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Coalgate: SC Scraps 214 Blocks Allocated Since 1993

BW Online Bureau Nov 08, 2014

<div>The Supreme Court has cancelled all coal block allocations made since 1993 – barring four, sending the share prices of major companies tumbling. However, by the end of day, the market had mostly recovered. The ball is now in the government’s court, which needs to act and minimise the set-back, say experts. The much awaited order deciding the fate of coal blocks deemed illegal last month by the Supreme Court (Read Also: <a href="http://www.businessworld.in/news/economy/coal-block-allocations-since-93-done-in-illegal-manner-sc/1498494/page-1.html">Coal Block Allocations</a>)  is the necessary bitter pill, with far reaching impact. Putting an end to the uncertainty of coal blocks allocated over the last three decades, the apex court has laid the foundations of a possible haul-up of the sector. But as a natural consequence, it also has caused a flurry in the market and investor sentiment. Ramesh Vaidyanathan, managing partner at Advaya Legal says, “the verdict seriously questions the credibility of government licensing process and will have an adverse impact on foreign investment.” At the same time the order is also being viewed as a two-edged sword by industry experts (Read Also: <a target="_blank" href="http://www.businessworld.in/news/business/energy-and-power/dark-and-damned/1508422/page-1.html ">Dark& Damned</a>) and they caution the government against apathy, urging the authorities to take quick steps and reduce the damage. “This is a moment for serious introspection and corrective action on the part of the political establishment,” says Vaidyanathan.  Reiterating the illegal manner of giving out the coal blocks, the Supreme Court bench headed by Chief Justice RM Lodha pointed out, “allocations are illegal and arbitrary; the allottees have not yet entered into any mining lease and they have not yet commenced production. Whether they are 95 per cent ready or 92 per cent ready or 90 per cent ready for production (as argued by some learned counsel) is wholly irrelevant. Their allocation was illegal and arbitrary, as already held, and therefore we quash all these allotments.” (See: <a target="_blank" href="/en/c/document_library/get_file?uuid=c0e1de4f-6667-4cc6-8227-4d3e6efabb61&groupId=36166">COURT ORDER)</a>  </div><table cellspacing="1" cellpadding="1" width="211" border="0" align="right"><tbody><tr><td><a href="http://businessworld.in/news/business/energy-and-power/the-order-in-a-nutshell/1546661/page-1.html">The Order In A Nutshell</a></td></tr><tr><td>The Order says: Our judgment highlighted the illegality and arbitrariness in the allotment of coal blocks and these “consequence proceedings” are intended to correct the wrong done by the Union of India' <a href="http://businessworld.in/news/business/energy-and-power/the-order-in-a-nutshell/1546661/page-1.html">Click Here For Full Story</a>  </td></tr></tbody></table><div>In August, the court while calling the government’s process of coal lock allocations arbitrary, had ad hoc declared the 218 block allocations made since 1993 illegal and reserved the decision on the future of these blocks after “further study”. In response various stakeholders - the union government (Read Also: <a href="http://www.businessworld.in/news/economy/govt-urges-sc-not-to-cancel-some-illegal-coal-mines/1506985/page-1.html">Govt Urges SC Not To Cancel Some Illegal Coal Mines</a>), power producers association, sponge iron manufacturers association and even petitioners made submissions in court both for and against the cancellation of these blocks. And today, while cancelling all but four – Ultra Mega Power Plant (UMPP) connected coal blocks - the court emphasised that “all parties likely to be adversely affected were given a hearing.” Spreading Gloom Aditya Birla Group chairman Kumar Mangalam Birla said the Union Government should ensure that the massive investments made by the companies to acquire coal blocks do not go down the drain following Supreme Court's order cancelling the mine permits. The cancellations do not come as a surprise but at a heavy cost. Given the court’s ire about the allocation processes followed, the large loss to the Indian treasury reported in 2012 by the CAG and the reach of the coal scam spreading from the PMO office, public undertakings like Hindalco to big private industrial houses like Jindal Steel and Power, the cancellations appear to be a natural consequence. “Once the SC came to the conclusion that the coal allocations were arbitrary, cancellations were perhaps inevitable,” says Vaidyanathan of Advaya Legal. But it is an inevitability India Inc was hoping against hope would not take place, especially at this stage when the economy is just beginning to show green shoots after almost two years of stagnation. “Unfortunately, a far reaching impact is on the sovereign risk perception relating to India” says Kuljit Singh, Partner-Infrastructure Practice, EY. According to him such a judgment enhances the perception of sovereign risk – i.e. risk that past decisions of the sovereign authority like the government can be undone. "Now, the government has the opportunity to bring about sweeping reforms in the sector,” says Singh. He explains that the reforms cannot be piece-meal as seen in the past. The government needs to address three core issues plaguing the sector – end-use restriction, dominant role of Coal India and lack of transparency in allocation, which can be achieved through large scale competitive bidding says Singh. We need en-mass reforms and it is important this opportunity not be lost,” he emphasises. Other cases that have created this sentiment in the market are the retrospective tax order and the 2G licence cancellations. And as Debasish Mishra, Senior Director with Deloitte in India explains, “Government needs to expeditiously devise the parameters of coal block bidding and start bidding process as soon as possible. This will ensure minimum disruption for affected companies.” Invested companies’ margins are going to be hit hard in the current fiscal. “The short-term impact is immediate and significant, says Kameswara Rao, Energy leader at PwC India. According to him, the market reaction is unavoidable given the financial impact of the fine levied by the court, which could total to about Rs 9,000 crore in the books of the companies.  Ficci President Sidharth Birla said: "The cancellation of coal blocks involves significant investments and will obviously impact the economy and investment climate, therefore a quick response from Government will help allay the apprehensions". "I am hopeful that this decision would act as a precursor to review of coal sector policy paving way for full-fledged coal reforms starting with amendment in Coal Mines Nationalisation Act, 1973 and Mine Minerals (Development and Regulation) Act, 1957 to facilitate entry of private entities in coal exploration and mining," he added. Eye To The Future All may not be lost as the order provides a huge opportunity say industry experts. Plus the fact that barely 5 per cent of the allocated coal blocks were actually producing any coal, the far reaching impact on energy security is limited. In the hope that the government will bring up the promised auctioning of the coal blocks at the earliest, it is expected that coal production as such may not be impacted for too long. The order comes with the rider of a possible clean and efficient system in the near future. “Now, the government has the opportunity to bring about sweeping reforms in the sector,” says Kuljit Singh of EY. He explains that the reforms cannot be piece-meal as seen in the past. The government needs to address three core issues plaguing the sector – end-use restriction, restriction of sale in the open market and lack of transparency, which can be achieved through competitive bidding says Singh. “We need en-mass reforms and it is important this opportunity not be lost,” he emphasises. But others like Kameswara Rao advise caution against banking on the new processes to be put in place. “Auctions will increase cost as a purchase consideration will have to be paid, at least to the extent of floor price, in addition to change-over costs in event another bidder wins the block. Auctions of operating blocks will only give us fairness but not additional value.” He says we need to wait for the much needed amendments to coal mining law to actually reap benefits of a clean, transparent and efficient coal market. moyna@businessworld.in mmatbworld@gmail.com</div>