The Supreme Court today cancelled 214 out of the 218 coal blocks allocated by the various governments starting in 1993. The Court found the process of allocation of these blocks to be suffering “from the vice of arbitrariness”.
As the Court had pointed out on an earlier occasion “The entire exercise of allocation through Screening Committee route…appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected. There is no evaluation of merit and no inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective as the minutes of the Screening Committee meetings do not show that selection was made after proper assessment. The project preparedness, track record etc., of the applicant company were not objectively kept in view.”
Given this, the court has decided to cancel 214 out of the 218 coal blocks that had been allocated.
Only four coal blocks which included two blocks allocated to the Sasan Power (an ultra mega power project) in Madhya Pradesh, and one each to NTPC and SAIL were not cancelled. Further, companies which are already operating mines have been given six months to wind up their operations.
Over and above this the court has also fined the companies which are already mining coal to pay a fine. As senior lawyer Prashant Bhusan said “The Supreme Court has also asked the companies running the coal blocks for the next months to pay Rs 295 per tonne of coal they extract. They also have to pay the same amount per tonne for the coal they have already extracted from the blocks.”
This is where things get interesting. Data from the ministry of coal suggests that around 42 coal mines of the 218 blocks that had been allocated are currently producing coal. They are expected to produce close to 52.9 million tonnes of coal during the course of this financial year (from April 1, 2014 to March 31, 2015).
Of these mines, two mines are owned by Sasan Power which is an ultra mega power project and one by SAIL. These allocations have not been cancelled by the Supreme Court. Between them these mines are expected to produce around 2.07 million tonnes of coal (2 million tonnes from Moher & Moher Amlori extension mines owned by Sasan Power and 0.07 million tonnes from the Tasra mine owned by SAIL).
This leaves around 50.83 million tonnes of coal (52.9 million tonnes minus 2.07 million tonnes) which will be produced by the remaining mines. At Rs 295 per tonne, the companies which own these mines will have to pay a total fine of around Rs 1500 crore (50.83 million tonnes multiplied by Rs 295 per tonne) just for 2014-2015.
Between 1997 and 2013-2014 a total of 301.6 million tonnes of coal was mined. The coal mined by mines whose allocation has not been cancelled was minuscule and can be ignored. At Rs 295 per tonne, the companies which were producing coal will have to pay a total fine of around Rs 8900 crore (301.6 million tonnes multiplied by Rs 295 per tonne) for these years.
Hence, the total fine that these companies will have to pay for the period 1997-1998 and 2014-2015 will work out to close to close to Rs 10,400 crore (Rs 8900 crore plus Rs 1500 crore). This with the assumption that they are able to produce as much as has been targeted for this financial year. If they are not, the number will be a little lower than Rs 10,400 crore.
This fine is a clear vindication of Vinod Rai, the former Comptroller and Auditor General of India. The CAG had estimated that by giving away coal blocks for free the government had essentially lost Rs 295 per every tonne of coal that would be mined. Rai explains the maths behind this calculation in his book Not Just an Accountant—The Diary of the Nation’s Conscience Keeper. For establishing the price at which this coal could be sold at, the Rai led CAG had considered three options.
As Rai points out in his book: “The first was by imports. The average import price of non-coking coal sourced from Indonesia during 2010-2011 was Rs 3,678 per tonne (Indonesia supplied most of our non-coking coal imports). The second source was the coal sold in e-auction by Northern Coalfields Limited, a subsidiary of CIL [Coal India Ltd] based in Singrauli. The third and major source of coal supply in the country was that which was mined and supplied by CIL. Audit utilized the only creditable data available in the public domain—that of CIL. CIL is regularly audited by the CAG, so its accounts and other details can be taken as authentic. From the audited accounts of 2010-2011, the average sales price of all grades of coal sold by CIL was taken as Rs 1,028 per tonne. This was the most conservative price.”
Having established a selling price, the CAG then went back to CIL to establish the cost of production of coal. For this, the CAG again went back to CIL, which produces most of the coal in the country. As Rai writes “The average cost of coal mined by CIL was found to be Rs 583 per tonne. The MoC has indicated, after due verification, that the financing cost ranged from Rs 100 to Rs 150 per tonne. To be on the safe and conservative side, audit assumed it to be at Rs 150. Thus, while the average sale price was Rs 1,028, the average cost was Rs 583 plus Rs 150, namely Rs 733.”
This left Rs 295 per tonne (Rs 1028 minus Rs 733) as the financial benefit. And this is the amount per tonne of coal that the Supreme Court has asked companies which benefited from the allocation of free coal blocks to pay as a fine for the coal that they have already produced and the coal that they will produce over the next six months, which they have been given to wind up their operations.
This decision is also a slap on the face for the likes of P Chidambaram who had constantly questioned the CAG’s calculation and tried to tell the world at large that there has been no loss. “If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued,”Chidambaram had said.
Nevertheless between 1997-1998 and 2013-2014 more than 300 million tonnes of coal was mined. This financial year more than 50 million tonnes of coal is expected to be mined. And on this, the Supreme court has asked companies to pay a fine.
To conclude, it is fair to say here that the crony capitalists who got coal blocks for free have been taken to task and justice has finally been delivered.
The article originally appeared on www.FirstBiz.com on Sep 26, 2014
(Vivek Kaul is the author of the EasyMoney trilogy. He tweets @kaul_vivek)