Coal quandary

In a sweeping pronouncement, the Supreme Court has termed all the 218 coal blocks allocated since 1993 illegal. This has raised a fundamental question: how to allocate high-value natural resources in a fair and transparent manner? An analysis by Anupam Chakravartty and Srestha Banerjee

By Anupam Chakravartty, Srestha Banerjee
Published: Tuesday 30 September 2014

Coal quandary

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Dirty picture

Fate of 218 coal blocks in limbo; Centre seeks to cancel mines yet to be developed

ON SEPTEMBER 9, the Supreme Court reserved its judgement on the fate of the 218 coal blocks it had declared illegal a fortnight ago.

On August 25, the court pulled up the Centre and declared all allocations between 1993 and 2010 illegal. The “common good and public interest have suffered heavily” because of arbitrary allocation of these coal blocks to private and government companies, said Chief Justice R M Lodha. The apex court was hearing a slew of public interest petitions that contested coal block allocations based on the 2012 report of the Comptroller and Auditor General (CAG) of India, which suggests that illegal allocations of coal blocks to mining companies have caused losses to the tune of Rs 1.86 lakh crore to the exchequer. The court had also held the government responsible for granting largesse to private companies. As many as 106, or about 50 per cent of the coal blocks, have been leased out to private companies. The ruling on August 25 had landed the ruling BharatiyaJanata Party (BJP) in a sticky situation. Just a few months ago the BJP had campaigned against the previous United Progressive Alliance (UPA) government wielding the CAG report. But 39 of the 218 coal block allocations declared illegal, were allocated during the regime of the BJP-led National Democratic Alliance (NDA) between 1998 and 2004 (see ‘Political anatomy of a mega scam’).

On September 9, Union Coal Secretary Akhouri Sanjay Sahay told the court that the government is ready to begin on a “clean slate” with speedy and “transparent” auctioning of the coal blocks because the priority is to deal with the “looming power crisis” in the country. The Ministry of Coal stated that it did not want to form any committee to look into allocations and favoured cancellation of all the coal blocks, except 46.

Political anatomy of a mega scam
Both the Congress- and BJP-led governments at the Centre bent rules to allocate coal blocks to companies
Fall of a national asset
From nationalisation to privatisation

Mines and Minerals (Development and Regulation) (MMDR) Act came into being; it placed mines and minerals under the control of the Centre but allowed it to only develop and regulate the mines

Coal Mines Nationalisation (CMN) Act enacted; 711 coal mines were nationalised whose development was vested in the Centre; the rest continued to be operated by private companies

CMN Act amended; mining leases with private lease holders terminated except for iron and steel who were allowed mining for captive use

Oct, 1991
The Planning Commission proposed the entry of private entities to develop coal and lignite mines as captive units of power projects

Jan, 1992
Cabinet approval sought for allowing private sector participation in captive coal mining operations for power generation and other end uses to be notified from time to time

Jul, 1992
Coal ministry set up Screening Committee to implement provisions of captive mining as per the 1976 amendment clauses

May, 1993
CMN Act amended to allow private sector participation in coal mining for captive use for purpose of power generation as well as for other captive end uses to be notified from time to time. Coal washery was also included as end use

Mar, 1996
Cement included as an end use sector

Mar, 1999
NDA government led by BJP allowed captive coal mining companies to sell coal in the open market to keep the surplus stock away from fire

New State Mining Policy came into being; allowed state agencies to mine commercially

May, 2003
Electricity Act 2003 brought about electricity reforms but created open and short-term markets for power trading. With no long-term power purchase agreements with distribution companies in place despite coal allocations since 1993, many captive power producers switched to trading in these power exchanges, which led to high tariff

Jul, 2004
Idea of competitive bidding to ensure transparency in coal block allocation was proposed

Sept, 2010
MMDR Act amended to allow the Centre to set the terms and conditions for the selection of a company through competitive bidding

Feb, 2012
Auction by Competitive Bidding of Coal Mines Rules introduced

Aug, 2012
CAG report on Performance Audit of Allocation of Coal Blocks and Augmentation of Coal Production tabled in Parliament

Aug 25, 2014
Supreme Court declared coal block allocation process between 1993 and 2010 illegal

Sept 9, 2014
The court reserved its judgement

Attorney General of India Mukul Rohatgi had sought exemption for these 46 coal blocks—19 were allocated during the NDA regime—from possible revocation of licences on September 1, saying 40 are under production and mining is about to begin in the rest. These coal blocks are with big-ticket private power and steel companies and are estimated to produce 53 million tonnes of coal this year. This is 10 per cent of the total projected output from all the 105 coal blocks with private companies and is sufficient to generate 26,000 MW of electricity and produce 12 million tonnes of steel.

Representing Indian Power Producers’ Association, senior lawyer Harish Salve told the court that individual cases must be considered by a three-member panel comprising a retired Supreme Court judge and an auditor. Rohtagi opposed the idea, saying it will delay coal block allocation. If the Supreme Court cancels all the coal blocks, he said, the government mining company Coal India Ltd should be allowed to take over active mines, or companies be allowed to continue production until the blocks are re-auctioned to ensure supply to power plants.


Prashant Bhushan, a Supreme Court lawyer representing non-profit Common Cause, a petitioner in the coal allocation scam case, says, “For all the noise made by the government, production of coal from the post-1993 allocations is only 7 per cent of the total coal demand in the economy, which is about 739 million tonnes.”

While declaring the coal blocks illegal, the court based its judgement on the presidential reference related to the allocation scam of another natural resource—2G spectrum. In 2012, it cancelled all 122 spectrum licences on the ground of arbitrariness, saying alienation or allocation of natural resources should rely on principles of equality as enshrined under Article 14 of the Constitution, else such executive decisions are arbitrary or capricious (see ‘Behind the blocks’).

Behind the blocks
The first signs of the coal allocation scam started emerging in 2005. Hansraj Ahir, four-time BJP MP from coal-rich Chandrapur district in Maharashtra, wrote to offices of the prime minister and finance minister questioning the basis on which coal blocks were allocated. On November 30, 2009, Madhu Koda was arrested for illegally allotting iron ore and coal mining contracts in Jharkhand when he was the chief minister. It is said Koda and his associates amassed over Rs 4,000 crore by allocating coal blocks.

In March 2012, the Comptroller Auditor General (CAG) of India in its draft report accused the government of "inefficient" allocation of coal blocks between 1993 and 2010 and said the block allottees made windfall gains worth Rs 10.7 lakh crore. Then, Ahir and 19 other MPs from Maharashtra, including current Union minister for environment, forest and climate change Prakash Javadekar, submitted a signed petition on coal block allocation in Parliament and to the Central Vigilance Commission (CVC). On May 31, 2012, the CVC ordered a CBI inquiry on the basis of the petition.

In August 2012, CAG revised the alleged gains of private parties to Rs 1.86 lakh crore. That year on the basis of the CAG report, Common Cause, led by Prashant Bhushan, filed a petition in the Supreme Court seeking cancellation of the allocation of coal blocks to private companies between 1993 and 2012 to uphold Articles 14 and 21 of the Constitution. These Articles pertain to two fundamental rights that guarantee equality and life and personal liberty to the citizens.

On April 23, 2013, a Parliament Standing Committee on coal said coal blocks were distributed between 1993 and 2008 in an unauthorised manner. It recommended cancellation of mines that have not started production. The CBI, on June 11, 2013, registered FIR against Naveen Jindal and Dasari NarayanaRao. On October 16 that year, it filed an FIR against industrialist Kumar Mangalam Birla and former coal secretary P C Parakh.

On August 25, 2014, the CBI decided to close its case against Birla and Parakh.

Sanctioned, illegally

More than 65 per cent of the country’s total electricity requirement is met from coal, a non-renewable reserve. Industries like iron, steel and cement also depend on coal as fuel. To ensure equitable distribution of this vital yet limited resource, the government in the 1970s nationalised coal reserves, except a few blocks being mined by iron and steel companies. It also set up the Coal India Ltd (CIL) as the sole authority to develop the reserves and sell the mineral to companies, both public and private. In the 1990s, following economic liberalisation, there was a surge in the demand for coal. So in 1993, the Centre amended the Coal Mines Nationalisation Act, 1976, and allowed private players to develop coal blocks. This is when irregularities started creeping in.

The court has identified two major irregularities in the way coal blocks were allocated. In 1993, the government allowed the Screening Committee, an inter-ministerial body, to award coal blocks to private players. But in the absence of clearly defined evaluation criteria, the committee followed an “ad hoc and casual” policy that was neither consistent nor transparent, the court said. The exercise of allocation denied a level playing field, healthy competition and equitable treatment. This whimsical procedure of allocation had resulted in “unfair distribution of national wealth” to a few private companies, read the judgement (see ‘How Screening Committee allocated coal blocks’).


The apex court has also questioned the authority of the Centre in allocating coal blocks.

The governments of Odisha and Maharashtra, in their submissions to the court, have argued that they have “virtually non-existent” role as the Screening Committee allocates coal blocks without taking their recommendations into consideration. For instance, the committee awarded Kosar Dongergaon coal block in Maharashtra to Chaman Metallics Ltd even though the state government had not recommended it. This contravenes provisions of both the Mines and Minerals Development and Regulation (MMDR) Act, 1957, and the Coal Mines Nationalisation Act, which say that the Centre has the power only to regulate and develop mines and that the leasing process largely stays with the state government. “The allocation letter by the Central government leaves practically nothing for the state government to decide, except to carry out the formality of processing the application and for execution of the lease deed with the beneficiary selected by the Centre,” said the court.


The other irregularity crept in 2001 when the coal ministry introduced New State Coal Mining Policy. The policy allows state government corporations to mine anywhere in the country at a commercial scale to meet the demand of small industries that cannot be catered to by CIL. The apex court has said the policy has “no legal sanction”, however laudable the objective may be, because it violates the Coal Mines Nationalisation Act that prohibits commercial mining by state corporations and restricts transportation of coal by the railways, ensuring that the mined coal is used by industries in isolated pockets.

Sitting idle on black gold

Companies once allocated a coal block are supposed to develop it within the stipulated time period of 42 weeks (for open-caste mining) and 54 weeks for underground mining.But so far, only 46 have been able to develop the mines and another 80 coal blocks have been deallocated as they could not start production within the stipulated time frame. Some of these blocks were allocated more than 14 years ago. Former power secretary E A S Sharma alleges that there was an orchestrated move to benefit some influential private companies so that they can exploit land and coal resources with the help of public money raised by public sector banks. Almost all public sector banks have given big loans to power companies that have bagged coal blocks (see ‘Banks under burden’). imageThis is the reason stocks of several banks tanked shortly after the court termed the coal blocks illegal. Sharma, in a letter to the Reserve Bank of India early this year, says, “There is an impending financial crisis in PSU banks which granted loans to developers of dubious power projects and questionable captive coal blocks.”

According to an estimate by Karvy Stock Broking, wealth management firm in Gurgaon, loans make up a major chunk of the amount power developers have invested in exploring, mining and setting up projects. Since 2006, Indian banks have lent Rs 2.6 lakh crore to iron and steel companies and Rs 5 lakh crore to power companies. While not all of these loans will be at risk, a back-of-the-envelope calculation shows that exposure to the companies with captive coal blocks could be between Rs 2.5 lakh crore and Rs 3.5 lakh crore.

“If these projects fail to take off, banks will have to either write off or classify them as non-performing assets. Even if the court asks the government to reallocate these coal blocks, it would mean substantial delays and would result in slippages and restructuring of loans,” says an analyst with Karvy Stock Broking.

Some projects are already in a fix. A consortium of banks comprising Axis Bank, Punjab National Bank and UCO Bank are trying to find buyers for debt-ridden Corporate Power Ltd (CPL) of Nagpur-based Abhijeet Group, which was allotted five coal blocks but is yet to start production from any of the blocks. In August, the chairperson and managing director of Syndicate Bank, Sudhir Kumar Jain, was arrested for accepting bribe from Chhattisgarh-based Bhushan Steel, implicated in coal allocation scam. The company wanted a loan of Rs 100 crore from the bank. The CBI, which has issued arrest warrant against Bhshan Steel’s managing director Neeraj Singhal for bribing Jain, says the company has taken loans of Rs 40,000 crore from 51 banks. The coal ministry has also issued a showcause notice to Bhushan Steel for not being able to develop four coal blocks allotted to it between 2003 and 2008. Bhushan is yet to file a response.

Companies often cite green clearances as a reason they have not been able to develop mines. An analysis by Down To Earth shows some companies are yet to apply for clearances, while in several other cases, coal blocks are located in areas with dense forest cover where community rights are yet to be settled. Consider this. In 2006, power company Essar and aluminium producer Hindalco were allowed to develop Mahan coal block in Singrauli. The communities challenged the clearances granted to the companies, saying that their rights over Mahan have not been recognised.

Communities of Singrauli, Madhya Pradesh, protest against environmental clearances granted to Mahan coal block. They say their rights over the Mahan forest are yet to be settled

Hopes of cheap power dashed

Though many coal blocks could not be developed within the stipulated time period, the coal ministry kept allocating reserves, mostly to power firms. Between 1993 and 2010, as many as 83 coal blocks were leased out to power companies. This excludes coal blocks allocated for ultra mega power projects (UMPPs) that have been exempted from the case by the Supreme Court. In 2006, the government dereserved another 81 coal blocks with CIL and awarded them to private firms, including power and other infrastructure companies. This was to bridge the gap between demand and domestic supply of coal and to stabilise electricity price, says the coal ministry. But its objective is nowhere closer to being achieved.

In 1999, the NDA government had decided to allow the sale of coal from captive mines saying that surplus coal was hazardous to keep in plant. It intimated its decision through a letter to ASSOCHAM, Sponge Iron Association, FICCI and CII. This gave elbow room to private players, who instead of producing electricity for the grid, started selling coal in the open market.

“Between 2009 and 2012, the coal ministry allowed Tata Steel, Jindal Steel & Power Ltd, Integrated Coal Mining Ltd, Sarda Energy Minerals Ltd and Electrosteel Castings Ltd to sell coal in the market,” says Sudiep Srivastava, a lawyer in Chhattisgarh and petitioner in the coal scam case.

Some independent power producers also procured the surplus coal from captive mines at a cheaper rate and generated electricity to sell it at a whopping Rs 10 to Rs 12 per unit in the short-term open markets such as power exchanges while generation cost did not surpass Rs 2.50 per unit. Power manufacturers are supposed to enter into long-term agreements with power distribution companies (discoms) which brings stability in electricity prices. Captive power producers also sold electricity in these exchanges and charged arbitrary prices, which effectively increased electricity bills for consumers.

Interestingly, the Centre rolled out two policies to facilitate sale of electricity leading to creation of short-term power market. The Electricity Act of 2003, passed by NDA, allowed private players to trade electricity. Then in 2005, the UPA formulated the National Electricity Policy (NEP) which called for creation of power exchanges for power trading. “It was only in 2012, 16 years after coal blocks began to be allocated to private firms, that the companies were asked to participate in power procurement bids called by discoms or their authorised state agencies and enter into long-term power purchase agreement,” says Kalyan Banerjee, Trinamool Congress MP, who led Parliamentary Standing Committee of Coal. Since the entire process of allocation was unauthorised, no one should enjoy the benefit of allocation, said Banerjee, recommending that all the coal blocks allocated to private power companies should be scrapped.

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