NEW DELHI | MUMBAI | KOLKATA | May 03, 2016: The government managed to get amendments to the Mines and Minerals Development and Regulation (MMDR) Act cleared but added a rider, making the industry anxious about the implications of the fine print. The Rajya Sabha on Monday approved the amended MMDR Bill, 2016, that will allow companies to transfer captive mining leases issued prior to last January, helping cement several M&A deals in the mining and resources sector.
However, the government is planning to levy a charge for transfer of mines allotted in the pre-auction era. The transfer charge, government functionaries indicated, will be fixed but will be revised from time to time.
With no clarity yet on the quantum of the levy or even the mechanism through which it will be arrived at, companies and legal experts are preferring to wait and watch before rejoicing.
"The clarification will surely help clear the backlog of M&A deals, but we still need to wait to see the amount of the transfer fee, since there is no clarity on that," said Haigreve Khaitan, senior partner at Khaitan & Co. "If the fee for transferring assets is too high, then it might become unviable to close a transaction even after regulatory clarity."
According to Hemant Sahai, founding partner of HSA Associates, the fixed fee structure will bring about transparency and eliminate subjectivity. However, this will be another capital cost for the acquirer and hence the valuation of many deals will change.
Even after the amendment, the Centre will have to notify terms and conditions governing such transfers. Also, there's need to define the term 'captive' — how much would the producer or extractor have to consume internally for it to qualify as a captive user, said experts. "The fee structure is not clear. Will there be a one-time flat fee or will it be on the basis of annual production? This will be a key factor that will determine valuations," said Ajay Saraf, executive director, ICICI Securities. He was confident the details will soon emerge, triggering large-scale consolidation.
The industry, thus, remains cautiously optimistic. Almost all mining-related sectors will see some transactions after the amendment, but cement and steel would arguably be the biggest beneficiaries. "It's a case of better late than never," said the CEO of a large multinational cement company with operations in India that is eyeing consolidation opportunities. "Undoubtedly this is a big positive for the sector. But the devil could still be in the detail," the executive said, requesting anonymity.
SPURRING CONSOLIDATION Others said the clarity would spur consolidation and investments. "This will hopefully provide clarity on a range of mining issues and is likely to pave the way for mining sector consolidation and industrial investment. Depending on the provisions, it will be certainly helpful in reviving some mining deals that were stalled," said Jayant Acharya, director (commercial & marketing) at JSW Steel.
The lack of a provision for transfer for mining leases issued prior to January 12, 2015, in the MMDR Act upset many headlinegrabbing transactions in the past one-and-a-half years, such as Lafarge's sale of two cement units to Birla Corp for Rs 5,000 crore. The French major subsequently had to submit a revised plan to sell its entire India operations as a pre-condition to getting approval from the Competition Commission of India for the India leg of its mega global merger with Holcim.
Similarly, after facing regulatory logjam for 15 months, the Jaypee Group had to finally call off a deal to sell two of its cement units in Madhya Pradesh to UltraTech this February. The two assets then got folded back into a larger Jaypee Cement divestment involving 22.4 million tonnes of its portfolio, which was subsequently sold to the Aditya Birla Group.
Following the enactment of the amended MMDR Act on January 12, 2015, all mining leases in the country could only be issued after a competitive bidding process. Under the amended Act, even in case of M&As, transfer of mineral leases was only allowed for those that have been auctioned out.
Even legacy mines were not spared. Earlier, mines moved along with the transfer of ownership. For instance, the assets and mines that Lafarge was previously selling were acquired from Tata Steel (then Tisco) in 1999 through a business transfer agreement. The limestone mines with 145 million tonnes of reserves — received through nomination — had moved seamlessly then.
Ever since, the industry wanted policymakers to recognise the practical impact of the transfer of such an asset. A mine is integral to the raw material supply to a plant, industry officials said. "Why will the seller hold on to only the mining lease and why will an acquirer buy the plant without the assurance of the rights from the mine?" asked the chief financial officer of an iron ore mining company.
With the law covering all major minerals except coal and atomic minerals, the new rules made any M&A impossible. "No buyer would acquire a cement or steel plant without limestone or iron ore mines that come with it. That's what one is paying top dollars for," added the CFO quoted above.
Several companies such as Reliance Cement chose to sell shares of the company which owned the mining and prospective leases instead of opting for a slump sale of assets to circumvent the logjam. Reliance sold the business to Birla Corp in February.
The transfer provisions have a bigger implication and will also facilitate banks and financial institutions to liquidate stressed assets where a company or its captive mining lease is mortgaged. Most of the banking sector stress is in commodity or infrastructure sectors. Quicker consolidation will help bring down overall indebtedness. "This is a NPA (non-performing assets)-reducing move," quipped a government functionary.
(Source: http://economictimes.indiatimes.com/)