Coal allocation case: Companies try to work out next course of action

Written by Pallavi Ail | Aveek Datta | Mumbai | Updated: Aug 26 2014, 10:12am hrs
CoalSupreme Court may order for existing allocations to be cancelled and re-auction the coal blocks afresh. (Reuters)
Power and metal companies that will be affected by the Supreme Courts observation on Monday, holding coal block allocations between 1993 and 2010 illegal, are waiting for a final verdict on September 1 before evaluating the impact on business operations.

Executives at some firms said on condition of anonymity that while the court had established that the process followed

by the government to allocate coal mines was illegal, it remained to be seen whether companies would be penalised.

Companies like aluminium maker Hindalco (part of the Aditya Birla Group), Tata Steel, Essar Power and JSW Steel declined to comment on the matter.

Click here for graph

Going by precedence, it is a possibility that the Supreme Court may order for existing allocations to be cancelled and re-auction the coal blocks afresh. In February 2012, the apex court cancelled the allocation of 122 2G licences awarded to telecom operators by the erstwhile United Progressive Alliance government, as it found the process illegal.

But the outright de-allocation of coal blocks awarded to the likes of power firms will directly impact power generation capacity in the country and have a bearing on the overall economy. Consequently, the court may enforce some alternate punitive action.

It was the government of the day that devised the eligibility criteria and the processes to be followed to apply for and secure coal blocks. We just followed rules laid down

by them, said an executive at one of the companies whose coal block allocation is in jeopardy. What did we do wrong

Vivek Vikram Singh, director at consulting firm Grant Thornton, said that metal companies will be hit badly if coal mines were to be eventually de-allocated. Production costs for some of them may rise by 30-40%, Singh said.

Many firms that have completed their power, steel, cement projects depending on coal supply from captive mines will go to the government, asking for linkage from Coal India, said Debasish Mishra, senior director at Deloitte Touche Tohmatsu India. Given Coal Indias level of production, it will not be able to meet such requests immediately.

The court stated that it intended to allow ultra mega power projects (UMPPs) to continue mining coal from the blocks allocated to them but in some cases where

the government had allowed diversion of coal from

ultra mega power projects to other end users for

commercial exploitation, the same wouldnt be allowed any longer.

On the other hand, coal block allocations being cancelled and auctioned afresh may not be a bad thing for some companies.

Take, for instance, JSW Steel, which was awarded

only one disputed coal block the Gourangdih ABC

coal block in West Bengal along with another company, Himachal EMTA Power.

JSW Steel was to use this

coal for an 800 MW power plant it planned to build in Jharkhand, along with a

steel plant.

Since the project hasnt even started, cancellation of the coal block allocation wont matter to JSW Steel much. But if all coal block allocations were cancelled, it would lead to a vast potential of coking coal resources

being freed up, which JSW Steel could bid for, keeping in mind its growing steelmaking capacity.

Coal production in India has missed targets over the last few fiscals, resulting in increased dependence on imported coal.

State-run Coal India, which produces over 80% of Indias overall coal output, produced 462 million tonnes in fiscal 2014, less than its target of 482 million tonnes for the fiscal. Simultaneously, the quantum of imported coal handled by major ports in India rose 17% in FY14 to 104.7 million tonnes.