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The Landmark Decision of Commercialising Coal Mining

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The ways and lifestyle of modern civilisation are highly dependent on mining and allied practices. When you take a moment to think about it, from your house to your workplace and everything in-between is an outcome of, or uses a product based out of mining.

Mining accounts for a rather important economic activity in India. Not only is India amongst the top mining nations of the world, we are also one of the leading producers of coal and iron ore. The mining sector contributes nearly 2.4 per cent to India’s GDP. In the last few years, the government has been trying to increase foreign investment in the sector. Foreign Direct Investment is essentially an investment made by an individual or a company from one country into another by establishing business operations or by acquiring business assets which would result in ownership or controlling interest of some form. The concept has proved to be a significant catalyst behind development and also promotes healthy economic interdependence amongst countries.

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The 2019 amendment of the 2017 policy allowed 100% FDI in coal and lignite mining for captive consumption for power projects, iron and steel and cement units via automatic route, i.e. without prior approval from the Government. However, the 2020 amendment, post privatization of the coal mining sector changed the FDI route to government for countries sharing border with India. While some obvious reasons behind increasing FDI in any sector are to simply facilitate growth higher output, more employment, this paper will attempt to analyse the impact of these two policies on the mining sector, possible reasons behind the changes, and the future impacts.

SCOPE AND OBJECTIVES

The study is primarily going to focus on FDI in coal mining sector owing to the recent changes and impact of the 2019 and 2020 amendment on the same and thus will attempt to achieve the following objectives:

1. To understand the factors that impact FDI in mining

2. To understand the objective and possible impact of said amendments

RESEARCH QUESTION

The paper will attempt to answer the question as to whether the 100% FDI in coal mining will promote business in the sector, and give it the much-required boost to come out of the government monopoly regime.

RESEARCH METHODOLOGY

The study undertaken by the author is based on both, qualitative and doctrinal research. Thus, under the qualitative research, several books, articles, research papers and journals were read and analysed which found foot in the current research. As a part of the doctrinal research methodology, several national and international legislations, case laws, commentaries along with theories were taken into account and further analysed so as to find relevance in the present study.

FACTORS AFFECTING FDI IN MINING

There is a certain idiosyncrasy associated with mining industry that makes it stand out amongst others. It’s a high capital, high-risk industry which runs on non-renewable resources. Thus, it outrightly does not carry with it the element of infinite life. It is for these reasons that the decision to make foreign investment by a mining company needs to be very calculated, taking into account all possible factors.

In a resource-rich country like India, it is the non-commercial factors that need to be taken into consideration. The idea behind this remains that availability of resources is the primary requirement for the capital heavy mining sector. Importing raw material further would just be an additional cost. Thus, the non-commercial factor can include political stability, poor socio-economic conditions, corruption, quality of bureaucracy, amongst others.

Political stability accounts for a very important factor while investing in any field, let alone mining. When the political system or government of a State is stable, the possibility of sudden or radical policy changes reduces. Stable governments are also known to support business growth avoiding sudden license revocation, tensions with local communities and promoting employee safety. The laws and regulations related to mining should be transparent too, so that the investors are given the opportunity to make apprised decision regarding committing to a long-term investment or not. The mining policy needs to be consistent, clear and concise. Only when the policies are clear, there can be effective and monitored implementation. Lack of ambiguity promotes quicker resolution of disputes as well as effective and speedy bureaucratic decisions. “A high level of cooperation between government departments or the existence of a ‘one stop shop’ to manage the regulatory process can reduce the time required for, and cost of, obtaining approvals, which may encourage mining exploration in a jurisdiction”

Another important factor is the fiscal regime of the government. The reason why mining is a high capital industry is because it is not just the equipment and set up that costs millions of dollars, but also exploration before establishment to assess the viability of the geographical area which accounts for a major expense. Exploration is taxed by most States, as it should be. However, a simplified, transparent taxation mechanism, devoid of ambiguities such as double taxation or bureaucratic hurdles is always an added advantage.

Naturally a foreign company investing in a different jurisdiction will also look for the possibility of remittance of profit to country of origin. Companies are known to face obstructions in forex due to a plethora of reasons such as the limitation on amount, frequency of transfers.

SERIES OF POLICY AMENDMENTS

The 2019 amendment of the 2017 FDI policy stated that subject to the provisions of the Coal Mines (Nationalization) Act, 1973, 100% FDI via automatic route will be in coal & lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities will be permitted.

Before we begin to analyse the impact of the amendment, it is necessary to understand the motive behind introducing it. The National Steel Policy of 2017 aimed to invest INR 10 Lakh crore in the industry, to increase the output capacity to 300 million tonnes by 2030-31. It recognised the shortfall in availability of raw materials, such as coal and further hurdles put by the cancellation of coal mines following landmark SC judgements. Thus, to increase the output capacity of steel, it is of paramount importance to increase availability of coking coal to reduce dependence on import which is nearly 85%. It also included plans to introduce foreign players along the way.

In 2019, the National Mineral Policy was introduced. The policy essentially aimed to convert the sector into a thriving industry by increasing the production (in value terms) by 200% in next 7 years and will work towards increasing foreign investment in the sector by appropriate mechanisms. This was followed by permitting 100% automatic FDI route in coal mining.

In the first quarter of 2020, the government made the landmark decision of commercialising coal mining, ending its monopoly of 47 years. The move was welcomed by private companies who have been eyeing the world’s fourth-largest resources base. Subsequently, in the second quarter, the government introduced a change in the FDI policy, introducing a limitation for countries which share border with India, or individuals which are citizens or owners of businesses in such countries. For the aforementioned categories, FDI route must be governmental and not automatic.

The 2020 amendment of the MMDRA works towards simplifying the procedure involved as that companies which did not have mining leases prior, will now be eligible to contest in auctions. This opens the avenue for foreign investors to participate at par with the domestic players. Furthermore, end-use requirement, as it existed earlier has also been removed giving the companies freedom to utilise the mined goods as they wish. Introduction of composite prospecting-cum-mining license as well as transfer of environmental clearances are other notable amendments.

ANALYSIS AND IMPACT OF POLICY AMENDMENTS

A perusal of the series of amendment gives an idea that the government in a way started laying down the foundation of introducing 100% FDI in coal mining pre-commercialisation as well. At the outset, it does seem to be a welcome step. Sectors such as mining include equal contribution from labour as well as sophisticated equipment. Indian mining industry currently is in dire need of technological advancement. Foreign investors will bring in new technologies, new ways of doing business, which will essentially ease the arduous processes involved. Leading companies in the business are using technologies such as paper-less transactions, automated rail networks, which are nowhere to be seen in the Indian scenario.

Thus, opening up the market to international players after years of governmental monopoly is bound to add value to the sector, giving it the competitive edge that it most certainly lacks- not just in the international market, but domestic as well. Our advantage is that we still have a significant resource base which can be effectively utilised- something which significantly influences investments made by mining companies. Thus, such a step is bound to attract big names in mining like BHP and Rio Tinto, given the fact that government has such big plans for mining sector, including making Odisha ‘the Steel Capital of India’. Introduction of foreign players in the market, as they attain economies of scale might also result in stabilisation of prices.

The limitation put on 100% FDI for countries sharing border with India, is not an outright prohibition, but only a method for further regulation of investment made by citizens of these countries or companies operating out of these countries. A possible benefit this could offer is that China has an insatiable demand for coal, and will thus prove to be an important consumer ‘for Indian market players. However, the amendment only seems to be an outcome of the ongoing border tension with China as well as Pakistan.

However, there are some negative implications as well. For instance, the fate of deals which would have been finalised before the restriction and after introducing 100% FDI remains uncertain. While the idea remains to avoid opportunistic take over of Indian market by foreign players, targeting certain critical sectors such as healthcare, telecom, banking, etc. would have been a more stable approach. Furthermore, a clearer distinction between effect of the policy on acquisition of majority or minority share would have facilitated easier understanding.

SUGGESTIONS AND CONCLUSION

Presence of minerals and their extractability account for the most important aspect while taking the decision to invest in a foreign jurisdiction. However, despite availability of resources, new jurisdictions come with several challenges. Getting acquainted with the law, business culture and market, as well as trying to establish a stronghold owing to the high investment is a demanding task. Investment in mining will give India the opportunity to align its socio-economic development plans while making a favourable environment for MNCs in mining. While India is moving towards the direction of simplifying ease of doing business, a lot remains to be done. Mining laws in India to date are rather archaic and riddled with ambiguities. Bureaucratic and political failure associated with the sector was highlighted in the Samaj Parivartan Case in Goa and the Common Cause Case in Odisha, both of which resulted in cancellation several mining leases. The law can be made as stringent as possible, but it will continue to fail unless it is being implemented with the same fervour. Thus, only improved legislation will not improve the investment climate. In the current economic climate, where the global economy is standing on stilts, attempts made by India to attract foreign investors are commendable, but visibility in results is still miles away. 

A labour-intensive industry such as mining, cannot undergo such a drastic technological advancement overnight which will reduce the cost invested in Human resources. Thus, while the policy will be effective in bringing the economy out of Covid-19 associated woods, it will most certainly be a game of patience.        

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