Legal minefield over lease transfers queers Lafarge-Birla Corp; Ultratech-Jaypee M&A play

MUMBAI/ NEW DELHI: The government has sought legal opinion on the interpretation of a clause in the new Mining Act that has put spoke in corporate M&As in the mining and resources sectors as it bars the transfer of mines that were not allotted via auctions.

This legal minefield can even torpedo many headline grabbing transactions like the recently announced Lafarge India’s sale of two cement assets to Birla Corp for Rs 5000 crore or the takeover of Jaypee Group’s cement plants in MP by Kumar Mangalam Birla’s Ultratech that is stuck for months largely over this issue.

"Hundreds of mines have been allocated for captive use by industries in the past. In many circumstances, when these businesses change hands via mergers and acquisitions, it could be an issue if the captive mines linked to production capacities are not transferable," said an official in the mines ministry.

The ministry has asked the law ministry whether mines allotted prior to the new laws enactment could be transferred to other players and their opinion is expected soon.

At the heart of this confusion is a clause in the amended Mines & Minerals (Development & Regulation) Act 2015 that came into force earlier this year. Sub Section 6 of Sec 12A says that only mines which have been allocated through auctions can be transferred. “The transfer of mineral concessions shall be allowed only for concessions which are granted through auctions,” it states.

But it is unclear if it covers historically allocated mines given via nominations or only ones going forward. Multiple government officials and legal experts told ET that this ambiguity in the law makes it open to different interpretations. The moot point is does the new rules apply prospectively or retrospectively?

“The industry has taken a pause following this new law, which is indeed very ambiguous in its current form,” says Qais Jamal, Practice Head of Mining and Infrastructure at law firm AZB & Partners. “Not only acquisitions but also mergers of subsidiaries within groups are affected due to this. Many banks have also disbursed loans by keeping mining leases as collateral. With this new Act they too are also seeking clarifications from the government.”

There is one view that believes this clause would apply to only mines allotted after January 12, 2015 when the new mining law came into force come. But the counterview argues that no such exemptions are explicitly or implicitly permitted in the law for any transfer of mineral concessions without auctions. In the earlier regulatory regime, transfers of lease to a third party was permissible after approval from the state government under Rule 37 of the Mineral Concession Rules of 1960.

For Lafarge, the problem is unique as it is divesting its two cement plants to Birla Corp to comply with a Competition Commission of India (CCI) diktat. The competition watchdog had asked the French major to sell them by the end of the year as a precondition for giving a green light to conclude the Indian leg of its mega merger with Holcim.

Incidentally, the CCI order and the MMDR law were finalized around the same time, but the law prevents Lafarge from transferring its captive limestone mines to Birla Corp. A senior government official said that players like Lafarge may cry hoarse claiming a Catch-22 situation between the CCI order and the MMDR law, but it’s unlikely to get relief. “If the law hasn’t provided any exemptions for transfer of allotted mines and has a retrospective effect, nobody’s going to touch it,” a senior government official said.

Conversely, if the government were to say that mines allotted in the past could be transferred, it could become vulnerable to political attacks given that the Modi government’s demonstrated policy in all natural resources sectors has been to opt for auctions. The Prime Minister highlighted this in his Independence Day speech last Saturday.

Some legal experts disagree, saying since there was no auction in the past, the law must be applicable for recent mine allocations only. “The earlier MMDR Act of 1957 has not been repealed, just few clauses amended. Section 13 of the MMDR Act also gives power to the Central government to make rules for transfer of mines. So the new provisions under the amended Section 12 has to harmoniously co-exist with the older provision. If the government wanted a retrospective amendment then they would have deleted Rule 37 and Section 13,” argued a senior lawyer involved directly. “Every law is prospective in operation unless and until the law itself says it is retrospective,” he added.


DEAL DAMPENERS

This controversy in turn is causing havoc in deal closures. “It has now become commercially unviable for anyone to invest in a mineral production facility without any attendant right over the raw material/mineral, which forms the basis of such business enterprises," said Rajiv Luthra, Founder and managing partner of Luthra & Luthra Law Associates.

Earlier mines moved along with the transfer of ownership. For example, the assets and the mines that Lafarge is selling was 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.

“The Ministry of Mines and the CCI should recognise the practical impact of the transfer of such an asset. The 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 the buyer purchase the plant without the assurance of the rights from the mine” asks Sandip Bhagat, founding partner of law firm S&R Associates.

“No buyer will acquire a cement or a steel plant without the limestone or iron ore mines that comes with it. That’s what you are paying the top dollars for. Without it, no M&A will take place across the board,” adds a CEO of a global cement company aware of the issue. “It’s a lot like telecom rules where the government said spectrum can be transferred with a fee linked to the last auction price. That killed all potential transactions.”

Even in Lafarge, Birla Corp’s offer is conditional on mining lease transfers. “It is difficult to take such a risk in India without a clear directive from the government. What is the guarantee that in an auction I will get the mine? As things stand today, our legal understanding is that Lafarge's limestone mines cannot be transferred and without that there is no value in the plants," a source directly involved in the deal said.


THE WAY OUT

An ordinance or an amendment in the law clarifying that the new rules only impact mines won through auctions will clear the air, feel most. But with such polarised legal viewpoints, some feel the matter will inevitable get dragged to court, “The government is conscious that this is a massive roadblock. So let the Supreme Court decide what the intent of the legislation was when they passed it. We saw that happen before during privatisation of PSUs,” said a Mumbai based investment banker.

Alternatively some feel, companies that are keen to transfer the mining leases can request the state governments to conduct the auction and the transferee or the acquirer should have a right of first refusal to match the highest bid, much like a Swiss challenge, and continue with the lease.

This they say is allowed under the current MMDRA on ROFR for captive mines. This could be a win-win solution for all as the government gets true price discovery for the natural resource; the buyer of a plant is not left high and dry without a mine and the seller gets to complete the deal though at a price potentially lower after getting adjusted for the higher price for the auctioned mine.

“It’s not as if the acquirer can’t get those mining leases, but they will have to buy them through an auction. So if they were paying Rs 100 crore to the seller, they would simply deduct the auction price of the mines at the time of payment,” a government said, adding that the interplay of commercial terms will have to play out over time in deals like Lafarge-Birla, but they won’t be undone just because mines aren’t transferred.