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COAL BLOCK ALLOCATION SCAM

INTRODUCTION:
Coal allocation scam or Coalgate, 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, the Comptroller and Auditor
General of India (CAG) office accused the Government of India of
allocating coal blocks in an inefficient manner during the period 2004
2009.

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
laws
The Apex court slammed the allocation of the coal blocks, saying
allocations were made in casual manner without doing any comparative
assessment of applicants
They 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%

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Steel sector accounted for 69 blocks or 31%

SECTORS AFFECTED BY THE SCAM:


Power Sector
Iron and Steel Sector
Banking 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:

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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 Ltd
Jindal Steel and Power will also take the heat
Reason being, they were running close to 12 million tonnes of coal from 2 of
their coal mines
One 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:

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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 have lent 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.
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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
rent/royalty/revenue shares
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whoever

offers

the

highest

lease

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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