Despite Cabinet nod, cloud hangs over fate of chip fab units

Government would re-engage with the investors as the subsidy component was now decided upon: Kapil Sibal

Despite the go-ahead from the Cabinet on Thursday for incentivising two semi-conductor chip fabrication units, a cloud hangs over their fate as the door has been left open for more players to come in.

While giving 'in-principle approval' to subsidise the two proposed fab consortiums - one led by Jaypee Associates and the other by Hindustan Semiconductor Manufactu-ring Company (HSMC), the cabinet has also asked the department of electronics and IT to actively seek for more proposals in the next four weeks.

Communications and IT Minister Kapil Sibal said on Friday that the government would re-engage with the investors as the subsidy component was now decided upon. "If there are more proposals, we would extend the same incentives to them also… India needs more fab units than just two," he said.

This, in a way, inverts the procedure earlier followed to shortlist the vendors where the proposals were invited first and the subsidy discussed later. According to the latest provision, the subsidy has been fixed while proposals are being invited after that.

According to Sibal, the government got 33 proposals initially, but most of them fell by the way side. Only two reached the evaluation stage and their proposals were later placed before the Cabinet.

A government official said the earlier approach was followed as bidding is not feasible in such high-end technology projects.

However, the road till now for fab units in India has been bumpy. Initially, the Planning Commission had some reservations to the proposal on Fab on the ground that allocating subsidy to just two consortiums without adequate guarantee of technology transfer was not advisable, officials told Business Standard on condition of anonymity. They added that the Cabinet had a lengthy discussion on the issue as just two consortiums were selected to set up the high-value units.

Some members in the Cabinet were of the view that just having two consortiums handle such a high-value project could give the impression of malpractice and, hence, the option to allow others also to participate should be explored. The move was done to ensure that there is no-post facto criticism of the procedure followed to incentivise the two fab units, which could land the government in a 2G scam-like situation. Also, the presence of a particular company in one of the consortiums raised some questions. However, given that the two consortiums were selected after a lengthy process, many experts feel that not many consortiums will show interest in setting up fab even after four weeks, making it smooth for the existing proposals to pass through.

One consortium comprises International Business Machines, India's Jaiprakash Associates and Israel's Tower Jazz. The second comprises HSMC, STMicroelectronics and Silterra, said Sibal. The investments in the first fabrication unit are to the tune of Rs 26,300 crore, while the second unit entails Rs 25,250 crore worth of investment.

Officials of the department did not say why it will issue the letter of intent to the consortiums only after completion of four weeks if the government is ready to consider more proposals and has no limit on how many it can fund.

However, a senior official of one of the consortiums said the government asked them to start preparing for the detailed project report, signalling a go-ahead from their end.

"We are not worried about more applications coming in as it is impossible for someone to form a proposal in just two-three weeks time, especially with the kind of sophisticated technology, which is being demanded by the government."

An industry expert, who has been closely involved with the project, said that it is very unlikely that more proposals will come in. "But, if the government manages to woo an Intel or a Samsung with its incentives, then it is better for the country."

"The country has limited resources and what's wrong with spending it judiciously on the best proposal?" asked the expert. "Maybe, having more proposals will only make the process better as we could negotiate with the players better and technology, etc… It will make it comparable."

The government has agreed to include subsidies to the extent of 40 per cent. While 60 per cent of the subsidies will be covered under the existing Modified Special Incentives Package Scheme, which gives 25 per cent subsidy on capital investment along with other benefits, the government will also give an interest-free loan equivalent of 11 per cent stake in the project. Also, capital investment in the fabs will be offset against the profits to ensure tax breaks.