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Metals & Mining: Bills to be paid

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Malini Bhupta Mumbai

While the draft Bill may resolve some of the sticky issues, the profitability of mining companies will take a hit in the short term.

From the look of it, the government is ready with its draft, Mines and Minerals Development and Regulation bill. An initial interpretation speaks of an extra payout by companies in the mining business. The bill proposes that coal mining companies share 26 per cent of their net profit with the affected people. And, non-coal mining companies pay an amount equivalent to the royalty, for the same purpose.

The bill will be referred to the Cabinet and then introduced in Parliament in the monsoon session.

 

This is good news from a long-term perspective, as the biggest issue in getting a mining licence is land acquisition and rehabilitation of the affected people. By making profit sharing mandatory, the hassles associated with starting operations should ease. The proposed Bill also seeks to decentralise powers to the state governments and help states increase revenues by rationalising royalties/taxes/cess. Going ahead, the mining blocks will be auctioned, helping faster disposal of proposals.

However, in the short term, the Bill, if implemented in the current form, would hit profits. According to analysts, the most affected company would be Coal India (CIL), whose profit could go down by 35 per cent. According to Citi, the impact on CIL’s profit after tax would have been 40 per cent, had the 100 per cent royalty sharing been applicable as well. Analysts at Citi say, “Though early days, if the Bill is passed in its current form, we believe CIL is likely to either ask for an offset against their corporate social responsibility (CSR) expenses and/or pass on the additional burden.”

CIL currently passes on its royalty burden to end-users.

If the Bill is applicable to both existing and new mines, the profits of non-coal mining companies (including integrated metal/cement companies) could be impacted 3-16 per cent (no pass through, no tax benefit), with Hindustan Zinc being hit the most and JSW Steel the least. Sesa Goa’s and Hindustan Zinc’s profit could be impacted by eight per cent and 17 per cent, respectively. All other metal companies will be impacted by 5-15 per cent (depending on the rate of royalty on the mineral).

The draft bill has also led to many questions. There is no clarity on whether the 26 per cent profit sharing will be at the subsidiary or the parent level. Whether this rule will apply to captive mine companies is also not clear. The picture could look very different if CIL and others are allowed to make deductions on CSR expenses.

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First Published: Jul 09 2011 | 12:12 AM IST

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