MUMBAI: After over a year of uncertainty, the Cabinet’s decision to amend the Mines and Minerals (Development and Regulation) Act and allow transfer for captive mining leases issued prior to last January will help in cementing several M&A deals in mining and resources sector, but the industry isn’t rejoicing yet and would rather go through the policy fine print that’s yet to be finalised. Some even feel the government will eventually end up charging a fee for allowing such transfer of natural resources.

“It’s the first step. The government now needs to stipulate guidelines that will specify the criteria for approval — the fees if any and other conditions for such transfer. That way, only genuine M&As will be given the nod and mines can move along with the assets. Nobody should profiteer from it,” said Haigreve Khaitan, Senior Partner at law firm Khaitan & Co.

Thursday’s amendment will now need the ratification of the Parliament.

“It’s a case of better late than never,” said the CEO of one of the top five north-based cement companies. “Undoubtedly a big positive for the sector. But the devil could still be in the detail.”

Even after the actual amendment, the central government will have to prepare and notify terms and conditions which will govern such transfer. Also, there’s a need for clarity in terms of the word ‘captive’ as how much the producer or extractors need to internally consume for it to qualify as a captive user, said experts.

“The explanatory note to the draft amendment that was circulated in January this year indicates that the government may be contemplating charging a fee for transfer of captive mines. The government needs to formulate the exact terms and conditions once the amendment to the MMDR Act gets ratified,” said Qais Jamal, Practice Head of Mining and Infrastructure at law firm AZB & Partners.

Almost all mining related sectors will see some transactions after the amendment, but cement and steel would arguably be the biggest beneficiaries. “This is the logical step to last year’s amendments and will liberalise the environment for steel producers and mining companies,” said Ravi Uppal, MD & Group CEO, Jindal Steel and Power Ltd.

The lack of provision for transfer for mining leases issued prior to January 12, 2015, in the MMDR Act upset many headline-grabbing transactions in the past one and a half years such as Lafarge’s sale of two cement units to Birla Corp. for Rs 5000 crore. The French major subsequently had to submit a revised plan to sell its entire India footrprint as a pre-condition to get CCI approval for the India leg of its mega merger with Holcim.

Similarly, after facing regulatory logjam for 15 months, Jaypee Group had to finally call off a deal to sell two of its cement units in Madhya Pradesh to UltraTech Cement in February. The two assets then got folded back into a larger Jaypee Cement divestment involving 22.4 million tonnes of its portfolio.

Following the enactment of the amended MMDR Act on January 12, 2015, all mining leases in the country could only be issued after a competitive bidding process. Under the amended Act, even in case of M&As, transfer of mineral leases was only allowed for those that have been auctioned out.

Even legacy mines were not spared. Earlier mines moved along with the transfer of ownership. For instance, the assets and the mines that Lafarge was previously selling were acquired by them from Tata Steel (then TISCO) in 1999 through a business transfer agreement. The limestone mines with 145 million tonnes of reserves — received through nomination — had moved seamlessly then.

Ever since, the industry wanted the policymakers to recognise the practical impact of the transfer of such an asset. A mine is integral to the raw material supply to the plant. “Why will the seller hold on to only the mining lease and why will a buyer buy the plant without the assurance of the rights from the mine?” asked a CFO of a leading cement maker which has been proactively scouting for buyout targets. With the law covering all major minerals except coal and atomic minerals, the new rules made any M&As impossible. “No buyer would acquire a cement or a steel plant without the limestone or iron ore mines that come with it. That’s what one is paying the top dollars for,” explained a CEO of a global cement company.

Several companies such as Reliance Cements chose to sell shares of the company which owned the mining and prospective leases instead of opting for a slump sale of assets to circumvent the logjam. Reliance sold the business to Birla Corp last month.

But legal experts still remain wary. “The government has still not clarified whether change of control in licensed entities would trigger the transfer provisions of the MMDR rules. With a majority of M&A transactions – from Stemcor to Lafarge – being in the nature of of stock purchases, the air of uncertainty in mining M&As do not entirely go away. The wording of the legislative changes appear to be focussed on transfer of mines and not change of control and of course the principles outlined by Supreme Court in the Gotan case very much continue against non-Bonafide share transfer cases, argues Shuva Mandal, national head of corporate & M&A practice, Shardul Amarchand Mangaldas & Co

The transfer provisions have a bigger implication and will also facilitate banks and financial institutions to liquidate stressed assets where a company or its captive mining lease is mortgaged.

“Most of the banking sector stress are in these commodity or infrastructure conglomerates. Now quicker consolidation will help overall indebtedness to come down fast. This sends a clear message to go ahead. But hopefully Parliament will not hold it back,” said an investment banker specialising in the sector.

Even for companies like Ultratech or Birla Corp which have already agreed to acquire assets, the amendments will open up alternative deal structures. “Ultratech can now buy Jaypee’s units either through slump sale route for tax efficiency or alternatively by demerging the listed Jaiprakash Associates and carving out a separate entity that will own the group’s other businesses, such as hotels, construction and real estate.,” said a Mumbai-based cement analyst.