The Lokayukta Report

In the inspection report of the Accountant General of Karnataka for the years 2003-2005 on Mysore Minerals Limited (MML), a public sector undertaking, several lapses were pointed out regarding various Memorandum of Understandings, raising and marketing contracts, joint ventures etc, between MML and private companies, wherein the interest of MML was compromised to deprive the PSU of the contractual entitlements, dividends and profits due to one sided agreements, non-revision or suboptimal revision of prices resulting in losses amounting to crores of rupees at a time when the mining sector was generating huge profits.

It has also been noticed that the iron ore fines and mud stocks/ low grade ore far in excess of the quantity were allotted arbitrarily to select individuals through MML, much below the prevailing market price and MMTC price and even below the prices fixed from time to time by MML itself. There have been complaints of certain influential individuals who were part of the power structure within the government, by manipulating the records and interfering in the affairs of MML, caused huge loss to the corporation and the state. Following are the excerpts from Karnataka?s Lokayukta Santosh Hegde report on illegal mining in the state.

Opening remarks

In my report dated 18/12/2008, in regard to irregularities and illegalities in the mining in the districts of Bellary, Chitradurga and Tumkur, I had explained in detail my findings. I had conveyed my conclusions, suggestions and recommendations. But, I am sorry to say that apart from filing few criminal cases against some mining companies, no concrete actions have been taken, consequent to which the illegal mining as pointed out in the report herein above, has continued to exist.

Export of illicit iron ore during 2006-2010

Supplies of iron ore for exports and for domestic consumption can only be sourced from leases granted by the government. These leases are either in forest area, revenue lands or in patta lands. Any quantity extracted beyond permitted annual quantity is illicit. Further any quantity extracted and dispatched without paying royalty is illegal. The quantity of ore transported without transit permits means nonpayment of royalty and also theft of state property, hence has to be treated as illegal.

Obulapuram Mining Company (OMC) and Y Mahabaleshwara (YM) are big exporters of iron ore, who have mining leases in Andhra Pradesh that is adjoining to Karnataka. As per the available customs data, they have exported iron ore of Karnataka origin. However, as per the permits database, no permits were issued to OMC and YM as party from director of mines & geology, Karnataka. The total exports of iron ore of Karnataka origin by OMC during 2006-07 to 2010-11 is 71,61,455 mt, which includes 21,44,789 mt from Chennai port. The total exports of iron ore of AP origin by OMC from Chennai between 2006-07 and 2010 (till Dec) 2,17,660 mt only. The investigating team has reported that these export details requires further investigation. It is also stated that CBI is dealing with the matter in this regard and the said agency may take note of it.

The total export of iron ore of Karnataka origin during the period 2006-07 till 2010 was 12.57 crore mt. The figures exclude exports through Murmagao and Panaji ports and exports by OMC and YM. The permits for domestic destinations increased from 88.52 Lakh mt in 2006-07 to 1.68 crore mt in 2007-08. Thereafter the permits issued for domestic consumption remained steady between 1.68 crore mt and 1.88 crore mt in the period 2009-10. Permits issued for domestic consumption in 2010 (April to July) were 70.6 lakh mt. Hence, there were no large fluctuations in permits issued for domestic consumption in the last 5 years.

Based on the figures compiled from the Customs and Department of Mines and Geology, it is computed that around 2.98 crore MT of illicit iron ore was exported during the period 2006-07 to 2010.

Value of the iron ore quantity exported illicitly

An estimate of the value of iron ore exported illicitly has been made by taking average annual export sale rate (in dollars) of iron ore across all ports and the corresponding average annual INR value of dollar. Estimated value of 2,98,60,647 mt of illicit iron ore exported during the period 2006-07 to 2010 is R1,22,28,14,22,854 (around R12,228 crore). The illicit iron ore transported to port for exports could have been transported either through;

a) Vehicles travelling with permits but carrying ore in excess of the quantity permitted per truckload. b) Vehicles travelling without any permit. c) Vehicles travelling with forged permits.

As per the data seized from computers of Adani Enterprises and Shree Mallikarjun Shipping, the average per truckload quantity received in Adani plots and Shree Mallikarjun plots in Belekeri port was 20.26 mt as against permitted load of 16 mt. The data pertains to 2,99,255 trips to Belekeri port between the period October 2009 to May 2010. The team has assessed that the total 2.986 crores of mt of illicit iron ore that was transported to ports in excess of permitted quantity, significant quantity of illicit ore might have been transported through vehicles overloading. It is pertinent to note that the computed figures point towards large scale transport without any permit or with forged permit in 2009 and 2010.

Exports after ban on permits to destinations for exports

There were 83 exports of iron ore after the ban on issue of permits to destinations for exports. It is pertinent to note here that due to large scale of exports of illicit iron ore the state government took a decision July 28, 2010 to ban issue of permits to destinations for exports. In that context, exports after this date have been obtained from all the ports and it is found that there were 83 exports with a total quantity of 17,58,336 mt of iron ore. Out of this, the maximum exports have taken place from Krishnapatnam port. The quantity exported from this port alone was 14,85,076 mt. This specific matter requires further investigation for finding out illegalities and persons responsible/behind it.

List of consignees with quantity of iron ore (Karnataka origin) imported through various ports. Since 2006-07 to 2010 (Till Dec), the total exports of iron ore of Karnataka origin is about 12.579 crores mt from the ports of Belekeri, Chennai, Ennore, Kakinada, Karwar, Krishnapatnam, New Mangalore and Visakhapatnam ports. The exports from Murmagao and Panaji ports are not included in this quantity. The difference between permit issued and export made for the said period comes approximately to 2,98,60,647 mt. This is the illicit iron ore exported during 2006-07 to 2010 (till December) from the ports.

The highest quantity of exports of illicit iron ore has taken place in year 2009-10, approximately 1,27,99,396 mt. Further it is equally pertinent to note that in year 2010-11( when permits for destinations for exports were issued for 4 months), the quantity of illicit iron ore that was exported was approximately 48,06,719 mt, which is higher than the exports of illicit iron ore for entire year of 2006-07, 2007-08 and almost equal to the entire year of 2008-09. This indicates the continuity of magnitude of exports of illicit iron ore even after the raids conducted by the Lokayukta at Belekeri in February 2010 and the issue widely reported in the media.

The loss of R12,228 crore caused to the state government due to illegal iron ore exports for the period should be recovered from the exporters/ suppliers/ traders/lessees and others after following due process of law. There were about 252 exporters engaged in export of iron ore of Karnataka origin during the period from all the ports. There are about 228 consignees who have imported iron ore of Karnataka origin.

During the port-wise examination with regard to illegal export, it is found illicit iron ore has been proportionately exported more from the Belekeri and Krishnapatnam ports. Both the ports are run by private companies.

It is relevant to state herein that the Hon?ble Supreme Court had appointed a Central Empowered Committee (CEC) to look into such irregularities. The committee has suggested to the state, that the value to be recovered from such persons responsible for illegalities should be five times the value prevailing at the time of the commission of offence and their respective lease, licence, permits should be withdrawn forthwith. This suggestion of the CEC, I think, is appropriate and hence, I recommend the same to the government.

Export of illicit iron ore from Belekeri port

The Belekeri is a fair weather port. The government has leased out certain areas within its limits to private companies, who are port service providers in this port. They are; (1) Shree Mallikarjun Shipping (SMSPL), (2) Adani Enterprises (AEL), (3) Sri Salgaonkar Mining Industries and (4) Raj Mahal Silks.

The activities of the port are supposed to be controlled by the Port authorities under the Karnataka Ports (Landing and Shipping Fees) (Amendment) Rules, 2006 and other related enactments. The port is not equipped with coast guards for monitoring of movement of vessels and others activities as found in ports like Mangalore. There is no watch tower and other infrastructure to keep control of illegal activities in the port. UV Singh?s team report observed that Belekeri port should not have been allowed to export iron ore, until security and other arrangements are upgraded.

From the information gathered, it was seen that 2.30 crores of mt?s of iron ore was exported from Belekeri port between 2006-07 and April-May 2010. As against this, the total permits issued for transport of iron ore to Belekeri port during the same period was for 1.26 crores mts. Therefore, it is clear that 77.38 lakhs mts of illicit iron ore was exported from this port during the above said period. From the report of UV Singh, it is seen that Adani Enterprises and SMSPL has on an average received 20.26mts of iron ore per lorry as against 16 MTs per truck load permitted. The data received also refers to 2,99,255 trips of loaded lorry carrying iron ore to Belekeri port between the period 2009 and May 2010. The data also indicates that over loading of trucks carrying iron ore is a routine practice leading to substantial iron ore theft.

It is further noticed that in the months of April-May 2010, 15.84 lakh mts of iron ore was exported through Belekeri port, out of which 11.59 lakhs mts was illicit. Similarly, in 2009-10, 65.01 lakh mts of iron ore was exported through Belekeri out of which 36.50 lakh mts was illicit.

All the four lease holders/ port service providers SMSPL, AEL, Salgonkar Mining Industries and Raj Mahal Silks have been found to be actively involved in large scale illegal exports of the iron ore causing huge loss to the government. All these leases granted to the said four companies should be cancelled by following due provisions of law and other contemplated action should be taken against them.

Illegalities in transport of iron ore via railway to Goa

Railway is a major mode of transport of iron ore from Karnataka to Goa. The two major railway destinations in this regard are Tinaighat and Soverdem. The investigating team has obtained details of transportation of iron ore through railways to Tinaighat and Soverdem, from the railway authorities. The investigating team has recommended the following for further action.

(I) Comparison of the records of railway and the permits issued by the Mines Department, it is amply clear that there is no mechanism to verify the legality of iron ore received at Railway stations. Action should be taken by railway authorities to check and verify the documents with regard to iron ore transported through railways. It is computed that prima facie approximately 45,59,365 mt of illicit iron ore was transported through railway during the period 2006-07 to 2010- 11.

Cases of under invoicing of iron export sales

Some exporters exported iron ore at sale rates ( $/mt) that were considerably lower than the prevailing international rates or comparative rates at which other exporters were exporting iron ore during the period. It is also found that these under-invoicing have been made by some selected companies/firms and it is also found that some of the preferred overseas buyers are suspected to be ?front companies?. The transactions of the exporters with these ?front companies? are convoluted transactions devised for the purpose of evading paying taxes, duties etc. in India. These under invoices are being done largely on the basis of sham/make believe agreements with the ?front companies? in order to camouflage their act of suppression of their real income.

There are 478 suspected cases of under invoiced export during the period 2006-07 and 2010. The total under invoiced portion of sales is about R2,222 crores @ R40 per $. There are 174 suspected cases of under invoicing of exports of iron ore fines and 45 suspected cases of under invoicing of exports of iron ore lumps during the periods of ad valorem customs duty regime.

NMDC

NMDC has exported iron ore at a rate much below the prevailing rates. It is further noted that NMDC has exported very high grade iron ore. Due to this the Public Sector Undertaking has incurred a huge loss. The concerned Ministry Government of India may take note of it and take further needful action.

Associated Mining Company ? a pool of illegalities

Associated Mining Company (AMC) is a registered partnership firm and during the course of time, the partners of the firm changed within the family of lessee but finally the firm has been brought under the control of total outsiders. It is interesting to note the manner in which the change in management has taken place since 2006. It is seen from 1/8/2009, there is complete replacement of original partners and finally there remains only two partners G. Janardhan Reddy and G Lakshmi Aruna in AMC.I am of the opinion that retirement and induction of various partners knowing that the entire firm is going to be transferred to G Janardhana Reddy and G Lakshmi Aruna, was an attempt to get over the prohibition of transfer in MMDR Act and MCR.It is interesting to note how this company was able to manage its mining activities after the last reconstitution of the firm on 1/8/2009. From 1/8/2009 till January 2010, this company did not take the necessary permits. The issuance of permits taken only in January 2010. One cannot forget that by the time the husband and wife became the sole partners of AMC, the husband had become a minister in the Karnataka Government, that too Minister in charge of Bellary District.

AMC had been granted mining lease ML No. 2434 (old 625) for a period of 30 years w.e.f 02.03.1966 over an area of 16.9 hectares in Venkatagiri village of Sandur taluk, Ramghad forest block (Ramanmalai block) of Bellary district Karnataka State for winning of iron ore mineral. The lease period expired on 01-03-1996. After expiry of the mining lease, the first renewal had been effected from 24-03-2000 having kept gap of 4 years. Hence there was no continuity for this renewal. The first renewal is improper and in violation of Mines and Minerals (Regulation & Development) Act. There is no approval from the Centre for this deviation under the MMRD. The Mining lease granted in favour of AMC is since been taken over presently by all together new managing partners through back door entry to overcome the law. The new managing partners are G Lakshmi Aruana and G Janaradhana Reddy. The confirmation of lease rights or interest upon new managing partners is in violation of Rule 46 (2), 48 and 37 of MCR 1960.Further the renewal application pending before the Government should be rejected. The new managing partners have opened a new account no. 31000313003 in SBI, Bellary. This account number has not been informed to Commercial Taxes Department for collection of VAT purpose. The deputy director, mines, Hospet has issued a bulk permit for the quantity of 24992 mt on 16-01-2010 for one month. In the said period 45107.55 MT have been supplied to JSW Steels Ltd, Torangallu. This excess supply of 20115.55 mt is due to over loading and multiple trips against a single trip sheet or Form No. 27. This is utter misuse of the official power and the transit permits. The recovery of cost for the excess quantity of 20115.55 mt and with exemplary penalty from the AMC should be done. Other contemplated legal action should also be initiated. About 900 transit permits (Form no. 27) have been issued after expiry of lease period.

South West Mining Company

UV Singh in his Report submitted to me in the above chapter, has discussed some sensitive matters in regard to certain payments made by South West Mining Company Limited to a trust of which the sons of chief minister are trustees and so also certain sales effected by the son and son in law of the chief minister, of an acre of land in the suburb of Bangalore to South West Mining Company Limited which according to the report is abnormal. His report traced the possible relationship between Jindal Group of Companies with South West Mining Company Limited. It is found from his report that the Jindal Group has set up its first steel plant in 1982 at Vasind near Mumbai. Soon after, it acquired Piramal Steel Ltd., which operated a mini steel mill at Tarapur in Maharashtra. The Jindals, who had experience in the steel industry, renamed it as Jindal Iron and Steel (JISCO). In 1994, the Jindal Vijayanagar Steel (JVSL) with its plant located at Toranagallu in the Bellary-Hospet area of Karnataka has been set up in the heart of the high-grade iron ore belt and spread over 3,700 acres of land. In 2005, JISCO and JVSL merged to form JSW Steel Ltd (JSW).

The Jindal Group is one of the largest Groups in the State having a steel plant at Toranagallu. The main supply of iron ore to this Steel plant is from mines in Bellary district. The JSW is also having mines managed jointly with Mysore Minerals (MML) through Vijayanagar Minerals (VMPL). The mine is known as Timmappanagudi Iron Ore Mine (TIOM). The VMPL is a joint venture Company of JSW and MML. The iron ore is supplied through an agreement and conditions therein. There is another company by name M/s. South West Mining (SWML) having office at Main Road Old JVSL, Administrative Building, Vidyanagar, Toranagallu. In their letter pad the address is shown as JSW Mining Office, Near Talur Cross, P.O. Vidyanagar-583275, Toranagallu. 5) The details of export and domestic trading of iron ore by M/s. South West Mining Ltd was sought from this office letter dated 07-01-2011 and 20-01-2011. The details so required were submitted by the company and has been analysed. For having certain clarification the authorised signatory of the SWML was requested to be present in this office. Sri BP Pandey and his associates were present on 03-03-2011. The matter was discussed with respect to the records submitted by South West Mining. It is to state that there is a JV (Joint venture) agreement between MML and JSWSL (the then JVSL) for sharing of produce generated out of TIOM Mines. As per the agreement the sharing of iron ore is restricted between the two (MML and SWSL). There is no provision for selling the iron ore to third party. Contrary to agreement in the year of 2003-04, there was a sale of 85,022 mt by VIMPL to South West Mining Ltd and the same had been exported along with other iron ore. A total 3,65,594 mt have been exported during 2003-04 and 2004-05 by SWML as per the information submitted by them. The MML has not taken any action in this regard.

To supply iron ore to JSW Steel the company has submitted proposal for grant of iron ore mining lease in Donimali range on 18/7/2007. On the same date two more proposals for different locations by SWML and VMPL has also been submitted. The details of proposals submitted by them and recommended by State Government in past are pending in Government of India.

It is to state that there are three proposals of grant of mining lease in favour of JSW Steel Ltd, South West Mining Ltd (SWML) and VMPL Ltd pending since 2007, were in active consideration of the state government for replying a query raised by ministry of mines, Government of India regarding whether there is any complaint case pending against the proposals (Govt. of India letter dated 26/2/2010). In another letter, the Govt. of India forwarded a copy of news paper report dated 8/3/2010, which appeared in the Financial Express, captioned ?SC Notice to Center, JSW others on Karnataka Mining Case?. It appears that the Hon?ble High Court Division Bench?s Order dated 5/6/2009 is under adjudication before the Hon?ble Supreme Court.

The Government of India requested the State Government to furnish the comments in the matter, in the light of the above report.

This information was called in the month of March 2010. The Centre also wanted to know whether the proposals can be processed by the ministry. The JSW, SWML and VMPL have submitted the letters to the director, mines and secretary, Mines requesting to submit suitable clarification to Ministry of Mines, Government of India so as to process the recommendation of Government of Karnataka in their favour.

It is to be noted that though the above mentioned companies made their application for grant of mining lease on 18/7/2007, the same was not pursued till March-July 2010. By the said time, the Government of India had sought feed-back on certain issues and the government of Karnataka was to reply to the same. The correspondence made between the companies mentioned herein above and the government clearly shows that the companies concerned were keen on persuading the government to send replies to the Centre in their favour.

From the tables above, it is to state that R10 crore have been paid to ?Prerana Education Trust? on 17/3/2010 and 18/3/2010. Further, it is to state here that an amount of R119124000.00 has been credited vide cheque no. 80912 dated 26-02-10 in the account no. 64010486365 of SWMC. The said amount has come from the account of JSW Steel. From the bank of Vijaya Bank, JVSL branch, Toranagallu. A letter dated 18/03/2011 of Vijaya Bank is enclosed as Annexure to chapter-22 of UV Singh?s Report. With this trail of transaction it is clear that the amount finally came from the account of JSW Steel which is paid to the Prerna Trust. There is no trade of iron ore between the two during the period. It is further stated that the balance in the bank account no.64010486365 of South West Mining was running under overdraft during that period and also in other periods in the range of 3 to 5 crores. If we go by the trail of money transaction it can be construed that R10 cr has been paid by JSW to Prerana education Trust.

The South West Mining has also submitted the details of the land purchase in Bangalore i.e. agreement to sell and sale deed etc. On going through the details for agreement to sell signed between Sri Vijayendra S/o Sri BS Yeddyurappa and RN Sohan Kumar S/o Sri RD Nataraj and South West Mining , Vidyanagar, Toranagallu. As per para 2 of Agreement to Sell, it has been stated that full consideration amount of a sum of R100,000,000 has been paid to the vendors by the purchasers (in the month of July 2010). The details of the cheques etc, is kept blank in the said para 2 of Agreement to Sell. It is to be noted here that all the cheques in this regard has been paid in the month of August 2010 and validity dates fall in August and September 2010. The date of the agreement is kept blank but it is signed in July 2010. Hence, there is a mismatch recorded in the agreement signed and amount actually credited in the accounts of the vendors. If consideration has been paid on the date of Agreement to Sell R10,00,00,000.00 then the payments made in August and September 2010 by cheques may not be towards sale consideration.