Disputed coal blocks account for almost a tenth of the annual coal output in the country. While the Supreme Court stopped short of de-allocating these blocks, the series of hearings starting this week shall bring out the likely consequences for the coal sector. At stake are productive assets estimated at `2,86,000 crore till 2012, which could be left stranded and rendered non-performing, in an hitherto unprecedented manner in event of an unfavourable ruling...
Last Monday’s ruling by the Apex Court declaring allocation of about 200 coal blocks in India since 1993 as illegal “lends turbulence to the coal sector in the short-term, but may be positive for the healthy development of the sector in the long-term. As the Supreme Court stopped short of de-allocating these blocks, the series of hearings starting this week shall bring out the likely consequences for the coal sector” says Care ratings.
According to it “ A blanket de-allocation shall be a big setback to the development of the coal sector which is already grappling with problems of transparency, inadequate and irregular supply, coal grading issues and land acquisition etc. The companies in the private sector, deriving direct operational benefits of these allocated coal blocks for power generation and manufacturing goods, are expected to be impacted the most. Coal blocks have also been allocated during the period for projects which are yet to come up. In such cases, the viability of these projects may be affected in case of any unfavorable ruling” this week.
India is still dependent on coal as a primary fuel source with about 60% of power generating capacity in the country dependent on coal. De-allocation, although not favored, would in general have unfavourable consequences for Asia’s third largest economy which is embarking on a path of economic recovery. The move may lead to coal shortages at cement, metal and power plants and other power intensive manufacturing units. Disputed coal blocks account for almost a tenth of the annual coal output in the country. During the period of disruption of supplies, the coal consumers may have to resort to imports to meet this shortfall in the short to medium term. An unwarranted spike in the price of coal due to the ensuing demand-supply mismatch would hurt the industry’s operating margins and may trigger inflationary trends in the economy. International coal traders are already delaying supply contract renewals, awaiting the Supreme Court verdict on the issue, seeking better pricing terms.
“A balanced view is called for by the industry on this matter, and taking inputs from various stakeholders would be a better approach to tackling the issue. The irregularities, as cited by the Apex Court, needs to be regularized in a smooth manner, keeping in mind the overall development of the coal sector and the impact on the industry. Also policy and framework needs to be put in place for future awarding of the blocks. Being a natural resource which is explored at public cost, auctioning system is best suited for awarding coal blocks for commercial exploitation. The sector calls for stable and consistent policies for short-term and long-term which will attract investments for the efficient development of this crucial sector and benefit the nation as well as the consumers” says Care Ratings.
Industry body's are also much concerned. Says Sidharth Birla, President, FICCI "This latest judgment has once again brought to the fore concerns about the country's policy regime and has the potential to disrupt restoration of investors' trust. We reasonably expect that any extreme step (such as possible en-masse cancellation of allocations) shall not compromise legitimate business and investors who participated in good faith in processes laid out over an extended period by the governments of the day. Of course, in cases of proven mala fide, the law must take its own course."
"At stake are productive assets estimated at Rs. 2,86,000 crore till 2012, which could be left stranded and rendered Non-Performing, in an hitherto unprecedented manner. We urge the fullest consideration of multiple levels of serious economic implications to the Nation, including loss of employment, replacing domestic loss of production with imports and compromising energy security.", he added.
"One tangible solution going forward could be introduction of independent mining companies, selected by competitive revenue-sharing bidding and engaging them from exploration to mining in un-mineralised blocks; this is in line with global practices. Use of electronic platforms for market access and price discovery ensures transparency and avoids implicit transfers from the Centre. A comprehensive legislation encompassing these objectives is urgently required to overhaul the coal sector" believes the FICCI president.