The spectre of cancellation of coal mine allocations looms in the air : what could the government do?

The Supreme Court's (SC) finding that all the allocations of coal mines since 1993 have been illegal has stunned the markets.  It leaves the spectre of cancellation of coal mine allocations hanging on some of the largest steel and power generation projects in India.

This affects all the 218 allocations including 41 de-allocations and re-allocations. Of the 218, 105 were private companies, 99 state owned firms, 12 were UMPPs (ultra mega power projects of 4,000 MW each) and two coal to liquid projects.  The apex court was of the opinion that state owned companies were not eligible to exploit coal commercially.  This is the right that Coal India and its affiliates enjoy.
It may be recalled that in March 2012, the draft report of the Comptroller Auditor General (CAG) mentioned that the 'inefficient' allocation of coal mines by the government to various parties could have cost the exchequer a loss of revenue of Rs.10.7 lakh crore. 
This led the government to ask the coal ministry to form an inter-ministerial panel to review the allocation process.  As a result the government decided to take back 80 coalfields, while forfeiting the bank guarantees in 47 cases.
A public interest litigation, filed before the SC in September 2012, led to the apex court to monitor CBI investigations into the matter.
The court has also said that while operational coal mines could be allowed to continue functioning for the time being, the implications of how the mine allocations would have to be cancelled would be discussed at its hearing on 1 September 2014.

What the court observation implies
There are several implications that arise from the Supreme Court's observation that all coal mine allocations made by the government since 1993 were illegal and arbitrary.
First, this could mean that many of the coal mines could get cancelled.  This could affect many of steel, aluminium and power generation projects.
That in turn could affect bank loans which some analysts estimate to be close to 200,000 crore.  Each UMPP alone would be expected to have a debt of around Rs.12-000 to Rs.16,000 crore.  Considering that 12 UMPPs are involved, the power sector itself could see contaminated loans of over Rs.150,000 crore.
Since investigations were ordered for all allocations right since 1993, it could mean some more PILs being filed to look into the way allocations were made in respect of oil fields, telecom bandwidth and even radio waves.  That could affect some of the largest industry groups in the country.  It may be worth recalling that some of the best oil fields of ONGC were given away to private industry groups in 1997 without calling for an auction, or a proper policy framework being framed.

What could the government do?
In view of the Supreme Court's observations, the government should immediately begin working on a transparent set of guidelines to define how the damage can be minimised without any hit of arbitrariness or favour.
One possibility could be for the government to announce policy guidelines that allow sanctioned power projects with coal linkages, but only for captive usage, to acquire coal mines at a fixed price.  This fixed price would have to be decided quickly by a committee in a manner that would allow some rationale. One way would be to consider the power purchase agreements (PPAs) tariffs that have been signed.  The committee could then calculate backwards the price of coal at which such power tariffs could be considered viable.  This would demand working out and fixing – for such cases alone – benchmarks of the coal (based on calorific value) required for producing each unit of power, and then working out a benchmark rate of return for such power projects.  That would compel power producers to generate additional profits only through better efficiency, and not because of government favours.
That in turn would allow the government to open up for auction (in a transparent manner) all other mines which were sought to be commercially exploited.
Such a transparent policy would fall within the jurisdiction of the legislature, leaving the courts merely to then ascertain whether the rules so crafted were fair, or whether they smacked of arbitrariness.
The same method could be used for determining captive allocation for metal producers.  
By ensuring that captive mines are not allowed to sell their coal commercially, the justification for a different price for captive mine allocations and those for commercial exploitation could be justified.
Unless the government does this quickly, there are chances that many banks will suffer grievously, and many projects might end belly-up.
It would also lay down the rules and processes for sensible policy making – something that was entirely ignored by the previous government.