Creation of encumbrances on non-auction mineral concessions

An important requirement of lenders to a mine based industry is to have valid encumbrances over the assets of the borrower. This note briefly discusses concerns around creation of encumbrances over certain mineral concessions.

The Mines and Minerals (Development and Regulation) Act, 1957 (“MMDR Act”) is the principal enactment governing major minerals in India. The 2015 amendment[1] to the MMDR Act brought about certain major changes to the statutory policy, including: (i) introduction of an auction regime for grant of certain mineral concessions; and (ii) an embargo being placed on transfer of mineral concessions granted otherwise than through auction[2].

Thereafter, the Minerals (Other than Atomic and Hydrocarbons Energy Minerals) Concession Rules, 2016 (“MCR 2016”) were notified by the Central Government on March 4, 2016. One of the key provisions of the MCR 2016 deals with creation of encumbrances and enforcement of security interest in relation to ‘transferable concessions’. The term ‘transferable concessions’ has not been defined under the MCR 2016 or the MMDR Act. Notably, the only concessions which were specifically permitted to be transferred under the MMDR Act at the time of notification of MCR 2016 were the concessions which were granted through auction route.

Provisions in the MCR 2016 do suggest that encumbrances can be created only over those mineral concessions which are granted by way of auction. As mentioned above, the MCR 2016 also explicitly states that no encumbrance will be created over a mineral concession other than a transferable concession. In view of this, the following emerges: (i) transfer of mineral concessions granted otherwise than through auction is not permitted; (ii) encumbrances can be created over mineral concessions granted by way of auction; and (iii) encumbrances cannot be created over those mineral concessions which are not transferable concessions. However, this analysis requires a relook in view of amendments to the MMDR Act on May 6, 2016 (“2016 Amendment”), i.e. after the MCR 2016 was notified.

By way of the 2016 Amendment, mining leases granted otherwise than through auction and for captive purposes (“NAC Leases”) were permitted to be transferred with the prior consent of the government, subject to certain conditions[3]. Accordingly, the embargo placed on transfer of mineral concessions granted otherwise than through auction was partially lifted; however, the ambiguity which this creates is that while an NAC Lease is capable of being transferred, it appears that creation of an encumbrance over an NAC Lease may not be permissible given that: (i) MCR 2016 does not specifically provide for creation of encumbrance over an NAC Lease; and (ii) insofar as transfer of an NAC Lease is concerned, such transfer is permitted pursuant to the provisions of the MMDR Act and the rules framed thereunder, which contains provisions in relation to outright transfer, but not creation of encumbrance.

Having regard to the foregoing, it appears that the applicable regulatory regime for mining laws in India does not contain an express restriction as regards creation of encumbrance over an NAC Lese; however, it may not be a very correct view that creation of encumbrance over an NAC Lease is permitted. A clarification from the government on this would be helpful in allaying the concerns and provide adequate comfort to the lenders on the validity of an encumbrance over the mineral concessions of the borrower being used for captive purposes.

Author:
Qais Jamal, Senior Associate
Rishikesh Desai, Senior Associate

Footnotes:
[1] (effective January 12, 2015)
[2] Section 12-A of the MMDR Act
[3] proviso to sub-section (6) of Section 12-A of the MMDR Act

Date: August 30, 2019