Lokayukt report slams mining PSU

In the process, the report throws light on some of the mechanisms through which gains from mining are lost to the national exchequer and accrue to private players

The Karnataka Lokayukta’s report on illegal mining in the state concludes that state government-owned Mysore Minerals (MML) caused huge losses to the state by entering into one-sided contracts with private players.

In the process, the report throws light on some of the mechanisms through which gains from mining are lost to the national exchequer and accrue to private players.

Take Karnataka. It mines about 35 million tonnes of iron ore every year worth about Rs 6,500 crore, but earns a mere Rs 165 crore as royalties. Take MML’s deals with two Kalyani Group companies — Kalyani Steels and Kalyani Forge. On January 17, 2002, Mysore Minerals subcontracted mineral extraction in about 80 hectares of land in Subbarayanahalli Mines to Kalyani Steels and entered into a separate marketing agreement for the mined ore with Kalyani Ferrous. It agreed to pay Kalyani Steels Rs 188 per tonne for calibrated iron ore, Rs 100 per tonne for banded haematite quartzite, and Rs 25 per tonne for iron ore fines. Next, after paying royalty, welfare cess, net present value, charges connected with compensatory afforestation, fencing of safety zone, etc it sold the iron ore to Kalyani Ferrous for Rs 250 per tonne.

The Lokayukta’s report raises questions about this deal. Iron fines and BHQ, it says, are natural byproducts when calibrated iron ore is produced. No additional process or expenditure is needed to produce them. For that reason, it concludes charging a separate price for BHQ and iron ore fines are an undue favour shown to Kalyani at the cost of MML. It also states that prices paid to Kalyani Steels were higher than what those paid to other companies by MML.

As for the marketing arrangement, the Lokayukta found that the Rs 250 rate was “firm for a period of two years after (a) moratorium period of one year”. There was no provision to revise prices for three years, despite iron ore prices rising rapidly from 2003 onwards. This moratorium period, says the report, is not found in any agreement except that with Kalyanis. When the revision eventually became due on the April 1, 2005, MML revised its price to Rs 902 per tonne on the basis of prevailing MMTC prices (Rs 1,070). But, after opposition from Kalyani, dropped the price down to Rs 314 and agreed to stick to that price for the next two years. Over the next year, the PSU lost Rs 22.3 crore as a result. Needless to say, it had already run up a considerable loss due to non-revision of price between 2002 and 2005.

Indeed, Kalyani got the iron ore virtually free, being paid for extracting the ore and paying only a small margin over that amount for the ore, with the PSU meeting all royalty and other payments from the wafer-thin margin that accrued to it.

Or take the agreement between MML and Jindal Vijayanagara Steels. In an MoU signed on the January 17, 1997 between the latter and the government of Karnataka, it was decided that a JV company called Vijayanagar Minerals Private (VMPL) would be set up to supply ore to the Jindal steel plant. As per the MoU, MML has a 30 per cent equity share in VMPL.

And, VMPL’s P&L indicates it earned a total net profit of Rs 8 crore between 2003 and 2007. However, there is no indication that MML received its share of these profits.

Perversely, it took on some of VMPL’s expenses. Under the MoU, VMPL had to pay royalty, taxes, levies, compensatory afforestation charges, etc. Again, the Lokayukta report found that while MML was not liable to pay these amounts, it nonetheless had.
Or, take MML’s agreement between 2000 and 2003 with Narayan Mines. The latter had to excavate a specified quantity of ore from old dumps and deliver it to MML every month. If it didn’t, it would have to pay MML Rs 11.74 lakh for that month. The company failed to excavate and deliver that specified quantity every month. And yet, till December 2008, MML was yet to collect this amount — Rs 481,34,000 in all.

In another set of agreements, the company authorised six companies — Hajee Ameer Minerals, Sree Om Minerals, Sunny Agencies, Dhrevdesh, Metasteel and Linga Reddy — to extract, process and purchase iron ore. In these agreements, all signed in the second half of 2005, the purchase price was fixed as Rs 200 per tonne. Market price, at that time, says the report, was not less than four times that amount.

There are two points to be made here. One, there is no apparent illegality here. As Rajendra Sharma, president (legal), Jindal Group, says: his company is “abiding by the terms of its contract with MML”.

It can be just as easily argued that the Kalyani Group and the others are also sticking to the terms of their contract. At the most, MML’s management can be charged with financial mismanagement and showing undue favour to some companies resulting in a loss to the state. Indeed, the Lokayukta has charged six former managing directors of the company for causing a total loss around Rs 549 crore to the state government.

Sharma argues that “the agreement between the Jindals and MML was based on prices and rates prevalent and agreed upon at that time. It will not be correct to question that agreement on the basis of today’s prices.”

He further adds that Thimmappanagudi, the mines given by MML to VML under the MoU, were not given as a commercial venture but as a captive mine — to fulfill a commitment made by the Karnataka government back in 1994. But this raises questions about the age-old practice of allotting captive mines to steel plants. For, while the company has benefited, it is not clear if MML or Karnataka have.

The setting of ore prices seems to be a systemic flaw. In 1987, MML gave its chairman and its managing director the joint power to set price for ore from “time to time”. As the report says, if the chairman and the managing director didn’t exercise that power whenever there was an increase in price, the commodity would be sold at the old price resulting in loss to the PSU. This flaw was further exacerbated between 2000 and 2001, and again towards the end of 2005, when the roles of the chairman and the managing director were conflated.

This, as the report says, resulted in a great scope for arbitrary exercise of power by a single person. According to the Lokayukta, MML should have either adopted the price as laid down by MMTC, or disposed of its minerals, etc, through tenders or auctions.

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