FDI in coal mining: A viable option?

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Recently, at a media briefing, Commerce and Railways Minister Piyush Goyal made an announcement that is bound to have big implications for the mining and other related industries. He was quoted as saying, “There is a little slowdown of (Foreign Direct Investment) FDI worldwide so we have taken some significant decisions; 100% FDI for coal mining and all related processing activities will be allowed under the automatic route”.

This decision is a step towards accomplishing the Cabinet’s dream plan of achieving 300 million tonnes of steel by the year 2030-31, which envisages Rs. 10 lakh crores’ worth of investments as provided in the National Steel Policy of 2017.

Until now, Coal India Limited (CIL) had the sole authority to mine coal and sell it in the country. The private and public companies, including CIL with captive mines were allowed to sell 25 percent of coal in the open market. But the deregulation of this sector would open the doors for the private companies to mine and sell coal. 

After this bold step, 100 percent FDI is now allowed for coal and lignite mining for captive consumption by power projects as well as iron and steel and cement units under the automatic route. FDI is also permitted for setting up processing plants like washeries, subject to the condition that the company shall not do coal mining or sell the washed or sized coal in the open market.

This decision of the government has been hailed as a ‘positive’ step towards India’s ‘300 million tonnes’ target as the introduction of foreign players would help boost economic growth, reduce fuel shortages and help get the latest technologies by attracting fresh investment.

What is FDI?

A Foreign Direct Investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.  FDI usually involves participation in management, joint-venture, transfer of technology and expertise in the operations of the other firm.

Foreign Direct Investor may acquire the voting power of an enterprise in an economy by incorporating a wholly-owned subsidiary or company anywhere, by acquiring shares in an associated enterprise, through merger or an acquisition of an unrelated enterprise or by participating in an equity joint venture with another investor or enterprise.

An increase in FDI is associated with improved economic growth due to the influx of capital and increased tax revenue for the host country.  FDI also brings with it a greater competition which can lead to productivity gains and greater efficiencies in the host country. It also leads to the introduction of the latest technologies to the host country.

The Narendra Modi Government which came into power in 2014 has emphasized a great deal on FDI by liberalizing norms and introducing 100 percent FDI in various sectors of the country. In 2015, India emerged as a top FDI destination surpassing China and the US.

Similar laws in India

In India, foreign direct investment policy is regulated under the Foreign Exchange Management Act, 2000 governed by the Reserve Bank of India (RBI).

India gets FDI through different routes. First, there is the automatic route where the companies do not require prior approval of the RBI or the Government of India; the approval from the concerned Ministries/Departments is the sole requirement.

Second, there exists the government route where the prior approval of the RBI or the Government of India is required. The approval process is administered by the Department of Industrial Policy and Promotion (DIPP) through a single-window called the Foreign Investment Facilitation Portal (FIFB).

Proposals from NRIs and Export Oriented Units, applications relating to issues of equity for import of capital goods/equipment, pre-operative/pre-incorporation expenses, etc. are also handled by DIPP. Every non-resident entity is allowed to invest in India either under the Automatic route or Government approval route, except in prohibited sectors.

In addition to the Foreign Exchange Management Act, 2000, there are some sectors where the specific laws are to be amended or complied with, for the function of FDI. The recent introduction of 100 percent FDI in coal mining is subject to the provisions of Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957 as amended from time to time.

The Coal Mines (Special Provisions) Act, 2015 provides for opening up commercial coal mining to private and public entities. The government had laid out guidelines for commercial coal mining but is yet to auction coal blocks for the purpose.

How will FDI affect mining in India?

The introduction of 100 percent FDI has been appreciated as well as criticized by the companies and others in general. The Commerce and Railways Minister, Piyush Goyal, made it clear in his statement that 100 percent FDI has been introduced because there is a slump in FDI worldwide but there was no doubt that this step would boost India’s slowing down economy.

“The historic decision would boost the ease of doing business and increase the growth avenues. Coal India would be strengthened and the government was aiming at achieving production of one billion tonnes by 2023-24,” said Parliamentary Affairs and Coal minister, Prahlad Joshi.

 As per Coal India’s director-finance Sanjiv Soni, FDI would lead to an increase in competition which would prompt the introduction of additional supplies to the market and prices would stabilize once the foreign players start producing in India.

Some believe that the Coal India Limited had proven itself incapable of meeting the coal demand of the country and it is about time that private companies stepped up with their huge resources and not only increase the supplies, but also bring improvement in the process of mining.

However, some institutions believe that global investors are now moving towards renewable energy. According to a study by the Delhi- based Centre for Financial Accountability, the global sector is fleeing from thermal coal and the time is not congenial to attract foreign investment.

The study analyzed that the private banks have provided 75 percent of the finance to the renewable energy projects whereas the loans for coal-fired generation projects was made available by the government-owned bodies in 2018 – indicating the disconnect between worldwide trend and government policies.

Conclusion

In a nutshell, with the onset of 100 percent FDI in coal mining in India, it is evident that the economic growth of India would get a boost. The basic objective of the FDI which is to improve efficiencies in the host country would be sufficiently fulfilled. .The FDI in coal mining in India is also expected to be able to utilize the resources available in India to their maximum potential where Coal India Limited was dangerously lacking. Thus, the FDI has been welcomed by the various coal and other interested companies as a step towards the tremendous growth of the sector.

However, the question still remains whether the FDI would be a step towards the further downfall of the already sulking Indian economy. Some fear that the FDI would increase the local competition which is just what needs to be avoided right now.

Moreover, at a time when trends are moving towards more environmentally friendly resources, the main question is whether such FDIs to the thermal coal sector would be beneficial or not. All in all, the picture might seem glittery but perhaps it is not gold.

Nonetheless, the majority of companies have stated it to be a positive and a welcome step towards India’s economic growth and it is hoped that this would be a step ahead in achieving the dream goal of ‘300 million tonnes’ by 2030-31.

Author: Prachi Gupta from University Institute Of Legal Studies, Panjab University, Chandigarh.

Editor: Ismat Hena from Faculty of Law, Jamia Millia Islamia.

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