Business of coal blocks

It doesn't require a double tap to the cerebellum to know that the coal block allocation issue is not done and dusted. Attorney General Mukul Rohatgi's reply in the Supreme Court sought cancellation of all 218 coal blocks and re-auction of the same.

And in the same breath, the reply stated, "The government stands by the August 25 judgment. We want re-auction of 218 coal blocks. We will be happy if we save some 40 of them which are functional or operational and ready for end-use plants." Not wanting them to be treated like the non-operational ones, Rohatgi pleaded 40 mines with requisite clearances have been on board and operational "can be exempted" from cancellation and reauction, provided they meet the condition of compensating the loss of Rs.295 per tonne caused to the government and enter into a purchase agreement at Rs.95 per tonne to make up the loss. Though contradictory reports in the media seem to suggest that a meeting under the helmsmanship of Power and Coal Minister Piyush Goyal on Wednesday indicated a change in the position articulated by the AG in court. The altered position may well be collating all the information from the 46 coal block owners and providing a mere status report.

Penalty

If saving them from the guillotine of cancellation is no longer the government's position, it will be incumbent on the court to levy a harsh penalty. At the last hearing, the AG said over and above the 40 operational mines, there were six others which are "absolutely in readiness" to be operational for end-use plants and if the verdict has to be strictly followed "all have to be cancelled with one stroke of the brush." The court's view was that "the allocations have been found to be altogether illegal. Therefore it (Centre) wants to start from a clean slate."

With the court having posted the matter to Sept 9 by asking the Centre, three Associations - Coal Producer's Association, Sponge Iron Manufacturer's Association and Independent Power Producer's Association of India - and petitioners to file their affidavits, it is interesting to look at the state of play.

A look into the functioning of coal blocks reveals the government stands to make money using the AG model, but even more if the penalty is based on the e-auction price. Essentially, the government has a choice between collecting Rs 8,000 crore and Rs 80,000 crore.

Every block is different in terms of quality and grade of coal available, as also the degree of difficulty that is extraction to the surface. A common penalty doesn't work at all for starters. Let me explain this: Take Gare-Palma IV/1, 2 and 3 all allotted to Jindal Power. The cumulative production upto FY 2014 is 100 million metric tonnes. At the penalty rate of Rs 295 per tonne retrospectively, Jindal Steel & Power will have to cough up Rs 2,953 crore to retain the mine.

The question is coal blocks also work on the principle of reserves. Ergo, shouldn't the company pay for that as well? Here's another instance: Pachwara Central allocated to Punjab State Electricity Board has seen total production upto Fy2014 of 49.6 million metric tonnes and will thus have to cough up Rs 1,464 crore as penalty. The 38 blocks for which data was checked by Mail Today can yield the government Rs 7,904 crore in penalties.

But if you want to disgorge ill-gotten wealth, the best benchmark is the Coal India e-auction which will fetch the exchequer revenues. At an average discovered price of Rs.00 per tonne,(see box) the math has been worked out. There is one more formula which needs to be considered. Allow the 46 blocks facing the chop the right of first refusal where they are allowed to match the price within a 10 per cent range of the highest bidder. The government will secure revenues, as none of the blocks can be retained without a penalty.

Wrongs

The wrongs can be corrected in this manner without damaging business prospects of genuine players. But there are those who will suffer. Take, Jayaswal Neco which required 2 million tonnes annually. It got a coal block - Gare Palma IV/7 with coal reserves of 125 million tonnes. Take Electrosteel Castings which required 0.58 million tonnes per year. Guess how much it got - Parbatpur block with geological reserves of 231 million tonnes. This is indefensible. And the anomaly needs to be corrected for the simple reason that a company has benefited unduly due to the preferential allotment disguised as redistribution of natural wealth.