New Delhi: The Rajya Sabha on Monday approved an enabling legislation to make it easier for mergers and acquisitions (M&A) of steel and cement companies reeling in the aftermath of the collapse in global commodity prices.
The legislation will also help alleviate a bad-loan crisis afflicting commercial banks, many of which have heavy exposure to steel and cement companies.
Since Lok Sabha has already approved the proposed law, The Mines and Minerals (Development and Regulation) (Amendment) Bill, 2016, is just one step away from becoming a law—it now only requires the President’s signature.
The legislation will facilitate UltraTech Cement Ltd’s deal with Jaiprakash Associates Ltd to acquire its 21.20 million-tonne cement capacity for Rs.15,900 crore.
Once the Bill is signed into law, there will be no bar on the transfer of mining leases.
In February, LafargeHolcim called off its deal with Birla Corp. Ltd to sell its 5.15 million-tonne cement assets in east India, citing the MMDR rules that did not allow the company to transfer mining rights.
The companies acquiring the cement units will now have raw material security as they can access limestone mines belonging to the acquisition targets. In cases where the companies have mortgaged these licences, the lenders will be able to transfer the licence to a potential buyer, which will help creditors to recover some of their dues.
“The amendment enables transfer of captive mines on a basis similar to that allowed for mines that are won through an auction. This eliminates uncertainty that held up mergers and acquisitions of resource-based companies earlier, and permits distressed metal and cement producers to sell their production units along with the mines,” said Kameswara Rao, leader of the energy, utilities and mining practice at consultancy PricewaterhouseCoopers India.
According to Debasish Mishra, senior director, Deloitte Touche Tohmatsu India Llp, the metals and minerals sector accounts for a majority of the non-performing assets in the banking sector.
“Lenders will benefit from the amendments proposed in the MMDR Amendment Bill as assets will shift from the books of stressed groups to better-off balance sheets. The change will also help mergers and acquisitions in the metals and minerals industry where assets are stressed,” said Mishra.
Gross non-performing assets (NPAs) of 39 listed banks surged to Rs.4.38 trillion, as of 31 December, from Rs.3.4 trillion at the end of September, according to data collated by Capitaline. Provisions against bad loans surged by 90% between the September and the December quarters.
A rout in commodity prices, which made it difficult for many borrowers to repay debt, contributed to the growing pile of bad loans.
In 2015, the government brought The Mines and Minerals (Development and Regulation) Amendment Bill, replacing a 1957 legislation which stipulated that mining licences could only be auctioned. This amended law allowed transfer of mines allotted through auctions but was silent on captive mining licences handed out in the past on the basis of recommendations of a screening committee. That discouraged deals among companies.
“The amendment will help a lot and was very much needed; while drafting, the new practical situations were not thought of; this has now been corrected,” said H.M. Bangur, managing director at Shree Cement Ltd.
“Companies set up plants in a remote area for access to captive mines, there is no logic to sell that asset without the captive mine. The amendment will help cement companies in a big way where limestone is the backbone of any assets. In the metals space the overall amendment is a positive move, but not many metal companies, which have a captive mine with the asset, are right now in the market to sell. The amendment may help in future if any such asset is up for sale,” said an investment banker who did not wish to be identified.
In August, Birla Corp. agreed to acquire two cement manufacturing units with a combined capacity of about 5.15 million tonnes (mt) from the Indian arm of Lafarge for a total enterprise value of Rs.5,000 crore. The plants were put up for sale after Holcim Ltd of Switzerland and France-based Lafarge SA agreed to a global merger that required the divestment of the assets to meet local competition rules.
After the deal was cancelled, LafargeHolcim made a revised appeal to the Competition Commission of India (CCI) to allow the sale of Lafarge India Pvt Ltd’s entire 11 million-tonne cement assets in India and received initial bids in April for these assets. The sale process was stalled after the Competition Appellate Tribunal questioned the CCI’s jurisdiction to allow a revised deal.
In February, Jaiprakash Associates said that it had signed an agreement with UltraTech, an Aditya Birla Group firm, to sell a total capacity of 22.4 million tonnes per annum. The amendments to the mining law will facilitate the conclusion of the transactions.
The discussions on the Bill in the Upper House, however, witnessed some protests from the Opposition parties.
Madhusudan Mistry of the Congress argued that the land acquired for mining should be returned to the original owner rather than being transferred to another business house. “This is a small Bill, but its repercussions are huge. I appeal to the House that we should make a serious introspection about this. All Bills being proposed are meant to benefit the industry and not the common man,” said Mistry.
In his reply to the debate on the Bill, mines minister Narendra Singh Tomar said that when the Bharatiya Janata Party-led National Democratic Alliance took charge in 2014, it held discussions with every political party and decided that the problems hurting the mining sector should be effectively addressed so that its contribution to the economy is sustained.
To get the mining sector back on track, the Narendra Modi administration introduced the auction process for mines after the allotment of more than 200 coal mines was scrapped by the Supreme Court of India in September 2014.
The apex court had ruled that the process adopted for allocating the mines was flawed, after a scandal broke out during the Congress-led United Progressive Alliance’s regime over the way coal fields had been allotted.
The Comptroller and Auditor General of India said in a 2012 report that coal mine allocations had caused the exchequer a notional loss of Rs.1.86 trillion.