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Naveen Jindal discovers there’s no such thing as a free lunch

Billionaire Naveen Jindal ran what was once India’s most valuable steel maker worth more than $14 billion. It’s now valued at about 87% less.
The rise of his company, Jindal Steel and Power Ltd, was built on coal mines handed out for free by the government. That ended last year when the courts cancelled the permits.
Beside the loss of investors, he’s fighting a court investigation into alleged irregularities in winning rights to a coal mine in Jharkhand. It all got worse last night when the company reported its first annual loss in at least a decade.
Jindal is one of several industrialists that constructed empires around a government policy starting in 1993 to give away rights to coal deposits. The idea was private businesses would do a better job developing the mines. This in turn would boost supply of coal to power plants under pressure to generate more electricity. Jindal received more of the gratis coal than any other company.
“It was the right policy at that time, because none of these mines were viable,” said Kameswara Rao, executive director for energy and utilities at PwC India. “As commodity prices rose, the policy should have been changed.”
The Supreme Court did that in September, ruling the giveaways were arbitrary and illegal. The court said the mines should be auctioned off in open bidding or other sales.
No coal
That left businesses running the mines suddenly without supply and facing the costs to replace it. This was after years of combined investments of more than $45 billion in power plants, steel mills and aluminum smelters to run on the free coal.
As the biggest beneficiary of the coal give-aways, Jindal won rights to 10 mines of the 218 handed out. The court in September ordered all the companies that received free mines to pay a levy of Rs.295 a tonne for the coal they had extracted. Jindal got the biggest bill of Rs.1,910 crore, hence the Rs.1,280 crore loss last year, it said Wednesday.
It’s not that warnings weren’t given that the free coal trough wouldn’t last.
India’s government started looking at auctions of the coal blocks in 2004. It took six more years to get that enacted in parliament, then another four years till the Supreme Court ruling.
“If we had adopted the auction methodology, there would be no such mess that we see today,” P.C. Parakh, India’s top bureaucrat in the coal ministry in 2004-05, said in an interview. “No one said no to auctions, but they kept dragging their feet.”
Hard lobbying
It isn’t difficult to see why. Companies lobbied hard to get their hands on the free mines, which would later stoke allegations of influence peddling and bribery.
According to an interim report from a court in New Delhi last month, Jindal used his role as member of the Congress Party to gain control of a coal block in Jharkhand.
The court report says Jindal promised the state’s chief minister Madhu Koda political support for his coalition government to remain in power. In return, Jindal got full control of the mine.
The court on 22 May said it will hear the case again on 1 June. If found guilty, Jindal could face three years in prison.
Jindal Steel is confident of a positive outcome in the court case, it said in a 22 May statement. The company didn’t respond to multiple requests by phone and e-mail for an interview with Naveen Jindal or chief executive officer Ravi Uppal.
Electricity cash
Beside free coal, another windfall came in the sale of coal-generated electricity.
In the absence of clear regulations, Jindal declined to sell power to state utilities and instead sold all the electricity from his plant in Chhattisgarh in the spot market at higher rates.
“Investing in the power plants without securing a long-term buyer was a big gamble that paid off,” Anil Razdan, India’s secretary for power from 2007-2008, said in an interview.
“With these steps, his company did very well financially and rose in the eyes of investors,” said Rakesh Arora, an analyst at Macquarie Capital Securities India in Mumbai.
India would later make it mandatory for electricity producers using Indian coal to sell at least 85% of their power at regulated rates.
Next step
In line with the Supreme Court ruling, India auctioned off 29 coal mines in March. Jindal won a couple of mines only for the government to hold back the permits, saying the bids were too low. Jindal has challenged that in court.
“Auctions are just a first step,” said Debasish Mishra, a senior director at Deloitte Touche Tohmatsu India Pvt. Ltd in Mumbai.
Private companies mining coal in India are only allowed so-called captive use of the fuel at their own plants. By law it can’t be resold. State-run Coal India Ltd has the monopoly on coal sales.
“The next reform should be to do away with captive coal mining altogether and open up the sector to private mining companies,” said Mishra. “That would allow us to open large projects and dig deeper for the resource.”

source: http://www.livemint.com