It is a ‘semi-con’ policy, surely, and the devil is in the detail

A DNA Analysis

HYDERABAD: A day after the notification of the semiconductor policy nobody seems to be shouting from the rooftops.

Missing is the euphoria one had witnessed in the industry exactly a month to the date when the policy was announced, albeit without the finer print.

With the actual policy out in the open — after over a year in the making — the reaction is at best cautious and, in some cases, circumspect. 

Forget Intel, even non-resident Indians promoting proposals that need international financial closures may react cautiously to the policy though on the surface it might appear attractive for potential investors.

The investment threshold for eligibility for the incentive regime has been fixed at a minimum of Rs 2,500 crore and Rs 1,000 crore, respectively, for chip fabs and units for other semiconductor related products.

While this floor-level investment seems quite reasonable the bone of contention could be the norm that the threshold value shall be taken as the net present value of investments made during the first 10 years at a discount rate of 9%. This leads to an extra cost of 3% on investments, sources said.

For instance, on a $3 billion project, the additional cost will be about $19 million.

“It will also create problems for projects seeking international financial closure,” said Ajay Jalan, CFO of venture capital firm Sandalwood Partners.

And given that the same 9% discount rate will be used to calculate the interest subsidy, the capacity of the project to raise loans also gets lowered.

It then pushes down the subsidy cap or special incentive package that has been set at 20% for SEZ units and 25% for non-SEZ units (which have a countervailing duty waiver, too).

The incentive package, which will be available for 10 years for SEZ units, will be in addition to the other SEZ benefits or incentives extended by state governments or their agencies.

The units can claim the subsidy or incentive package in the form of either equity not exceeding 26% or capital subsidy in the form of investment grant and interest subsidy.

By the minister’s reckoning this should help in garnering total investments of around Rs 24,000 crore in these two to three chip foundries and other units.  In the first instance, this means that the industry’s demand for a Rs 10,000 crore fund to finance the government’s contribution to seed the industry stands truncated to just around Rs 4,800 crore.   The cap on incentives for SEZ units, though attractive in some respects, does not compare well with what countries like Israel give --  which is an upfront incentive of 32% of the project cost plus 15% in subsidies for projects located in specified areas. Some Chinese regions pick up 20% equity and also offer interest-free loans and capital subsidies to fab units.

What is intriguing is the government’s decision to limit the subsidies to just two or three fabs and 10 other units in the ecosystem.

It common knowledge that at least two proposals, SemIndia and South Korean NTSI, are at an advanced stage, while there are several more that have shown keen interest including one, for a mega investment, slated for announcement later this month.

“I hope the government will review its decision on capping the number of units,” said Poornima Shenoy, president, India Semiconductor Association (ISA).  Quite clearly then apart from leaving several questions unanswered the policy actually leads to doubts whether it is too late and too little to really entice the big investments particularly at a time when the global chip market is showing signs of fatigue and overcapacity. 

But perhaps as ISA chairman Raj Khare says the burgeoning Indian domestic market is compensation enough for at least a beginning has been made with the policy and the domestic market itself will be an attraction for chip-makers to set up shop here.