KOLKATA (miningweekly.com) - The Indian government will amend the Mines, Minerals Development and Regulation Act (MMDRA), making mining licences (MLs) granted outside auctions freely transferable and enabling banks to liquidate such MLs in the event of defaults by borrowers.

The purported objective in bringing in amendments in the forthcoming session of Parliament was to facilitate consolidation of mergers and acquisitions (M&As) in the mining and mineral industries, as existing provisions in the MMDRA did not permit transfer of MLs granted prior to last year, when auction was not mandatory for grant of such licences.

However, the fine-print of the amendment was significant to the extent that this would provide the legal framework of not only making MLs freely transferable between entities proposing M&As but also giving banks the option to liquidate any mortgaged licence by borrowing miners.

This was considered an important step in protecting commercial banks with large exposures to mining and mineral companies, particularly in the current climate where banks were facing a rise in stressed debt and increasing nonperforming assets on the books of lenders.

Officials in the Ministry of Steel and Mines, which was spearheading the amendment, insisted that transferability of MLs would enable consolidation in the industry and unlock the logjam faced by several M&A proposals wherein the acquirer company was not able to secure possession of raw material assets of the target company, as MLs were not transferable, along with other assets of the said target company.

The amended legislation would enable closure of two of the biggest deals stuck over non-transferability of MLs, including Birla Corp’s acquisition of two cement units from LafargeHolcim and Ultrtech Cements’ acquisition of two cement units from Jaypee Group.

Both the acquiring companies had been unable to secure raw material sources in the form of limestone mines of the target companies.

However, the officials conceded that one of the corollary benefits would be the banks, which would now have the option of selling off  MLs mortgaged with it in the case of defaults on debt repayment.

The option was important against the backdrop of a directive from Reserve Bank of India to commercial banks to clean up their books and nonperforming assets by March 31, 2017.

According to reports of several equity research firms, total stressed assets of Indian commercial banks were estimated at 11% of total debt outstanding, or around $62-billion. Of this the infrastructure and steel sector accounted for 40% of the stressed assets and steel companies accounted for 10% of bad debts.