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  1. GVK suit shows perils of coal block compensation rider; could vary 10 times

GVK suit shows perils of coal block compensation rider; could vary 10 times

Creating uncertainty over the costs of snapping up the captive coal blocks being auctioned...

By: | New Delhi | Updated: February 4, 2015 3:20 PM
Coal India, Coal India floor price, Coal India share price, Coal India news, NMDC, BHEL, PFC, Dharmendra Pradhan

Prior allottees of blocks operational include: GVK Power, JSPL, Usha Martin, Monnet Ispat, Hindalco, Essar Energy.

Creating uncertainty over the costs of snapping up the captive coal blocks being auctioned, the government has introduced a fresh rider in the tender document that the compensation required to be paid by successful bidders to the former allottees for infrastructure created at the sites could be revised upwards later.

According to a new addendum to the document, where the compensation as determined by a committee for each of the 70-odd cancelled blocks with infrastructure are mentioned, “any upward revision in (this) fixed amount on a subsequent date by the government or the nominated authority consequent upon any process or on the orders of any competent court of law, shall also be payable by the successful bidder”.

The new condition, meant to buttress the government’s case in a potential legal conflict, is seen to create asymmetry of information to the bidders and comes close on the heels of many existing allottees harbouring dissent on the government’s alleged underestimation of the value of the infrastructure built. On Monday, GVK Power moved the Delhi High Court seeking a stay on e-auction of coal blocks. It argued the compensation of R57 crore decided by the Pratyush Sinha committee for its Tokisud block in Jharkhand was grossly inadequate and said that that actual amount spent by it was roughly 10 times higher at R550 crore.

As reported earlier, existing allottees that have paid over R6,000 crore as penalty to the government for the illegality of the allotment are entitled to get compensation from the successful bidders equal to the infrastructure spending.

Apart from the value of land and mine infrastructure, this fixed (compensation) amount includes the cost of preparation of geological report borne by the prior allottee, and the cost of obtaining all statutory licences, permits, permission, approvals, clearances or consents relevant to the mining operation.

“The addendum clearly leads to asymmetry of information for the bidders. Before bidding, a bidder should know about his liabilities in no uncertain terms. In this case, the liability now becomes open-ended and, thus, the bidding strategy, in the absence of concrete information, becomes shaky,” an industry insider told FE on condition of anonymity.

According to Rao, leader, energy, utilities and mining at PwC, the open-ended provision would alter a bidder’s risk perception. “Ideally, the prior allottee payment should have been capped to the amount declared in the dossier and the differences if any could have been paid out of auction proceeds,” Rao added.

A total of 204 coal blocks were cancelled by the Supreme Court in September last year, stating that the allocation process was arbitrary and illegal. Of these, 42 are operational mines and another 32 were about to start production. All these blocks are equipped with varying degrees of mining infrastructure.

GVK Power, Jindal Steel and Power, GMR, Monnet Ispat, Hindalco, Essar Energy and Usha Martin are among the firms with operational mines. FE wrote to GMR, Adani and JSPL seeking their comments on the compensation dispute but while GMR declined to comment,  no response were received from Adani and JSPL till the time of going to press.

Pit stops:

* Captive coal blocks cancelled by SC: 204
* Of these, blocks where allottees spent on infra, statutory clearances: 74
* These include 42 operational blocks & another 32
* Annual capacity of blocks is seen at 180 million tonnes
* Prior allottees of blocks operational include: GVK Power, JSPL, Usha Martin, Monnet Ispat, Hindalco, Essar Energy

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