Now to see how long auctioning coal mines for FDI firms takes

By: |
Updated: August 29, 2019 6:26:32 AM

Last year’s move virtually upended the Coal Mines (Nationalisation) Act, 1973, which has kept the sector largely a preserve of public-sector monolith Coal India (CIL) for long.

coal mines, coal mines auction, FDI firms, FDI in coal mines, BHP Billiton, Rio Tinto, Glencore, Coal India, power purchase agreementsThe coal ministry is now in the process of auctioning off a clutch of coal blocks and the Cabinet move has come as shot in the arm for it.

Global mining giants such as BHP Billiton, Rio Tinto and Glencore may soon populate India’s coal-mining sector with their deep pockets and high-end technology to aid the government’s efforts to ramp up production of the fossil fuel, rising imports of which have been an increasing strain on the country’s current account in recent years.
The Cabinet on Wednesday allowed 100% foreign direct investment (FDI) through the automatic route for sale of coal in the open market, in a critical step that will result in culmination of a February 2018 decision allowing auction of coal-bearing blocks to private parties for commercial mining.

Last year’s move virtually upended the Coal Mines (Nationalisation) Act, 1973, which has kept the sector largely a preserve of public-sector monolith Coal India (CIL) for long.

Also read: Sanjeev Sanyal says economic slowdown evident, lists factors affecting demand

However, the move hasn’t yet borne fruit as local players like Adani Group, Tata, GMR and JSPL have evinced little interest. The absence of a facility to tie up with global players is cited to be one reason for the tepid response. The coal ministry is now in the process of auctioning off a clutch of coal blocks and the Cabinet move has come as shot in the arm for it.

Vedanta chairman Anil Agarwal said, “100% FDI in mining is another progressive step announced by the government. This will send a positive signal to global investors and will give a significant push to the economy to reach the $5 trillion mark.”

India is estimated have coal reserves of up to 300 billion tonne; the country produced 730 million tonne of coal in 2018-19: 607 million tonne by CIL, 64 million tonne by Singareni Collieries and the balance by captive coal producers. The country has set a target to increase coal production to 1,500 million tonne by 2022.

Even though domestic coal production has improved in recent years, the rising demand for the fuel had led to a surge in coal imports — shipments surged from 190 million tonne in FY17 to 235 million tonne in FY19.

Currently, 100% FDI via the automatic route is allowed in coal and lignite mining for captive consumption by power, steel and cement units. Also, 100% FDI is allowed via the automatic route for the setting up of coal washeries, but the FDI firms can sell washed coal only to those units that supply raw coal for processing, and not in the open market. This has practically prevented FDI from flowing in. Under Wednesday’s decision, 100% FDI will now be allowed in not only mining for sale in the open market, apart form in ‘associated infrastructure’ like washeries, crushing, coal handling and separation.

If private players, including foreign ones really get into production of coal for sales, owners of distressed power assets won’t have to worry about uncertain fuel supplies. This could lead to consolidation in the power sector and rise of large vertically-integrated energy companies with interests in coal mining, power generation, transmission and distribution and retail supply, an analyst said.

“As India’s thermal coal demand far outstrips production, the more we produce within the country, the better. Less imports mean less forex outgo. In that light, FDI will play a complementary role to Coal India. However, in the evolving scenario, Coal India will need to improve its efficiency to remain competitive. It has to reduce its cost of operations,” a former CIL official told FE, on condition of anonymity.

After the Supreme Court, in 2014, cancelled 204 coal mines (barring 10 blocks with cumulative geological reserve of 5,418 mt) that were allocated to government and private companies since 1993, 84 mines (53 PSU allotment, 31 auction) have been reallocated for captive consumption to the power and non-regulated (steel, cement, fertilisers) sectors under the Coal Mines (Special Provisions) Act, 2015. These included coal blocks with extractable reserves of more than 8,500 mt. However, the production from these mines is being stepped up in a rather slow pace.
In February 2019, the Cabinet allowed private companies to sell up to 25% of production from captive coal mines in the open market. Following that, the coal ministry has started the process of auctioning 27 coal mines. It will also allot 15 coal mines to PSUs.

The Union power ministry, as FE reported recently, wants the coal ministry to ramp up commercial mining. Power minister RK Singh has written to his coal counterpart Pralhad Joshi emphasising the need to create open coal market which, in turn, will facilitate an open power market. The power ministry feels that power producers must be able to buy coal from open markets at competitive prices and power purchase agreements (PPAs) should not be a precondition for getting access to coal.

As FE reported last month, a high-level Niti Aayog committee had also suggested the coal ministry to conduct auctions only for commercial mining and put an end to captive coal block allocation. Experts have attributed sub-optimal use of captive coal mines to lower requirement at power plants to which they are tied up to, and have argued that such dynamics limit competition and reduce efficiency.

Captive coal blocks produced only 25.1 million tonne (MT) in FY19, much lower than the peak output of 43.2 MT in FY15 when the Supreme Court had cancelled the licences of 204 such coal mines. However, a senior coal ministry official told FE that captive coal production would surpass the 43 MT mark in the ongoing fiscal.

Do you know What is Wholesale Price Index (WPI), Public Debt, Finance Commission Grants & Other Transfers, Economic Survey, State Finance Commission? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.