Tuesday 14 October 2014

Stage set for reforms in coal sector



The Supreme Court this week scrapped the allocation of all but four of the 218 coal blocks awarded between 1993 and 2010. While the move gives the government an opportunity to make a fresh start and put in place a transparent rules-based regime in the allocation of coal, it also sets in motion attendant problems of unwinding investments and loans already made in some of these projects.


Further, this has disruptive potential for the power sector, as a tenth of the existing power capacity in the country comes from captive power. The verdict, an implicit indictment of the practice of crony capitalism, came a month after the apex court said the allocation of coal fields had been illegal and arbitrary and resulted in the “unfair distribution of national wealth”. In the 25 August ruling, the court had refrained from cancelling the allotments, choosing instead to assess the possible impact of such a move.


The bench, headed by chief justice of India R.M. Lodha who retires on 27 September after a short tenure of five months, said it intended to correct the “wrong” done by successive central governments. “These proceedings look to the future in that by highlighting the wrong, it is expected that the Government will not deal with the natural resources that belong to the country as if they belong to a few individuals who can fritter them away at their sweet will,” the bench observed.


The order is reminiscent of the apex court’s order in the 2G telecom spectrum allocation; in 2012, it annulled all 122 licences awarded to telecom companies in 2008 after finding fault with the ‘first come-first served’ allotment process. Cases like the coal field and spectrum cancellation served as a “great signalling mechanism”, said Rahul Singh, an assistant professor of law at National Law School of India University, Bangalore.


“The day the court comes to know that there has been such crony capitalism, it will cancel the same irrespective of whether it was 10 years or 20 years before. Earlier there were considerations when there were vested interests attached, and unsettling a lot of settled mechanism was avoided, but not so today.” Shares of metal and power companies that have invested heavily in the belief that they had secure fuel supply, and banks that have an estimated Rs.5 trillion of exposure to the power sector alone, plunged after the ruling, which opens the way for auctioning of the cancelled fields. The companies with operational coal blocks that were affected include Jindal Steel and Power Ltd (JSPL), Usha Martin Ltd, Jindal Power Ltd, Hindalco Industries Ltd, Tata Power Ltd, Monnet Ispat Energy Ltd, Sova Ispat Ltd and Jai Balaji Industries Ltd.


“The government should have an alternative (plan) as a lot has been invested…Hope to learn about the government’s action plan in the near future,” Aditya Birla Group chairman Kumar Mangalam Birla said. The group controls Hindalco. “Tata Power would study the order and discuss the same with Board before having a view point,” Tata Power said in a statement. “Tata Power would look forward to opportunities of having a new, legally enforceable framework by which coal blocks could be awarded, perhaps at an early time.” “It is going to impact the investments that have already made,” said Sushil Maroo, chief executive officer at Essar Energy Ltd.


“Now it is up to the central government to come up with a clear policy to mitigate the risk. Every single contract would need to be revisited post this decision.” The court allowed 42 blocks that are producing the mineral, or are ready to produce, time until 31 March 2015 to stop operating. The 42 coal blocks will be taken over by Coal India Ltd (CIL), which also has till March-end to “adjust to the changed situation and move forward”. photo As part of the ruling, the firms allowed to continue operating the 42 mines will have to pay a fine of 295 rupees ($4.80) for every tonne of coal extracted. The companies with the four ongoing contracts are exempt. Chintan J. Mehta, an analyst with Mumbai based Sunidhi Securities and Finance Ltd, said that out of the allottees of the 42 blocks, Hindalco and JSPL would have to suffer the highest penalties. Mehta said that as per his calculations, Hindalco may have to cough up Rs.600-800 crore and JSPL would have to pay Rs.1,800-2,000 crore.


The apex court spared two coal mines operated by Reliance Power Ltd, which won them through competitive bidding, and one each by state-owned NTPC Ltd and Steel Authority of India Ltd (SAIL), that had no joint venture partners. “The Central Government is confident, as submitted by the learned Attorney General, that the CIL can fill the void and take things forward,” the court said. Still, cancelling the allocations could potentially plunge the power sector into a crisis. Because of limited domestic coal supplies, companies have had to resort to imports. Half of India’s thermal power stations had less than a week’s supply of coal on hand as of Monday, the lowest since mid-2012 when 620 million people were cut off in one of the globe’s worst blackouts ever. Coal block allocations have been under the scanner since 2012, when the Comptroller and Auditor General of India (CAG) said the allotments had caused notional losses to the tune of Rs.1.76 trillion to the exchequer.


“The ruling is more severe than the industry was hoping but it sends a clear message about India taking a stand against the improper allocation of national resources and in favour of improving transparency and good governance,” said Sushil Jacob, a lawyer at London law firm Linklaters.


Legal hurdles may still persist, said Dipesh Dipu, an energy analyst and a partner at Jenissi Management Consultants. “This will be another round of nationalization. It can have legal challenges. The coal blocks may have been allocated unfairly, but what about surface rights and land mineral rights?” he said. Attorney General Mukul Rohatgi said over the phone that the government could consider an ordinance to overcome legal hurdles that may arise out of the apex court’s judgement. He said that the deallocated mines would revert to the government and would be put on the auction block in case of private companies or given to government companies.


To acquire the land from the allottees, one of the options the government could look at is bringing in an ordinance to take back allotted land from the companies and compensate them, he added. Rohatgi, however, said that he was not aware of the exact thinking of the government on this matter and that an ordinance was one of the options available to it.

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