China model seen coming in way of India's foreign mineral buys
New Delhi: Admitting, in effect, India's history of failure in the international mineral assets market, the government has acknowledged China's model of dealing with such strategic acquisitions as a major threat for India's ambitions to book resources abroad. Also, with state-owned International Coal Ventures Ltd not making a dent, the government has proposed setting up another such body, to be headed by Coal India Ltd (CIL), to scout for assets abroad.
Acquiring mineral reserves in other resource-rich nations is considered to hold the key to India's energy security, owing to domestic constraints in exploiting reserves and the global rise in commodity prices. Also, holding such assets acts as a strategic tool in energy diplomacy for developing and maintaining foreign relations.
"In the face of a government-backed Chinese merger and acquisition (M&A) model, it would become difficult for Indian companies to acquire coal assets, or any other mining assets for that matter, in emerging economies like Mozambique, Indonesia and South Africa," the 12th Plan Working Group on Coal, headed by then coal secretary Alok Perti, has said in its report. The group has recommended a similar workable national policy for India.
The Chinese M&A model dictates that nation's policy in approaching global deals not only in coal but oil, gas and other infrastructure sectors, too. Under the model, the Chinese government adopts a policy wherein two Chinese companies are rarely seen competing with each other in foreign soil for acquiring the same asset.
Also, their companies are always backed with soft loans from China Investment Corporation, enabling them to acquire assets which would otherwise look unattractive, based on prevailing market rates. Besides, the Chinese government provides sovereign funds for creation of supporting infrastructure in host countries, especially in the African continent. The relation thus developed is leveraged by companies to acquire mineral assets.
Finally, completing the circle of the strategy, the Chinese government extends its diplomatic umbrella to sensitise government-to-government initiatives to ensure favours for Chinese companies in case of acquisition of mineral assets on a nomination basis.
Bureaucratic hurdles in India, leading to delays in decision making and lack of financial autonomy, have marred efforts of state-owned companies to make any major headway in acquisitions abroad. CIL's efforts to clinch a deal in the global market were initially blocked by two conditions imposed by the finance ministry — at least a 12 per cent internal rate of return from the asset and the requirement of considering only listed entities for acquisition. The two issues were later resolved but only with riders attached. CIL has failed to deploy Rs 6,000 crore earmarked for the purpose successively during the past two years.
"Copying the Chinese model may not work for India, especially because providing soft loans may be difficult, owing to the bad financial situation of the government," said Amrit Pandurangi, senior director at Deloitte Touche Tohmatsu. "These acquisitions involve transactions where decisions are taken on the spot. We need to assign this task to experienced officials who also have the flexibility in decision making in financial matters."
Chinese companies have reportedly completed $21 billion of foreign acquisitions of coal and mining assets over the past two years, as compared to around $5 bn of India's deals, including private ones. In the public sector, the only major deal clinched was a $20-million one by NMDC in December to buy a 50 per cent stake in Australia's Legacy Iron Ore Ltd. CIL had last year tried to buy a 30 per cent stake in PT Golden Energy Mines from Indonesia's Sinar Mas Group.
The deal was lost due to delayed approvals. NMDC failed last year to purchase a Siberian coal deposit with 363 mt reserves, owing to delayed approvals.
There have been success stories in the oil and gas sector on acquisitions by Indian companies in countries like Russia and Angola. However, acquisitions in the sector had taken place much ahead of the coal sector, owing to the high import dependence of oil in India.
The group has also recommended creation of a sovereign fund to assist companies in acquisitions.
Experts argue against it, saying there is no dearth of cash balances with PSUs trying to acquire assets. "Funding is not a constraint for CIL, sitting on Rs 50,000 crore of cash reserves. The real issue is that independent directors refuse to take decisions in matters where risk, however small, comes attached," a former chairman of a public sector undertaking told Business Standard.
He also played down the idea of creating another ICVL-like body, arguing the consortium approach fails owing to diverse interests of member-companies. ICVL was set up in 2009 as a JV between SAIL, CIL, RINL, NTPC and NMDC, under the steel ministry, for securing coal assets abroad. It has an authorized capital of Rs 10,000 crore but has not been able to register any success since its formation.