COAL BLOCK ALLOCATION SCAM

INTRODUCTION:Coal allocation scamorCoalgate, as referred by the media, is a political scandal concerning the Indian government's allocation of the nation's coal deposits to public sector entities (PSEs) and private companies by former Prime Minister Manmohan Singh.The Indian government had illegally allocated 218 coal mines to both Public and Private sector industries. The allocations are termed as illegal because they were not done on the basis of a competitive bidding. Due to this the companies had to pay less than what was expected of them. In a draft report issued in March 2012, theComptroller and Auditor General of India(CAG) office accused theGovernment of Indiaof allocating coal blocks in an inefficient manner during the period 20042009.

CURRENT STATUS:The Supreme Court on Monday declared allocation of all the 218 coal blocks made since 1993 as illegal and arbitrary while also holding that the central government had no power of allocation under the relevant lawsThe Apex court slammed the allocation of the coal blocks, saying allocations were made in casual manner without doing any comparative assessment of applicantsThey were done in an unfair, arbitrary & non transparent manner without following any objective criteria ALLOCATIONS: Out of 218 coal blocks Power sector accounted for 95 blocks or 44% Steel sector accounted for 69 blocks or 31%

SECTORS AFFECTED BY THE SCAM:Power SectorIron and Steel SectorBanking Sector

IMPACT OF THE COAL BLOCK ALLOCATION SCAM:INCREASE IN IMPORTS OF COAL FOR UPTO MORE THAN 50%The Supreme Court verdict of cancellation of the coal blocks that were allocated would cost the country a great deal. The country will have to import large amounts of coal and this will raise the import bill.Cancellation of the allocated coal blocks would lead to a huge scarcity of coal in the country and power generation will be affected largely since more than two third of the electricity in India is generated with the help of coal.

BANKS WILL BE AFFECTED IN TERMS OF BAD LOANS:The lending banks will be affected to a great extent since the borrowing firms will not be able to return the loans since the SC verdict will affect their cash flows due to an increase in costs.Till date, the amount lent by banks to the power sector is up to Rs. 5 Lakh Crore. This amount might not be affected to a large extent but there will be a problem of bad loan.Due to bad loans, the banks might face problems in the sense that they will have to make provisions for them and keep some additional amount of money aside to cover them.

INCREASED BURDEN ON COAL INDIA FOR SUPPLY OF COAL:Another effect of the coal block cancellation will be that the burden on Coal India for supply of coal will increase.Since there will be scarcity of coal, for immediate help the needy sectors will turn to Coal India for supply of coal. This will increase the burden on Coal India.STOCK PRICES WILL FALL:One of the very obvious impact of the scam will be that the stock prices of the companies involved will fall. There was a sell off of the metal stocks after the SC verdict was announced. Many stocks like JSPL, Hindalco, etc. were affected as their prices fell a great deal.

IMPACT ON SPECIFIC COMPANIES:Jindal Steel & Power LtdJindal Steel and Power will also take the heatReason being, they were running close to 12 million tonnes of coal from 2 of their coal minesOne is helping them with the Jindal Power and one is helping them in Jindal Steel and Power Hindalco Industries: Hindalco will also be affected to a great extent since it will affect the profitability of the company.The company produces 25% of its total aluminium production from Hirakud smelter which uses the coal from Talabira coal mine. If the said coal mine is deallocated, Hindalcos profitability will be affected.Reliance Power: Government had earlier allowed the company to divert surplus coal used in Sasan UMPP. Although after the ruling, the diversion of coal from UMPP coal mine is disallowed. COAL BLOCK SCAM AFFECT - PFC, REC, SBI FALL ON ASSET QUALITY The coal crisis has affected public sector lenders that havelent to iron and steel companies after the Supreme Court on Monday deemed coal blocks post-1993 illegal. Even the stocks of PSU banks slipped due to their exposure to coal mines. State Bank of India was trading down 18 points at Rs 2487.55 on 26 Aug. 2014 Even Power Finance Corporation ( PFC ) and Rural Electrification Corporation ( REC ) have the highest exposure to coal related companies. Shares of PFC were trading over 4.5 percent down at Rs 245.50 and REC was down over 3.5 percent at Rs 259.10 in early trade.

QUICK TAKEAWAYS AT THIS POINT FROM THE SUPREME COURT ORDER:

There is absence of penalty or disciplinary measures towards the illegality of allocations happened.

This will also lead to the argument to affected companies why the block must not be de-allocated.

Even on the usage of coal, the SC has not ordered anything on whether the companies should continue using coal from the illegal blocks.

But it had a powerful message saying - no matter how far back we have to go - if a process was illegal it was illegal. And doesnt matter how much time has lapsed, how many Governments have come and gone, one can always attempt to correct it.

The stock market may grumble or complaint, profits of many companies will affect crucially and the economic sentiments of people may hurt or strengthen down but for the long term case it may a good news or a initiative towards being fair in a futuristic vision. And will also relate to fair to National Resource Allocation Policy.

The Power Developers are in jitter as they have invested a total of Rs 2,86,677 crore toward exploration, mining and attached end use projects, which represents almost 3% of GDP. Coal-based projects represent 58.75% of India's total installed capacity.

REMEDIES: Removal of state monopoly in coal Remove repressed pricing at a discount to imported coal Auction coal mines to whoever offers the highest lease rent/royalty/revenue shares A suboptimal solution can also be done by auctioning of captive mines To institute complete transparency CBI should be made autonomous of the government Handover all the unallocated coal blocks to Coal India Ltd. Since it a Government company. Most probably coal blocks allocated after 2004 and all those where no work is started will only be cancelled. From the blocks allocated prior to 2004, any coal sold in open market/ diverted to other plant may be penalized @ 100% market value of coal. All allocations that have remained still-born, where no ground has been broken, should be cancelled. Those allottees, who have no serious business plans that entail use of coal apart from selling it on at a profit, should have their allocations revoked and face fines. But those allocations that have seen actual mining for viable business projects, should stand and be considered good in law.

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