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Transferred liability

Policy changes should not end up penalising companies

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Business Standard Editorial Comment New Delhi
Last Updated : Sep 29 2015 | 10:32 PM IST
Controversies over telecom spectrum and coal mine allocations during the second term of the United Progressive Alliance rightly influenced a key change in the government's policy on natural resource distribution. After the Comptroller and Auditor General pointed to the potentially large amounts of revenue the exchequer stood to lose, the government replaced the system of opaque and discretionary allotments with relatively transparent auctions. The problem is that the shift to the auction system is still partial, creating serious issues for companies that hold allocated natural resource assets.

A case in point is a clause in the Mines and Mineral (Development and Regulation) Act which was passed by Parliament in March this year. A new section, 12A, was inserted in the Act on the transfer of non-coal mineral concessions. Clause 6 of that section unequivocally states that "the transfer of mineral concessions shall be allowed only for concessions which are granted through auction". In other words, companies with allocated mining leases cannot transfer these assets. In one stroke, this clause blocks exit and restructuring options for companies that were allocated mines in the past. Mineral auctions are scheduled in two months but these are for mines that have not been allocated; companies that have been allocated mining leases have been granted extensions of between five and 15 years. This lock-in hardly helps when the assets are non-transferable. This has created problems for at least two big-ticket cement deals Lafarge-Birla Corp and Ultratech-Jaypee Cements, the former the result of an order from the Indian competition regulator. Larfarge sold units in Chhattisgarh and Jharkhand to Birla Corp as a precondition for the global merger with Swiss major Holcim. Under the terms of the MMDRA Act, however, it will not be able to transfer the captive mines of limestone, a key raw material for cement manufacture, which significantly alters the valuation of the plants. Debt-laden Jaypee group, which signed a deal with Aditya Birla Group's Ultratech to sell two of its units in Madhya Pradesh, finds itself in a similar predicament. The government has made it clear it is unlikely to amend the Act to remove this condition, leaving companies with little option but to go to court. Nor will it add a clarification exempting mergers and acquisitions from this provision of the law.

This sort of impasse does little to enhance this government's avowed effort to improve India's "Doing Business" indicators, especially when section 12A(6) clause marks a significant departure from the draft law of 2011 that provided for state government permission for asset transfers. Policy changes are inevitable in a country that has started opening up to private investment but they need to be leavened by some measure of stability for business and industry. The telecom spectrum-trading guidelines, for instance (the rules are not yet out) have stated that companies with allocated radio waves need to pay the auction price before they are eligible to trade in them. Given that some telecom companies hold these spectrum allocations as a result of policy prevailing when their services were launched, and before auctions were introduced, this amounts to penalising service providers for changes in government policy.

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First Published: Sep 29 2015 | 9:38 PM IST

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