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Decoding the New Legislation

Decoding the New Legislation

With the sharp increase in coal imports, it is imperative for the current Government to provide for a comprehensive legislation on coal allocation rather than the stop gap method undertaken by the Bill.

The current legislative framework in relation to eligibility with respect to coal mining in India is the Coal Mines (Nationalization) Act, 1973 (´CMN Act´). Under the CMN Act, nationalization of coal mines was completed in two phases. Coking coal mines were nationalized in 1972 viz. the first phase and non coking coal mines were nationalized in 1973 viz. the second phase. Coal mines that could not be nationalized were allowed to be worked by private lease holders. In 1976, an amendment to the CMN Act was enacted thereby terminating all private lease holders in all coal bearing regions with the exception of allowing captive mining by private companies involved in the production of iron and steel. The CMN Act was amended again in 1993, to permit coal mining by the private sector for power generation, washing of coal, as well as for other end-uses as may be notified by the Central Government from time to time. It was under this framework of legislation that competitive bidding for allocation of coal mines was permitted that ultimately became the subject matter of the Supreme Court judgments of 2014 cancelling the coal block allocations.

The Supreme Court cases were a result of the Comptroller and Auditor General (´CAG´) performance audit of Allocation of Coal Blocks and Augmentation of Coal Production on August 17, 2012. According to the CAG report, the total loss faced by the exchequer was Rs 1.86 crore. However, industry experts say this is a conservative estimate, coupled with the fact that the public sector units were kept out of this estimate. The CAG also recommended that the coal block allocation process be made more transparent and objective, and done through competitive bidding. On August 25, 2014, a bench of the Supreme Court of India declared that all coal block allocations from 1993 up to the date of the judgment were illegal and further stated that (i) the entire allocation of coal blocks as was recommended by the Screening Committee, a broad based body with representation from the state governments, concerned Ministries of the Central Government and the coal companies, from July 14, 1993, and (ii) the allocation made through the government dispensation route, suffered from the vice of arbitrariness and legal flaws. The fate of these coal block allocations was sealed with a subsequent judgment of the Supreme Court on September 24, 2014, declaring that all but four of the coal block allocations were cancelled (Coal Cancellation Order). The four functional coal blocks exempted from cancellation were two ultra mega power projects, one operated by National Thermal Power Corporation Limited and another by Steel Authority of India Limited. Vide the September; the Supreme Court recognized that the Government, state authorities and coal mine allottees alike would require time to manage their affairs. Therefore, it was made clear in the judgment itself that the cancellation was to take effect only after six months, which is from March 31, 2015.

Genesis of the Bill and Key Features
Scrambling to meet the deadline, the Government promulgated the Coal Mines (Special Provisions) Ordinance, 2014 for the allocation of the cancelled coal mines. This piece of legislation was not passed by the Parliament and lapsed. The Government, recognizing the perilous increase in the import of coal promulgated a second ordinance in December 2014. The new legislation – the Coal Mines (Special Provisions) Bill, 2015 (the ´Bill´) replaces the second ordinance and has been passed by both houses of Parliament.

The cornerstone of the Bill is to allocate the coal mines declared illegal by the Supreme Court. Some of the key features of the Bill are:

  • Provisions for allocation of coal mines through a transparent bidding process
  • The e-auction of coal blocks seeks to ensure continuity in coal mining operations and promoting optimum utilization of coal resources
  • The Bill is to facilitate e-auction of coal blocks for private companies for captive use and allot mines directly to state and central Public Sector Undertakings (´PSUs´)
  • It has provisions that propose measures for rehabilitation and compensation for project affected persons
  • The Bills also provides for vesting of the right, title and interest over the land and mine infrastructure together with mining leases to successful bidders

Mine Categories and Eligibility Criteria under the Bill
There are three categories of mines under the Bill

  • Schedule I – This is further divided into 3 categories – (i) coal mines and coal blocks wherein the allocation was cancelled by the Coal Cancellation Order; (ii) land acquired by the prior allottee in or around the coal mine; and (iii) existing mine infrastructure
  • Schedule II – mines listed in the Coal Cancellation Order as likely come into production during 2014-15
  • Schedule III – mines listed therein which are earmarked for specific use

The eligibility criteria are also linked with the category of mine – for Schedule I mines, any government, private or joint venture company is eligible to bid. While in respect of mines listed in Schedule II and III mines, government, private and joint venture companies with a specified end-use are eligible to bid. These specified end uses under the Bill are production of iron and steel, generation of power including for captive use, washing of coal obtained from a mine, cement and other uses as may be identified by the Central Government. All Schedule I mines are to be allotted either by way of either public auction or government allotment. While, under the Bill, Schedule II and III mines are to be allocated by way of public auction. Public auction is to be conducted by way of e-auction on a payment of maximum fee of Rs 5 crore. As per the Coal Cancellation Order, all auctions are to be completed by March 31, 2015.

With respect to prior allottees, that is the allottees in respect of mines listed in Schedule I to the Bill, whose allotments have been cancelled vide Coal Cancellation Order, the Bill states that no allotment may be made such prior allottee unless the fine of Rs 295 per metric tonne of coal extracted has been tendered.

Under the Bill, one of the end uses specified for a Government company allottee of the mines listed in Schedule I, is its own consumption, sale or for any other purpose as mentioned in the permit, license or mining lease, as the case may be. The Bill, however, remains silent with respect to end uses of coal blocks allocated to private companies. Therefore, we may conclude that there appear to be no restriction on the usage by private companies.

Issues under the Bill
A.The Central Government is empowered to set up a nominated authority who will be responsible for overseeing the auctioning of coal blocks, but the Bill remains silent as to whether the authority will be responsible for monitoring activities undertaken by the allottees post allocation. While the Coal Controller is vested with these powers to some extent, one would have hoped that this piece of legislation that is to be enacted for the purpose of inter alia promoting optimum utilization of coal resources consistent with the requirements of the country in national interest and for matters connected therewith or incidental thereto would have provided for the establishment of an industry wide regulator to deal with issues that may arise post allocation of the cancelled coal blocks. The establishment of this regulator becomes important as when there is a possibility that the allottee may be permitted to sell in the open market, steps should be taken to ensure the interests of household consumers, medium and small enterprises, and cottage industries are protected. Additionally, the Bill has not laid down any guiding principles for overseeing the mining activities by the allottees.

B.Another point of contention in the Bill could be the wide powers granted to the Central Government. The Central Government may suspend the powers of the State Government under the Mineral Concession Rules, 1960, with respect to maximum period for which a lease or license may be renewed. This could lead to tension between the central and state governments.

C.There are certain practical difficulties that have arisen with the new Bill, such as the manner of handover of the mines to successful bidders and the manner of allocation of auction money to the States.

D.Additionally, with a number of mines having been earmarked for specific uses, several states find themselves in a situation wherein a large number of industries in the state will suffer due to non-earmarking of adequate number of coal blocks to meet their captive requirements. This coupled with the fact that power sector has witnessed a reverse bidding process puts the state at a distinct disadvantage. This is because several of these reverse bids have demonstrated an industry preference of fuel security in the long-term over near-to-medium-term profitability. These zero bids together with premiums to be paid to the state governments that cannot be passed on to consumers may pose problematic in the long run as this could lead to under-recovery in production cost for those with existing power purchase agreement. However, those who have not signed these power purchase agreement may be able to seek higher fixed charged to compensate for under recovery.

Coal imports jumped more than three times over the past eight years ù from 41.2 million tonne in 2005-2006 to 140.6 million tonne in 2012-2013 and are expected to increase by 19 percent to a record of about 200 million tonnes this fiscal year. With the sharp increase in coal imports, it is imperative for the current Government to provide for a comprehensive legislation on coal allocation rather than the stop gap method undertaken by the Bill.

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This article has been authored by Aakanksha Joshi, who is an Associate Partner and Tarini Menezes, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice.

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