rediff.com

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News 
Rediff.com  » Business » 'Metal firms took environmental approvals lightly'

'Metal firms took environmental approvals lightly'

December 24, 2010 10:54 IST
Rakesh AroraWith no major greenfield capacities being added in India owing to land acquisition problems, companies are now grappling with the tougher environmental laws.

In conversation with Shubhashish and Arijit Barman, Rakesh Arora, managing director and head of research, Macquarie Capital Securities (India) Pvt Ltd and among the most authoritative metal analysts in India, says companies should start taking environmental laws more seriously.

Excerpts:

Let's start upfront with the news trigger. After the JSW-Ispat deal, do you think we will see a lot more consolidation in the Indian metals space?

Consolidation will increase because larger players will put up larger capacities.

But I don't see any major consolidation through the mergers and acquisition route since large companies will not be interested in smaller companies unless the latter come with raw material integration.

So that is the only lucrative part for anyone to acquire a smaller company.

I don't think mergers and acquisitions will pick up. Ispat was a one-off case since the company was going into bankruptcy and lenders were under duress to get this deal done, otherwise the company would have become a non-performing entity on January 1.

But small seems to be beautiful. Even ArcelorMittal is now planning to build smaller steel plants in India rather than exploring big scalable greenfield projects. Do you think that is the way forward for these companies in India?

That way, you require smaller land pieces and you attract less attention. That is what they are trying to do. But the issues are similar across the industry.

If Tata Steel, which has been here for over 100 years, can't go ahead with its Kalinganagar project, how can you expect a newcomer to do so?

Even Indian companies are finding it difficult, as the deal between JSW Steel and Ispat Industries shows -- the main reason is that they think it is difficult to put up greenfield capacities.

I would say that putting up greenfield capacities in India is getting more and more difficult. India is a supply-deficit economy and will become a larger supply-deficit economy going forward.

It seems the metals sector (steel and mines) has suddenly become the bad boy of India Inc. Greenfield investments have simply halted.

India is going through a transitional phase.

Till now, environment approvals weren't taken seriously, and most companies took it for granted that once they got the approval they could expand capacities without having to take further approvals.

Now Jairam Ramesh is much more keen and wants to stringently apply those rules and regulations that have been around for a while. So the industry has to regularise its existing operations under the environmental laws.

There is a bit of a hiccup, but once people get into the mould of following rules and regulations that have been laid down till the last digit, things will work out. What is happening is that in the interim, things are slowing down.

It is not that India has the strictest laws. Most developed nations have strict laws too and it takes time and they build these into their systems. But we thought that India could get things done.

It's a transitional phase, otherwise I think it's on track.

So do you think these metals companies took it lightly?

Exactly. So the whole mindset has to change. Today, metal prices are so high that it makes sense for these companies to get these issues cleared as fast as possible and that is what they are trying to do.

I think there would be fewer violations of environmental laws, going forward.

That's just one part of the issue. For companies like ArcelorMittal and Posco, it's been over five years since they entered India and their plans haven't moved an inch.

Other than environment, the big issue is land acquisition. Our land acquisition laws are very archaic and a new land acquisition law is awaiting Parliament's approval.

The government has taken too much time to clear that. In the meantime, given all the scams, the state governments, which were earlier helping companies to acquire land, have also pulled back. Some of our newly-formed states like Jharkhand and Chhattisgarh are rich in mineral resources.

These states don't even have resettlement and rehabilitation policies. Also, they are evolving.

Till the government comes out with improved legislation on this issue, it would be difficult for companies to perform. It is not only the mining sector, all investments are slipping into a slow phase and I won't be surprised if 2011 is the year of a slowdown in investments.

It could become a bottleneck for India to sustain an 8 per cent GDP.

Do you think India's credibility in the eyes of international investors is falling?

It's too early to say that because India is an attractive destination since demand is so strong.

But foreign direct investment this year is down 25 to 30 per cent year on year. There have been huge FII investments but FDI is actually going down. So that is definitely an area of concern.

You talk to a lot of global investors who are interested in India. How do they look at this issue?

Obviously, uncertainty is never welcome. All these uncertainties have caused de-ratings for a lot of Indian companies.

Take the example of the Vedanta group. After having committed an investment of $4 billion to $5 billion, the environmental clearance was issued and even the Supreme Court had ratified it.

If you take it back, it definitely hurts investor sentiment and most of the cases that we have seen in recent times have been post facto.

Environmental clearances have been withdrawn after they were awarded. So I would say investor confidence has shaken a bit and it will take a while for it to be restored.

Now comes yet another whammy: the 26 per cent profit-sharing clause. How do you look at this?

Once the 26 per cent tax comes in, the Indian metals sector will be effectively taxed 55 to 60 per cent.

There is a 30 per cent corporate tax, royalties are close to 10 per cent of the selling price and if you add this 26 per cent tax, Indian mining companies would be among the highest tax brackets across all countries.

So, in India when the mining sector is just starting to pick up and the need of the hour is to get investments, I think this is a very retrogressive step. Moreover, all this will lead to inflation.

The biggest commodity that we mine is coal, and Coal India does it.

So if coal prices go up, power prices will go up and if that happens the country will see inflationary pressures. Without doing enough to increase supply, this tax will be detrimental to India's growth.

Do you think this profit-sharing clause is the death knell for the mining industry in India?

We haven't started it yet so there is no question of an end -- yet. Obviously, the government is getting carried away by the huge boom in commodity prices.

But it should remember that this is a cyclical business and there could be good years and bad for a long time.

The profits might look outrageous currently, but if you look at the full cycle, it may not be the case.

Also, you have to be competitive compared to other countries. So will the government put in countervailing duties on imports? Otherwise, this industry will go down under if there is a recession.

The government has to take a balanced view. You can't just keep taxing the industry and not allow it to grow.

Otherwise imports will become cheaper and crowd out domestic industry.

Image: Rakesh Arora

Source: