New law to spur Indian mining M&A

Author: | Published: 23 May 2016
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Darshan Upadhyay and Pooja Chatterjee of Economic Laws Practice assess the proposed new mining legislation and how it will affect M&A players

ELP
www.elplaw.in

In 2015 when the existing primary legislation on mineral concessions, the Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act) underwent comprehensive reform, competitive bidding became the norm for the allocation of mineral concessions. One of the critical reforms under the MMDR Act affected the transfer of mining leases, whereby any transfer would only be allowed for concessions granted through auction; there was no carve out for mines used for captive purposes. While the mining sector was in a dire need for reforms, it opened a can of worms for merger and acquisition deals in the cement sector.

Rule 37

Prior to the introduction of these reforms, a transfer of the mining lease only required the state government's previous approval (and in some cases, approval of the central government) under Rule 37 of the Mineral Concession Rules, 1960 (MCR 1960), for the following acts:

  • assigning, subletting, mortgaging, or in any other manner, transferring the mining lease, or any rights, title or interest therein; or,
  • entering into or making any bona fide arrangement, contract, or understanding whereby the lessee will or may be directly or indirectly financed to a substantial extent by, or under which the lessee's operations or undertakings will or may be substantially controlled by, any person or body of persons other than the lessee.

On the face of it, the procedure was simple enough. However, since there was now a disconnect in the existing mechanism for transfer between the MCR 1960 and the new amendments in the MMDR Act, many companies had hoped that the Supreme Court would permit the transfer of indirect shareholding without seeking state government approval. Last year, the Rajasthan High Court examined a similar provision, that is, Rule 15 of the Rajasthan Mineral Concession Rules, 1986 (RMC Rules) in the matter of State of Rajasthan v JK Cements, and issued an order on May 14 2015. The decision dealt with the transfer of the entire shareholding by the shareholders of a private company known as Gotan Lime Stone Khanij Udyog Private (GotanCo) to Ultra Tech Cement Company (Ultra Tech). The Rajasthan High Court decided that the transfer of shareholding in GotanCo was not a transfer attracting the provisions of Rule 15 of the RMC Rules requiring the prior approval of the state government. Both GotanCo and Ultra Tech had independent legal personalities notwithstanding that GotanCo had become a wholly owned subsidiary of Ultra Tech. The respondent, JK Cements, appealed against this decision in the Supreme Court. The Supreme Court on January 20 2016, held that the acquisition of the mining lease was contrary to the RMC Rules and was void. The requirement of previous consent cannot be ignored nor taken to be a formality; the lessee cannot privately and without authorisation sell its rights for consideration and profiteer from rights which belong to the state.


"The multiplicity of regulators and potential differing views on interpretation also hampers the structuring and implementation of M&A transactions"


As mergers and acquisitions could comprise several kinds of structure, including a transfer of shareholding, it was a foregone conclusion that any kind of transfer – whether through direct or indirect shareholding – would require approval under Rule 37 of the MCR 1960. Amid the ambiguity surrounding the implementation of a changed mineral concession regulatory framework, a spate of mergers and acquisitions deals in the cement sector stalled over the past year. This included Birla and LafargeHolcim's failed acquisition attempt, and UltraTech, Jaypee Group and Reliance Cement facing similar difficulties in closing their deals.

It should be noted that the MCR 1960 has been replaced by Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Concession Rules, 2016 earlier this year, bringing the new rules in line with the amended MMDR Act. These rules further add that henceforth, if a 'transfer' (of a mineral concession not granted through auction) is carried out in contravention of Rule 24 (formerly Rule 37), the mineral concession may be terminated by the state government. There was, more than ever, an acute need for the government to review the transfer provisions for captive mines to facilitate the pending deals.

Proposed changes

As a consequence, on May 9 2016, the amendments to the MMDR Act, the Mines and Minerals (Development and Regulation) (Amendment) Act, 2016 (MMDRA 2016) were notified. The MMDRA 2016 incorporates a new proviso under section 12A(6) of the MMDR Act, which provides that:

'where a mining lease has been granted otherwise than through auction and where mineral from such mining lease is being used for captive purpose, such mining lease may be permitted to be transferred subject to compliance of such terms and conditions and payment of such amount or transfer charges as may be prescribed.'

Pursuant to this amendment, the government soon thereafter released the draft Mineral (Transfer of Mining Lease Granted Otherwise than through Auction for Captive Use) Rules, 2016 on May 12 2016, to set out the mechanism for transferring mining leases used for captive purposes. Some of these terms and conditions being considered by the Government are:

  • The State Government will convey its decision to approve or reject such transfer within 90 days of receipt of the application, or it shall be construed that the State Government has no objection to such transfer, to the extent such transfer was not made in contravention of any condition subject to which the mining lease was granted.
  • The transferee will have to bear the following financial obligations: (i) pay dead rent, (ii) pay royalty in accordance with the second schedule of the MMDR Act, (iii) pay an amount as transfer charges, to the State Government (the transfer charges shall be notified separately and will constitute a percentage of the royalty), (iv) contribute required amounts to the designated account of the National Mineral Exploration Trust and District Mineral Foundation, and (v) make an upfront payment of an amount equal to 0.50% of the value of the estimated resources (as determined by the State Government), to be paid as lump sum within 30 (thirty) days from the date of receipt of the letter of approval of the State Government.
  • The transferee will also have to provide a performance security to the State Government in the form of a bank guarantee or as a security deposit, for an amount equivalent to 0.50% of the value of estimated resources, which shall be adjusted every 5 (five) years so that it continues to correspond to 0.50% of the reassessed value of estimated resources.

While it will now be possible to transfer the captive mines, in accordance with the extant laws, without resorting to competitive bidding, the transferee companies would need to factor in the additional financial obligations in their deals. Since the draft rules are still awaiting comments from the public, it remains to be seen if these draft rules will be revised further or will be passed by the Parliament in its current form. However, without a doubt, this is a much awaited move which will allow several of the deals mentioned above to proceed and help facilitate ease of business.

Additionally, one of the other issues that hampers the structuring and implementation of a merger and acquisition transaction is the multiplicity of regulators and potential differing views on interpretation. Considering the government is keen on making India a business and manufacturing hub, it is important that these issues are addressed to build confidence and bring about certainty on legal issues. As far as the mining industry is concerned, the above amendment is a much awaited and desirable step in the right direction.

The views expressed in this article are based on interpretation of the law as on May 16 2016. The views are subject to changes in applicable laws, which could be retrospective, and facts and circumstances of particular situation.

About the author
Darshan  

Darshan Upadhyay
Partner, Economic Laws Practice

T: +91 22 6636 7000
M: +91 98216 79391
E: DarshanUpadhyay@elp-in.com
W: www.elplaw.in

Darshan Upadhyay is a partner in the corporate & commercial and private equity & venture capital practices of ELP. He is a qualified company secretary and a law graduate from the University of Mumbai.

With over 14 years' experience, Upadhyay has advised several Fortune 500 companies and continues to advise funds and multinationals on aspects like entry, acquisitions, joint ventures and other commercial transactions for their India-related forays. His expertise in exchange control regulations, SEBI and general corporate law is an added advantage on M&A transactions. He has been involved in some of the most complex transactions including takeover matters involving regulatory approvals, open offer compliances and other transactional support.

Upadhyay has been ranked as a leading lawyer for corporate/M&A by Asialaw Profiles 2014 & 2015; highly recommended for his expertise by The Legal 500 Asia-Pacific 2016; and recognised as a 'rising star' in IFLR1000 financial & corporate 2016.


About the author
Pooja  

Pooja Chatterjee
Associate manager, Economic Laws Practice

T: +91 22 6636 7000
M: +91 77100 34983
E: PoojaChatterjee@elp-in.com
W: www.elplaw.in

Pooja Chatterjee is an associate manager at ELP, and a member of the firm's energy & infrastructure and corporate & commercial practices. She graduated from Symbiosis Law School, Symbiosis International University, Pune; and also holds a masters degree in energy law and policy from the Centre for Energy, Petroleum, Mineral Law and Policy (CEPMLP), University of Dundee, UK.

Chatterjee's experience spans a wide spectrum within the energy and infrastructure sector, ranging from advising a leading global building materials company on its proposed acquisition of specific business assets in the cement and mining sector; to advising a leading international marine terminal operator on the development of a deep-water port and a free trade zone for the import and export of cargo in an island nation. She has experience in mining, nuclear, electricity and oil and gas laws. She regularly advises on infrastructure and corporate transactions as well as commercial agreements.


 

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