Leaked CAG report triggers coal licensing concern

Author: | Published: 1 Aug 2012
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Following the 2G scandal, which led to the cancellation of all 122 2G licences allocated by the Government of India (GOI), concerns have been raised about the legitimacy of the coal licensing process in India. A report drafted by the Comptroller and Auditor General of India (CAG), which discusses the revenue leakage from coal allocation, was published by The Times of India on March 22 2012. Legal practitioners say that if amendments are made to the coal allocation process, it could have an adverse effect on end use sectors.

The draft report prepared by the CAG and entitled 'Performance Audit of Coal Block Allocations' states that the GOI extended 'undue benefits' of Rs 1,067 trillion in total to commercial entities by giving them 155 coal acreages without auction between 2004 and 2009. This loss in the coal allocation process was calculated by subtracting the cost of production of each coal block from the total sale price of Coal India – the loss is six times the total loss figure for the 2G licensing scam (Rs 1,760 billion according to CAG).

State-owned Coal India is the sole trader of coal and coal related products in India. Since the Coal Mines Nationalisation Act was enacted in 1973, all private coal mines have been collected by the GOI and handed over to Coal India. Coal India is responsible for trading coal as well as allocating coal blocks to private companies and some of the coal blocks have been allocated to private players to facilitate other projects.

Among the beneficiaries of this coal allocation process are: Tata Group entities, Jindal Steel & Power, Electro Steel Casting, the Anil Agarwal Group firms, Bhushan Power & Steel, Jayaswal Neco, the Abhijeet Group, Aditya Birla Group companies, Essar Group's power ventures, the Adani Group, Arcelor Mittal India and Lanco Group.

Some foreign-funded projects have also obtained coal from Coal India including the Tata Mundra project, a 4,000MW Greenfield coal fired plant funded by IFC, ADB and Korean ECA.

Following leakage of the CAG report, Finance Minister Pranab Mukherjee said that the report was only a draft and was not formal. And, in a letter to Prime Minister Manmohan Singh, the CAG added that the information released in the draft report was "exceedingly misleading" at this stage.

However, Vinod Rai of the CAG later spoke at a function of the Indian Public Auditors' Association in New Delhi and told the audience that the CAG was "incapable of making any fundamental error in its audit report". He added that all of the information provided was being scrutinised and all of the facts and figures were based on documentary evidence.

Power companies such as Essar Group are among the beneficiaries of the existing coal allocation process

Industry insiders have taken the view that coal allocation is 'project specific'. Some coal blocks are allocated to particular players because the coal produced from these blocks is for facilitating other power or infrastructure projects rather than being for general sale. But other coal developers argue that low allocation prices are needed to enable them to sell coal at reasonable prices. This helps maintain the cost of production for projects at a time when the cost of fuel, equipment and wages is rising sharply.

Legal practitioners are also concerned about the potential financial implications of any regulatory response to issues identified in the CAG report. Khaitan & Co partner Sanjeev Kapoor says that auctioning the coal blocks in future might be harmful to project development in India. "The recent CAG report responds heavily to the 'Expert Committee on Road Map for Coal Sector Reforms Report'. This was issued in December 2005 by the Ministry of Coal and specifically stated that proposing an amendment to the Coal Nationalisation Act merely to enable auctioning would be counter-productive."

Kapoor adds: "It could also potentially increase the cost of coal, leading to an adverse impact on end use sectors. In other words, it will have an impact in a way that will increase the price of the end product. For example, if coal is used as a raw material for manufacturing a steel product, then the value of the steel product will escalate as the price of coal at the initial stage has already increased."

Legal practitioners are also worried about how the GOI will continue to supply coal in the meantime. Trilegal partner Akshay Jaitly says: "At the moment, it is still unclear how the government will continue to supply coal to the projects under this atmosphere. Developers will only feel less uncertain when this issue is sorted out."

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