Rs 5800 Crore Loss To TN Exchequer From Unpaid Royalties & Cost Of Illegally Mined Minerals
In the ongoing court battle between the beach sand miners of Tamil Nadu, the state government and various departments of the Government of India, a fresh calculation has come to light – that the miners owe the state of Tamil Nadu over Rs 5800 crore of royalties and cost of minerals that were mined illegally before and after 2013.
2013 is when the government of Tamil Nadu imposed a ban on beach sand mining in the state.
The Amicus Curiae appointed by the Madras High Court, senior lawyer V Suresh, submitted his third report on the case on 11 September 2019. This report, recently seen by The Lede, raises questions about the role played by various District Collectors, officials of the state mining department as well as officials of the Indian Bureau of Mines (Central government agency) in allowing the beach sand miners to get away with paying minimal royalty over many decades.
Rs 58,32,44,23,835 is the figure that has been calculated – this is the sum total of royalties that should have been paid by the miners to the state plus the cost of minerals that have been mined illegally both before and after the period of ban on mining i.e. 2013.
And this figure has been computed using export data from just one port - the Thoothukudi port!
So how did the royalty evasion take place?
According to the Amicus Curiae’s report, it was done through a series of clever moves and misinterpretation of rules over many decades.
This story is slightly complex, so do sit back and get comfortable for a longish read.
Calculating Royalty On Beach Sand Minerals
To understand how royalty was evaded over decades, it is important to know the government’s policy on royalties on beach sand minerals.
Beach sand minerals are found as a mixture on the coasts of southern Tamil Nadu. Until July 2016, these minerals were classified into atomic and non-atomic minerals.
Non-atomic minerals: Garnet, sillimanite
Atomic minerals: Ilmenite, rutile, leucoxene, zircon, monazite
Of these, monazite has always been prohibited from being mined by private players, since it can be processed to yield the nuclear fuel thorium. Only government agencies can process monazite due to national security concerns.
There has been a change in policy since 11 July 2016, wherein even garnet and sillimanite have been included as atomic minerals.
Now we head back to 1997.
Before 11 April 1997, the government had provided fixed rates for royalty.
It was after this date that the government changed to the ad valorem basis for calculation of royalty. What is ad valorem?
Ad valorem means a percentage of the selling price or sale price of the minerals. So if a mineral costs Rs 100 per metric tonne in the market and the royalty prescribed is 10%, the royalty to be paid to the government would be Rs 10.
Royalty calculations have undergone a number of amendments over the years but for our purposes, we look only at the royalties prescribed for beach sand minerals.
Upto 01 September 2014, the rate of royalty was 3% for garnet, 2% for ilmenite, rutile and zircon and 2.5% for sillimanite.
After 2014, the rate of royalty for garnet was increased to 4% while the others remained the same.
Who decides the royalty rates?
It is the Union Ministry of Mines, that periodically decides and updates royalty rates by amending the Second Schedule of the MMDR Act, 1957.
Determining Sale Price Of Beach Sand Minerals
Now that we have the royalty rate, how is the sale price determined?
The sale price of each mineral in the Second Schedule of the MMDR Act is published by the Indian Bureau of Mines, a central government agency under the Ministry of Mines.
Sale prices are published as part of the ‘Monthly Statistics of Mineral Production’ every month by the IBM.
This has been the practice since 10 February 2009.
Before this date, the sale price was determined by the owners of the firms were taken for calculation. For exports, the price mentioned in the FOB was considered for royalty calculation.
For garnet alone, the IBM sale prices were to be taken into account from 10 April 2003.
Royalty to be paid to government (in Rs) = Sale price (In Rs) X rate of royalty (in %)
Bending The Rules
Now that we know how royalty is calculated, we will get into how royalty was cleverly evaded.
The devil, as always, is in the detail.
Calculation of royalties is governed by the Mineral Concession Rules, 1960, which are amended from time to time.
For the purposes of this report, we look at Rule 64(B) and Rule 64(D).
(1) If mined raw material (called run-of-mine) is processed within the leased mining area, royalty is chargeable on processed mineral removed
(2) If mined raw material is taken to a processing plant outside of the leased area, royalty is chargeable on the raw material
This rule provides guidelines for computing the royalty on ad valorem basis for minerals sold in domestic market versus in the international market.
For domestic market: Royalty X sale price of the mineral
For export: Royalty X sale value as declared in Free On Board (FOB)
Take for example, the mining of iron ore. If a company has got permission to mine iron ore in 100 acres of land and has also built a processing plant within that area, royalty would be calculated on the finished product. The rate of royalty is prescribed in the Second Schedule.
But if the company’s processing plant is elsewhere, in another city perhaps, then the royalty is calculated on the iron ore that is taken out of the mining area. The Second Schedule provides for royalty rate to be fixed for iron ore in the form of lumps, fines or concentrates.
But as far as beach sand minerals is concerned, the Second Schedule does not provide for royalty rate for the raw sand that is initially mined. According to the detailed explanation in the Amicus Curiae’s report, this means that royalty rate would have to be fixed for the processed mineral i.e. garnet, ilmenite, rutile, sillimanite, leucoxene and zircon individually.
But the beach sand miners have managed to duck this rule. How?
Since beach sand minerals have individually been provided with royalty rates in the Second Schedule, Rule 64(D) should have been applied to calculate royalty due to the government.
However, the Royalty Settlement Proceedings show that a number of District Collectors of Tirunelveli and Thoothukudi have signed off on royalties under Rule 64(B)(2), paving the way for royalties being affixed to mined “raw sand” at a pittance of Rs 45 per metric tonne.
Compare this to the sale prices of garnet and other minerals which range from Rs 1500 to over Rs 10,000.
In fact, as found by the Amicus Curiae, all companies owned by S Vaikundarajan, namely VV Mineral, Transworld Garnet India and Industrial Minerals India benefited from the erroneous use of Rule 64(B)(2) while other companies were charged royalty under Rule 64(D).
“During the same years for which royalty has been calculated only on raw sand, each lessee company has exported substantial quantum of processed BSMs like Garnet, Ilmenite, Rutile, Leucoxene, Silimanite and Zircon. This entire quantum of BSMs exported has not been considered for computation of royalty. This omission is both motivated and illegal and has resulted in revenue loss for the State and pecuniary advantage for the company,” states the report.
This bending of rules took place in the Royalty Settlement Proceedings conducted by the District Collectors of Tirunelveli and Thoothukudi on 30 September 2012. The proceedings covered royalties for the years 2008-09 up until 2011-12.
Curiously Low Sale Price
However, long before the bending of the specific rules took place, the match had already been fixed.
Take a look at the table below.
It shows the sale price of garnet published between 2006 and 2016 as published by the Indian Bureau of Mines. The table compares the sale price of garnet in Odisha versus the price in Tamil Nadu.
There exists a vast difference in the sale price of garnet between the two states. The Amicus Curiae then compares the sale price of IREL, the Central government agency that mines and sells beach sand minerals. IREL’s sale prices too were much higher than that published by IBM, on par with Odisha’s prices.
Why? Because as mentioned earlier, royalties were affixed on “raw sand” at the rate of Rs 45 per metric tonne, instead of on the processed minerals.
It was only in 2013, post the ban on mining beach sand minerals that the sale prices corrected and came on par with Odisha’s and IREL’s prices. In fact, in a few months, the prices of garnet in Tamil Nadu even overtook Odisha’s rates.
In 2014, the IBM did write to the Director, Geology and Mining Department, Tamil Nadu, posing a query about why the sale prices of garnet were so low in the state. The bureaucrat did not send a reply. IBM did not follow up.
The report by the Amicus Curiae observes – “IBM by mechanically and uncritically accepting the sale value as disclosed by the mining companies which was said to be the ex-mine price of ROM production, and not exercising due diligence in assessing the actual sale value, especially in view of the declaration by the companies concerned of exporting almost 100% of the BSMs, have helped the three companies derive undue financial advantage and huge loss to the exchequer.
These actions of officials of both the IBM, as also the State Department of Geology and Mining constitute not only violations of the MMDR Act, 1957, but also penal offences as they have resulted in undue enrichment of the mining companies and loss to the state exchequer, for which the officials concerned should be held liable for appropriate action.”
The break up of the sum of Rs 5800 crore is given in the table below.
There are a few other ways in which the beach sand miners evaded royalties. We will go into those in the second part of this series.
The Lede sent exhaustive questionnaires by email to the beach sand miners, the IBM, the Director, Department of Geology and Mining of the Tamil Nadu government as well as to the Chief Minister’s office and the Chief Secretary’s office.
Except for one miner, S Vaikundarajan of VV Mineral, no one else responded. The email response of Vaikundarajan is reproduced below.
Given the history of biased reporting from you and the fact that these matters are sub-judice, we are not inclined to respond to any of your queries.”
This report will be updated if further responses are received.
(The next part of this series will examine the other irregularities that aided the beach sand miners to evade royalties due to the government.)