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Business News/ Politics / Policy/  Govt issues draft rules for coal block reallotment
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Govt issues draft rules for coal block reallotment

Govt-owned companies and power plants using imported coal can also bid for blocks offered through auction route

The Narendra Modi government is in a race against time to take over mines that have been deallocated by the Supreme Court and reallot them. Photo: BloombergPremium
The Narendra Modi government is in a race against time to take over mines that have been deallocated by the Supreme Court and reallot them. Photo: Bloomberg

New Delhi/Mumbai: The government plans to allot 74 of more than 200 coal blocks cancelled by the Supreme Court in September through a mix of auctions and allocations by 16 March, coal secretary Anil Swarup said on Wednesday, unveiling the draft rules for the much-awaited process.

Of these, 42 blocks with a production capacity of 90 million tonnes (mt) are operational and 32 with a capacity of 120 mt are ready to be mined.

According to the draft rules, while coal blocks will be allotted to central and state government-owned companies for meeting their needs, these entities will also be allowed to bid for blocks that will be offered through the auction route. Power plants using imported coal are also eligible to participate in the auction, and firm schedules are being put in place to ensure timely production of the fuel.

The government said its aim was not to increase electricity tariffs for the power generated from coal mined from these blocks.

Swarup said the government is considering several options to prevent irrational bids that could entail high prices for end-users.

Analysts have cautioned that reallocation of mines by way of competitive bidding, as articulated by the Coal Mines (Special Provisions) Ordinance 2014, could create an electricity tariff conundrum.

Independent power producers that were enjoying the benefit of captive coal will now see their input costs rise because they will now pay for both the mine licence and production cost of coal.

State government-owned distribution companies, meanwhile, have been hobbled by low tariffs, slow progress in paring losses, higher electricity purchase costs and crippling debt. State electricity boards are burdened by debt of 3.04 trillion and losses of 2.52 trillion.

Private companies that were allotted many of the 204 blocks that were cancelled by the Supreme Court—and, by extension, those that benefited from the irregular allotment of mines—are eligible to bid for these blocks offered under the auction route, provided they submit the 295 per tonne levy ordered by the apex court.

“It is not a revenue maximizing approach," said Swarup of the auctions, adding that he expects a good response from bidders.

The Narendra Modi government is in a race against time to take over mines that have been deallocated by the Supreme Court and reallot them.

On 25 August, the Supreme Court ruled that allocation of all coal blocks between 1993 and 2010 were illegal, destroying 20,000 crore of market capitalization of metal and power companies in a single day.

Swarup said bids would be called on 22 December, with the last date of submission being 11 February. The technical bids will be evaluated and listed on 3 March and the e-auction will be held on 6 March. The orders for the award of these blocks will be issued by 16 March. The government has invited comments and suggestions on the draft rules by 9am on 24 November.

“Eligibility to bid for Schedule II (operational mines) & III (ready to be mined) coal mines shall be dependent on the status of preparedness of their end use plant—80% of investment made in the EUP (end use plant) for Schedule II mines and 60% of investment made in the EUP for Schedule III mines," the government said in a statement on Wednesday.

This should ensure that only serious bidders enter the fray, not traders.

The government will also ensure that the blocks are not monopolized by one entity, with a cap on the maximum blocks one company can hold being worked out by the nominated authority. The valuation, including the reserve price for the blocks, is still being worked out.

The final decision will require approval by the Union cabinet.

“In case of allotment to Government companies, the progress of development of coal blocks by the applicant in the past, financial and technical capabilities of the applicant, status of preparedness of end use plant, per-capita power availability in the State of the applicant, its current and future requirements etc. will be the factors for selecting the allottee," the statement added.

The draft norms also specified that there will be a graded application fee depending on geological reserves. It would range from 5 lakh for reserves less than 10 mt to 1 crore for more than 100 mt.

Production of coal in India has not kept pace with growing demand for the fuel in a country where the power sector consumes nearly 78% of the domestic output of the mineral. While India’s power generation capacity grew by 60% over the last five years, coal production only grew by around 6%.

Some analysts have reservations about the reallotment process.

A significant upfront payment requirement and tariff caps on power companies are among factors that could “impact the coal block auction process and may hit the profitability assumptions of companies bidding for these mines", said a 13 November UBS Investment Research report.

“This could mean less interest from potential bidders, putting the success of the auction at risk," it said.

The time frame for the reallocation of coal blocks has to be in line with the Supreme Court’s 31 March deadline for cancellation of operating coal mines, said Dipesh Dipu, an expert on the power sector and associate professor at the Administrative Staff College of India in Hyderabad.

“This may be challenging for the bidders as new bidders might like to conduct detailed study, make site visits, examine the workings and assess a prudent value estimate, and time permitted may appear short for all this," he said.

To be sure, Swarup stressed the fact that this is a preliminary schedule, which may change.

“We are in the process of formulation of rules. They have been not fixed till date and we are open for stakeholders’ comments for ensuring transparency," the coal secretary told reporters.

Swarup said that these rules are only applicable for the first set of 74 blocks and may change in the future. He also added that as and when the government decides, it can go for commercial mining.

“Once this process is over, what we plan to do with the balance blocks is to be seen. We will evolve a strategy. We are also considering whether more blocks can be included in this lot," Swarup said.

Industry welcomed Wednesday’s announcement.

“This is a time-bound thing, so that is good as it will end the uncertainty in the industry," said Sushil Maroo, chief executive officer of Essar Energy Ltd, co-owner of the high-profile Mahan coal block in Madhya Pradesh with Hindalco Industries Ltd.

“Other norms that say there should be no monopolies in the market and that tariffs should not run high are pretty good principles to work with. Also, rationalizing the geographies in which the coal blocks would operate in so that there is proximity to the plants is excellent," Maroo added.

An Aditya Birla Group spokesperson declined to comment.

“Overall, this is positive for the industry, wherein the end-use will be given priority. Also the compensation to the prior allottee, in case they are not winning the bid, should be positive for the financial institutions, who have significant exposure to the existing mines," said Nilendu Mukherjee, director (corporate clients, corporate and institutional banking) at Royal Bank of Scotland Plc’s India unit.

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ABOUT THE AUTHOR
Utpal Bhaskar
"Utpal Bhaskar leads Mint's policy and economy coverage. He is part of Mint’s launch team, which he joined as a staff writer in 2006. Widely cited by authors and think-tanks, he has reported extensively on the intersection of India’s policy, polity and corporate space.
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Published: 19 Nov 2014, 06:55 PM IST
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