Government readies for BHP Billiton, but after first auction

Written by Sumit Jha | New Delhi | Updated: Oct 23 2014, 06:09am hrs
Coal block auctionBidders for 74 coal blocks to be auctioned first from the pool of 204 cancelled by the Supreme Court last month won't have the option to sell the coal. (Reuters)
Bidders for 74 coal blocks to be auctioned first from the pool of 204 cancelled by the Supreme Court last month won't have the option to sell the coal. But subsequent auctions of the remaining 130 blocks could usher in the much-needed reform of allowing commercial coal mining by the private sector. This means sooner rather than later, global mining giants like Rio Tinto and BHP Billiton could be part of India's effort to multiply its coal output, stagnant for long due to a lack of technological efficiency and competition.

The new winners of these 74 blocks (including 32 about to start production) will be allowed to swap the coal produced from these blocks among themselves to achieve operational efficiency. The swap facility, restricted to same end-use plants, will give relief to current holders of some of these blocks like Hindalco and Jindal Steel & Power as it could somewhat offset the absence of right of first refusal for the blocks they had invested in.

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The ordinance issued late on Tuesday also states that companies with multiple end-use plants in the same category for instance, a company with two power plants in two different locations can divert coal to the plant not associated with the block. Such diversion for a different end use will, however, be banned.

Sources said these two provisions coal swap and diversion would give a lot of operational leeway to firms. Not only the firms that are hit by cancellation of the blocks but also others that will now try to grab them will benefit from these relaxations. For firms that have invested heavily in one or the other of the cancelled blocks, these relaxations would help reduce the risk associated with losing them and having to settle with other block/s or even none.

Highly placed sources told FE that the government was yet to take a call on whether to make available the 130 blocks that are not included in the first round of auctions to the private companies/ joint ventures, but confirmed that the policy direction is towards letting private players in commercial coal mining.

In fact, Tuesdays ordinance equips the government with the prerogative to let firms grabbing coal blocks under the proposed e-auction to sell coal on a commercial basis besides meeting their own end use. However, to give commercial mining rights to the new allottees, the government will have to specify upfront in the auction documents for each block that the relevant permit or prospecting licence or mining lease is also for sale or any other purpose apart from own consumption by the bidder.

The firms that are currently producing coal from 42 of the 74 to be auctioned soon will have to agree to pay the court-prescribed penalty within the prescribed time limits to qualify for bidding.

The ordinance also brought some clarity with regard to the operational blocks where prior allottees still retained land use rights and end-use infrastructure. In such cases, the new allottee can negotiate with previous holder of his block and get the ownership of such infrastructure transferred to him. If the two parties fail to negotiate on the movable property, it will be the responsibility of the prior allottee to vacate the the area within 30 days of vesting order.

Also, lenders to a prior allottee will continue with their current agreement if it wins the auction. In case the prior allottee fails to win a coal block, the secured creditors will be paid out of compensation payable to such allottees, as per the ordinance.

To disburse the compensation to the prior allottees of operational mines, the government will appoint a joint secretary rank officer. However, if prior allottees win in the auction, the amount will be set off against the auction sum payable.