The 26% Trick – From ‘Mining Social Equity'
To ‘Minefield Of Inequity'
By Sadanand Patwardhan
Bijoy Krishna Handique was Minister of Mines from May 2009 to January 2011 of this year. During his tenure at the helm, he gave a new direction to the country's mining policy. He proposed that 26% of the *equity* or *profits* of the mining operations of a company should go to the people directly affected by the mining operations. In the present policy climate of promoting * private profits * at * public cost * this came refreshingly as an almost revolutionary suggestion. The government was concerned about the large-scale resistance and unrest faced all over the country to its *forced* land acquisition policies. The Maoists insurgency, described as the biggest threat to Indian democracy by her ‘scholarly ' PM Man Mohan Singh, is active precisely where all the *prime* & *easily accessible* - read most profitable - mineral deposits were located. Handique proposed to make locals –project affected people [PAP]- the stakeholders in the project, and thus remove major impediment in expansion of old or development of new mines. His initiative had blessings, or so it looked, from the highest power centre in Congress Party, its president herself : “ The new legislation is being framed amid UPA chief Sonia Gandhi voicing concerns over land acquisition norms and favouring the Haryana model - where farmers are provided lucrative compensation in addition to annuity for 33 years ”.
Handique's proposal though faced major flak from the Corporates' leading business chamber FICCI : “ However, the equity sharing proviso was opposed fiercely by industry, especially business chamber Ficci ”. Government was * sensitive * and * considerate * to what industry thought. Thus, it dropped the proviso for 26% equity like a hot potato. A layperson may feel what difference it makes if it is 26% equity or 26% profits; finally the benefits to locals won't change. But, * profit * is only one motive in running corporations, the other is * power *. The 26% equity would have threatened that. Indian Companies act treats anybody holding more than 24% share in a company as a *special minority* shareholder with power to veto any major resolutions moved by the board of directors. It is true that many locals would have held this 26% equity, but what would company do if they decided to act in concert. What strikes fear in the heart of rulers is the unity among people . [Source for Quotes: “ Mining companies to share profit: Panel ” –The Times of India, 18 September 2010].
This first * dilution * of the original proposal took place in a meeting of Group of Ministers held on Friday, 17 December 2010. Pranab Mukherjee headed a panel that had Handique, P Chidambaram (Home), Virbhadra Singh (Steel), Veerappa Moily (Law), Anand Sharma (Commerce), K Bhuria (Tribal Affairs), Sri Prakash Jaiswal (Coal), Jairam Ramesh (Environment) -all ministers-, and Montek Singh Ahluwalia (Dy. Chair Planning Commission). It had pretty much everybody who mattered on-board. GOM dropped the 26% equity proviso and gave “ its go-ahead to the draft mining Bill that essentially seeks to make firms share 26% of their profits with the local population which has to bear the brunt of mining operations. It is * largely approved *. One more sitting of GOM (group of ministers) remains after which it will go to the Cabinet. Whatever we have suggested has by and large been approved . We will work on it," mines minister B K Handique said after the panel's meeting ”. The draft also had a novel provision in case of * abandoned * or * loss making * mining projects, “ The draft also proposes that in case a mine is abandoned or runs up losses , mining firms should compensate those affected by land acquisition . The compensation will be equal to the royalty paid to state governments . The royalty paid by mining companies to state governments runs into hundreds of crores of rupees ”. Disbursal of profits thus paid to locals were to take place through “ a fund to handle the profits meant for local population, to be called District Mineral Foundation , be created and the beneficiaries be paid from it ”. [Source for quotes : Mining companies to share profit : Panel . Times of India – September 18, 2010].
“ One More Sitting of GOM ” was all that was required before the draft mining bill –with the clause of 26% profits to locals intact- would go to the Cabinet for approval before it was introduced in the winter session of parliament. That is what Handique said while briefing media after the aforesaid meeting. Did second meeting of GOM take place? What did it decide? The second meeting indeed took place again on a Friday, December 3, 2010. The second meeting proved probably more fractious than the first. It made following decisions.
1. “ Despite objections from the coal ministry and concerns of the Planning Commission , a GOM under Finance Minister Pranab Mukherjee - discussing the new Mines and Mineral (regulation and development) Act 2010 - approved the proposal of sharing 26% net annual profits from the mining activity with displaced locals ”.
2. “ The share of profits on annual basis can be equal to the royalty paid by the mining firm to the state, if there is ( no ) activity or if the net profits are less than the royalty paid ”.
3. “ Coal minister Sriprakash Jaiswal, also a member, objected the provision saying it would hit the PSU hard . Coal India Limited , the largest coal miner in the world, recently launched its IPO with initial target of R15,500 crores. But the GOM chose to go ahead with the welfare measure ”.
4. “ MMRDA bill does away with prior approval of the Centre , putting the onus of allocations, license on respective states. It, however, inserts a clause where the central regulatory authority can override allocation by states, bringing in conservation, strategic reserves and environmental concerns ”. This insertion was made at the behest of Moily (Law).
5. The man most worried by all these developments spinning out of hand was of course Montek Singh Ahluwalia (MSA), “ who said 26% profit -sharing serves as big disincentive for the industry, hurting its interests ”. The industry that gets to keep 74% of the profits on the natural wealth that belongs to the nation, and principally to local people, is hurt because it has to give only 26% of the profits to the locals.
However, despite MSA's * serious concerns * he was overruled and the 26% of the profits clause was retained by this second, and * assuredly * last meeting before the draft was sent for Cabinet approval. [Source for quotes : “ Mining firms must share 26% profits : GOM ” –Hindustan Times Saturday, December 4, 2010].
The fairy-tale of 26% of profits to locals is about to end today , Wednesday, 06 July 2011. The Mining Ministry is all set to put before the GOM a brutally raped and mangled draft of the original bill put forward by B K Handique. Even though the original draft was diluted somewhat, it was still progressive, and had been approved by two successive meetings of GOM as has already been seen. That draft was to go before the Cabinet for approval. Instead it has been sabotaged by the same Mining Ministry, which had originally proposed it. What has changed? For one, the change of guard has occurred. A new minister, Dinsha Jhaverbhai Patel , has come in place of Handique. Wikipedia says he was chosen to contest against Nerendra Modi in 2007 assembly election for his *clean image*. But getting back to the now mangled draft it is time to see its * main innovations *.
1. “ In a reversal of its earlier stance, the mines ministry has now suggested that the miners share * 26% of royalty * instead of * profits * with local residents. The mines ministry has also suggested reducing state and central cess from 10% to 5% ”.
2. “ In a note circulated by the mines ministry, it has proposed that "we can have an arrangement of industry sharing an amount equal to 26% of royalty paid in the previous year in the District Mineral Foundation. The royalty percentage shared can be reviewed by the National mineral Regulatory Authority. The review can take place every third year ”.
3. “ This move (of Handique proposing 26% of profits) was opposed by Planning Commission Deputy Chairman Montek Singh Ahluwalia , who had argued that it would discourage investments and even prompt similar demands from other sectors . Ahluwalia was supported by commerce minister Anand Sharma and home minister P Chidambaram ”. Make note of the 3 musketeers who are only worried about the corporates.
4. “ Handique's position had the support of environment minister jairam Ramesh and tribal affairs minister Kantilal Bhuria ”.
5. “ Industry has also opposed to the proposal to link the 26% share for local residents to profits . Business chambers CII and FICCI argued that upfront compensation to affected persons was the * international norm * and profit sharing or giving 26% equity would make the mining business unviable . The coal ministry has also opposed the move as it would mean an outflow of as much as 5,000 crores for Coal India ”. In September the chambers opposed 26% share in equity, but not in profits. Now they are bothered by the fact that giving share in profits to affected communities is not as per *international norms* . When it is about *profits* & *Compensation* industry is worried about *international norms*, whatever that means; but when it comes to working conditions, healthcare, salaries, equipment, safety, accident & death compensation, environment, etc. is there in mining industry any concern for international norms ?
6. “ A 26% share in net profits of companies was expected to bring in 18,000 crores annually ”. That means Mining Industry's profits are a whopping 51,230 crores rupees. But would these profits make the mining industry unviable ? Does the claim on our credulity become stronger because Shriprakash Jaiswal representing the biggest miner of them all, Coal India Ltd. – a Public Sector Undertaking not yet privatised , said that?
[Source for quotes : “ Mines ministry wants miners(read companies) to share 26% of royalty with locals ” –The Economic Times, 6 July 2011]
As late as in January this year, an official of the Mining Ministry was quoted to have said, “ While the mines ministry has managed to get green signal from the group of ministers (GOM) on the proposal that mining firms would share 26% of their profit with the affected people , the discretion to decide who is affected and the list of affected people has been left to the state governments ”. Then the report added, “ However, the industry opposed the profit sharing proposal and had said that if enacted it would choke investments . The draft has gone to the law ministry for its views and soon will go for the Cabinet approval ”. Usually when an approved draft is –this one was an approved draft- sent to Law ministry it is to make it consistent with legalese and other laws in force, and also to make sure it does not violate Constitution. [Source for Quotes: “ STATES TO NAME PEOPLE AFFECTED BY MINES FOR PROFIT SHARING ” –Financial Express 3 January 2011 ] This date, 3 rd January , is very crucial here. Didn't Handique cease to be a minister of Mines in January 2011? Then how come ministry still continued to maintain his vision of 26% profits to affected local people.? Handique lost Mining Ministry on 19 th January 2011 , the day Man Mohan affected reshuffle of his cabinet. Tehelka of January 23, 2011 had this to say, “ A central battle in the country is over its mineral resources . Some of the biggest foreign investment proposals are in this sector, with many conflicts already raging over corporate mining interests in India's interiors. Just at this time, Singh has taken away a Cabinet minister, BK Handique, and put mining in charge of a new and junior minister, J Dinsha Patel . It is possible that the Prime Minister has bigger plans for mining , which he wants to put in action after the Budget session of Parliament. But if he doesn't, the move to leave the ministry for mines open to influence, national and international, could haunt him ”. Unfortunately, Tehelka prophesy has been fulfilled. Why was charge of Mining Ministry downgraded from Cabinet to Junior minister? Why was Handique, who ably piloted the draft Mining Bill in consonance with prime minister's oft repeated mantra of *Inclusive Growth* removed ? Or did he go because he took PM too seriously and literally ? These are serious issues indicative of another swindle and of huge quantum of money changing hands to get desired outcomes as happened in case of 2G spectrum allocation & Raja's appointment in Ministry of Communication .
Time now to examine the impact this questionable stand of Mining Ministry under the stewardship of Dinshaw Patel will have.
1. The output of the mining industry is pegged at Rs. 156,600 crores in 2010, is expected to grow to Rs. 382,500 in 2015. ( BMI Mining Report
India Mining Report July 2011 ). On this turnover, the estimated profits of the mining industry were some Rs. 70,000 crores as stated by Economic times report earlier – profit form almost 45% of revenue .
2. The royalty payments to the states form a measly Rs. 2000 to 3000 crores in aggregate.
3. The new draft suggests 26% of royalty should accrue to affected local people or some Rs. 520 to 840 crores in all. Compare these figures to Rs. 18,000 crores that Handique's formula would have fetched. This would benefit mining companies by over Rs. 17,000 crores . A benefit mining industry wrenched back through only 6 months of efforts by change of minister and what else yet not known .
4. Contrary to what CII & FICCI said, *international norms* for compensating local communities are getting better & better from South Africa, Papua New Guinea, Canada, Australia, to hopefully elsewhere in the world.
5. Similarly, profitability of the Indian companies and therefore their viability will not be affected as disingenuously suggested by them: “ annual reports of three major non-coal mining companies (Manganese Ores India Ltd, Sesa Goa and National Mineral Development Corporation or NMDC) indicates that in 2009-10, their average profit after tax (PAT) was about 50 per cent of their turnovers . In the case of Coal India Limited, this was about 18 per cent . Assuming the draft MMDR Act, 2010 becomes a law, the CSE analysis of companies shows that it will not make any material difference to the profitability of the company. After sharing 26 per cent of the net profit with the affected community , the PAT of National Mineral Development Corporation – for instance -- will still be 41 per cent of its turnover (from 55 per cent) . In the case of Coal India Limited, PAT will become 14 per cent of its turnover from 18 percent ”.
6. Difficulty in calculating profits of individual mines operated by a company specifically and also segregating ‘mining profits' from ‘profits of its other operations' were cited as a major difficulty in sharing 26% of the overall mining profits . This is hogwash. Several simple solutions such as “ separating mining operations into a separate subsidiary ” to “ apportioning mining profits to separate mines in proportion to quantum & price of ores mined, and area of lease ” could have been devised. Where there is a will, there is way. But what to do when will is absent?
7. Minerals are natural resources. They should be so exploited as to benefit the people of this country, not a few corporates. Moreover, people who are directly affected by mining have to be cared for first & foremost, not last, or not all, as has been the history in this country. Handiques proposal was a first step in that direction. But that too has been whittled down to an inanity, though 26% remain intact as a cruel joke .
[Source : for immediately preceding points 4 & 5 the credit goes to “ CSE releases its report on profit sharing in mining ” ]
Recently, lot of dust was raised about *non-elected* persons dictating terms to *elected representatives* of people. The above adequately referenced record of the progress of this bill will show that a *non-elected* appointee like Dr. Montek Sigh Ahluwalia seems to have prevailed over at least *7 elected representatives of the people* and union ministers . That is some formidable clout indeed. He was ably assisted by P Chidambaram, a stalwart in UPA government, and someone who had deep links to both Vedanta Resources (as Director on its board till a day prior to his appointment to Union Cabinet as Finance Minister in 2004 UPA-I ) and to Pohang Steel & Iron Company (POSCO) as shown by this expose in Guardian, “ PC tracked Posco clearance almost daily ”. Can we let these *gentlemen* succeed ?
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