Any new legislation brings uncertainty, and the proposed mining law is no different. It appears that the industry’s pay-outs will increase—in the form of government levies and contribution to a compensation fund.

The Bill also overhauls mining legislation, putting in place a modern regulatory structure. That may bring some longer-term benefits too. Note that the actual provisions of the law will be known only when it is introduced. What exists in the public domain is a draft. This has been modified by a group of lawmakers and then approved by the cabinet. While the broad principles may be the same, in such landmark Bills, the devil is likely to be in the detail.

The central element of this Bill is the creation of a compensation fund. Coal mining companies will pay 26% of their net profits into a district-level fund.

Other mining companies will have to pay an amount equal to their royalty payments into this fund. This money will be paid to mining-affected families and to create local infrastructure.

The sums involved are substantial. Calculating the impact on non-coal mining companies is straightforward, except that the impact will vary if the royalty rates change. If this levy had been in force in 2010-11, it would have caused a 6% fall in Sesa Goa Ltd’s profit before tax (PBT), 18% for Hindustan Copper Ltd, and 13.4% for Hindustan Zinc Ltd.

This will affect costs for companies that have captive mines, too—5% of PBT for Tata Steel Ltd—but it will be less when compared with pure mining companies. For coal companies and their investors, life has become unnecessarily complex. While net profit is calculated at the corporate level, a fund has to be created at the district level. How to determine this will become a contentious issue. The Bill needs to specify this as well or it may lead to disputes. A revenue-based levy—easily calculated at the mine-level—may have achieved the same objective in a more transparent manner.

Also See | Fresh Hurdle (PDF)

The final Bill should also provide some clarity on the accounting aspect of the transfers to the mineral foundation, for both coal and non-coal mining companies. Will it be expensed through the profit and loss account or the balance sheet?

Tax implications are another aspect. Will the transfers be deducted from profits for calculating post-tax profits? The impact on earnings can vary significantly, depending on the accounting and tax treatment.

The financial impact of the mining Bill is significant and will hurt cash flows and earnings. But this also assumes that companies will absorb all the costs. Companies will seek to pass on these costs to customers. Their ability to do so will determine the eventual impact.

The new mining law will weigh on investor sentiment in the near term. In the longer term, though, it may become easier for the mining industry to do business.

Also, if the compensation fund is utilized properly, then mining activity in resource-rich areas with local populations may become easier.

As a whole, if mining output grows much faster than it would have without this Bill, then the industry may still benefit.

A lot rests on how the scheme is formulated and implemented; sadly, the government’s track record on this front is not very impressive.

Graphic by Sandeep Bhatnagar/Mint

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