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Searching for answer to restriction on transferability of mining leases

04 September, 2015

The Mines and Minerals (Development and Regulation) Act, 1957 (“MMDR Act”) and the Minerals Concession Rules, 1960 (“MMC Rules”) regulate reconnaissance, prospecting and mining operations in India.  

Under the MMDR Act, 3 types of mineral concessions are granted: (i) a ‘reconnaissance permit’ for preliminary prospecting of a mineral by way of aerial, geographical or geochemical surveys and geological mapping; (ii) a ‘prospecting license’ for undertaking exploration, location or proving the availability of mineral deposits – typically granted after reconnaissance over a piece of land has been undertaken pursuant to a permit; and (iii) a ‘mining lease’ for undertaking mining operations – typically granted once the applicant provides various detailed reports such as mineral deposit estimates, environmental impact assessment of the mining activity and a mine development and closure plan. With a myriad of approvals required from several arms of the Executive, the time taken to go from obtaining a prospective license to operationalising a mine was estimated at an average of 10 years.  

Following the Supreme Court’s decision in Manohar Lal Sharma v The Principal Secretary and Ors ((2014) 9 SCC 614), the Mines and Minerals (Development and Regulation) Amendment Act, 2015 (“MMDR Amendment”) was enacted with effect from 12 January 2015 to introduce greater transparency in the allotment of mining leases and removing delays in the processes. One of the concepts introduced by the MMDR Amendment was using the auction route to obtain mineral concessions.  

Noble as the objective might have been, this concept has thrown a colloquial ‘spanner in the works’ for certain industries dependent on mining activities largely thanks to the insertion of Section 12A of the MMDR Act. 

Prior to notification of the MMDR Amendment, mineral concessions were transferable with the prior approval of the relevant State Government where the mine was located or the Central Government (in case of specified minerals). The ability to transfer the mineral concessions or the process for such transfer were not previously linked to the manner in which such mineral concessions were acquired by the transferor. Sub-section (6) of Section 12A of the MMDR Act provides that “The transfer of mineral concessions shall be allowed only for concessions which are granted through auction”.

The question which remains to be answered is whether this transfer restriction applies only prospectively or whether it also has retrospective application. In this respect, there are two diametrically opposite views. One argument is based on the principle that unless a statutory provision is specifically stated to apply retrospectively, it shall only apply prospectively. Proponents of this view hold that mineral concessions granted prior to the coming into force of the MMDR Amendment are exempted from the applicability of sub-section (6) of Section 12A of the MMDR Act. 

On the other hand, an argument is raised basis a plain reading of the statute where no exemption is given to mineral concessions granted prior to the MMDR Amendment Act. Consequently, the view is that the transfer restriction contained in sub-section (6) of Section 12A of the MMDR Act applies to all mineral concessions existing as on date and mineral concessions granted in the future. 

Given this, there are serious implications for mergers and acquisitions in sectors which rely on mining activities for sourcing raw materials. To be sure, it would be commercially unviable to invest in a manufacturing facility which involves mineral production/ processing, without also having the right to source the necessary minerals from the associated captive mines.   

Mergers and acquisitions, specifically in the cement manufacturing sector, have hit a roadblock on account of this lack of clarity on transferability of mineral concessions. Recently, media reports indicated that the Ministry of Mines had written to the Ministry of Law and Justice, seeking its views on whether captive mines (which are linked to production capacities) allotted before the enactment of the MMDR Amendment could be transferred, pursuant to mergers and acquisitions, to other entities. 

Taking a practical view, it can be said that it would not have been the legislative intent to scuttle transfer of mineral concessions granted prior to 12 January 2015 and as such the MMDR Amendment does not apply retrospectively. Having said that, nothing lays down legislative intent like the legislation itself.  

In this situation and with a view to providing a solution to stake holders in the mining and allied industries, the Central Government should look to providing a clarification on the intent of Section 12A of the MMDR Act. This can be done by way of a notification, an amendment to the MMDR Act by the Parliament or an ordinance to be approved in the next Parliamentary session.  

If such a clarification does not materialise, litigation appears to be the only route available to the industry whereby courts will have to examine and expound upon the intent of the aforementioned provision. Unfortunately, this will result in various litigation across the country leading to different interpretations of the same statute until such time that the Supreme Court of India steps in and takes a stand.  

Given the amount of time which may elapse for either of these two solutions, the only route available to sellers and investors in the mining and allied industries is to participate in State Government auctions for fresh mining leases. This presents its own business and legal complexities in that parties run a risk of not being able to win a mining lease in a commercially viable location, or at all, and the manner in which this would impact the underlying transaction involving the seller and investor. As of now, all eyes are on the Ministry of Law and Justice in terms of being able to understand the options the Central Government may have in addressing the restriction on transferability of mining leases. 

Pooja Patel is Principal Associate and Rohan Singh is Associate at Khaitan & Co. The views are personal and should not be considered as those of Khaitan & Co.

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Searching for answer to restriction on transferability of mining leases

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