Coal news and updates

The fortunes of many Indian billionaires were hit after the Supreme Court of India, the country’s highest court, ruled on Monday that all coal-mining licenses that were distributed since 1993 are illegal.

 

The three-judge bench said that coal allocations since 1993 were ‘illegal and arbitrary’ as they did not conform even to the then prevailing laws on development of natural resources. The bench did not immediately cancel the licenses but said it will announce the future course of action on Sept. 1.

 

Past governments had granted mining rights to these coal blocks to a variety of companies including in sectors like power and steel. However, most of those licenses were given without payment or without auctioning them to the highest bidder, leading to claims of cronyism and and loss of billions of dollars in revenue to the exchequer that such licenses would have fetched in an open bidding process.

 

In the wake of the news, Kumar Birla, who heads the commodities conglomerate the Aditya Birla Group, saw his fortune slip by 2.3%, while the Jindal family’s fortune, headed by matriarch Savitri Jindal, was down 9%. Shares in the Aditya Group’s aluminum division Hindalco were down 10% and recovered marginally on Tuesday (but were still off their closing price on Friday), while shares in Jindal Steel & Power were down 20% since Monday, and Anil Ambani’s Reliance Power closed down 12% since Monday.

 

Arvind Ramakrishnan, head of India practice at UK-based risk analysis firm Maplecroft, says the court’s ruling is a negative development for the country. The power sector is the biggest consumer of coal in India and this will affect the availability of coal for power plants.

 

“Basically the court has said all these contracts need to be canceled and a failure to respect contracts sends a negative signal to investors, especially foreign investors,” Ramakrishnan said.Another sector that will be impacted by the ruling are the public sector banks as power is one of the sectors that these banks have leant to very heavily. (A Reuters report says firms like the State Bank of India and Power Finance Corp. Ltd. have leant some $10-$12 billion to the power, steel and coal sectors.)

 

In an note to clients, analysts at Kotak Institutional Securities categorized the coal allocations into three categories—

 

1. operational mines and end-use projects

 

2. non-operational mines awaiting execution of mining lease and with near completed end-use projects

 

3. non-operational mines awaiting a number of regulatory clearances

 

While it expects a rational outcome, like a penalty or premium payment, for the projects in the first category, it wasn’t sure of the fate of the ones in the second category, the note said. Projects in the third bucket faced “elevated risks of deallocation.”

 

Three companies that it expects to be directly impacted by this ruling are Jindal Steel & Power which currently operates two coal blocks and was waiting to start a third; Hindalco which is operating one coal block and was waiting for final approvals on another; and Reliance Power which diverted excess coal that had been assigned to it for a specific purpose.

 

Here are some excerpts from the court’s ruling that are very telling in the complete lack of transparency.On coal blocks allocated between 1993 and 2003:

 

The guidelines framed by the Screening Committee are conspicuously silent about priority between the applicants for the same block. As a matter of fact, for the 21 coal blocks allocated to private companies in pursuance of Screening Committee’s recommendation during the first period, priority or merit of the applicants for the same block had not at all been determined.

The guidelines do not contain any objective criterion for determining the merits of the applicants or provide for measures to prevent any unfair distribution of coal in the hands of a few private companies.

The Screening Committee simply relied upon the information supplied by the applicants without laying down any method to verify applicant’s experience in the end-use project for which allocation of coal block was sought.

The Screening Committee kept on varying the guidelines from meeting to meeting without adhering to any transparent system.

No applications were invited through advertisement and thus the exercise of allocation denied level-playing field, healthy competition and equitable treatment.

If a certain party requested for a particular block, it was so recommended without objectively considering the merit of such a request.

Certain blocks with coal reserves on the higher side were recommended to the companies with lower requirement.

On coal blocks allocated between 2003 and 2005:

 

 The guidelines do not lay down any criteria for evaluating the comparative merits of the applicants. The consideration had been ad hoc in so much so that in every meeting, guidelines were altered.

The Screening Committee altered the norms by shifting insistence on achieving financial closure of the end-use projects to some appropriate stage after the mining plan approval. How the guidelines are met by the recommended companies has not been discussed.

The Screening Committee considered allocation of 5 coal blocks in the MCL area. The size of these blocks was large as compared to the requirement of the applicants. The rules of the game were changed to adjust large number of applicants whose applications would have been otherwise rejected as their coal requirement was far less than the coal available in the coal blocks. However, in order to accommodate these applicants, a novel idea of choosing a leader company and associate companies was evolved though such procedure is in contravention of the statutory provision.

The merits of the companies, who were recommended for selection and those companies whose applications were rejected, were not comparatively assessed.

Certain companies, which did not come for presentation, were also considered but how and in what manner the applications of those companies were considered is not discernible.

The minutes of the meetings also do not show that the assessment of comparative merits of the applicants was done. The policy of pick and choose was adopted. The application of norms was changed from meeting to meeting with no uniform or consistent consideration.On coal blocks allocated post 2005:

The minutes of the meeting do not show the reasons for recommending three blocks jointly in favor of more than one company.

Some of the companies, which had no recommendation by the state government, were recommended by the Screening Committee.

A certain company, which has no recommendation/categorization, was also recommended for allocation and ultimately allocation was made.

The minutes of the 36th meeting do not contain the particulars showing consideration of each application for allocation of 23 coal blocks earmarked for non-power sector. There is nothing in the minutes to indicate how and in what manner the selected companies meet the norms fixed for inter se priority.

 

 

Source: http://www.forbes.com/