In a move that could significantly dampen the revenue flow to the government, GMR Infrastructure [Get Quote] group company's Delhi International Airport Limited has passed on the licence to develop the land it received as part of the privatisation deal to a newly formed subsidiary.

DIAL had received 250 acres of land around the airport area to be developed commercially, with 46 per cent of the revenues accruing from it flowing back to the government (Airport Authority of India), and the rest to be utilised by the company for airport development.

In May this year, DIAL licensed the land to its newly formed 100 per cent subsidiary called Delhi Aerotropolis Private Limited, which is responsible for developing the entire infrastructure. Currently, the company is in the process of selling the land rights to potential developers through a competitive bidding process.

"Since the sale consideration would be recognised in a "separate entity", the government would not be entitled to any share in this revenue," GMR officials said.

To give a ballpark estimate, the income potential (present value of the life-time lease rentals) from one acre of land would be in the range of Rs 100 crore (Rs 1 billion).

This would mean potential revenues in excess of Rs 25,000 crore (Rs 250 billion) for the 250 acres of land. Even after deducting certain expenses, the government should ideally be entitled to revenues of over Rs 10,000 crore (Rs 100 billion).

In a recently held conference call, GMR Infrastructure's top officials said DAPL was negotiating with potential bidders to take 80 per cent of the value (present value of lease rentals for the 60-year period discounted at 10 per cent) as upfront payment in the form of interest-free deposits, refundable after the end of the lease period (60 years), and the remaining as lease rentals to be paid through the tenure of the lease.

The entire refundable deposit will be passed on to DIAL to meet the capital cost for airport development. "Since it comes as deposit, it is not being shared with the Airport Authority of India�.because our concession agreement says we need to share only 46 per cent of the "revenue". DAPL will declare dividends after netting expenses from the rentals received by it, which will be shared with the government," GMR officials said.

It may be noted that since DAPL would accept upfront deposits (which gets accounted into the balance sheet directly) and not recognise this as income, it would not affect the profitability of the company directly, and hence escape the regular corporate tax levy of 35 per cent.

The company denied any conflict of interest with the government on the grounds that the latter is a beneficiary by virtue of its 26 per cent shareholding in DIAL. "The entire funding plan is according to the master plan, which has been approved by the airport authorities and the ministry of civil aviation in December," GMR officials said.

Civil aviation ministry officials, on their part, said that even if it forms a subsidiary company, DIAL has to act according to the operation management distribution agreement clauses. "According to the agreement, there has to be a 46 per cent revenue sharing even if a hundred per cent subsidiary is formed. The sharing will be on the basis of gross revenue of all the companies put together," said a senior ministry official.

The arrangement has received the approval of the board of directors too. Currently, there are two government nominees on the board of DIAL - K N Srivastava and H S Bain.

According to the most recent plan, in the first phase about 45 acres of land adjoining the Delhi airport is to be developed by 2010. The strategy for the remaining land would be devised after 2010 when more land is taken up for development.

In Hyderabad, too, where the company has 1000 acres of land, the company would follow a similar model by incorporating a subsidiary of Hyderabad International Airport called Hyderabad Aerotropolis Private Limited. But the board is yet to clear the proposal. The crucial difference between the Delhi and Hyderabad models, however, is that in the latter case, the company would develop the land on its own rather than selling it to a third party.

Passing the baton

• DIAL receives 250 acres of land around the Delhi airport to be developed commercially, with 46 per cent of the revenues accruing from it flowing back to the government
• The company passes on the licence to develop the land it had received as part of the privatisation deal to a newly formed subsidiary Delhi Aerotropolis Private Limited
• Since the sale consideration would be recognised in a "separate entity", the government would not be entitled to any share in this revenue, GMR officials said.
• According to ballpark estimates, potential revenues from land lease and rentals stand in excess of Rs 25,000 crore for the 250 acres of land, with the government ideally entitled to revenues of over Rs 10,000 crore