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Jan 29th, 2010
FinePrint: Land Acquisition Angst

Why there is a pressing need for a rational land acquisition policy

Ranjeev C. Dubey

It doesn’t take the great Saga of the Nano in Bengal for us to understand that we have a serious problem with land acquisition in India. In its angst, the national polity including Singh, our current king, has gone to the extreme of suggesting that all land acquisition should be consensual. I don’t think it will work. Let me illustrate.

Since land acquisitions typically deal with illiterate peasant farmers located perhaps a 100 km from the nearest town, it is easily forgotten that his motivations may not be very different from that of say an urban senior executive living in a metro. Imagine that you have to acquire the only residential house owned by a 50-year-old professional manager. What is his mindset? He has less than a decade of work ahead of him and he probably has already planned out his old age. He is at that point in his life where he has a lot of years of retirement to look to when his appetite for uncertainty and stress will be materially depleted and he has little energy to build another house from scratch again. It follows that if you want his house, you are going to have to take it away from him. Why should it be different for peasants? With illiterate farmers living in joint families with huge cultural issues around their ancestral small holdings, consent is very difficult and the whole business of consensual land acquisition acquires a truly surreal quality. The real issue then is this: what kind of law are you going to use to take properties away from their owners?
I’ll tell you what we have right now. If you want the executive’s house, you are at liberty to get the government to take out a notification in 2010 informing the world that the house is under acquisition. This freezes its value and informs the world that they would be smart not to buy it from him because there is no percentage in it. The problem is that government being government, they will probably take physical possession about 2015 by which time, the value would be substantially higher, creating a perception that the executive got ripped off. The bigger problem is that they will take possession in 2015 but will not pay him the 2010 price till 2020. What really cuts to the bone is that he will have no real chance of collecting even the 2010 price in 2020 unless he gives a substantial part of it as kickbacks to the guy who is paying him. What do we expect this man to do: meekly give up his house, rent another and patiently wait to be paid his compensation so he can build another house a decade after he retires? It’s fortunate he has access to lawyers and courts because for the peasant who doesn’t, about the only option open is to join the naxals and vent his frustration with a really gruesome shoot-em-up at the nearest police station and then get slaughtered for his pains.
If we want a realistic land acquisition policy, the answer is not to go antsy about the coercive aspect of it but to try and realistically compensate for it. We need a rational acquisition policy, and that has two aspects (a) the problem of corruption and delay, and (b) the problem of rational acquisition pricing.
On the first part, it seems to me we solve about half the problem if we find a mechanism to pay cash for possession or cancel the proposed acquisition if all payment processes are not completed by a short drop dead date. That would take care of payment delays and it would cut the corruption. When a man gets paid spot cash against possession for his property at current value, he feels a little less cheated even though he doesn’t really want to lose his property. I am inclined to the view that we are not implementing this simple policy change because we know that the whole point of the Land Acquisition Act is to grab land from illiterate peasants to the benefit of business, polity and bureaucracy. However, that is another story…
The rational pricing piece of the problem is a little complicated. How does the urban executive see the value of his house? First, there is the revenue stream he is deriving from his house; rental income that is rolled into his retirement plans. Second, he has a capital value in the property but this capital value is way more amorphous than we admit to him. Unidirectional capital appreciation apart, there is the location advantage he has: the whole issue of proximity in the lifestyle he plans for himself…to friends, relatives, malls, golf courses and perhaps the metro station too. To him, these intangibles are the very soul of the value he sees in his property but these intangibles are notoriously hard to capture just as you cannot capture the value of a tree by weighing the amount of wood it contains. That apart, we who invest in land (as opposed to say stock) don’t do it because of its current capital value at any point (since we are not exiting any time soon): we invest because it is the idiot and crook proof way to invest money (and neither is true for stocks because idiots will erode shareholders value and crooks will do more, R.I.P). If we are going to realistically compensate the executive, we have to do it keeping in view the ‘quality’ of the investment as he perceives it.

This is completely at variance with the acquisition pricing that the law currently provides. Properties are currently valued on the basis of what the market will pay ‘as a buyer’ when we know that a third party buyer doesn’t care a fig for the ‘quality of investment’ in the way the unwilling seller sees it. This I think is at the heart of the problem. How do we capture the true value of property coercively acquired? The whole problem is that we are valuing the property on the basis of the perception of a third party buyer. In the bargain, we are completely ignoring its value in the hands of an unwilling seller.

Thus, to justly compensate for this land, in the first place, we have to compensate the farmer for the current value of this land. What he has on the other side of this transaction is a pile of cash he can do nothing with but put in a bank and earn a marginal interest income. A farmer can’t simply take the money and buy another plot of land in the next village. That is at least one reason why we need to supplement this payment with some sort of revenue stream: a job perhaps. This immediately creates several issues. Unless you are paying him a salary substantially higher than what you would pay any other worker, your window dressing is doing him no favors. The biggest problem with giving him a job is that the job is not heritable. This revenue stream must dry up, unlike the revenue stream from land which will increase every year, as the decades pass. In turn, if the land is acquired for a project, project managers would argue that the man who takes a job as of right is unlikely to work. I suppose the answer to that is a job which is terminable but with additional terminal benefits.
Alternatively, or perhaps in addition, you could give him free equity in the company that takes the land. This is especially attractive because (a) it gives him a stake in an asset against a stake he has lost and (b) it has the potential for capital growth in a way that cash does not. On the other hand, the problem with the stake model is that: (a) capital growth in a start up project is never to be assumed, (b) dividends from start ups are unlikely and will remain unlikely unless promoters simply run out of places to reinvest profits, and (c) in the absence of listing or similar, investment in marginal equity with no hope of exit is only another form of cruelty. No doubt, the answer lies in a hybrid models so that there is a bit of everything in the mix.
Actually, I can hear the groans already! The farmer is triple dipping: he is being paid in excess of the value of what he lost. Is he? At the end of the day, I think we need to understand that a property that you coercively acquire should not be valued merely at ‘market value’ as between a willing buyer and a willing seller: you should be paying a coercion premium. Indeed, if you do this, you may well find one day that peasants will hammer down the doors of industry lobbying that their land be acquired for the next proposed project because they want to be shareholders of a growing business and their sons need the jobs!


The author is managing partner of the Gurgaon-based rechristened corporate law firm N South and author of the pioneering business book, Winning Legal Wars. He can be contacted at

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