a certain amount of contiguous amount of land has been acquired, it can develop and resell / lease the land at a suitably enhanced price that is determined by the market.
  4. The payment to the farmer can be in two parts. First there must be an immediate cash component that depends on current perceptions of land price. Second there must be second non-cash component that will be paid in terms of equity shares of the LAC. These shares will be locked in for a minimum period of 10 years and the original land owner can liquidate the same at a price that will reflect the premium that the land commands at a later period of time.
Industrial houses that do not have the core competence of negotiating and acquiring land are spared the trouble of doing so. They will deal with a single corporate entity and negotiate a price for the land on standard commercial terms. Different LACs in different parts of the country will create a vibrant market mechanism that will lead to industry getting located at places where the price of land is competetive vis-a-vis other economic inputs like raw materials, labour, connectivity, political stability and quality of life.

Original land owners will not feel cheated because not only do they get an initial, possibly low, market price but they get to participate in the upside created by the development of the land and the relocation of industry.

One challenge would be the valuation of the locked in LAC shares that will be given to original landowners but this can be addressed through a variety of valuation norms, including listed prices from the stock exchange, that can be arrived at after further discussion.

To prevent abuse and fraud especially in the valuation of shares, the LACs may be put under the supervision of an industry regulator like SEBI, IRDA or TRAI.

I believe that this model is being used in some parts of the country but perhaps not as openly and transparently as described in this note.

( image 'borrowed'  from http://www.gurgaonscoop.com/story/2010/1/27/2533/29088 )


Calcutta said...

The guaranteed cash component can also be paid with Post Office Monthly Income Plan certificates so that the original landowner gets a stream of income instead of one big "blowable" sum of money

Jigna Sanchaniya said...

Really novel approach
Yes, agree with Shri Prithwish. Farmers get unexpected money suddenly and they have a no idea how to utilize it, most of the farmer wasted their capital, because in rural areas farmers are mostly uneducated.
Farmers are left only with their dwellings and it is found that once they become landless, for generations they do not become capable to earn their proper livelihood from non-farm occupations. Mostly they work as a casual labourers in their neighbourhood of city and their socio-economic condition remain deplorable for decades together.
It is high time that Government must adopt the diffrent type of payment pattern where the productivity of land is calculated and the value is paid to the farmers for 30 years with consideration of cost escalation of agricultural produce during the years. It is the proper method through which farmers would slowly adopt to adjust with the non-farm livelihood, otherwise it is injustice to impose least value of land.