<div>Coal is King and the paramount lord of industry.” Thus began the Supreme Court (SC) judgment issued on 25 August 2014, declaring all coal blocks allocated by the government between 1993 and 2010 illegal. <br /><br />The judgment is, however, not final as the court has not de-allocated the blocks. It will hear representations on re-assigning the blocks beginning 1 September 2014. Some say the order is bad news for the economy and will have far-reaching consequences, leading to uncertainty in the market, while others believe the hearings could result in a stronger and healthier process of coal production, which is the backbone of the Indian economy.<br /><br />Over 50 per cent of India’s power comes from coal. It is a vital raw material that fuels steel, cement and other allied industries as well. But it is perennially in short supply as the current availability of around 550 million tonnes (mt) is way below the annual demand of 700 mt of coal. “The de-allocation of blocks (if the SC decides to do so in its September hearings) will set the economy back by almost three years,” says B.K. Bhatiya, director-coal, Federation of Indian Mineral Industries (FIMI).<br /><br />The de-allocation of blocks may not have happened so far, but the SC has ruled that the allocations were illegal, arbitrary and non-transparent.<br /><br />Listing the existing laws and provisions, the three-member bench headed by Chief Justice R.M. Lodha noted in its judgment that “…the entire allocation of coal blocks... suffers from the vice of arbitrariness and legal flaws”. <br /><br />This is not the first time that the SC has come down hard on the government and the CBI. In previous instances, the CBI has been compared to a caged parrot and show-cause notices issued to central and state governments on action taken in various matters brought before the apex court.<br /><br /><a target="_blank" href="/image/image_gallery?uuid=aebc3445-1390-47fa-a2b0-0a1885a7d475&groupId=520986&t=1409640674446"><img width="640" height="353" align="middle" alt="" src="/image/image_gallery?uuid=557be4f4-d2ff-47e0-babe-492b0864cab4&groupId=520986&t=1409640591661" /></a><br /><br />“It is clear that the court has observed the need to amend the Coal Mines Nationalisation Act 1973 to facilitate comprehensive reform in the coal sector rather than carry on with the ad hoc approach followed till now,” says Debashish Mishra, senior director, Deloitte. In other words, the interim ruling of the SC emphasised the need for reform in the energy sector to facilitate participation of a larger number of players in the coal mining space.<br /><br />While a few industry insiders hope that heavy investments (to the tune of Rs 2 lakh crore) made in the sector will deter the court from cancelling licences, others believe that may not be the case. “The judgment hints that there will be corrective action,” says Asutosh Kumar Mishra, an analyst with Karvy Stock Broking. He adds that in the short to medium term, the sector will see heavy activity, especially with the possibility of coal blocks being de-allocated. “The court has questioned the process and we are expecting a harsh judgment in September,” says Mishra.<br /><br />While sections of industry are expected to face setbacks if coal blocks are de-allocated, some could be off the hook. For instance, state-owned NTPC, which followed competitive bidding processes, will be safe as the court has observed that blocks issued using logical and regulated processes are not under question. Based on the same premise, the court has exempted the blocks awarded to the 12 ultra mega power plants (UMPP) from its order.<br /><br />But projects such as Reliance’s Sasan plant, which sources coal from two blocks — Sasan and Chitrangi — under different mechanisms, will have a tough time. “The project has a requirement of 25 mt per annum. The Sasan block, attached to the plant on the basis of competitive bidding, has an annual capacity of only 13-14 mt. The additional requirement was to be met from the Chitrangi block, which was linked to the power project through an MoU with state authorities. But the latter is deemed illegal by the court as the MoU does not fall under regulated processes,” explains a senior analyst on condition of anonymity.<br /><br />The banking sector is expected to take the worst beating, given that its exposure to the thermal power sector is estimated at Rs 5,00,000 crore. Exposure to the sector has grown from 4.3 per cent of non-food credit (98 per cent of total credit) in March 2008 to 8.83 per cent in June 2014. “Cancellation of blocks will adversely impact the chances of recovery of loans. If coal mines attached to projects fail to take off, banks will have to either write off or classify loans as non-performing assets. And even if the SC asks the government to re-allocate these coal blocks, it will mean substantial delays in projects and result in slippages and restructuring of loans to these projects,” says Mishra of Karvy.<br /> </div><div>break-page-break</div><div><br />The apex court order is being viewed as the first of many whose consequences will have far-reaching effects on various sectors. Kuljit Singh, a senior partner with EY, believes that while the long-term impact of the order will be positive (as it will bring about transparency and fairness), the short-term impact may be adverse. He says the SC ruling may also impact other minerals, as also the grant of coal linkages, as the government typically relies on a steering committee or a similar mechanism (lambasted by the SC) for determining allocations.<br /><br />Since the order covers actions taken over 21 years, its impact will be staggering and incalculable, given the large amounts of money spent, innumerable jobs created and the dependence of other industries on the sector, says Singh. Plus, it is expected that there will be increased litigation with project developers challenging the government decision or appealing against the court order as has been seen in the past whenever the government cancelled mining licences or allocations. <br />However, much of the investment is yet to translate into increased coal production or power generation or steel output. Since 1993, over 200 captive coal mines have been allocated, allegedly based on the need and eligibility of the allottee. These were, however, brought under the scanner when the Comptroller and Auditor General’s (CAG) office in 2012 reported serious irregularities in the claims of the companies based on which coal blocks were allotted to them and long delays in development of these blocks. According to the auditor, this allocation had cost the national exchequer close to Rs 2 lakh crore.<br /><br />From the coal blocks allocated until March 2014, barely 50 mt of coal was produced. Project developers said if the court had not intervened, production of another 60 to 70 mt of coal would have begun by the current or next financial year. But there is no certainty on these figures, considering that blocks allocated as far back as 1998 are yet to start production. In all, 289 allocations of 218 coal blocks have been made till November 2011 and around 80 blocks have been de-allocated (see Block By Block).<br /><br />Earlier this year, the central government submitted in court that it was willing to de-allocate 32 blocks that were awarded after 2005 since no rights had been created and no investments made. The mines were basically not operational. Of the total 195 coal blocks allocated so far for captive mining and under investigation, 30 have started production. And, of the 160 captive coal blocks allocated between 2004 and 2008, only two have started production.<br /><br />Project developers are quick to point a finger at the government for the delay in production. “The case should have been better represented by the government because, if you see case by case, much of the delay has been due to the government’s failure to provide timely clearances,” says Bhatiya of FIMI. <br /><br /><img width="640" height="350" align="middle" alt="" src="/image/image_gallery?uuid=fc512a75-ea29-4679-8e74-fe3a7cd54806&groupId=520986&t=1409640787138" /><br /><strong><br />Deep Impact </strong><br />Industry insiders say any de-allocation of blocks given out prior to 2005 will lead to multiple litigations. Of the 46 allocations made between 1993 and 2005, only 17 companies have received mining leases so far, while 29 are still awaiting clearances.<br /><br />“The judgment has once again brought to the fore concerns about the country’s policy regime, which can potentially disrupt restoration of investors’ trust. We expect that any extreme step, such as a possible en masse cancellation of allocations, shall not compromise legitimate businesses or investors who participated in processes in good faith. Of course, in cases of proven mala fide, the law must take its course,” says Sidharth Birla, president, FICCI. <br /><br />Till the case of coal block allocation is settled by the SC, investors who have pumped in thousands of crores will remain restless. As Birla says, “At stake are productive assets estimated at Rs 2,86,000 crore, which could be left stranded or rendered non-performing. We urge the fullest consideration of multiple levels of serious economic implications on the nation, including loss of employment, replacement of domestic loss of production with imports and compromising energy security.” <br /><br />However, if the government brings in comprehensive legislation in the mining sector, it will do some good in the long run. Mishra of Deloitte believes the important takeaway from this case will be the arrival of commercial mining using legal means and will, therefore, attract more investors.<br /><br />Asutosh Mishra of Karvy says cancellation of coal blocks should not be a cause for worry as the executive has the power to re-allocate. “Given the current government’s commitment to ensuring energy security, we are confident that quick action will be taken,” he adds. <br /><br />In other words, short-term pain for long-term gain. <br /> <br />moyna@businessworld.in<br /><br />(This story was published in BW | Businessworld Issue Dated 22-09-2014)</div>
