New Delhi: A parliamentary panel has recommended an overhaul of the compensation mechanism for people displaced and otherwise affected by coal mining operations by linking it to royalty payouts.

If the recommendation is accepted, coal miners will have to pay the displaced people compensation equal to the royalty they pay the government—a move that could have an impact not only on state-owned Coal India Ltd (CIL), but also on steel and power producers that have captive coal mines, and ultimately take its toll on consumers.

The compensation mechanism suggested by the panel for the coal sector is on par with that proposed for people affected by mining of other minerals such as bauxite and iron ore.

The parliamentary standing committee on coal and steel has recommended that this change be incorporated in the proposed Mines and Minerals (Development and Regulation) Bill, 2011, that will be taken up by Parliament. In the draft Bill, reviewed by the committee, the compensation has been fixed at 26% of profit after tax.

Since coal and non-coal miners typically pass the entire royalty burden to downstream consumers, such a move could raise the basic price of these minerals for end-users.

The panel headed by Kalyan Banerjee, a Lok Sabha member belonging to the Trinamool Congress, presented its report in Parliament on Tuesday, suggesting that in case of coal and lignite, the compensation formula be based on the royalty paid by miners during the fiscal year instead of the 26% of net profit that had been suggested earlier.

The proceeds would accrue to district-level panels that would be set up in areas where coal and other minerals are mined.

In July 2011, a group of ministers, while approving the draft Bill, said coal mining companies, including those that mine the mineral for captive use, should pay 26% of their profit net of taxes, while other mining firms should contribute an amount equal to royalty being paid by them during the fiscal year, for regional development.

The panel has also suggested several other key changes to the draft Bill. It said shares allotted by mining firms to affected people should be made transferable. According to the present draft, companies have to allot at least one share at par to each member of the affected families, but on a non-transferable basis. It also wants half the monetary benefits passed on to individual families to be handed to the eldest woman of the household, with the remaining distributed equally among the other members. The panel also suggested that granite be brought under the category of “major: minerals.

“This is a welcome step," said Chintan J. Mehta, an analyst with Mumbai-based Sunidhi Securities and Finance Ltd. “If they (coal miners) were asked to share profits, it is possible that they would have under-reported the same."

While the notified royalty rates on various grades of coking coal vary between 115 and 250 per tonne, the rates for non-coking coal vary between 65 and 85 per tonne. A royalty of 50 per tonne is payable on lignite at present.

A top CIL official said that adopting a royalty structure to compensate displaced people would mean that the company would have to revise its prices upwards by at least 12%.

“At present, the royalty payout across all our subsidiaries is to the tune of 10,000 crore. If this mechanism is implemented, the additional 10,000 crore burden would be fully passed on," this official said. He did not want to be identified.

CIL is the largest producer of coal in the world, and meets more than three-fourths of the country’s domestic needs.

Dipesh Dipu, an energy analyst and a partner at Jenissi Management Consultants, said that a 12% increase in the price of coal would typically mean that power tariffs would go up by around 7% on average.

Dipu further said that in case of integrated steel plants with captive coal mines, the royalty-based structure will have a greater impact on downstream prices of finished products. “Since royalty is paid on the actual volume of coal mined, the incremental costs will be passed on," he said.

Steel Authority of India Ltd (SAIL), Tata Steel Ltd and Jindal Steel and Power Ltd are among steel firms that have significant captive coal capacities.

A Tata Steel official said that the company could not immediately respond to an email query seeking comment. An email query sent to a Jindal Steel spokesperson remained unanswered. A phone call made and a text message sent to SAIL chairman C.S. Verma remained unanswered.

Firms that mine metals such as zinc, aluminium and manganese may have to take a hit as they may not be able to pass on incremental cost increases to downstream consumers.

“Major mineral companies like Hindustan Zinc can’t increase their price as it is market-linked. So if royalty increases, they have to take a hit on their profits. The same applies to other major mineral companies like Nalco (National Aluminium Co. Ltd), etc.," said a Mumbai-based metals analyst, who declined to be identified.

Another Mumbai-based analyst concurred. “Most metal prices these days are market determined. Therefore the companies won’t be able to pass on the increased cost," the second analyst said, also on condition of anonymity. “However, mining business is still profitable with sufficient cushion. I don’t think any mine is going to get closed because of this added burden. They will take a hit on their margins."