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  1. Mining Bills clear Rajya Sabha test, no more Coalgates now

Mining Bills clear Rajya Sabha test, no more Coalgates now

Auction a big plus but outgo could inflate costs

By: | New Delhi | Updated: March 21, 2015 8:09 AM
Arun Jaitley, Arun Jaitley news, mining bill, coalgate Union Finance Minister Arun Jaitley with Delhi Dy CM Manish Sisodia and others during a meeting of State Finance Ministers in New Delhi on Friday. (PTI)

The NDA government on Friday pulled off a legislative breakthrough by securing parliamentary passage of the Coal Mines (Special Provision) Bill and Mines and Minerals (Development and Regulation) Amendment Bill, together ushering in an era of transparent e-auction of diverse mineral blocks and potentially giving a boost to the country’s faltering mining output.

After the respective Rajya Sabha select committees vetted these Bills passed earlier by the Lok Sabha, the BJP-led government was able muster the required numbers in the Upper House to pass the Bills by roping in some parties outside the ruling coalition including the BSP and Trinamool Congress, even as the Congress and the Left parties did not oblige.

As the Coal Bill turns into an Act with President’s assent, the auction of coal blocks already on under an ordinance it will replace will get the requisite legislative endorsement. The new law will also have an enabling provision for game-changing commercial mining of the fuel by the private sector.

NDA government, Coal Mines, coal mines in india, Coal Mines Special Provision Bill, Mines and Minerals Amendment Bill, Rajya Sabha

The MMDR Bill, apart from proposing competitive bids to allocate all other minerals, also provides for district mineral foundations (DMFs) for rehabilitation and welfare of project-affected people affected, 50-year leases, freedom to trade rights/permits and non-exclusive reconnaissance permits, among other things.

For the country’s mining sector, which has been a witnessing a stagnation in output for the last couple of years (the output growth in the sector was just 1.3% in April-January this year and in January, it was -2.8%), the fast-tracking of allocations through e-auction will be a huge positive, but the mining industry is concerned about a possible margin squeeze due to the higher costs the auction payments and contributions to the DMFs would entail.

To ensure a level playing field, the holders of existing leases will have to fork out higher amounts to the DMF than those to be granted leases after e-auction. An amount up to 100% of the royalty paid to the state government will go from the current leaseholders to the DMF till the expiry of the lease tenures. As for new leases, the DMF contribution will only be a third of the royalty. The higher DMR outgo would have implications for Tata Steel, SAIL, Sesa Sterlite, Hindalco and JSW Steel, among others.

Mines secretary Anup K Pujari said the government would come out with rules governing the auction process for minerals other than coal soon in consultation with the states, which are the licensing authorities.

The Modi government’s MMDR Bill, which will replace an ordinance issued last January, retained the salient features of the UPA’s version of the Bill: For the four notified surficial minerals namely iron ore, bauxite, limestone and manganese, the auction will be for grant of mining (production) leases since the reserves in their case are known and nearly accurately estimated; as for deep-seated minerals including copper, nickel and zinc, given the lack of information database, prospecting-cum-mining leases will be issued to the winners emerging from competitive bidding.

Analysts welcomed the 50-year guaranteed lease tenures, saying this would give more comfort to investors. The current leases are for much shorter periods, although renewals, if need be, are almost automatic.

Although the combining of prospecting and mining for the award of leases in the case of minerals the mining of which is relatively more complex is generally welcomed, some analysts said this could create some practical problems. Globally, there are explorers and prospectors with skill sets different from that of miners and good prospectors need not necessarily be the most efficient producers, said Anjani Agarwal, partner (metals and minerals), EY. He said the government would do well to make available the database on minerals requiring complex mining to the investors in a transparent manner. Companies good at exploration would need to bring in mining development partners to complement their skill sets.

While it remains to be seen how much the new policy would enthuse global mining giants, the local industry contends the auction route might not be desirable in all cases as it could jack up costs. There are also worries over the requirement for putting all existing non-captive mines for auction after five years, given that this could prevent companies invested in these assets with long-term plans from realising their legitimate returns. In the case of existing captive mines, the maximum residual period will be 15 years.

According to RK Sharma, secretary general, Federation of Indian Mineral Industries, the new law will have to come with a stringent regulatory mechanism to avert illegal mining. “We feel that in the absence of information regarding reserves, foreign investors will remain chary. The extra outgo due to auction and DMF could make end products more expensive,” he said.

Agarwal said the companies in all cases may not be pass on the extra costs from auction and DMF contribution to their industrial and other consumers. The dynamics of pricing will be a function of global commodity markets, especially in the case of minerals that are internationally traded, he added.

While the auction of captive coal blocks has proved to be highly revenue-generating for the government (states will potentially get Rs 2 lakh crore over a 30-year period from just 32 blocks auctioned so far), its revenue from the use of competitive bidding for other minerals, where the private merchant mining has existed for long, could be relatively moderate, analysts feel.

Kalpana Jain, senior director at Deloitte, said: “Most provisions in the MMDR Bill have been long overdue and are welcome… The imposition of higher DMF will increase the cost and the prices of end products but the mining industry in India, which has one of the lowest costs of production, needs to be responsible to the environment and this levy will help in achieving that goal.”

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