Coal which struck Gold for Government


Until 1993 the Coal blocks were “Nationalised” i.e. only PSU’s like Coal India Limited could be allocated mining blocks. Owing to surge in power demand Sec. 3(3) (a) (iii) of the Coal Mines (Nationalization Act), 1973 was amended to allow private participation. From ’93 till 2010 some 218 coal blocks were allocated to various pvt Companies. In 2010 UPA Government amended the Mines and Minerals (Development & Regulation) Act, 1957 and introduced allocation of blocks via competitive bidding (auction).
BJP MP Hansraj Ahir was the whistle-blower in the “Coal Scam” in which UPA was accused of “looting” lakhs of crore rupees. The allegations got more traction after the CAG report was tabled in the parliament in the year 2012. Naturally a Public Interest Litigation was filed before the Supreme Court and two important judgments (very big impact on industry) were passed by the SC. On Sep 24 2014 the SC quashed 204 out of 218 coal mine allocations. The Court clearly stated that all these allocations were illegal and arbitrary. You may read the judgment Here

I personally opine that due to the scam, cancellations of coal blocks and lack of swift decisions by UPA many Companies suffered huge losses. In fact some nationalised banks also lost crores of rupees due to NPAs. However no action was taken against UPA (even NDA as some (very few) coal blocks were allocated by them as well) for wasting/looting public resources. Lets leave it at that.

Post May 2014:

1. Legislative Actions:
To improve power situation and reallocate the cancelled coal mines NaMo govt passed Coal Mines (Special Provisions) Act, 2015 which can be accessed Here and rules can be read Here

The Act/Rules provided for:

Allocation of the cancelled coal blocks through auction for specified end uses (SEUs).

Categories under ‘power’ and ‘non-regulated’ (Iron and Steel, Cement and Captive Power Plant) sector.

Enabling provisions for carrying out the auction and allotment processes and prescribed e-auction comprising of technical and financial parameters.

Standard Tender Documents (STD) prescribing the conditions and the process for e-auction of the coal mines.

 2. Governance Actions:
The following actions/decisions were taken by the NaMo Govt:
The Cabinet Committee on Economic Affairs (CCEA) approved the “Methodology for fixing floor price and reserve price for coal mines/blocks proposed to be auctioned/allotted” This document can be accessed Here

The methodology provided for fixation of a ceiling price for power sector coal mines/blocks, which was to be Coal India Limited (CIL) notified price for the equivalent grade of coal.

On the basis of the said methodology, the Central Mine Planning and Design Institute Limited (CMPDIL) calculated the intrinsic value based on the net present value (NPV) and the corresponding floor and additional reserve price of the coal mines/blocks.

Please note CMPDIL is a subsidiary Company of Coal India Limited which is a PSU. CMPDIL publishes some very informative reports one of which can be accessed Here

3. Admin Actions:

The following decisions/methodologies/actions were undertaken
The Standard Tender Document for power sector and non-regulated sector coal mines prescribed a two stage bidding methodology viz. Stage I and Stage II.

The Stage I bidding comprised of submitting technical bid providing details regarding compliance with the eligibility conditions; and financial bid specifying the initial price offer (IPO).

In the case of non-regulated sector coal mines, the IPO was to be higher than the floor price and in case of power sector coal mines the IPO was to be lower than the ceiling price.

The bidders who qualified on the basis of Stage I bidding submitted their final price offer (FPO) at Stage II bidding (e-auction), which was carried out online on the platform for e-auction provided by MSTC Limited on its website.

4. Explanation of the Process and How NaMo Govt’s Method is Different and Transparent

Coal blocks earmarked for the power sector were put on reverse auction, where the winning bidder was the one who quoted the lowest transfer price of coal. This was done for power sector to keep electricity prices lowest plus ensuring that the States also earn from the mining activity. This is explained in an article in The Hindu: Reproducing

In the reverse auction, the government sets a ceiling price that is representative of production cost of Coal India. The private sector companies, which are considered more efficient, are expected to bid at lower price. For example, if the ceiling price is Rs.1,000 and the bidder bids Rs.800, then the benefit of Rs.200 is directly passed on to consumers. This would mean if the power is sold at Rs.3.50, out of which Re.1 is cost coal and the same will become 80 paise because of pass through benefit of Rs.200. Thus, the new price of power will be Rs.3.30 a unit. In case the bids touch zero, meaning that the private producer is ready to pass on the benefit of coal extraction to power consumers, there would be a forward bidding. Under the forward bidding, the companies will be required to mention the price which they are willing to give to States. Here,

Other mines were auctioned at normal forward bidding process.

5. The advantages of reverse bidding process for various stakeholders are:

For State Governments: Higher returns to the state governments in the form of additional premium.
For Power Sector: Aggressive competitive bids in reverse auction leading to lower power tariffs for consumers
For Bidders: They can choose which mine to bid for based on their strategy and requirement.
The total capacity of coal put on auction for the power sector can fulfil only 5–6% of the total thermal generation capacity of the country, while the effect of reduced tariffs due to coal block auction will be localized in nature.

July 2016 CAG Report

CAG Report was tabled in the Parliament and our media started screaming. The main intention to write this article was to explain you guys the CAG observations, however you should be knowing the law/logic therefore this lengthy write up.

The main “non-compliance’s” pointed out by CAG and my views are presented below:

A. Potential Level of “Competition” was not achieved in bidding for 1st 2 tranches
B. Report points to “Inconsistencies and inaccuracies” in following some “assumptions” in computation of intrinsic values which resulted in under-determination of upfront amounts in 15 blocks, under-determination of floor prices in 6 non-regulated sector coal mine and revised fixed rates in all nine power sector coal mines.
C. In allocation of “Moitra Coal Mine” allocation towards washery for extraction of coking coal was not considered while calculating intrinsic value
D. Other miscellaneous non-compliance

My Views:

The issue of cartelization was examined by the Delhi High Court in a plea filed by Jindal Power Limited against cancellation of 2 coal mine blocks by GoI. The Court observed that there was no “evidence” of cartelization in low bids for coal blocks.

The above image is Sourced from an IE article which clearly shows that only about 6% of the bidders were JV Companies and out of which only 1 Company actually went on to win a coal block. So in my view the observation of CAG that there were low bids and allowing JV’s to bid stifled competition can be challenged.

Further the CAG report points that the bid should be higher than the floor price to be acceptable, but on close observation of bidding its revealed that the bids received were in multiples of the floor price. (anyone seeks detailed bid data, let me know)

Other observations regarding the price/valuation/calculation of intrinsic value are in my opinion post facto events where CAG has the advantage of hindsight. Valuation not being an actual science there could be a difference between the way CAG weighs assumptions and in the way valuation was done by CMPDIL.
Assuming that the valuation made certain errors, the bidding process in itself was designed such that the bidders, who surely did their “own” valuation, will bid in such a manner that the “real” price will be determined by market forces thereby not causing any losses to the exchequer.

Other observations regarding the not accounting for washery for coking coal and other systemic lacunae seem to be stemming up from the bureaucratic side of our Ministries. The observations by CAG are right and I am sure in future the same will be accounted for.

CAG’s observations that some of these issues which were not addressed like the non-tallying of output of mines, diversion of coal etc could result in losses. There surely is a huge scope for improvement and avoidance of litigation by/against UOI.

Some Achievements:

So what was achieved by going through this process by the GoI?

  • Allocation of 75 coal mines for specified end uses.
  • Expected revenue of these 75 coal mines to States is estimated at more than Rs. 3.53 Lakh Crores during the life of mine/lease period.
  • The estimated revenue from the e-auction of 31 Coal Mines is Rs. 1,96,698 Crores.
  • As on 31.05.2016, the revenue already generated from the allocation is 2,237 Crores (excluding Royalty, Cess and Taxes) which shall be devolving entirely to the coal bearing State.
  • Coal Mines have started production giving huge employment to people ( Here )
  • Availability of Coal Stock for power production. ( Here )

You may read all links attached and further do your own research and conclude if there is any “scam” or not. In my view NaMo govt’s “Neeti and Neeyat” both are clean. The CAG being our Federal Auditor has right pointed out to some sytemic errors which I am sure will be incorporated by the Coal Ministry.




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