EnvMin tells Lavasa: pay penalty to continue work

It was not an endgame after all, for Lavasa Corporation. There were some fears that the government would order the project to be shut down, which would have affected the company, other companies who had invested in the project, people who have bought homes, and investors in Lavasa’s listed parent, Hindustan Construction Company. The Ministry of Environment and Forests submitted its final order on the project, after obtaining submissions from all parties, including Lavasa, and considering the central and state level appraisal committee’s report on the project.

The environment ministry had earlier pulled up Lavasa for not taking the required permissions for the project, while Lavasa’s response was that the project did not require central approval initially. The environment ministry halted work on the project, and Lavasa went to court, which then directed the ministry to get a site inspection done by a high level committee, and then submit its final order on the issue.

The environment ministry has chosen a middle path in this report, even as it retains its major contentions against the project, supporting it with evidence collected by the committee which visited the site. The report says that the project is in violation of the Environment Impact Assessment notifications of 1994, the amended one of 2004 and the new notification of 2006. It has said that the construction activity is unauthorised and is environmentally damaging.

But it has considered the circumstances of this particular case, where investments have already been made, third party rights have been created (that is, commercial and residential developments), a comprehensive hill station is being developed. The social benefits of employment generation and development of the surrounding areas have also been considered. Hence, the ministry is willing to let the project continue, but only if Lavasa agrees to three broad conditions.

One, Lavasa will have to pay a substantial penalty for the violation of environmental laws. The sum has not been fixed, however. But it says the violation is ‘incontrovertible’ or it cannot be denied.

Two, Lavasa will contribute to an Environmental Restoration Fund, with a “sufficiently large corpus” which would be managed by an independent body with various stakeholders. But this fund will be under the overall supervision of the ministry.

Finally, the ministry will impose stringent terms and conditions to ensure that no further environmental degradation happens and whatever degradation has already happened, will be rectified in a time bound schedule.
Lavasa has been asked to submit the detailed project report, all plans, construction/development contracts, details of investments, sale and lease agreements and phase-wise future plans for the entire project. The ministry has said that if Lavasa agrees to its terms, and submits all relevant documentation, it is willing to consider letting the project continue. Till the matter gets resolved, the ministry’s earlier order of stopping construction on the project will continue.

A glass half full?
The ministry has thus shown its willingness to compromise, which protects it from protests from all the stakeholders in the project. If it had taken a tougher stance and asked for the project to be axed, and dismantled, it would have had to face a lot of flak. Tactically, this is a very smart move, which protects its jurisdiction, but also acknowledges that the damage is already done, so penalties will be levied to compensate, and a restoration fund will be created to undo some of the damage. Further damage will be prevented as the project will continue under the ministry’s supervision.

Will Lavasa take up the offer? The first option is to continue the fight in the courts and be willing to enter into a prolonged legal battle, which could take years to resolve. The company may be willing to fight out in the courts, but it will prolong the uncertainty. And, if work remains suspended, or the it is asked to deposit proceeds from the sale/lease of property with the courts, pending a final decision, it will affect its financial flexibility and performance. Lavasa has an initial public offer in the works, to raise funds for the project and unlock value for HCC, which will suffer if the matter gets indefinitely stuck in the courts.

The environment ministry’s offer is tempting because it will set rest to all uncertainty about the project. But Lavasa and HCC would be dwelling on a few critical issues, before they take a final decision.

Jurisdiction: This is the most important aspect, which arises from accepting the ministry’s offer. Till now, the company’s contention has been that the first phase of development, in about 2000 hectares of land, does not come under the environment ministry. The ministry’s permission is needed only for the second phase of 3,000 hectares, according to Lavasa. By accepting the government’s report, implicitly, Lavasa could end up accepting the environment ministry’s jurisdiction over the entire project.

Quantum of Penalty: The government has not defined the penalty except for saying it will be substantial. But it has asked for all details regarding investment in the project and about the contracts entered into for sale or lease of properties. That may mean that it will fix the penalty based on these figures. In May 2010, the Jammu and Kashmir Bank had invested in Lavasa, which was disclosed by HCC, at a valuation amounting to Rs 12,000 crore. Lavasa had revenues of Rs 184 crore in the June 2010 quarter and net profit of Rs 49 crore.

Environment Restoration Fund: will this fund be a one-time outgo for Lavasa with an initial corpus, which will be managed over a certain period of time, or will there be a recurring charge, based on income or investments in the project? The ministry’s report says, that a sufficiently large corpus may be created, which again creates some ambiguity on how large is sufficient.

Imposition of terms and conditions: The ministry will specify measures to prevent further environmental damage and rectify existing damage in a time bound schedule.

The penalty and the creation of a fund will have a financial impact on the project, which may be material. The environment ministry will also specify the rules and regulations which the project has to follow, to be compliant with environmental laws, as specified by the central government. This may require some change in the plans, which will become evident at a later stage.

The most important aspect is that Lavasa will have to accept the environment ministry’s jurisdiction over the project, and will have to follow all the rules that will come with it. It now has to decide which is worse, fighting out this case in court for years to get a ruling in its favour, or bite the bullet and negotiate with the ministry on its offer, and settle the matter out of court.

HCC has disclosed to the BSE a statement by Lavasa, where it has given its opinion on several aspects of the report. It finds fault with the report and says that “the task entrusted to the technical committee was to survey/inspect the site and present the report which would be of great consequence to the competent authority to pass the final order. If the report misrepresents the state of affairs at the site by amplifying minor faults and ignoring the environmental work done, it is bound to have a negative effect on the decision of the competent authority.” But the company does not reject the offer of the ministry. It says that Lavasa’s legal counsels are studying the order and will explore all options available to the company.

But it has not rejected the ministry’s offer outright. The HCC stock had fallen from Rs 44 on Friday, to a low of Rs 39 on Tuesday, but is up 4% at the time of posting. That indicates that the market, at least, expected worse and is relieved that a settlement may be in sight.

Read the Ministry of Environment and Forest’s final order on the issue.

Read Lavasa Corporation’s reply, submitted by HCC to the BSE.

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