Coal blocks verdict: Investor doubts back as Narendra Modi heads for US

Written by Anil Sasi | New Delhi | Updated: Sep 25 2014, 13:19pm hrs
Coal blockThe impact of the Supreme Court's verdict on coal blocks is likely to be felt most by the fuel-starved power sector.
The Supreme Court verdict scrapping nearly all coal blocks allocated to companies over the last two decades raises a Rs 1 lakh crore question mark over the banking sectors exposure to just the power sector, even by the most conservative estimate. The SC verdict comes on a day when the governments latest coal position update at the 104 major thermal power plants shows that nearly half (50 stations) had critical supplies of less than a weeks supply of coal while a third (34 plants) were bracketed under the supercritical category, with less than four days supply.

In terms of the broader impact, the en masse cancellations badly dent the new NDA governments efforts to reposition India as a bankable investment destination, coming exactly a day before the launch of the Prime Ministers Make in India scheme and just ahead of his trip to the US, where he is expected to make a strong pitch to global investors.

Most analysts have veered around to the view that the damage to the image of India as a stable investment destination on account the cancellation of coal block could far exceed the impact of the court order on 2G spectrum actions. Industry chamber CII said the decision will erode investor confidence while Ficci said the cancelled projects involve significant investments and will obviously impact the economy and investment climate.

The impact of the verdict is likely to be felt most by the fuel-starved power sector, which is the largest end-user of coal in the country. Of the cancelled blocks, about 40 are producing coal at a capacity that amounts to about 9 per cent of the 566 million tonnes of coal that was produced last fiscal year.

The biggest question mark is over the fate of end-use projects (power plants or steel plants) that have come up next to the block in at least 30-odd cases. While the prospect of fresh auctions raises the possibility of a new owner bagging some of these block, the latter will, however, not be able to sell the coal produced from the block to the previous owner, who has already has an end-use plant in place. This is because commercial mining in not allowed under the current regulations and only captive mining is permitted. The option then, for the new owner, is to either set up a fresh end-use plant to utilise the coal from the block or buy the end-use plant of the original developer, unless the government changes the current regulations to allow commercial mining.

For the banking sector, the big worry stemming from the en masse cancellations is that for most of the loans raised by developers of power, steel and cement projects, the collateral was the block itself. With the block now gone, there is little hope of these developers repaying the loan.

The government, in its first reaction to the order, put up a brave face, claiming that the decision by the Supreme Court would enable the Centre to make a fresh start. Basically, the judgement is in accord with the Government of Indias stand in affidavit, law minister Ravi Shankar Prasad said after the verdict.

While the exact impact of the ruling on lenders is yet to be known, bank shares, including those of State Bank of India fell in late trading as investors saw the ruling as negative for the sector. The crackdown on the coal blocks will put $10-$12 billion of loans at risk, Credit Suisse had said.