Supreme Court cancels 214 coal blocks: Things to know

 

The dreaded judgement is here. The Supreme Court (SC) on Wednesday cancelled all the coal blocks allocated since 1993. It only allowed four of the 218 blocks to continue operations.

No wonder then stocks of metal and mining companies crashed. The BSE’s metal index fell nearly 1.5%. Jindal Steel and Power led losses with a 7% fall, while Tata Steel and Hindalco shares dropped between 2 and 2.5%.

The order is the latest in the coal-gate scam, which grabbed headlines in March 2012. Here is your six-point cheat sheet on the issue:

What happened in the past: In March 2012, media reports suggested that the Comptroller and Auditor General of India (CAG) had prepared a draft report about losses worth Rs 1.86 lakh crore due to improper allocation of coal blocks. After two complaints by the opposition party Bharatiya Janata Party, the Central Bureau of Investigation (CBI) was directed to investigate if the coal blocks were allocated in legal manner. The Supreme Court too ordered the government last year to cooperate with the CBI.

What the SC had said: In August, the Supreme Court ordered that all the 218 coal block allocations between 1993 and 2010 are illegal. Of these, only 33 coal blocks are currently under production. 19 of these belong to the private sector. The Supreme Court had said that state governments or state PSUs were not eligible to mine coal for commercial purposes; only the central government or PSUs could do that. This is why it allowed four blocks to continue operations. These belong to Ultra Mega Power Projects (UMPP) and are run only by the central government.

What it has ruled now: The SC heard arguments from September 1 on whether these licenses should be cancelled. The Centre had requested the SC to allow the coal blocks that have already started or are nearing production. Meanwhile, the affected companies – coal miners and power producers – argued that the cancellation should be decided on a case-by-case manner. They also reiterated that stakes were high as a lot of money was invested in the mines. However, the Supreme Court has finally ruled that the companies will have to give up their coal blocks. It has also imposed a penalty of Rs 295 per tonne for all the coal that has been mined. This is expected to amount to Rs 8,000-10,000 crore.

Why has it said that: The apex court deemed that successive governments allocated the coal blocks in a non-transparent and unfair manner. Under the Coal Mines Nationalization Act of 1973, Coal India had the monopoly on coal production. An amendment in 1976 allowed producers of iron, steel, cement and power to mine coal blocks. Any coal produced would be used by the same company. This is called captive mining. However, the allocation of these coal blocks was random, and not through an auction. According to the Supreme Court, no objective criteria were followed by the government to decide if the applicants were actually eligible for the coal block.

What next: The cancellation is said to be effective by March 2015. Once the companies let go of the mines, Coal India Ltd will have to take over the blocks. The government can also conduct fresh round of auctions to allocate these mines again.

Companies most affected: 
Jindal Steel and Power gets hurt the most by this judgment, according to a report by Macquarie Capital Securities, a brokerage firm. Its earnings per share (EPS) may fall as much as 29%, a report by Morgan Stanley suggested earlier. 

The other companies that will be most affected are Hindalco and Sesa Sterlite. Their profitability will be impacted, according to Macquarie. However, power companies dependent on the mines for coal may not be much affected as they can still get the coal supply from the state run Coal India.