Nothing for tribals in Mining Bill

A 26-per-cent profit share, without rights to shareholding or a say in the management, means precious little, as profits can be understated.

A hefty 26-per cent share of mining profits would perhaps lift drooping tribal sentiments and

lull the apprehensions of those championing their cause. But soon it would be apparent to all concerned that the offer of a huge slice of the profit pie, without an offer of shareholding and a say in the management is, at best, an offer of a giant lollipop and at worst a payoff that was never to be.

A foreign collaborator with 26 per cent equity stake gets a 26 per cent share of the dividend pie and a disproportionate clout in the boardroom ?€" a veto power at the board meetings, emanating out of the shareholders' agreement with the Indian promoter, and a veto power in the general meetings given the fact that Company Law requires a three-fourths majority for crucial decisions, enabling the 26-per-cent shareholder to thumb his nose at the majority.

But to the tribals inhabiting the coal belts, there would be no shares offered in lieu of the havoc wreaked on their habitat and no berths offered on the board of directors. The proposed mining Bill, in fact, would rank as the most cloyingly sentimental piece of legislation ever, with its touching concern for the poor tribals living in the coal belts not being matched by measures to rein in corporate cupidity and rapaciousness.

A 26-per-cent share of profits logically must emanate out of, and flow from, a matching 26-per-cent shareholding, unless such share of profits is, in fact, a lease rental expressed as a share of profit by an ambitious lessor who is confident that accepting a fixed lease rental amount would be a mug's game, given the nature of the business he has leased out lock, stock and barrel. Leave alone veto power, the poor tribals' voice would simply not be heard in the boardrooms as well as in the shareholders' meetings.

Not that they are articulate enough to make an impression in such rarefied environs, but the trustees of the proposed mining fund into which their share of profits is supposed to pour in can be counted upon to safeguard their interests if they were to represent the tribal shareholders in the board meetings as well as in the general body meetings.

Royalty vs. profit share

Share of profits can prove to be a mirage unless one is at the centre of action, calling the shots and shaping the course of business. Thus, it is appropriate for a CEO who would strive to show greater profits by hook or crook, often sacrificing long term interests. But when a mind-boggling share of 26 per cent is mandated to be given gratis so to speak, coal mining companies can be counted upon to make an all-out effort to understate the profits and their CEOs may well move away from commission-based remuneration to a fixed one.

The manoeuvres could range from under-invoicing of sales with the ensuing credit transferred into secret accounts abroad, to the manipulation of accounts providing for all expenses on accrual basis. The poor tribals in the event might be fobbed off with a pittance; this perhaps can be foiled if they are in the managerial loop. Experience shows that royalty is steadier and less amenable to manipulation than the more alluring profit share.

Purveyors of technology insist upon royalty, either as a percentage of sale or a flat amount per unit produced. Under-invoicing can truncate percentage-based royalties and hence unit-based royalties may be more appropriate in the context of the tribals.

One wonders why coal has been singled out for profit-sharing, even as the government has called for higher royalties for minerals other than coal for the purposes of tribal compensation.

Mining bureaucracy

The new mining Bill contemplates creation of district-level mining funds in mineral belts, which would most certainly spawn a self-perpetuating and ever-growing mining bureaucracy. This brings back to mind the late Rajiv Gandhi's famous observation that only 15 paise in a rupee reaches the ultimate beneficiaries of public welfare schemes.

It is not clear from the contours of the scheme whether such a bureaucracy would be funded out of profit shares pouring into mining fund or by the Exchequer. Either way, the bureaucracy is likely to deplete public coffers in a big way, unless it kept under a leash.

The mining corpus, in the nature of low hanging fruit, could become yet another instance of relentless abuse of public money by politicians in cahoots with bureaucrats.

Roads and other infrastructure to improve tribal lifestyle imply a manifold increase in chances for these worthies to improve their own lifestyles. It might, therefore, not be such a bad idea to mandate direct cash transfers into the biometric bank accounts of the tribal people of at least 25 per cent of the mining companies' transfers into the fund. It is another matter that sceptics would bristle at the suggestion because cash transfers, too, are admittedly beset with problems ?€" the money may be blown away in vices such as gambling or drinking, or in social spends like dowry to keep up with the Joneses.

(The author is a Delhi-based chartered accountant.)

(This article was published on October 9, 2011)

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