A regulatory hurdle over ownership of mines might queer the pitch for companies competing for distressed steel assets now under the National Company Law Tribunal.
The steel and mining industry’s marquee names like JSW Steel, Tata Steel, ArcelorMittal, Vedanta Resources and POSCO have expressed interest in their distressed peers on the block – Bhushan Steel, Bhushan Steel and Power, Monnet Ispat and Electrosteel Steels. Each of these companies have thousands of crores in unpaid loans, forcing banks to refer them to the NCLT.
Apart from the steel-making facilities of these companies, the suitors are equally interested in the mines owned by the two Bhushan companies, Monnet Ispat and Electrosteel. While the Bhushan companies and Monnet Ispat have access to rich iron ore reserves, Electrosteel bagged a coking coal mine in Jharkhand in auction held last year.
But what if the mines are not included? “If mines are not included, then the acquisition targets might not look as promising as they are now,” admitted a senior official from one of the suitor-companies. It doesn’t help that prices of iron ore – recently upped by Rs 500 per tonne by NMDC – and coal have been rising.
The issue is this. Till 2015, if a company with mines was bought by another company – like Sesa Goa was acquired by Vedanta Resources in 2007 – then the acquiring firm had to separately get an approval from the state government for the raw material assets. After acquiring Sesa Goa, Vedanta did get green signal from the Goa government to take over the mines.
But things changed in 2015, following the huge controversy regarding mine allotment and allegations of corruption. The Mines and Minerals (Development & Regulation) Act of 1957 was amended. From now on, mines wouldn’t be allotted but have to be auctioned. This, the government argued, will help get the maximum possible value for its resources.
The amendment is now haunting the likes of JSW Steel and Tata Steel, who have expressed interest for the distressed steel companies. For instance, if Tata Steel manages to bag Electrosteel Steels, then it might have to now not just seek approval of the Jharkhand Government for the mines owned by the Kolkata-based company; but also participate in fresh auction to get the mines. This would mean additional expense, and given the importance of captive mines in boosting margins, a Tata Steel or JSW Steel will be loath to lose the raw material resources to competitors.
“Our legal experts agree that only auctioned mines can be transferred to a new owner after an acquisition, and not an allotted mine,” said the official cited above. “Even otherwise, the law is open to several interpretations, especially when the documents don’t mention that the mines can be transferred,” said another official from the industry.
Jyoti Singh, Partner at Phoenix Legal, agrees on this point. “There is a cloud of uncertainty. A case could be made that the Insolvency and Bankruptcy Code could override laws that are contradictory to it, or are not supportive. But we need to see how the authorities respond to this,” said Singh.
While Bhushan Steel and Bhushan Steel and Power have considerable iron ore reserves in Odisha, Monnet Ispat has a coking coal mine in Jharkhand.(Reference to Jyoti Singh being part of a committee has been removed after a clarification from her)