Ministry's royalty-sharing formula may come as relief to Coal India

But being brought under the benefit-sharing regime to hit captive coal miners? bottom lines

In what could come as a relief to Coal India Ltd (CIL), the coal ministry wants a percentage of its royalty payment to be set as compensation for locals affected by mining operations. Besides, the ministry has called for captive coal miners to also be brought under the benefit-sharing regime, making a similar dispensation for them, too.

In the Mines and Minerals Development and Regulation (MMDR) Bill, tabled in the winter session of Parliament, the government had proposed 26 per cent profit sharing by coal miners and 100 per cent royalty sharing by non-coal mining companies.

Since the Bill had not proposed anything specifically for captive miners, the coal ministry’s move could dent the bottom lines of these companies — including large players such as Tata, Reliance, Essar, GMR, GVK and Aditya Birla Group — by bringing those under the benefit-sharing ambit. It would, on the other hand, benefit state-owned CIL by way of a reduced outgo on account of compensation in the new regime that will be put in place under the MMDR Bill, 2011.
 

THE BENEFIT-SHARING NOOSE

• MMDR Bill, 2011, approved by the Union Cabinet and being discussed in Parliament, has proposed 26% profit sharing for coal mining companies and 100% royalty sharing for non-coal miners as compensation
• The coal ministry wants miners to share with locals a percentage of royalty as compensation. It argues that profit sharing by coal miners is not feasible, as captive coal miners do not make profits 
• The proposal, when implemented, would bring captive miners under the benefit-sharing ambit, but push input costs on account of an additional compensation outgo 
• The shift from profit sharing to royalty sharing would, however, benefit state-owned monopoly producer CIL, for which profits are much higher than the royalty paid
• Royalty is calculated on sale price, which, being govt-controlled, is kept low. So, switching to royalty will be difficult as states may cry foul on their royalty earnings being cut in the royalty-sharing regime
• The mines ministry wants coal miners to share 100 per cent royalty with locals to bring the compensation regime for coal miners in sync with non-coal miners 
• The mines ministry's proposal, too, would impact captive miners' bottom lines, with their compensation outgo doubling, as they would have to pay royalty to the state government concerned and an equal sum as compensation to locals

The ministry’s recommendation is part of the amendments suggested in the MMDR Bill, currently being discussed by a Parliamentary standing committee. The ministry fears the 26 per cent profit-sharing provision for coal miners does not apply to captive mining companies, as those are not supposed to make profit on mining operations, given that the law does not envisage any commercial sale.

The ministry has, therefore, suggested replacing the profit-sharing clause in Section 43 of the Bill with a new clause that reads: “...in case of coal and lignite, an amount equal to a certain percentage of royalty paid during the financial year, as prescribed by the central government, provided that the percentage shall not be increased more than once during any period of three years.”

India produces around 530 million tonnes (mt) of coal a year. CIL accounts for close to 82 per cent of this. Captive miners, largely private sector companies that have been allotted blocks for their specified end-use, contribute a mere 35 mt to the annual production. At present, these companies pay states around Rs 680 crore a year as royalty.

CIL would benefit from the shift from profit to royalty, as the base for calculation of compensation — with the company’s annual net profit of over Rs 14,000 crore — is much higher than the annual royalty of around Rs 6,000 crore it pays to states.

The proposal to link compensation to royalty for coal miners could be difficult to implement, as coal prices, unlike prices of minerals like iron ore, are not market-driven and the government continues to wield significant control over pricing. The proposal is, therefore, likely to be opposed by state governments on fear that their royalty earnings would take a hit. The government control over coal prices was, in fact, the reason why a ministerial panel had proposed profit sharing for coal companies in the MMDR Bill.

Also, the mines ministry is not likely to favour the proposal as it has already recommended a mandatory sharing of 100 per cent royalty by coal miners with project-affected families. The amount to be shared should be equal to the royalty paid, as it was clearly identifiable and would be in harmony with that paid in case of other (non-coal) minerals, the mines ministry told the Parliamentary standing committee on the MMDR Bill. It also said it favoured an amount equal to, instead of a percentage of, royalty. This may open up such demands for 73 other major minerals, too.