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Development of Coal Industry: The formula on sharing of profit may not help its expansion, nor the people , Shri R V Shahi, Former Secretary, Ministry of Power

Development of minerals in India has been regulated through the Mines and Minerals Development and Regulation (MMDR) Act of 1957. Though there are a few legislations meant exclusively for coal industry, but the MMDR Act is the over arching legislation which governs development of all mines and minerals including coal mines. Obviously in the last fifty years, since this legislation came into existence, there are experiences of successes and failures. There have been amendments to this Act, but these have not kept pace with the changing challenges. Therefore, it is but natural that the various provisions which have governed and regulated development of mines are revisited to take cognizance of new realities.

One of the factors which, in last few years, have been particularly witnessed is in relation to the backwardness of the area in which these mines are located. The local people affected by mining activities have felt deprived, and in most cases rightly so, because the development administration has not been able to take care of the hardships caused on account of dislocation of these people. In recent years, this problem has assumed such a large proportion that almost every large coal belt of India is faced with militancy from the Naxal Groups, which have emerged. Several steps have been taken by the Government of India to address the problems of the area and aspirations of the people, with a view to creating an atmosphere in which the people identify with these development initiatives and they perceive that development process helps in the mitigation of their needs.

One such step is in relation to the review of the Mines and Mineral Development Regulation Act which proposes to, apart from other issues, address the local area needs and provide for the benefits for the local people. Last week the Group of Ministers (GOM), it is reported, has concluded that 26% of the profit of the coal companies should be shared with the local people. This issue has been under debate for the last few months and different views have been expressed. Just before the above conclusion of the GOM, it appeared that the consensus was in favour of providing for the local people amounts linked to the royalty rather than provide for a percentage of profit. The conclusion as reported appears to be providing for 26% of the profit to be shared with the local people in case of coal mines while in case of other minerals, the sharing formula is linked to the amount of royalty. It is not understood clearly why this distinction between the coal mines and other minerals, is proposed to be made. Also, the modality as to how this formula would be worked out in implementation is not very clear.

From an interview given to one of the leading Economic Dailies by the Mine Secretary, it appears that the details have yet to be crystallized. In his interview he has said "I think the phrase being bandied about was an amount equal to 26% of Profit After Tax of the previous year. So, the tax treatment is clear. It is an expense which can be budgeted. But this is not to say I am confirming the precise formulation, since the matter has to go to the Cabinet". If this approach is what will finally constitute the legislation or the rules framed under the legislation, then it is obvious that the coal companies can treat this amount as an expense, in which case the figures of profit before tax or profit after tax may not be adversely affected. This would, however, be on the assumption that the coal companies would be in a position to absorb the extra expense by suitably enhancing the price of coal. Therefore, this approach also needs very critical examination. Price increase merely to provide for an amount equivalent to 26% of profit of last year may itself have so many ramifications, including its unacceptance by major consumers of coal.

The whole approach has generated intense debate. Even though the matter has not been decided at the level of Cabinet, let alone the Bill being considered and decided in the Parliament, merely on account of conclusions reached in the Group of Ministers, in one day Coal India share price went down by almost 9%, an indication that investors are highly disappointed at the approach. We need to recognize that coal industry has to go a long way in its expansion. Domestic coal supplies, in recent months, have given disturbing moments to all the major consumers, particularly power sector. The gap between demand and supply has been widening necessitating larger imports of coal, thus creating avoidable burdens on the power sector and ultimately on consumers.

If India has to grow at 9%, power sector will also have to grow at similar pace and so will be the growth needed for the coal industry. In last several decades, for the first time, during 2010-11, coal industry had practically a negative growth. Therefore, coal sector needs huge investments. The decision of the Government to have Coal India launch its IPO, which received enthusiastic response globally, was indeed a laudable initiative. Indian coal sector both in private and public groups will need massive investments, and, therefore, uncertainties in policies of this nature are bound to have adverse impact. To solve one set of problems, it may not be advisable to create much bigger problems and hurdles which may cut at the root of the growth story.

It is because of the inherent flaws in this approach that important Business Dailies of the country have made very critical comments about the proposed provision in the Bill. It would be relevant to quote, out of many such comments in various news papers, a few editorials. The Economic Times (January 11, 2011), in its editorial has captioned the write-up as "Sound Intent, But.... The profit-sharing policy for coal is a bad idea and the Cabinet should dump it." The editorial further says "The Group of Minister's approval last week for 26% profit sharing by coal mining companies with local people is glaringly anomalies. It would be perverse incentive to fudge accounts, routinely prone to misinterpretation by all and sundry, and hugely problematic to implement as well." And, further "The Thirteenth Finance Commission did explicitly call for a share of royalty for mining areas, and it would make eminent sense to earmark funds upfront............. The Cabinet needs to nip the coal profit share rule in the bud."

Similarly the Financial Express (January 11, 2011) in its editorial has been even more forthright and critical, "New Delhi Mining Disaster" it says "The entire exercise has created a huge level of uncertainty among mining companies, both public and private pushed back investment plans and has still left unresolved how the coal miners are supposed to develop each coal mine as a separate profit entity and then workout the percentages that need to be shared - there will now be host of allegations of under reporting of profits."

These comments are indeed well deserved, because considerable thoughts do not seem to have gone into formulation of this approach. To develop an area, to provide infrastructure and other facilities to the people of the area, and to generally upgrade the living standards of the people are, no doubt, the tasks that need to be handled. What is important to underscore is how to handle them. Rehabilitation and resettlement of people is to be addressed by policy on the subject. There is a policy which has been changed from time to time, and is still undergoing changes, while the land Acquisition Bill is being drafted. Corporate social responsibility is another emerging approach under which responsible corporations are suitably increasing their budgets to take care of the local area developmental and other needs. There is scope to considerably enhance not only the budget but also the scope of activities. The Government imposes taxes and duties and generates fund. Such taxes and duties, which emanate out of these projects, could also be partly utilized for the local area developments. Government Corporations, which are substantially held by the Government, distribute dividends. A part of dividends could also be deployed for local area developmental activities. After all the dividends which the Government receives is a profit for the Government generated out of these projects which are located in these areas. Royalty received by the Government is on account of mining activities. The rates of royalty keep getting reviewed from time to time. There is a perception - and there is a lot of truth in it - that rates of royalty have been very low. In the past, Committees chaired by eminent personalities have analysed this issue and have also made recommendations. If there is a need to further upscale the rates of royalty that could also be done. But what is important is the need for proper deployment of funds generated out of various streams.

What is weighing in the minds of people, and also in the Group of Ministers, is the present highly inadequate status of infrastructure in these areas, and more particularly the plight of people. But, remedy discovered may not prove to be effective, unless we examine as to why the funds available through the existing streams have not been properly deployed, so that delivery of results could be satisfactory. To give an example, large sums of money are provided by the hydro project developers for rehabilitation and resettlement of affected people. Barring one or two good examples, in most cases, the institutional arrangements, made by the concerned State Governments, do not deliver, resulting in wide spread dissatisfaction of people. In the case hydro projects, the policy of the Government of India provides that 12% of power generated at the hydro power plants would be given to the State Government free of any payment. The idea was that the State Government would utilize the revenue generated from the said free power. This would be deployed, atleast a major part of it if not all, for the development of the area and various benefit schemes for the people. Experiences of last several decades indicate that almost all the State Governments have used these funds to take care of their ways and means position rather than utilize them for the benefit of the people in the area. Obviously this causes dissatisfaction and frustration leading, in turn, to strong pockets of resistance against these projects. Amount of fund generated out of royalty is another example of similar dispensation. There is no study on how royalty amounts have been used on schemes benefitting the people.

Companies make profits, and there is Law to tax the profits. The Government of India took historic initiative way back in 1991-92, to not only rationalize the tax structure, but also to draw a road map on how the tax structure will move over a period of time. This was with a view to bringing about predictability in the approach of the Government. Tax administration has proved that rational tax structure yields more effective results in terms of compliance, rather than excessive tax rates. 26% of profit to be shared, as proposed for the Bill, almost doubles the taxation on the companies. As stated earlier, if it is allowed as an expense, then profits would go down. If its effect is to be addressed, the prices may go up substantially. Airthematic of these equations has to be thoroughly examined and a balanced formulation needs to be worked out, so that the Act, while attempting to solve one set of problems does not end up creating many more and of bigger dimensions. It appears that the formula on sharing of profit may not yield the desired results. Besides it may hamper the growth of the industry. Increased royalty, better CSR, but more importantly, streamlined and effective implementation of schemes funded by these, could provide better solutions.