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Coal Block Cancellation

In a recent development, the Supreme Court has deallocated 214 coal blocks out of the

218 coal blocks allocated since 1993. The Supreme Court said that it saw no reason to

save the blocks, as the allocations were arbitrary. All the companies have also been fined

Rs. 295 per mega tonne for the loss suffered by the country, and in this case, the Court

has accepted CAG's estimation of the loss.

On the Centre's request to save 40 functional coal blocks and two ready-to-function ones,

the court said they would continue to function for the next 6 months, till March 31, 2015,

to give the government time, to make a transparent policy under which these coal blocks

will be allocated.

Implications of the SC verdict

Impact on the banking sector:

The banks' exposure to iron and steel companies till June 2014, stands at Rs 2.65 lakh

crore, and the verdict is going to have an impact on the banks, which have given loans

directly or indirectly to these companies affected by the verdict.

Moreover, banks’ exposure to power companies, which too will get partly affected, stands

at Rs. 5 lakh crore.

The whole process could push up banks' NPA (Non-performing Assets) levels, as many

power projects could get stuck.

Impact on companies:

The power companies would be the worst affected by the Supreme Court's judgment.

The companies which have already begun production have to pay a fine. Companies like

JSPL who were getting windfall gains on steel and power production have to pay a penalty

of more than Rs. 3000 crore. Those who have not started production may lose the blocks,

or will have to buy mining rights in a fresh auction.

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Impact on CAD:

The Supreme Court's decision to cancel coal block allocations may have a marginal impact

on the current account deficit and the net burden on CAD is estimated to be just an

additional $700 million.

Our View:

Even though many analysts feel, that the judgement is sentiment negative, we feel that

it is true only for the very short run. Given that the government and the companies

have been given 6 months, we do not see any disruption in coal supply in the long run.

In fact, such a judgement has given a clear signal against any further nexus between

the politicos and India inc. This should be seen as a positive step in the long run.

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