MPIIDC (Indore) Limited is interested in knowing whether it can raise funds by converting leased plots to freehold plots.
MPIIDC has been allotting land for industries in its growth centres on lease basis. It levies following charges:-
| Activity | Period | Charges | |
| 1 | Premium | Since 1983 | Premium Rates |
| 2 | Development charges | Since 1985-86 | 1250 per ha |
| 2500 per ha | |||
| 1% of premium | |||
| 2% of premium | |||
| 2.5% of premium | |||
| 3 | Street light | Since 1.4.1991 | 0.5% of Premium, min. Rs. 300 |
| 4 | Lease Rent | Rs. 50 or 100 per ha for SSI | |
| Rs. 200 per ha for M/L | |||
| 1% of premium | |||
| 2% of premium | |||
| 2.5% of premium |
MPIIDC plans to convert leased plots to freehold plots by charging which will allow units to pay lump sump price. Conversion of leased property in freehold has been done on number of occasions in different countries, mostly in countries with colonial background. In India, Delhi Dev. Authority and Chandigarh Dev. Authority or Chandigarh Housing Board have already done this. Karnataka is the only state in the country where land is allotted on lease-cum-sale basis.
Following will be fall out effects: -
| On MPIIDC | On Units |
| Units will be able to own the land, obtain loan or offer as collateral. | |
| Units will save themselves from upward revision in lease rentals, which are inevitable. However conversion will force them to pay stamp duty. | |
| Units will benefit themselves from change in Land Use. | |
| Units will become more transferable and this adds to their saleability. |
Thus, MPIIDC needs market price of land leased by it to the units. This price (less premium and lease rental already paid) would be charged to the units enabling them to own the land they are using. However, for MPIIDC, the market price should be more than what it would get by way of lease rental and premium.
Thus, we have examined as to what MPIIDC has got and will get from its existing arrangement. From Allotment register, details of units were drawn. Complete details were available for:-
| Sector | Units said to be | No. of Units | %age |
| I | 290 | 173 | 59.55 |
| II | 63 | 35 | 55.55 |
| III | 332 | 171 | 51.62 |
| TOTAL | 685 | 379 | 55.32 |
An analysis of statistics on above units indicated that :-
| Sector | No. of Units | Land Allotted (Sqm) | Unearned Lease Rental (average) (Rs./sqm)* | Total Revenue (Rs in lakhs) | |
| I | 173 | 1794930 | 25.32 | 454.56 | |
| II | 35 | 230781 | 52.94 | 137.48 | |
| III | 171 | 2502033 | 23.77 | 594.86 | |
| Total | 1186.90 | ||||
| *Lease Rentals (Rs/sqm) to be collected in for remaining period in 99 year lease (Less rentals & premium already paid) | |||||
This (Rs. 1186.90 lakhs) represents the amount this Corporation is due to collect in future. If all lessors agreed to buy the land, maximum income the corporation can look forward to would be Rs. 2158 lakhs only. To make it realize it, the Corporation will have to lower the asking rate. However, it should remain above the present IRR.
To estimate, we have worked out un-earned lease period by averaging out leases allotted in different years. Than, for this un-earned lease period, we have found return, which Corporation will get by NOT selling plots at Rs. 25.32 /sqm, Rs. 52.94 /sqm and Rs. 23.77/sqm in the 3 sectors correspondingly.
Unearned Period
Corporation started leasing out plots from 1983. Thus, unearned period of various units is has been worked out.
If a lease has started in 1985, it would expire by 2084. This lease would have an unearned period of 83 years in 2002.
Allotment of Plots in various Sectors, Year Sector Total Year-Wise Cum.%age I II III %age of plots 1983 1 1 0% 0% 1984 16 5 8 29 8% 8% 1985 45 4 34 83 22% 30% 1986 20 0 28 48 13% 42% 1987 4 1 14 19 5% 47% 1988 8 2 19 29 8% 55% 1989 4 2 16 22 6% 61% 1990 6 0 0 6 2% 63% 1991 4 0 0 4 1% 64% 1992 7 2 9 18 5% 68% 1993 6 1 2 9 2% 71% 1994 6 2 7 15 4% 75% 1995 15 5 13 33 9% 83% 1996 7 3 6 16 4% 88% 1997 11 3 2 16 4% 92% 1998 2 0 1 3 1% 93% 1999 5 2 7 14 4% 96% 2000 6 1 3 10 3% 99% 2001 0 1 2 3 1% 100% 2002 0 1 0 1 0% 100% TOTAL 173 35 171 379
Though maximum plots (22%) were sold in 1984, it took full 10 years (from 1984 to 1994) to sale 75%of land. By 1988, the corporation had sold more than 50% land, which may be taken an average period for start of lease for all plots.
Thus, the Corporation has already earned lease for 13 years and is due to earn lease for remaining 86 years.
We have assumed that (though Corporation makes distinction in rates offered to large and small units), rate for allotting a sqm of plot, the Corporation will charge Rs. 8 as premium and 5.5% towards development, lease and street light charges. Taking future cash flow from 1 sqm plot in each of sector at Rs. 25.32 /sqm, Rs. 52.94 /sqm and Rs. 23.77/sqm, we find, the Corporation is earning: -
| Sector | I | II | III |
| Return % | 3.00 | 6.27 | 2.82 |
Thus, before arriving at any sale decision, the Corporation will have to compare this return with returns in alternative lines.
