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Government to prevent aggressive coal-linkage bids

Coal India to put more to put reasonable quantity of coal should be put up for auction, cut contract period by half to 10 years

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In a hint that it may have got more than the actual price in the recent coal block auctions, the government has decided against going piecemeal for auction of coal linkages to prevent artificial scarcity that leads to "aggressive bidding by large players".

It has mandated SBI Caps to prepare a road-map for the next 2-3 years for coal linkage auctions that will prevent any fear of uncertainty among coal users.

"It was discussed that reasonable quantity of coal should be put up for auction as very small quantity may lead to aggressive bidding by larger players and may be unviable for the industry. It was also discussed that auction calendar for 2-3 years would be required to be given by Coal India Ltd on a rolling basis," a note on the meeting called to thrash out the modalities for the auction of coal linkages said.

This, analysts said, is a fallout of government's recent experience from the coal block auction where many of the bids particularly by large corporate houses were considered too steep, impacting their future profitability and even current valuation in the stock market.

It was also decided at the meeting that duration of coal linkage would be fixed at ten years, citing the reason that most projects have a loan repayment tenor of 10-15 years, sources said.

According to existing norms, Fuel Supply Agreements (FSAs) are inked between Coal India and its customers for a period of 20 years.

During the meeting, SBI Caps made a presentation to an inter-ministerial committee on approach to a market-based mechanism for allocation of coal linkages, sources said.

The merchant banker has also been mandated to prepare bid documents at a later stage.

Till recently, the government was granting coal linkages, assuring supplies from Coal India on an adhoc basis much like the way it did for allocating blocks.

But after the landmark Supreme Court ruling cancelling all such adhoc block allocations, coal ministry has recently started mulling e-auction of existing as well as future coal linkages to keep away from any future allegation of impropriety or adhoc decisions on awarding the linkages.

And to replace such adhoc decisions made by government committees, tariff-based competitive bidding is being considered, a final decision on which would be taken only after detailed presentation from the power ministry.

Reserve price for auction would be set on the basis of notified price of Coal India; while prices would have escalation clause -- it might get raised by a fixed percentage -- it was decided after rejecting a suggestion that revision be linked to end-price of products like steel and cement.

The modalities for fixation of the auction guidelines are yet to be fixed and SBI Caps would hold meetings with ministries of steel, power, Department of Industrial Policy and Promotion for cement sector and also industry bodies to discuss the approach on proposed auction.

The next meeting between SBI Caps and members of inter-ministerial committee would again be held on March 20.

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