Gauging impact of India’s new land acquisition law on Chinese companies

A majority of large Chinese companies that invest in India are involved in the construction or infrastructure sectors. These are also the sectors in which India needs maximum participation from Chinese companies. As such, it is very important for Chinese companies to understand the implications of the recently enacted law relating to land acquisition in India. In this article, we provide a brief overview of the legislation and explain the significance of important provisions.

The new law is based on The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2012. It received the assent of both houses of the Indian parliament and will replace the Land Acquisition Act, 1894.

Appropriation of land

The new act allows for appropriation of land for any “public purpose”, such as strategic defence purposes and national security, accommodation of project-affected people, roads, railways, highways and ports built by the government and public sector enterprises, etc. This includes the following categories of infrastructure projects: a) projects benefiting the general public, where the project is owned and at least 51% of it is funded by the public exchequer; b) public private partnerships with the prior informed consent of at least 70% of people affected by the project; and c) private companies with the prior informed consent of at least 80% of people affected by the project.

Under the new act, “affected families” will receive compensation, and this includes: a) persons whose land or other immovable property has been acquired; b) tenants, sharecroppers or other persons who have worked in the affected area for at least three years prior to the acquisition, and whose primary source of livelihood is affected by the land acquisition; c) scheduled tribes and other forest dwellers who have lost their rights as recognised under the Scheduled Tribes and Other Forest Dwellers (Recognition of Forest Rights) Act, 2006, due to the land acquisition; d) persons who have been granted land by the state or central government, and that land is then subject to acquisition; and e) persons residing in urban areas for a minimum of three years preceding an acquisition whose primary source of livelihood is affected by the land acquisition.

Types of assessments

The new act provides that in the event of any proposed acquisition, a social impact assessment (SIA) process has to be conducted in consultation with local bodies in affected areas. The SIA must provide an estimation of the number of affected families, extent of lands, houses and settlements likely to be impacted by a proposed acquisition, and must also explore alternatives if the proposed acquisition is unfeasible.

If the land being acquired is in excess of 100 acres (40.5 hectares), a committee comprising various departmental secretaries from departments such as revenue, finance, tribal welfare, rural development and social justice must evaluate the merits of the proposed acquisition. This is done to ensure that the acquisition is being made for a bona fide public purpose after having duly explored and exhausted all possible alternatives.

Compensation

For rural land, compensation payable must be four times the market value of the land acquired, and for urban land it must be two times the market value. Where land acquisition has been undertaken through private participation, the new act mandates the private participant to be responsible for the rehabilitation and resettlement of affected families in cases of acquisitions exceeding 50 acres in urban areas, and 100 acres in rural areas.

In addition to resettlement: a) a one-time settlement amount of INR500,000 (US$8,000) must be paid; or b) employment must be provided; or c) inflation-adjusted payments of a minimum of INR2,000 must be made, spread across 20 years.

Costs will rise

It is clear that the costs of implementing infrastructure projects in India will rise due to the new act. However, if there is substantial clarity on the procedure for acquisition of land, then investors can factor these costs into their capital budget. Such certainty will encourage investment in large projects that require substantial parcels of land. In the past, several large projects in India have been abandoned simply due to lack of clarity on the procedure for land acquisitions, the most recent case being Korean company POSCO’s project in the eastern state of Odisha.

The major impact of the new act will depend on the effectiveness of the SIA, compensation, rehabilitation and resettlement processes. If these procedures can be completed in a timely manner, then regardless of the rise in compensation value, this new act will have a positive impact on businesses operating in the infrastructure and construction sectors.

Finally, there are few aspects of the new act that could lead to considerable complications in projects that are already underway. The new act contains certain retrospective compensation provisions. For instance, where land was acquired more than five years ago but where no compensation payment has been made, or no possession has been taken, certain provisions of the new act will apply. Further, where acquisition of land has not been completed within a period of 10 years, the land acquisition process will have to be recommenced afresh.

In conclusion, it is a huge relief that an antiquated law that was more than 100 years old has been replaced with a more modern piece of legislation. However, this new act will have repercussions for many Chinese companies that are executing or looking to invest in infrastructure projects in India. Apart from the escalation in costs, it will impact timelines in both the planning and execution stages as the provisions of the new act are implemented.

Santosh Pai and Vikas Kumar are partners at D H Law Associates. D H Law Associates is the only full-service Indian law firm with an active China practice since 2010