By: Munawwar Naseem, Partner-Dua Associates, Delhi
Febin Mathew Varghese, Principal Associate- Dua Associates, Delhi

1. Regulatory regime along with geo-politics play a significant role in the mining sector. Political upheavals and consequent regulatory changes are major factors influencing investment decisions in the mining sector in any given jurisdiction. An ineffective regulatory framework would corrode the confidence of an investor in the mining and exploration sector which is already a high-risk investment. A regulatory framework, defining the contours of a business ecosystem, should be consistent with changing times and predictable to give comfort to a sector which is susceptible to market volatility. Frequent changes to regulatory framework are unappealing unless they are in response to market forces. Mining involves a long-term strategy and heavy capital investment over a period of time and therefore foremostly requires players to be certain of the regulatory framework. The mining sector in India has seen significant changes over the past few decades in the regulatory framework. Some of these changes – the investors never signed up for - have been unpredictable and sweeping keeping everyone in the industry on its toes.

Evolution of Regulatory Framework governing mining in India

2. Since its independence in 1947, India adopted an economic policy essentially socialist in nature giving the State and its enterprises the primary responsibility to drive industrial growth. In 1948 the Indian Bureau of Mines (IBM) was established to monitor and supervise mining activity in India. In 1956, Parliament adopted the Industrial Policy Resolution making attaining a socialist pattern of society as an objective. It felt that the need for a planned and rapid development required industries of basic and strategic importance or of public utility services to be in the public sector. Industries were divided into three categories. Development of Industries in the first category was exclusively with the State. This included iron and steel, coal and lignite, mining of iron ore manganese, chromium, gold, diamond; mining and processing of copper, lead, zinc, tin, molybdenum etc. Private sector already operating industries in the first category were allowed to continue. Development of Industries in the second category were also to be undertaken by the State with the private sector given an opportunity to develop the same. Development of Industries in the third category was expected to be undertaken by the private sector. Overall, the private sector was given a limited role and kept under a tight leash by the government.

3. Following the Industrial Policy adopted in 1956 Parliament passed the Mines and Minerals (Regulation and Development) Act, 1957 (MMRD Act) regulating mining in India. MMRD Act replaced the 1948 Act and classified minerals into major minerals and minor minerals where major minerals included iron ore, coal, bauxite etc. Minor minerals included building stones, gravel, ordinary clay, ordinary sand and other notified minerals. Though States were the owners of the minerals, prior Central Government permission was required for grant of prospecting and mining lease in case of major minerals. There was no place for reconnaissance as a mineral tenement.

4. In the 1950s government stepped up its efforts for coal exploration followed by exploration of iron ore deposits and later of base metal belts including copper, zinc etc. In 1972 the Mineral Exploration Corporation of India Ltd. (MECL) was established by the Central Government for carrying mineral exploration and to ‘bridge the gap between initial discovery of a prospect and its eventual exploitation’. Discovery of mineral deposits by Geological Survey of India, MECL and other state entities led to incorporation of a spate of Public Sector Undertakings (PSU) to exploit mineral deposits. These PSUs included Coal India Limited, National Mineral Development Corporation, Hindustan Zinc Limited, Hindustan Copper Limited, National Aluminium Corporation Limited etc.

5. In 1972 the MMRD Act was amended to increase government control over mining by introducing provisions for Central Government, Geological Survey of India (GSI) etc. to undertake exploration. The next wave of amendments came in 1986 when the MMRD Act was amended giving power to the Central Government to reserve areas for exploitation by PSUs. Minerals mentioned in the first schedule of the MMRD Act were also increased from 27 to 38 requiring prior Central Government approval for mining. The MMRD Act and the industry reflected the industrial policy adopted by the country in 1956. The State had a firm grip on the mining industry.

6. However, lack of state-of-the-art-technology coupled with an economic policy which was largely based on conservation led the Governments to sit over one of the largest mineral resources of the world. In 1991, sweeping reforms were introduced by the Central Government opening the Indian market to foreign capital and players. Foreign investments were invited with the hope that it would bring the added advantage of technology transfer, market expertise and possibility of promotion of exports.

7. For the first time in 1993 a comprehensive mining policy was announced. The National Mineral Policy, 1993 promoted foreign investment in exploration and mining, thirteen major minerals including iron ore, gold, diamond, nickel, lead were thrown open for mining by the private sector; induction of foreign players as joint venture partners was encouraged. Consequently, the MMRD Act and allied rules were amended to reflect these changes. In order to boost private investment in exploration concept of Large Area Prospecting Licence was introduced by increasing the area for grant of prospecting licence from 25 sq. km. to 5000 sq. km.

8. However, the mining industry did not see an upsurge in private and foreign participation. In 1999, pursuant to suggestions by a committee that India needs to give impetus to development rather than regulation the name of the legislation was changed from Mines and Minerals (Regulation and Development) Act to Mines and Minerals (Development and Regulation) Act (MMDR Act). The concept of Large Area Prospecting Licence was replaced by introducing reconnaissance stage distinct from prospecting; preferential rights to reconnaissance permit holders to obtain prospecting licence was also introduced.

9. In the first forty years after independence, the Central Government consolidated its control over the mining industry. After the wave of liberalization in 1991, the Central Government relaxed its grip on the mining industry and moved towards a regime encouraging private investment. In 2006, 100% Foreign Direct Investment was allowed for exploration and mining of diamonds and other precious stones.

10 However, despite the efforts undertaken, private investment and participation in the mining sector remained lukewarm. Pursuant to the Hoda Committee report, Government of India announced a new National Mineral Policy in 2008. The 2008 policy, amongst others, stressed on the need to have investment and technology to achieve large scale prospecting and optimal mining; make business environment conducive to private investment; procedure for grant of mineral concessions to be made transparent and seamless with guaranteed security of tenure; private sector to be made the main source of investment for future exploration and survey; relief and rehabilitation for persons affected by mining etc. The country continued to follow the first-in-time principle for first time applicants and selection criteria for multiple applicants for grant of mineral concessions. For grant of reconnaissance an open-sky policy was to be adopted with grant of non-exclusive reconnaissance and right to obtain the next stage of mineral concession on certain conditions. Importance was also laid on transfer of mineral concessions.

Illegal Mining

11. Around 2009-10 the Indian mining sector found itself in the middle of a storm. A bullish international iron ore market led to rampant illegal mining in the first decade of the 21^st century with windfall gains to the miners. Rampant illegal and unscientific mining caused extensive damage to the environment forcing the Supreme Court of India to step in. The Justice MB Shah Commission of Inquiry found widespread illegal mining of iron ore in States of Goa and Odisha. The State of Karnataka was already before the Supreme Court defending itself for taking no action to curb illegal mining in the State.

12. Unrelated though but equally important, on February 2, 2012 Supreme Court of India (Centre for Public Interest Litigation & Ors. vs. Union of India & Ors., Writ Petition No. 423 of 2010) cancelled allocation of 2G spectrum, a natural resource, by the Central Government. Supreme Court found that 2G spectrum allocated on a first come first serve basis were underpriced causing loss to the public exchequer and huge windfall gain to licensees who sold the spectrum to a third party at a much higher price. Supreme Court suggested allocation of cancelled spectrum by an alternate mode of allocation namely auction. This caused a lot of conundrum as there were several natural resources being allocated without following the auction method. The Central Government moved the Supreme Court for a clarification and pursuant to a Presidential reference (Natural Resources Allocation, In Re, Special Reference No. 1 of 2012), a five-judge bench of the Supreme Court of India held that allocation of natural resources by auction was not a constitutional mandate but only an alternate method for maximizing revenue. On August 25, 2014 Supreme Court of India (Manohar Lal Sharma vs. The Principal Secretary & Ors., Writ Petition (Cri.) No. 120 of 2012) cancelled coal blocks allocated since July, 1993 on the ground that the procedure followed by the Central Government was arbitrary and non-transparent and in violation of the MMDR Act. These events were enough for the new Central Government in 2014 to bring sweeping changes in the regulatory framework governing mineral resources.

Introduction of auction

13. In 2015 the MMDR Act was amended to introduce auction as the sole method for allocation of mineral resources doing away with the principle of first come first serve basis and preferential right for grant of next stage of mineral concession. The tenure of mining lease was increased to fifty years. New trusts were set up including the District Mineral Foundation (DMF) for the benefit of persons affected by mining and National Mineral Exploration Trust (NMET) for regional and detailed exploration. In addition to royalty, mining lease owners were to pay a maximum of 30% and 2% of royalty to DMF and NMET respectively.

14. The introduction of composite licence of prospecting licence-cum-mining lease saw the three-stage mineral concession being replaced with reconnaissance permit, prospecting licence-cum-mining lease and mining lease. Areas with evidence to show adequate mineral contents were to be auctioned for grant of mining lease whereas areas with inadequate mineral contents were to be auctioned for prospecting licence-cum-mining lease. Reconnaissance was to be granted non-exclusively and Reconnaissance permit holders had no right to claim prospecting licence or mining lease. While all pending mineral concession applications were disqualified a saving provision [section 10A (2)] was provided to protect the rights of existing mineral concession holders so that they can apply for the next stage of mineral concession under certain conditions.

New Policies

15. This was followed with the announcement of the National Mineral Exploration Policy in 2016. The exploration policy while giving much importance to the role of GSI and public expenditure on exploration provided that private sector would be encouraged in exploration. In order to increase exploration, the Central Government permitted several PSUs to conduct exploration.

16. In 2019, after directions from the Supreme Court of India, Government of India announced a new National Mineral Policy. The new policy like the previous policies talks about encouraging exploration by private sector, long term import export policy for minerals to help private sector in better planning and stability in business, effective utilization of district mineral fund for development of project affected persons and ensuring sustainable development of mining etc.

A goal directed approach

In order to have an efficient and effective regulatory framework it is important to identify objectives and work towards achieving the stated goals. However, we have had regulations contrary to what is mentioned in the policy document. This is highlighted by the fact that since 1993 successive policies have talked about increasing the role of the private sector in exploration. However, private investment in exploration is yet to soar. Private investment in exploration was encouraged in 1999 by introducing reconnaissance as a separate stage with right to obtain the next stage of mineral tenement. However, section 10C introduced in 2015 did away with that right to obtain the next stage of mineral concession. While rule 4 of the Mineral (Non- Exclusive Reconnaissance Permits) Rules, 2015 gives reconnaissance permit holders the option to hand over the data to the State, it does not give enough incentive for a private player to do reconnaissance as the next stage of mineral concession is to be granted through auction. So, there is not enough incentive or comfort for a professional exploration and mining entity to introduce the latest technology or best practices in India. Therefore, not surprisingly, India continues to lag in exploration budgets as compared to other countries like Canada, Australia, USA and China.

Level playing field

18. A good regulatory framework should create a level playing field for all players howsoever big or small. As mentioned, since 1991 there has been a move towards involvement of private players in the mining sector. Policy documents continue to talk about private players to be the main source of investment. However, creation of National Mineral Exploration Trust and collection of cess from mining lease holders (both public and private) for contribution towards the Trust indicates that government wants to take the lead in exploration. Provisions favorable to government undertakings undo the many steps taken since 1993 when a conscious decision was taken to relax government stronghold on the mining sector. Thus, a need for a level playing field for all players in exploration.

Predictable approach

19. Regulatory framework also needs to be predictable. The auction method of allocation of mineral concession was introduced in 2015 immediately after change in regime at the center in 2014. Replacement of grant of allocation based on first come first serve with the auction method was a swift and a sweeping change. While the auction method brought objectivity and transparency to the system of allocation it replaced a system which was not necessarily bad but was reproached because of non-transparency and venality of the officers manning the system. There is some fear that the auction system will result in rich corporations grabbing maximum number of mines leaving either very little or kicking out the smaller firms. Indian mining sector cannot afford to go the telecom way where there are very few players operating at present unless that is the plan.

A forward approach

Reports in the media indicate that the Central Government is mulling to put all mineral concessions saved in 2015 to auction by deleting section 10A (2) of the MMDR Act. Mineral concessions having rights to obtain the next stage of mineral concession were saved from the auction regime in 2015 giving due respect to the rights obtained by the concessionaires. However, any move to extinguish crystallized rights would be baneful and only increase litigation and contrary to the interest of the Sector and national interest. The sector has hardly moved much as such and therefore cannot afford to take a step forward and two steps backward.

A neutral approach

21. In order to ensure fair play to all players it is imperative to have a neutral referee. It is time for India to have an independent regulator for the mining sector. The present regulatory framework is structured heavily in favour of the State and its entities. An independent regulator would come with an added advantage of expertise and knowledge of the mining sector and the risks associated with it.

22. The coal sector in India has seen bold reforms recently. A sector which was nationalized in the 1970s has been made open to commercial mining. Restriction regarding end use of the mineral resource has also been done away with. These reforms are welcome as they align towards the objective of loosening government control on the coal sector and boost private participation.

23. Since the wave of liberalization in 1991, India has seen three national mineral policies with an average gap of nine years. In the interregnum India also had a national exploration policy announced in 2016. The gestation period from discovery of mineral to a producing mine is about 10-15 years. Recently the tenure of a mining lease has been increased to fifty years. The industry cannot afford to have a new policy every ten years without achieving the objectives of the previous policy. Frequent policy and legislative changes in the mining sector will not foster investor confidence. Though, some flexibility is to be granted to the State to amend the regulatory framework for good in response to changing business environment and technological advances.

24. Since 1993 India has taken brave steps to realize the true potential of the mining sector by shedding its conservative approach. The mining industry requires long term investment and therefore policies and legislative framework should reflect long term goals. Rule of law is a very important component to attract business in a jurisdiction. Rule of law provides stability and protects investments from the whims and fancies of the government. At a time, when mining in India is already highly “taxing”, rule of law can give confidence to investors that they are investing in a regime which is not only predictable but will also protect its investments. To attract more private players and investment the regulatory framework in the mining sector should offer stability, continuity and predictability.