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Amendments to the Mines and Minerals Development and Regulation Act : The Formula on Sharing of Profit in case of Coal Industry may neither help Growth of Coal Sector 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. The Group of Ministers (GOM) recommended that 26% of the profit of the coal companies should be shared with the local people. Prior to this recommendation, this issue had been under debate for the previous few months and different views had 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 Cabinet has decided 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.

The whole approach has generated intense debate. The recommendations by the Group of Ministers followed by Cabinet decisions led to adverse impact on the share prices of Coal India. 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 were highly disappointed at the approach. Ever since, the expectations of the market and its response have been rather unfavourable to Coal India. 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 (July 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 (July 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."

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. 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, 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.

Specific Drawbacks Of The Proposed Formula On Sharing Of Profit

It is fully recognized that the concerns of the local people need to be adequately addressed and sufficient amount of fund should be generated and properly deployed with a view to taking care of the needs and aspirations of the people. However, the following drawbacks of the formula need to be given serious consideration:

  1. It will call for radical increase in the coal prices because Coal India Limited and other Coal companies will propose to pass on the additional burden to customers. As a result, prices of power, steel, and other commodities are bound to increase leading to overall increase in Inflation.

  2. Since, power generation in India is dependant, to the extent of more than 70% on coal, power price will increase substantially. As it is, because of increased imported coal, the power prices are going up.

  3. Formula of 26% of profit means, in fact, Double Taxation for Coal Companies. Alongwith Royalty, Taxes, and the proposed 26%, the overall taxation becomes more than 60%, highest of taxation anywhere in the world.

  4. Coal is the most predominant energy source, not only for power, but also for most other industries. Discriminating Coal Industry by aligning it to the profit sharing, as compared to other minerals, where the benefit is linked to Royalty, does not appear to be having any justification at all.

  5. This dispensation is bound to lead to similar expectations in other areas of industrial activities, and locals in all industrial projects will obviously demand similar benefits. This would, therefore, inevitably lead to a chain effect in all other sectors.

  6. Private sector captive coal mine companies may get away, in a significant way, because for them the presentation of profit will be for the whole Power or Steel Company, captive mining being only a part of the whole Balance Sheet and Profit & Loss Statement. Thus, it is only Coal India (Public Sector Company) which will be most affected on account of Profit Sharing Formula.

  7. Private sector companies having captive coal mines may have other flexibilities as well which may enable them to show a much lower profit in coal mining operations, by outsourcing many activities to other outfits. Thus, very little may be available to share with local people.

  8. This scope for manipulations of profit may lead to allegations and, therefore, the Policy and the Formula could be criticized on the ground that it provides for such flexibilities for private sector which could lead to manipulation of profits by them.

  9. Within Coal India, there are companies which are highly profitable, there are others which make modest profits, and there are others, like Eastern Coal Fields Ltd. (whose operations are in West Bengal and Jharkhand), which make losses. Linking the formula with Profit Sharing will have the greatest disadvantage of discrimination among different areas of local people on account of this large scale variation. Loss making companies will have nothing to share.

Linking The Benefit With Royalty Is A Better Formulation

In view of the major drawbacks of the proposed formulation, which links the benefits with profits of the companies, it is suggested that the benefits to be shared with the local people should be linked to Royalty. This will take care of all the major drawbacks highlighted above. The formula for computation of Royalty is not linked to profit or loss. It is primarily dependent upon the volume of production and a few other related factors. Therefore, this would not be subject to influences by pricing and financial performance of different companies. Once the amount of benefit, which is considered to be appropriate to be shared for the benefits of the local people, is approximately estimated, the same can be expressed as a Percentage of Royalty rather than Percentage of Profit.