Raising many questions

With the mushrooming of illegal mining and the criticism of large number of tribals living in mining areas forced into joining Maoist activities due to deprivation of forest wealth, the Centre was under pressure from various sections to replace the archaic law and make it more people and industry-friendly.

Indeed, the Ministry of Mines had to struggle a lot to finalise the bill with the push and pull from various sectors on a number of issues. While framing the new law, illegal mining was thriving across the country, especially, in ore-rich states like Karnataka, Odisha, Chattisgarh, Goa, Jharkhand and Andhra Pradesh. After consulting all the stake holders, the bill got the stamp from the Union Cabinet recently and is likely to table in the winter session of Parliament beginning from the third week of November for its approval.

The new MMDR Bill, which aims to increase revenues by bringing in concepts of price discovery and true value, ensuring equity, fair play, transparency and promoting scientific mining and sustainable development, also raised many questions about the government levies.

The new law has proposed automatic mining approvals once a discovery is made after looking at the prospects. Currently, miners need separate approvals for surveying deposits, prospecting and mining.

Another feature of the bill is that mining leases will be freely transferable and will mostly be granted through competitive bidding, with some preference given to state-run companies whenever they face a resource crunch.

The core of the bill is a provision for 26 per cent profit-sharing by coal miners and an amount equivalent to royalty by people affected by the project. In the case of non-coal miners, the new law will provide for payment of an amount equivalent to royalty paid to the state government to persons affected by the project. As per the new bill, a Mineral Development Fund will be created in every district, in which profit and royalty shared by miners will be deposited and spent on the local population and area development.

Apart from compensating project-affected people through profit-sharing and royalty, the new bill also obligates mining firms to pay a 10 per cent cess to state governments and 2.5 per cent to the Centre on the total royalty paid. This cess will be used to set up a fund that will focus on capacity building in the industry, such as research and introduction of scientific mining methods. The Ministry of Mines claims that the new bill has longer vision and will address all the industry issues including preventing illegal mining, value addition, investment and proper rehabilitation and resettlement policy.

However, the mining industry raised several questions about the provisions of the bill, complaining that it would harm the sector as it has a provision for imposing more levies by both central and state governments. The creation of Mineral Development Fund for which the mining companies have to make payment, will hit the financial health of the companies.

For instance, if the levy had been in force in 2010-11, it would have caused a 6 to 13 per cent fall in profit before tax of the leading mining companies like Sesa Goa Limited, Hindustan Copper Limited or Hindustan Zinc Limited. For coal companies and their investors, the new bill would hit even harder. While net profit is calculated at the corporate level, a fund has to be created at the district level. How this is to be determined will become a contentious issue, says an industry expert.

Indeed, the bill will have a significant impact on the companies’ finances and is likely to hurt cash flows and earnings. To absorb all costs, companies may seek to pass on these costs to customers.

“The doubling of royalty payments will make it unattractive for the private sector to invest in mining,” said Federation of Indian Mineral Industries Secretary General R K Sharma, adding, “Unless you are able to attract investors, how will you develop mines and the local area?”

The bill will weigh on investor sentiment in the near term. In the longer term, though, it may become easier for the mining industry to do business, if the compensation fund is utilised properly, which would also lead to mining activity in resource-rich areas with local populations to ease out. As a whole, if mining output grows much faster than it would have without the bill, then the industry might still benefit. A lot depends on how the scheme is formulated and implemented.

Dismissing the industry fear, Ministry of Mines Secretary Vijay Kumar says, “The new bill has gone through an enormous amount of consultation with the state governments, the industry, civil society, and central ministries. We have come up with a robust bill that addresses mining on a very broad range of issues whether it is regulation or concession grant, whether it is scientific mining, value addition or sustainable development.”

Defending the profit sharing clause, the ministry officials say that they were inspired by BEE Act (Black Empowerment Act) of South Africa. The BEE requires companies to have ownership by historically disadvantaged South Africans at a level of 15 per cent, which is increasing it to 26 per cent by 2014. Raising concerns over the royalty and profit sharing proposals of the new mining bill, industry body Ficci said that its implementation would make Indian mining industry uncompetitive globally as it will be charged with highest tax rates cross the world.

Seeking changes in the proposed law, the industry chamber said that tax incidence on coal will rise to over 61 per cent from the current 47.7 per cent, post-implementation of the new mining law. For the iron ore industry, the tax incidence would be about 55 per cent, while for Bauxite miners, it will be as high as 110 per cent, it added.

Talking about the financial implications of the proposals, Ficci said that it will not only drive them to losses and subsequent closure, but even big public sector companies like Sail, Coal India, NMDC’s revenue and valuations would also be hit to a big extent. Despite India producing 86 minerals, the industry is still characterised by a large number of small operational mines and is not able to realise its full potential. The industry contributes around 2 per cent to the overall GDP. During 2004-09, while the GDP in India grew at a CAGR (compound annual growth rate) of 8.5 per cent, the mining industry registered a slower growth at 5.7 per cent.

The key factor is the low thrust on exploration which accounts for less than 0.5 percent of the global exploration expenditure of $12.6 billion in 2008. Industry experts say that backed by low cost advantage, strategic location and an untapped mineral base, the industry has the potential for higher growth and attracting capital to the exploratory stage of mining.

Though India has huge mineral reserves, the country failed to create global mining leaders. The scale of operations of Indian producers is very small compared to international standards. Countries like China, Brazil and Australia have been successful in developing global companies with large scale of operations and these companies generally dictate the price environment in the global market for key minerals.

As per business Monitor International, the overall mining industry is expected to grow at a CAGR of 9 per cent during 2008-12 to reach Rs 1.9 trillion by 2012. The industry is expected to form 2.7 per cent of GDP by 2012.

In this situation, the new law should not hamper the growth of the industry, instead, address its concerns. While welcoming some of the provisions of the new bill, the Confederation of Indian Industries (CII) doubts the setting up of the fund to provide assistance to project-affected people, stating it may be difficult to be implemented.

While urging the government to address industry concerns, the industry chamber said that only if the government is able to address concerns can the bill be more appropriate, meaningful and useful to the nation. While propelling the industry’s growth, the government has an obligation of protecting the interests of the people who live in and around the mining areas. As most of them are poor tribals, the government must ensure that they should not be driven out of the development trajectory of the country.