SC quashes allocation of 214 coal blocks allotted since 1993

Samanwaya Rautray & Sarita C Singh, ET Bureau | 25 Sep, 2014, 

NEW DELHI: The Supreme Courtcancelled almost all coal blocks given to private companies since 1993, delivering a severe blow to firms that invested heavily in power stations and factories linked to producing mines, but officials said the verdict clears the air for auction of blocks and formulation of policies to rejuvenate the troubled sector.

The judgment — similar to an apex court order cancelling 122 telecom licences in 2012 — dashed hopes of several business houses, including the Naveen Jindal and Aditya Birla groups, GMR and GVK, which will lose mines, but spared the mines attached to Reliance Power's Sasan project. The corporate sector fears that the apex court verdict will hurt coal supply, erode investor confidence, and hit sectors such as power, steel and mining. 

The officials of some companies said they would file a review petition while some legal experts asked why the private sector had been singled out for mistakes committed by the government.

The apex court showed no sympathy for the operators of 38 blocks that are already producing and five that are close to production and said these allocations were "fatally flawed" and the beneficiaries must suffer the consequences.

"It is expected that the government will not deal with the natural resources that belong to the country as if they belong to a few individuals who can fritter them away at their sweet will; these proceedings may also compensate the exchequer for the loss caused to it..." the court said.

The companies operating the 38 blocks will be allowed to produce coal for six months to ensure smooth transition before Coal India steps in. They will have to pay a penalty of Rs 295 per tonne for coal already extracted, on the basis of the calculation made by the Comptroller and Auditor General of India, which was accepted by the court.

Official data shows that 301 million tonnes have been mined from these blocks until last year, which translates into a penalty of aroundRs 8,800 crore, including a likely penalty of Rs 1,300 crore for JSPL alone. The court asked the companies to pay the penalty in three months. Shares of Jindal Steel and Power fell 10%, while lenders like Bank of India, Canara Bank, and Punjab National Bank lost 4.5-5.5% on worries that the decision would result in an increase in their non-performing assets (NPAs).

The bench, comprising Chief Justice RM Lodha and Justices Madan B Lokur and Kurian Joseph, justified its decision saying that the government was prepared to take things forward even if all allocations were cancelled. In that eventuality, the central government had said that CIL can take over and continue the extraction of coal from 46 coal blocks."...CIL would require some time to take over the coal blocks and manage its affairs for continuing the mining process. 
Effectively therefore, it was submitted that even if the allotment of these 43 coal blocks is cancelled, the central government can ensure that coal production will not stop," the court recorded. 

Government officials said they were planning to quickly auction the blocks and were preparing a plan to ensure smooth supplies, but industry was not convinced. Issac George, Group CFO, GVK Power & Infrastructure said: "This move will have an extremely negative impact on power, steel and cement companies as an issue that is almost 21-years old is being addressed now and a lot of investments have gone into these blocks which will now get impacted.

Also the penalties imposed by the Supreme Court are very exacting and will take a big toll on the finances of some of these companies, how will the companies cough up this kind of cash without seriously compromising their cash flows or indebting themselves further." 

Hindalco Chairman Kumar Mangalam Birla said he hoped the government had a plan ready. "...Many companies have invested lakhs of crores on these mines. I am sure the government has an action plan and we will learn more about it in the coming days and weeks." CII President Ajay Shriram said the judgement may have been intended to bring in transparency, but it will jeopardise investments made in the sector. 

"It will raise questions on sanctity of government policies impacting the investment climate. The government will need to expedite reallocating the cancelled producing blocks so that production is not affected in the short term," he said.Suhail Nathani, Founding Partner Economic Law Practices, who appeared for some of the companies whose mines have been de-allocated, said the court order would herald a new transparent regime for allocation of state-owned resources but the process of correcting "the wrong done by the Union of India" will take a heavy toll on the private sector. 

"Allotments over the past two decades were made in accordance with the laws and practice adopted by successive governments at the centre. It was nobody's case that the private sector made the rules or laws. Then, the question that begs consideration is why must private sector alone bear the cost of this wrongdoing - whether under law or equity?" he said.

Advaya Legal managing partner Ramesh Vaidyanathan said: "The verdict seriously questions the credibility of the government licensing processes and will have an adverse impact on foreign investment. Bankability of these types of licences and concessions is critical not only to developers of these projects but also other stakeholders such as investors, lenders and shareholders. What makes it worse is that a process that ran for more than 20 years has been held to be illegal, thereby implying that the clock can be set back several years down the line."

NGO Common Cause and lawyer Manohar Lal Sharma had challenged all coal block allocations since 1993 as illegal. The court had agreed with them on Aug 25, 2014, but had deferred a ruling on the consequences of its decision in view of its far-reaching economic impact.