100% FDI under automatic route in coal mining and associated infrastructure has been approved
Allocation of coal mines will only be done through auctions and even after winning the auction, a miner has to acquire the necessary land for operations
Even as India takes its first steps towards privatizing coal mining in India, it might be a while before the country sees active participation in the sector.
On Wednesday, commerce and industry minister Piyush Goyal said 100% foreign direct investment (FDI) under automatic route in coal mining and associated infrastructure has been approved. This comes after a decision that the Modi government took in February 2018 that would allow auctions of coal-bearing blocks to private parties for commercial mining. Coal mining has so far been the exclusive domain of public sector Coal India Ltd.
Before this, FDI was allowed only in captive coal and lignite mining by power projects, steel and cement companies. In addition, coal washeries were allowed to be set up, subject to the condition that these washeries would not either mine coal or sell washed coal in the open market. Now, 100% FDI is permitted under the automatic route to set up such washeries, subject to provisions of a) Coal mines (special provisions) Act, 2015 and b) MMDR Act, 1957.
In response to the government’s decision, Anil Agarwal, chairman of metals and mining conglomerate Vedanta, 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." The current decision will allow global miners like Rio Tinto, Glencore and BHP Billiton to enter the Indian coal mining space.
However, analysts point out that there still will be some initial hindrances to private investment taking place. The allocation of coal mines will only be done through auctions and even after winning the auction, a miner has to acquire the necessary land for operations. The miner is also responsible for obtaining the environment and forest clearances and a host of other clearances needed before mining can begin. “The new miner also needs comfort on availability of rakes, which is in short supply," an analyst said. “Once coal is mined, the new miner will have to compete with Coal India prices (likely e-auction prices) to sell or enter into long-term contracts for sale."
A report by Emkay Securities said: “Although the initiative is a welcome move, we are still some time away from merchant coal mining given the overarching presence of Coal India, shortage of rakes, time taken for land acquisition and various approvals from local/state/central governments. We do not see any near-term risks to Coal India because of this decision."
However, the thermal sector is likely to benefit from this move. Acuité Ratings and Research said in a note that the “government’s decision to permit 100% FDI via automatic route in coal mining and allied activities will facilitate higher investments in the thermal power sector and arrest the increasing dependence on coal imports over the medium term. A study by Acuité Ratings indicates that coal imports by private sector independent power producers have leapfrogged to 14.5 million tonnes from 10.3 million tonnes i.e. over 40% year-on-year increase in April-June 2019."