Coalgate Scam and Implications of Recent

SC Ruling
Introduction
In a nutshell, the coal allocation scam, or Coalgate as it is
popularly referred to in the media, is a political scandal that
engulfed the UPA Govt in 2012. The scam came to light after the
Comptroller and Auditor General of India (CAG) accused the
government of India for allocating 194 coal blocks to public and
private enterprises for captive use in a flawed, ad hoc manner
between 2004 and 2009.
The Government, had the authority to allocate coal blocks by a
process of competitive bidding, but chose not to. As a result both
public sector enterprises (PSEs) and private firms paid less than
they might have otherwise. The CAG estimated in its final report
tabled in the parliament to put the figure at Rs. 1.86 lakh crore as
loss of revenue to the Govt exchequer.
The former government defended its allocation policy saying
maximization of revenue shouldnt necessarily be the
governments prime motive, as an auction can lead to higher
prices hurting consumers.
The Coal Allocation Process

In July 1992 Ministry of Coal, issued the instructions for

constitution of a Screening Committee for screening
proposals received for captive mining by private power
generation companies.

The Committee was composed of government officials from

the Ministry of Coal, the Ministry of Railways, and the
relevant state government.

A number of coal blocks, which were not in the production

plan, were identified and a list of 143 coal blocks were
prepared and placed on the website of the Ministry of Coal
for information of public at large.

Coal Allocation Guidelines

The guidelines for the Screening Committee suggest that
preference be given to the power and steel sectors (and to large
projects within those sectors). They further suggested that in the
case of competing applicants for a captive block, following
guidelines be taken into consideration:

State of preparedness of the projects. i,e. How well

equipped is the company to start production.

Net worth of the applicant company.

Production capacity as proposed in the application.

Maximum recoverable reserve from that coal block as

proposed in the application.

Date of commissioning of captive mine as proposed in the

application.

Technical experience (in terms of existing capacities in

coal/lignite mining and specified end-use).

Recommendation of the administrative ministry concerned

and state government.

Track record and financial strength of the company.

Results of the Coal Allocation Program

The response to the allocation process between 2004 and 2009
was spectacular, with some 44 billion metric tons of coal being
allocated to public and private firms. By way of comparison, the
entire world only produces 7.8 billion tons annually, with India

being responsible for 585 million tons of this amount. Under the
program, then, captive firms were allocated vast amounts of coal,
equating to hundreds of years of supply, for a nominal fee.
As a result of the CAG report in 2012, UPA Govt was forced to deallocate 80 Blocks and draw up auction policy. A number of such
companies that were decommissioned have filed cases in the
court.

Supreme Court Ruling

The Supreme Court on 25 Aug 2014 declared that all coal

mining rights distributed between 1993 and 2011 were
assigned illegally by the government in a process that
lacked transparency in the absence of a competitive bidding
system.

How the mining rights should be re-assigned will be decided

by the top court in a series of hearings starting September
1.

On 24 September Supreme Court delared 214 out of the 218

Coal Blocks allocated between 1993 and 2009 as invalid, as
the allocation was found to be carried out in an adhoc
manner.

Implications of the SC Ruling

The Centre and Coal India Limited will take back all all the
214 Coal Blocks allocated during the period, for subsequent
reallocation as per the new procedure.

Companies that had been allocated these coal blocks have

been given six months grace period to look for alternative
means to support there coal needs.

All companies that were extacting coal from the coal blocks
declared invalid will be required to pay up the government,
at the rate of Rs 295 per ton of coal extacted for the
complete period till date. This is likely to generate Rs 9000
crores for the state exchequer. Also, the cost of coal
extracted by companies uptill 31 March 2015 (deadline given
for handing back the coal blocks to CIL) will generate
additional Rs 1500 crores.

The Supreme court ruling has created quite a furore in the

banking sector that was financing the companies extracting
coal.

India is the world's third-largest coal producer after China

and the United States, but output has struggled to keep up
with consumer demand for electricity.

The uncertainty over the coal contracts will add to

investors' confusion about doing business in one of the
world's fastest-growing economies.

SC has ordered CBI to probe nexus between politicians and

Companies that were allocated coal blocks during that
period.

Power, Steel and Cement industries have been adversely

affected. The low production in these sectors will eventually
effect consumers.

Power and Mining stocks have overnight crashed.