On Wednesday, the Supreme Court of India held as "arbitrary and illegal" all coal blocks that had been allocated by the government of India between 1993 and 2011 to state-run as well as private companies and cancelled the allocation to most of the 218 blocks.
Background of the case
In the absence of a quick scale-up in coal production by state-run miner Coal India, starting from 1993, the government started allocating coal blocks to several companies who could then use the mineral for several end purposes such as producing power, steel or cement.
Between 1993 and 2011, coal blocks with reserves of about 43 billion tonne were allocated to a whole host of companies at a nominal cost on a first-come-first-serve basis, instead of being given away by using a competitive bidding process.
In its draft report in March 2012, the Comptroller and Auditor General (CAG) criticized the decision and said that if 90 percent of the 43 billion ground reserves of coal were to be mined, it would result in windfall gains of Rs 10.67 lakh crore . (The math: companies would make profits of Rs 322 per tonne – Rs 1100 sale price minus Rs 750 odd manufacturing cost -- multiplied by 33 billion tonne in reserves.)
In its final report, the CAG scaled down the loss presumption to Rs 1.76 lakh crore, after taking into account that only about 6 billion tonne was extractable (after adjusting for losses in washing, etc, during extraction) and scaling down the per-tonne windfall gain to a more conservative Rs 295.
However, the fact that only about 300 million tonne coal had actually been mined in all these years from 40 operational blocks, the then UPA government criticized the CAG's loss figure as exaggerated and sensationalist. (Former finance minister P Chidambaram famously asked: "if the coal has not been mined, where is the loss?")
Yesterday, the Supreme Court decided to cancel all allocations from March 2015 onwards, after which the blocks would be taken over by Coal India till such time as a fresh auction is initiated, and using the CAG's assumption, slapped a fine of Rs 295 for every tonne of coal mined till now from these blocks.
According to estimates, the industry will have to pay penalties of about Rs 10,500 crore (Rs 295 per tonne multiplied by 350 million tonne that is expected to have been cumulatively produced by March 2015), with Jindal Steel & Power and Hindalco bearing slightly less than half of it.
Implications
A pertinent question that the apex court faced while making the decision was the broader implications on the economy.
If the court had decided to cancel allocations on an immediate basis, there could have been severe disruptions for several sectors such as power, which is already facing an acute shortage of coal.
By ensuring that mining activity could go on till March 2015 by which time Coal India gets adequate time to prepare for a takeover, the court has ensured a seamless transition while maintaining minimal disruptions to key sectors such as power.
There was also the risk that an immediate cancellation could impact the number of power, steel and cement projects that depend on these mines and in which companies had invested a total of Rs 2.86 lakh crore thus far over the years. That risk has been kept to a minimum.
Any delays in these projects could have triggered defaults for a banking sector that is already reeling under its worst NPA crisis in years.
Road ahead
The next question is how soon can the government auction all of the 214 blocks that have been cancelled.
In an interview with CNBC-TV18, former coal secretary PC Parakh said the process could conclude in as little as the next six months even as the incumbent government has expressed its preparedness in executing a fresh, transparent auction process soon.
What remains to be seen, however, is how eager will companies be in making a fresh bid for the auction – considering that there are already concerns that many of the blocks allocated contained inferior quality coal compared to mines operated by Coal India.
Thankfully, the coal auction process is not expected to prove to be a dud on the lines of the telecom auction (where 122 licences cancelled by the SC, on the assumption of a similar Rs 1.76 lakh crore loss, were sold in an auction for a mere Rs 10,000 crore) where the erstwhile UPA government was said to have done its best to make the sale unsuccessful by setting an unrealistically high reserve price, only to make a point.
"This is simply because there has been a change of guard, and the leadership of the Bharatiya Janata Party is under the gun for the coal scam," Scroll wrote in an editorial .
"It helps, of course, that the economy appears to be in a better place and that demand for coal, unlike spectrum, is nowhere close to being on the wane."
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