Mining law changes fail to deliver

As the central government busies itself in hyping up the 'excellent' response to the nine mineral blocks recently put up for auction, regulatory issues facing the capital-intensive Indian mining sector seem to have been carefully forgotten.

In fact, Balwinder Singh, secretary, ministry of mines, even struck an optimistic note at a recent event in the national capital, promising the exploration of 100 new mineral blocks and the auction of 40-50 new mining leases by the end of the financial year.

Assurances and rhetoric aside, the nation's mining industry has been plagued by excess capacity and low private investment much of this past decade, with several such entities facing declines in profit margins and issues with debt servicing.

Along with business challenges, the legislative framework for the nation's mining sector has greatly compounded the systemic concerns and has been the topic of considerable debate.

In an attempt to revamp India's mining laws, the central government had framed the Mines and Minerals (Development and Regulation) Bill in 2011 to replace the Mines and Minerals (Development and Regulation) Act 1957 (the Act). After the Bill failed to make it through Parliament and finally lapsed in 2014, the government followed up by introducing the Mines and Minerals (Development and Regulation) Amendment Act 2015, in a continuing effort to modernise the country's checkered approach towards mineral extraction.

The amendment promised increased investment, robust exploration, improved allocation and timely decision-making to renew the domestic mining market, which had previously been plagued by multiple regulatory complications, inadequate monitoring and feeble enforcement.

If the figures of acquisition of new mines since its notification in March 2015 are anything to go by, the amendment seems to have failed in making much headway. The advent of the auction-only process for mineral block allocations has failed to see the acquisition of even one mine since the system came into place.

"The agencies proposing these auctions have unfortunately not succeeded in structuring the process correctly. Some mines put to auction suffer from low reserves, uneconomic mineral grades, environmental restrictions and high reserve prices," said Kameswara Rao, partner, government reforms and institutional development, PwC India.

According to industry players, an auction-only mechanism (unlike a first-in-time approach) creates high levels of uncertainty in mineral blocks where resources have not been fully prospected and can lead to significant over or under valuation.

The introduction of non-exclusive reconnaissance permits (NERPs), with no certainty of eventually mining such a block, has also met with severe criticism from the industry. Under the new regime, there is no assured revenue stream for a successful explorer as all future leases must still be secured through an open auction.

"Earlier, the preferential right attached to a reconnaissance permit was arguably the only incentive for encouraging private parties to undertake reconnaissance operations. While the government is insisting that the change was designed to help global miners, there is still a lack of clarity on how these operations will be incentivised," said Aakanksha Joshi, partner, Economic Laws Practice.

According to L Viswanathan, partner, Cyril Amarchand Mangaldas, for the NERP mechanism to succeed, bidders who spend money and share exploration data need to be duly compensated by the government or an alternative successful bidder. "In fact, the National Mineral Exploration Policy issued by the central government in 2016 also contemplates that reconnaissance permit-holders should be given such a benefit. However, this policy has not been translated into rules," said Viswanathan.

As rates of compensation are yet to be determined, the exploration of new reserves by private entities has come to a grinding halt. Under the new system, mining leases will also be allotted only for a period of 50 years (or a period of 50 years since the grant of a lease in existing allotments) with re-auctioning thereafter. This inability to mine till exhaustion does not incentivise responsible mining practices.

Alongside these issues, the amendment requires significant payouts to the newly established National Mineral Exploration Trust (two per cent of royalties) and district mineral foundations (10 per cent of royalties for new acquisitions and 30 per cent of royalties for existing mines), in addition to already high rates of royalties and service taxes payable.

According to Amit Vyas, founder, Vertices Partners, this added pressure to the profit margins of the mining sector will continue to make it difficult for miners to compete given the prices prevailing in the international market. "Environment and forest clearances are another reason for delayed development of mines, as prior approvals are needed to start the extraction process. In some cases, land acquisition issues also delay developments," said RK Sharma, secretary-general, Federation of Indian Mineral Industries.

Unlike private explorers of notified minerals such as iron ore, bauxite and manganese, their public sector counterparts enjoy direct allocations of reserves. Coal acquisitions are also not subject to many of these requirements either, by virtue of the Coal Mines (Special Provisions) Act, 2015, and exemptions under the Land Acquisition, Rehabilitation and Resettlement Act, 2013, leading to further discontent amidst these affected industries.

This dichotomy, coupled with the lack of a single-window clearance to mitigate the plethora of legal and procedural roadblocks, is proving to be the Achilles heel of many of India's mineral explorers, a situation that cannot be resolved by safeguard duties, anti-dumping duties and extending minimum import prices alone.

LEGAL ISSUES THAT AIL THE MINING SECTOR

• Auction-only approach for allocation of all mineral blocks: No first-in-time mechanism for allocation of blocks where prospecting is still incomplete
   
• Non-exclusive reconnaissance permits: No preferential right to mine even after mineral exploration
   
• Rate of compensation for NERP to the explorers yet to be determined