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Public Affairs Round-up

MSLGROUP INDIA

October 2013 | Vol 1 | Issue 3

Mining sector woes Pg. 2

Impact of new Companies’ Bill on CSR Pg. 4

Policy roadmap Pg. 5

Policy round-up Pg. 6

Number view Pg. 7

2

Mining sector woes: Time to dig deep for an answer

profit with the local community through contribution to a District Mineral Fund (DMF). It provides for a National Mineral Regulatory Authority to advise the government on rates of royalty, dead rent, benefit sharing with the District Mineral Foundation, quality standards, and also conduct investigation and launch prosecution in cases of large-scale illegal mining. Miners have been opposing the provision for profit sharing, citing the already heavy burden of royalty and dead rent. However, the Parliamentary Standing Committee of Coal and Steel has recommended that the provision be retained with some modifications.

Big guns set to boomIndia has been gradually liberalising the policy for foreign direct investment (FDI) in mining. The sector was opened to FDI in 1993 after the announcement of a new mineral policy. Following the changes over the past two decades, FDI in mining for all non-atomic and non-fuel minerals has now been fully opened up to 100% through the automatic route, including for diamonds and precious stones.

India is endowed with an enviable reserve of minerals. It has the fourth-largest coal reserves in the world and significant reserves of bauxite, titanium ore, chromite, diamonds and limestone. Gold, copper, zinc and uranium reserves have also been identified, though in limited volume. In terms of production, India ranks third in coal and lignite (80% of the mines in India are of coal), second in barites, fourth in iron ore, fifth in bauxite and seventh in manganese ore. Its geographical location makes it the perfect hub for raw materials or metals exportation to both, developed European markets and fast-developing Asian markets.

Yet the mining sector’s contribution to India’s gross domestic product (GDP) has been stagnant for the past few years at around 2%. The per-capita GDP of a majority of mineral-rich states is lower than the national average. The Fraser Institute Annual Survey of Mining and Exploration Companies 2012/2013, a comprehensive assessment of the attractiveness of mining policies across the world, puts India at 86th position.

Change is afootThe Mines and Mineral (Development and Regulation) Bill 2011, that seeks to replace the Mines and Minerals (Regulation and development) Act, 1957, is expected to change the mining sector’s landscape. The bill will usher in a simple and transparent mechanism for the grant of leases and prospecting licences through competitive bidding in areas of known mineralisation, and on a first-in-time basis in areas where mineralisation is not known. It also provides for the seamless transfer of licences from the reconnaissance permit stage to the prospecting licence and the final grant of mining leases, thus providing greater certainty to companies which invest in exploration.

The Bill also enables mine holders to adopt sophisticated technologies for the exploration of deep-seated and concealed mineral deposits, especially of metals in short supply, through a new concession – High Technology Reconnaissance-cum-Exploration Licence. Moreover, the main concern for investors – projects delayed due to red tape – has been addressed by specifying timelines for clearances and providing for mining tribunals at the central and state level.

The states have also been empowered as they would be allowed to grant direct mining concessions through bidding based on a prospecting report and a feasibility study in notified areas where data of minerals is adequate. In addition, the Bill has several provisions to check the menace of illegal mining.

A contentious provision relates to profit sharing. The Bill provides that miners will be required to share part of their

Despite having large reserves of iron ore anD coal, india’s imports have been increasing. recently, arcelorMittal scrappeD its plan to set up a steel plant in Odisha, the largest Fdi project for india, citing among others an inability to get iron Ore linkages. india’s Mining sector Faces serious challenges.

2008-09

2009-10

2010-11

2011-12

2012-13

34.22

86.63

79.51

142.65

57.89

Year FDI in $ million

(Source: Department of Industrial Policy & Promotion;Lok Sabha Question No: 2400 August 23, 2013)

Investments So Far

Already, some of the top most mining majors – BHP Billiton, Companhia Vale Do Rio Roce (CVRD), Rio Tinto and De Beers – have a presence in India or are looking for opportunities here. Rio

3

Coal mining has been the prerogative of Coal India Ltd and government efforts to open it up to the sector to private sector has not been successful so far. The Coal Mines (Nationalisation) Amendment Bill has been on the backburner due to opposition from the unions. While the recent Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2012, passed by Parliament will increase the cost of land, its passage will clear the uncertainty that had surrounded land acquisition since the government announced its plan to bring in the Bill. The Bill includes mining as a public purpose for which the government can continue to acquire land.

Early this year, the government set up the Cabinet Committee on Investment to hasten approvals for large projects with investments above Rs 1,000 crore ($158 million).

Challenges aboundThe economic slowdown has impacted the mining industry, particularly the iron ore segment. The latest government data shows that growth of the sector, hit by policy and environmental clearance delays, fell by 2.8% in the April-June quarter of 2013-14 compared to an expansion of 0.4% in the same quarter the previous year. Coupled with

Tinto has got a few prospecting licences for diamond mining. Public sector companies have a large presence in mining, accounting for more than 80% of the firms in the sector. Many of them also provide attractive opportunities for foreign investors as they would now be permitted to rope in technology partners from abroad under the ‘mine developer and operator’ model.

sluggish market conditions, the Supreme-Court-imposed iron ore mining ban in Karnataka and Goa has impacted production and exports, resulting in the closure of several operations in these states.

Before the ban, India was exporting iron ore worth more than $7 billion per year, making it the third largest exporter in the world. But after the ban, shipments plunged to 18 million tons in 2012-13 from nearly 168 million tons in 2010-11.

But the country’s soaring current account deficit and plummeting rupee have compelled the government to relook the ban, which has deprived the exchequer of billions of dollars since 2011. The government is preparing to appeal to the Supreme Court to lift its ban. Already, the court has relaxed the ban on a few mines in Karnataka.

Finance Minister P Chidambaram’s budget

announcement to introduce a public-private

partnership (PPP) policy framework to increase

production of coal is likely to open a window for

the private sector, including foreign companies, to

participate in coal mining. A committee to devise the

policy is expected to submit its report in three months.

Prime Minister Manmohan Singh and Finance Minister P Chidambaram have spoken about liberalising iron ore exports to fetch much-needed foreign exchange. The government is now willing to rethink the 30% export duty it had imposed earlier following representation from the steel industry.

The system of ‘go and no-go’ has been dismantled in the coal sector, but the coal scam has cast a fresh shadow on transparency and objectivity in allocations. Now the government is preparing to introduce competitive bidding for coal blocks and indications are that it may follow suit for iron ore.

The hope from iron ore is greater as it is commercially mineable unlike coal and its prices are hovering around $120 a ton in the global markets after touching a low of $84 per ton last September. Even state-run companies’ efforts to establish overseas footprints have not taken off in a big way as International Coal Ventures Ltd, an umbrella body of leading metal and mineral PSUs,has failed to win any overseas projects despite having bids for more than half a dozen. Further, India’s exploration budget continues to be very small leading to extremely low reserve-to-production and reserve-to-resource ratios. The impending general elections leave little space for the MMRD Bill to be introduced as the winter session will be the last full working session of the present Parliament; the Budget session will be a brief vote-on-account session in which legislative business is not expected to be transacted.

Mining Minister Dinsha Patel recently stated in Parliament that the sector has the potential to contribute up to Rs 11.25 lakh crore ($250 billion) to India’s GDP by 2025 and create 15 million jobs. To achieve this, India needs to hasten the parliamentary approval for MMDR Bill and also focus on increasing its investment in exploration.

4

In recent years, community objectives have been growing in

importance for large businesses in India. Many have

comprehensive programmes that integrate social initiatives with

the corporate mission. This could take the form of volunteerism

by staff or non-financial commitments, while others partner

with the government or non-profits for a cause.

So far, these initiatives have been driven voluntarily by the management. However, the new Companies’ Bill, recently approved by Parliament, mandates corporate social responsibility (CSR) programmes for large corporations.

While this is significant for the social sector, the law could change forever the corporate social activity landscape in India.

New Companies’ Bill an opportunity for CSR consultancies, will alter firms’ social approach

As per the new law, companies with a net worth of more than Rs.500 crore or revenue of more than Rs.1,000 crore or net profit of more than Rs.5 crore will now have to spend at least 2% of their average net profits of the preceding three years on CSR

According to a report in Forbes India magazine in March, the new regulation would mean that the top 100 companies by annual net sales in 2012 would spend Rs 5,611 crore on CSR, compared to the Rs 1,765 crore they are spending now. If all companies comply with these norms – there is no penalty clause in the law for lack of compliance, but there is one for reporting – India could probably be the first nation to have successfully implemented CSR spending through a statute.

Companies can choose their causes, but would need to change their auditors every five years to impart credibility to their initiatives. Some of the activities that the Bill recognises as CSR activities are eradicating extreme hunger and poverty, promoting gender equality and empowering women, rural skill development and sports, environmental sustainability and imparting vocational skills.

Amrita Choudhary,deputy head of content,MSLGROUP India

T Samsukumar, a practising advocate, said the new regulation could help cover the development deficit if corporations extend support effectively.

The Bill has drawn a mixed response from corporate India. Describing it as a “historic moment” while presenting the Bill in Parliament, Corporate Affairs Minister Sachin Pilot termed its passage as the beginning of a new era of corporate law and regulation. Dhaval Udani, chief executive officer of Give India, a charitable donation website, told the Mint newspaper that India will see CSR consultancies mushrooming now. “There are three to four organisations that have been doing it for some time, but I think we will see a lot more organisations getting into this and also individuals consulting companies,” he said. For social entrepreneurs, the law will open up many opportunities as they now have a clear conversation starter.But there is also a flipside. CSR is not about funds alone, but an organisation’s willingness to actively ally with a cause. While many businesses have been doing this voluntarily, a regulation could foster ‘chequebook philanthropy’. Doling out an obligatory amount merely to be on the right side of the law would defeat the very purpose of CSR.

There is also the concern about monitoring these activities. Chandra Mauli Dwivedi, global head of human resources and CSR at Datamatics Global Services, cautioned in the Mumbai Mirror: “The question as to how it will be assessed and evaluated continues to be a challenge… Companies must have CSR councils, and all such activities and initiatives must find [mention] in the annual company report.” A government-introduced regulation would be truly successful only corporations, institutions and the social sector work as partners to make a significant impact on the ground.

5

Policy Roadmap

A lot has changed since the Companies Act was introduced in 1956. The licence raj has been replaced by a liberalised era and the number of companies has increased by millions.

Promulgated as the Companies Act 2013, the new Companies Bill is the first major overhaul of company law and will replace the Companies Act, 1956. The law aims to ease the conduct of business and improve governance by making firms more accountable. The legislation was passed by the Lok Sabha in December 2012 and was by the Rajya Sabha on August 08, 2013.

non-compliance will not be penalised, companies must disclose strong reasons for this.

≠ As of now, there are restrictions on the merger of Indian companies with offshore firms. The Bill permits such cross-border mergers with certain provisos. It also liberalises inter-group mergers and restructuring.

≠ The Bill introduces clauses 245 and 246 on class-action suits. Such suits may be filed by investors with the National Company Law Tribunal if they believe that the company is being run in a manner detrimental to its shareholders. This is likely to empower small investors. Take the example of Satyam Computer Services. Even four years after its fall, its Indian shareholders are yet to get any meaningful compensation. However, their counterparts in the US were able to get $125 million (Rs 675 crore) from the company as settlement due to a strong class-action framework there.

≠ The Bill provides for purchase of minority shareholders’ holdings by a person/group holding 90% or more of a firm’s equity by virtue of amalgamation, acquisition, etc. Generally, a company can squeeze out minority shareholders by opting for capital reduction. Experts argue that minority shareholders, under the new law, will have no option but to surrender their shares if the company wants to buy them out. They say that the Bill gives more power to corporations by helping them buy out minority shareholders without risking legal battles.

ConclusionThe new Bill has a mix of self-regulation and government supervision. It calls for stringent accountability of directors and auditors, failing which criminal liability can be applied. The Bill also attempts to strengthen the Serious Fraud Investigation Office, including bestowing the power of its director to arrest those he believes are guilty of offences such as fraud.

Major amendmentsCompared with 700 sections in the earlier law, the new one has around 470 clauses. Several key changes have been introduced to promote transparency in investments, strengthen the rights of minority shareholders – making it tough for companies to hide illegal transactions – and to boost gender parity on boards.

≠ The new law stipulates the appointment of at least one woman director on the company board. Women constitute only 14% of senior management positions in India, against the global average of 24%.

≠ The Bill also introduces the concept of independent directors. For every listed company, at least one third of the directors should be independent, with every such board member allowed a maximum two terms of five years each. Independent directors cannot have any monetary transaction with the company of a value equivalent to or more than 10% of revenue.

≠ Another issue the Bill addresses is spending on corporate social responsibility (CSR) initiatives. Every company with a net worth of more than Rs 500 crore or turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore must spend at least 2% of average net profits made during the preceding three financial years on CSR. While

companies Bill

Simplify laws Improve corporate governance

Provide for better and more powerful

oversight

Allow class action

suits

Ensure independence of boards of which, a third will now be independent

directors

Limit the term of independent directors to ensure they do not

become too close to management

Make spending on CSR

mandatory

Improve quality of financial statements that will need to have

details of unlisted subsidiaries

Limit the term of auditors to ensure they

do not become too close to management

Enforce gender equality by reserving

board seats for women

The Companies Act Will...

6

Policy round-up

Boost for local fertiliser production

The government has taken initiatives to encourage the indigenous production of potassic and phosphatic (P&K) fertilisers by reducing customs duty on phosphoric acid, making it cheaper for indigenous fertiliser manufacturers. The government is also encouraging the private and public sectors to explore the possibility of joint ventures abroad to ensure uninterrupted supply of fertiliser inputs.

Focus on oilseed cultivation

A centrally-sponsored Integrated Scheme of Oilseeds, Pulses, Oil Palm and Maize is being implemented across 14 states to promote the cultivation of oilseeds, such as soyabean. Financial assistance will be provided for purchase of breeder seeds, production of foundation seeds, production and distribution of certified seeds, distribution of seed mini kits, distribution of plant protection chemicals/equipment, weedicides, supply of micronutrients and improved agricultural implements, supply of rhizobium culture/phosphate solubilising bacteria, distribution of gypsum/pyrite/liming/dolomite, distribution of sprinkler sets and water carrying pipes, training and publicity.

Cabinet okays Real Estate Bill

The Real Estate (Regulation and Development) Bill, 2013, has been approved by the Union Cabinet. It provides for a uniform regulatory environment to protect consumers, help speedy adjudication of disputes and ensure orderly growth of the sector. The Bill is thought to be a pioneering initiative to protect the consumers' interests, to promote fair transactions and to ensure timely execution of projects.

Tax reform panel set up

The Union Cabinet approved the setting up of the Tax Administration Reform Commission. The commission will review the application of tax policies and laws in the context of global best practices, and recommend measures. It will help remove ambiguity in the application of policy and laws, thereby establishing a stable tax regime and a non-adversarial administration.

Helping agro tech go commercial

Memorandums of understanding have been signed between the Indian Council of Agricultural Research and industry at the Agri-Tech Investors Meet 2013 for more than 60 ready-to-commercialise agro technologies from sectors such as crops, horticulture, food technology, veterinary, agri engineering, agri inputs and fisheries. The objective is to promote entrepreneurship in agriculture and accelerate the successful

development of entrepreneurial companies and activities through an array of business support resources and services.

Minerals regulation report submitted

The Standing Committee on Coal and Steel has submitted its 36th report on the Mines and Minerals Development and Regulation Bill, 2011. Among the salient features is the provision of a simple and transparent mechanism with clear and enforceable timelines for the grant of mining leases or prospecting licences through competitive bidding in areas with known deposits, and on the basis of first-in-time in areas where mineralisation is not known.

National Offshore Wind Energy Authority soon

A National Offshore Wind Energy Authority (NOWA), under the aegis of Ministry of New and Renewable Energy, will be constituted as the nodal agency for offshore wind projects. NOWA will carry out resource assessments and surveys in Exclusive Economic Zones and enter into contracts with project developers for offshore wind energy project in territorial waters. NOWA will be a single-window agency and will coordinate with ministries for clearances.

Ministerial panel for quick rulings on infra

An empowered group of ministers has been constituted to quickly resolve infrastructural issues and to ensure speedy implementation of power projects in the North-East. The group is meeting with the ministers of coal, environment and forests, and water resources for speedy execution of power projects. The improved coordination has facilitated several clearances and improved implementation tremendously.

Boost for food processing sector

To promote the food processing sector, the government is implementing infrastructure schemes with components for mega food parks, cold chain, value addition, preservation infrastructure and modernisation of abattoirs, which could be availed of by farmers. This would maximise value addition, minimise wastage and improve their income. The government has launched a National Mission on Food Processing, a Centrally-sponsored scheme during the 12th Plan to give a further impetus to food processing.

7

rs 1.83 lakh crOreValue of 36 infrastructure projects cleared by the Cabinet

Committee on Investment recently in a bid to revive

investments and perk up sentiment. They were stalled

because of regulatory reasons. Among the projects are 18 in

the power sector with investments of Rs 85,000 crore and 18

others in roads, railways, petroleum and natural gas.

17,546 tonsAmount of foodgrains damaged between 2009-10 and July

2012 in Food Corporation of India godowns. Poor storage

infrastructure also results in wastage of fruits and vegetables

worth Rs 44,000 crore every year.

35%Proposed tax rate for those earning more than Rs 10 crore per year.

rs 2,000 crOreProposed dedicated outlay for Sub-Mission on Agricultural Mechanisation for the 12th Plan, which seeks to provide assistance for promotion and strengthening of agricultural mechanisation through training, testing and demonstration, post-harvest technology and management.

Number View

40.29 crOreNumber of Aadhaar numbers issued so far. With this, the Unique Identification Authority of India is on track to achieve its target of 60 crore Aadhaar enrollments by 2014.

$100 millionValue of loans and agreements signed by the government of India/National Housing Bank with the World Bank for low-income housing finance projects.

$300 million Value of loan agreement signed by the government of India with the Asian Development Bank for the upgradation of 254 km of severely damaged highways in northern and southern Bihar.

rs 25,400 crOreProposed investment by Coal India Ltd during 2012-17. In addition, an ad hoc provision of Rs 25,000 crore for acquisition of coal assets abroad and Rs 10,000 crore for development of coal blocks in Mozambique has been proposed.

259 million tonsProduction targets for foodgrain for 2013-14.

8

Public Affairs Round-up

MSLGROUP INDIA

For more information on what MSLGROUP INDIA PAR has to offer to your company,

please contact our Asia Practice Leader

Jaideep Shergill jaideep.shergill@mslgroup.com