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The coal mining crisis

Published in Investment Saturday, 11 October 2014 18:16

The coal mining crisisThe recent Supreme Court verdict cancelling 204 coal blocks awarded between 1993 and 2012 is indeed unfortunate. This decision will make the power situation of our country more vulnerable and thereby impact the economy as a whole. The apex court has taken the extreme step considering the irregularities in the coal mine allocation process. However, this Supreme Court decision has not inflicted any kind of penalty on the ministers and officials who were directly instrumental for the irregularities. Instead the people of the country will have to suffer for the misdeeds of these corrupt ministers and officials.
Out of the 218 blocks awarded by successive Union governments over two decades, only 14 blocks that are owned by NTPC, SAIL and Reliance Power have been allowed to continue with their normal functioning. Public sector undertakings under various state governments such as West Bengal, Rajasthan, Madhya Pradesh, Karnataka, Arunachal Pradesh and Punjab are also there among the companies that have lost their mining licenses.
It is estimated that the Court order will impact around Rs 2.85 lakh crore worth of investments linked to the coal blocks and their end-user plants. Of the 40 mines that are operational and six that are ready to produce, the court has exempted only the non-joint venture operational mines of the government-owned NTPC and SAIL, besides the two mines allocated to Reliance Power’s Sasan MPP. In the order, the three judge bench of the top court made it clear that the new Union government was not against cancelling the allocations, including those of the above mentioned 46 mines.
A more sensible approach would have been to allow these 46 mines to function, after imposing a penalty on them. Cancellation of licenses of 160-odd blocks that are not producing or for which mining leases haven’t been executed was justifiable. Instead, a process running for more than 20 years had been rendered illegal, implying that the clock may get set back several years.
The Court directed the state-owned Coal India Ltd to takeover all the cancelled blocks. But is it practical? It is a fact that Coal India lacks the financial muscle and the requisite human resources to take over all these mines. The companies that have lost control of the mines have made investments of several thousand crores for developing the blocks and setting up coal-fired plants. Here there is a risk of large sums of bank money lent to these projects turning into NPAs.
Furthermore, what will be the fate of the power and steel plants that are currently running on coal extracted from these cancelled blocks? There is also no guarantee that the de-allocated blocks would revert to them, more so in the event of their being auctioned.
The apex court has given time up to March 31, 2015 to take over the cancelled blocks. The bench said the Union government was keen to move ahead, but it needed some time to manage the emerging situation. As such, “breathing time” was also required to be given to the allottees to enable them to manage their affairs on cancellation of the coal blocks. The court, to compensate the government to that extent, has also imposed a penalty of Rs 255 per tonne on all coal block holders that had not operated their mines. The payment, considered as a twin blow to the allottees, will have to be made on or before December 31.
The court verdict questions the credibility of the government’s licensing system as well as the bankability of these licenses. This will be harmful not only to the developers, but to the investors and financial institutions as well. Above all, this development is likely to have some adverse impacts on foreign investments.

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