By Rahul Basu
A deep dive into the ownership of mineral wealth as per the latest reforms by the Centre.
“There is a need to understand that natural resources, including minerals, are a shared inheritance where the state is the trustee on behalf of the people to ensure that future generations receive the benefit of inheritance.” – India’s National Mineral Policy 2019.
Lakhs of crores of mineral wealth will be lost due to a proposed amendment to the MMDR Act. A change to the definition of the Average Sale Price of mineral ore proposed in a recent consultation by the Ministry of Mines will result in a significant discount on the price states receive for their mineral wealth. States as trustees over mineral wealth for the people and especially future generations are required to ensure zero loss in the trust wealth, the rules are set and bent by the center.
The Family Gold
What does this mean? Minerals are the rightful jeydaad (inheritance) of future generations, our collective family gold. The state is a trustee, and all of us are joint custodians over the jeydaad.
Mining usually results in the sale of the extracted minerals, with royalties and auction premia received as the sale consideration.
The miner is merely an outsourced service provider, a contractor converting mineral wealth into financial form.
Zero Loss is the Goal
“Whenever the Government or the authorities get less than the full value of the asset, the country is being cheated; there is a simple transfer of wealth from the citizens as a whole to whoever gets the assets `at a discount’.” – Meerut Development Authority case [(2009) 6 SCC 171].
“State Governments will endeavour to ensure that the full value of the extracted minerals is received by the State.” – India’s National Mineral Policy 2019.
If mining is the sale of the family gold, the goal of the state as mineral owner is Zero Loss in value (after extraction costs and a normal profit for the miner).
The Central Catch
‘Regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union’ – Entry 23, State list in the Constitution.
However, this entry is trumped by the superior authority of the Center
‘Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.’ – Entry 54, Central list in the Constitution.
Exercising the power available to the Centre, the Mines & Minerals (Development and Regulation) (MMDR) Act, 1957 has been passed.
State Government’s Mineral Sale Proceeds
Traditionally, states received royalties and dead rent (insignificant). The rates for royalty (for major minerals) are reflected in the Second Schedule to the MMDR Act.
“For calculation of royalty three systems are prevalent worldwide. These are: quantity based or rate per tonne, ad valorem or percentage of revenue, and profit based or percentage of profit.” – Hoda Commission (2006).
At that time, they noted that of the 51 minerals in the schedule, 29 attracted ad valorem rates while 22 still attracted specific rates expressed as Rupees per tonne.
The Hoda Recommendation
The Hoda Commission recommended a move to ad valorem basis for royalty for a number of important minerals, including iron ore. Over time, most minerals have moved to an ad valorem basis.
Ad valorem rates are based on the concept of a pit head price – the market price of the mineral at the exit gate of the mine. This price can vary and is subject to various manipulations.
Consequently, the Indian Bureau of Mines calculates an Average Sale Price (IBM ASP) for the ore. For calculating ad valorem royalty, the IBM ASP is used instead of the actual price received at the mine gate.
Royalty = IBM ASH x Royalty Rate
The royalty amount is simply IBM ASP times the royalty rate as specified for that mineral, ore grade & state in the Second Schedule of the MMDR Act.
The Conflict of Interest
The state as mineral owner, has a fiduciary responsibility to ensure zero loss, to get the full value of the extracted mineral. This is echoed by the National Mineral Policy.
The miner of course wants to pay as little as possible for the minerals they extract.
The centre is keen on atmanirbhartha (self-reliance), the availability of domestic minerals in the economy, and constitutionally has the authority to regulate and develop minerals in the public interest, including setting the price (royalty rate, auction terms) at which miners can buy minerals from the state.
The lower the price of the mineral, the greater the profit of the miners, and more the miners will extract.
The 2019 National Mineral Policy does propose a safeguard against the centre unilaterally forcing states to set rates artificially low:
A unified authority in the form of an inter-ministerial body under Ministry of Mines, with members like Ministry of Coal, MoEarth Sciences, MoEFCC, Ministry of Tribal Affairs, Ministry of Rural Development, Ministry of Panchayati Raj, Ministry of Steel, including state governments, shall be constituted to institutionalise a mechanism for ensuring sustainable mining with adequate concerns for environment and socio-economic issues in the mining areas, and to advise the Government on rates of royalty, dead rent etc. – India’s National Mineral Policy 2019
The Impactful Amendment
It has been clear for some time that the royalty regime did not achieve zero loss – the price was too low. Following a slew of Supreme Court judgments on the alienation of natural resources, the MMDR Act was amended in 2015 to provide for mandatory auction of leases.
Winners at the auctions would pay royalty plus an ad valorem auction premia.
The royalty rate for iron ore is 15%.
If the winning bid was 35%, the bidder would pay the state government, as mineral owner, 50% (15%+35%) of the IBM ASP.
The reasoning is to avoid disruption to the economy.
Auctions would ensure that the minerals are sold for fair market value. At the same time, existing leases were extended for a minimum of 50 years from original grant, and longer in some cases.
The auction results are instructive. Since 2015, 184 mineral blocks have been auctioned off. The Ministry of Mines used to publish estimates of additional amounts that states would receive as a consequence of the auctions, but has subsequently discontinued the practice.
After 104 auctions, the summary from the Ministry of Mines shows that states will receive by way of auction premia, 5.80 times that they would receive as royalty.
In other words, if a pre-auction lease paid Rs. 1 for minerals, the auctioned lease would pay Rs. 6.80. A stunning success for which the centre should take all credit.
Table 1: Mineral Sale Proceeds for State Government
|Particulars||Total (Rs. Crore)||% of Mineral Value|
|Market value of minerals at IBM ASP||804,098.65||100.0%|
|Royalty as per Second Schedule||119,439.16||14.9%|
|Auction premia as per winning bid||693,371.58||86.2%|
|Auction premia / royalty||5.80 times|
The Nobel Problem
Unfortunately, the Ministry of Mines and its advisor, SBI Caps, did not seek the advice of Robert Wilson and Paul Milgrom, the winners of the 2020 Nobel Prize for their work on the theory of auction design.
The auctions resulted in a situation where around 2,000 mineral leases were paying only royalty (because their lease periods had been extended), while the newly auctioned leases were paying nearly 7 times those amounts. The pre-auction leases can simply undercut the auctioned leases. Naturally, few auctioned leases started operating.
The Change for Extraction
In desperation, the Ministry of Mines has piloted a number of changes to the Act, rules and regulations to encourage the extraction of more minerals.
Among other things, it enabled holders of captive leases, who were earlier barred from selling on the open market, to supply excess production by paying an intermediate price of up to 3.5 times the royalty. This has further undercut the winners of auctioned blocks.
These changes were made without the constitution of the inter-ministerial mechanism including states to advise the Government on rates of royalty, dead rent, etc.
In parallel, the bidders in the auctions have also ignored plain economics, and have bid absurdly high ad valorem rates to win the auction.
An iron ore mine was auctioned off for a premium of 154% of IBM ASP.
The winner was committing to pay 154%+15% royalty or 169% of IBM ASP to the mineral-owning state. This can only be rational if the expectation is that it would be possible to turn a profit by illegal mining, illegalities in mining such as under-reporting the grade of ore, or that the rules of the game can be changed subsequently.
The ASP Proposal
Now the Ministry of Mines has conducted a public consultation where it proposes to change the basis of calculation of royalty & auction premia.
What it does not say is that its proposal will amount to a massive hidden discount for mineral leaseholders, whose value will go into lakhs of crores of rupees. What is being proposed?
Quite simply, it is redefining the average sale price (ASP) as follows:
Proposed ASP = IBM ASP – royalty – DMF – NMET – other items that may be notified.
Royalty, auction premia, DMF and NMET will be charged at the same rates but on the Proposed ASP.
Let us consider iron ore.
For a pre-auction lease, royalty is 15%, DMF is 30% of royalty, NMET is 2% of royalty, for a total of 19.8%. So if this has to be subtracted from IBM ASP, the Proposed ASP reduces to 83.5% (100/1.198), or a discount of 16.5%.
The mineral sale proceeds reduces from Rs. 15 to Rs. 12.8, a reduction of 14.6%
For an auctioned lease, royalty and NMET are unchanged while DMF is 10% of royalty, for a total of 16.3%.
Hence, the Proposed ASP reduces to 85.6% (100/1.168), or a discount of 14.4%.
If we assume the auction premia is 86.2%, which is the average of the first 104 auctions, we find that the mineral sale proceeds of royalty + auction premia reduces from Rs. 101.2 to Rs. 86.6, a reduction of 14.4%.
|Pre-auction lease||Auctioned lease|
|Rate||Current IBM ASP||Proposed ASP||Diff||Rate||Current IBM ASP||Proposed ASP||Diff|
|Average Sale Price||100.0||83.5||100.0||85.6|
|Total Mineral Sale Proceeds||15.0%||15.0||12.5||-2.5||101.2%||101.2||86.6||-14.6|
The rubber hits the road when we consider the total hidden discount. From the first 104 auctions, an approximate estimate is that the States will lose Rs. 115,934 crores by way of mineral sale proceeds. Further, the amounts going to the District Mineral Foundation for the benefit of the mining affected people and areas reduces by Rs. 1,704 crores and funding for mineral exploration through the NMET declines by Rs. 341 crore.
|104 auctioned leases||Total(Rs. in Crore)||% of Market Value||Value at Proposed ASP||Difference|
|Total Mineral Sale Proceeds||812,810.74||101.2%||696,876.61||-115,934.13|
The Legislative Violations
This is not the half of it. We haven’t considered the balance 80 auctioned leases for which information is not available. And the overwhelming majority of mineral extraction today is through pre-auction leases, which already benefit significantly as they only pay royalty or a slight premium.
Arguably, this violates a variety of constitutional provisions, notably Article 14 (equality). This proposal bypasses the inter-ministerial committee including states, which is yet to be constituted, violating the National Mineral Policy 2019.
There’s been a clear violation of the Right to Information Act, 2005, whose Section 4(1)(c) provides that “Every Public Authority shall publish all relevant facts while formulating policies or announcing decisions which affect public.”
This also violates administrative law. The Pre-Legislative Consultation Policy (PLCP) of the Government of India provides “The Department/Ministry concerned should publish/place in public domain the draft legislation or at least the information that may inter alia include brief justification for such legislation, essential elements of the proposed legislation, its broad financial implications, and an estimated assessment of the impact of such legislation on environment, fundamental rights, lives and livelihoods of the concerned/affected people, etc. Such details may be kept in the public domain for a minimum period of thirty days for being proactively shared with the public in such manner as may be specified by the Department/Ministry concerned.”
No broad financial implications have been provided. For obvious reasons.
The Big Brother
What the centre gives the states, it can also take away.
Federalism is being choked by the series of ad-hoc amendments, each one designed to meet serious problems created by the 2015 changes to mining laws.
The root cause is a flawed system where different prices exist for the same commodity. Throwing the wealth of states at the problem will not fix it.
States should demand that the Centre ensure that states, at the very least, receive the full value of their minerals upon extraction.