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The Coal Judgement That Took Down the Market

The Supreme Court has ordered that 214 our of 218 coal block allocations since 1993 be “quashed”. Only about 46 of these blocks were actually operational, and all those that were not operational cannot be made so (because they are now illegal).

That means the companies that got them are in trouble, for two reasons:

  • They can’t operate these blocks after March 31, 2015
  • and they have to pay a fine of Rs. 295 per tonne of coal produced till now (and from now till March 2015)

Just four blocks were spared the axe; two given to Reliance Power for their Ultra Mega Power Projects, and one each of NTPC and SAIL. The reasoning: the first two is for an Ultra Mega Power Project (UMPP) and the others are for public sector enterprises. (We protect our own!)

The Judgement Provides Scary Interim points

The judgement says that some of the reasons the defense gave to not cancel the blocks was

  • SBI has an exposure of 78,263 cr,
  • overall loans to such companies are at risk, amounting to 250,000 cr.
  • investments of Rs. 287,000 cr. have been made to extract coal
  • REC and PFC have even more exposure than banks.

Even if this defense is overstating the case, the numbers in this are huge enough that even half their value would be scary. Even a 100,000 cr. hit to banks means that more than 15% of banking capital will be eroded!

Why Are The Coal Blocks Illegal?

The case is long and shady. The main point here is that these allocations weren’t actually following the principles of justice or equitable distribution. These blocks should have been auctioned out – they weren’t, and were given “arbitrarily”.

This went through a few cases, and the CAG had a detailed report, saying that these non-auctioned blocks involved a loss to the government, adding up to Rs. 295 per ton. This much was a “windfall” gain, said the CAG. The court has agreed, and that much has to be paid back.

(I’m not sure the courts are considering the time value of money and that Rs. 295 ten years ago is not the same thing as Rs. 295 now, but let me not get all mathematical on you)

Impact: Power, Steel and Financials

Obviously the big impact is to the power producers. Here are a few charts that show the carnage:

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Jindal Steel is down 20% to Rs. 175 from the 220 levels it started with on Tuesday, and more than 40% off the 300 level! It has the biggest impact – over 1.2 crore tons of coal it mines per month is at stake. It will pay a fine of about Rs. 3300 cr. for the 11 cr. tonnes of coal it has mined since it started. This is more than the company’s net profit in the last 12 months (1800 cr)!

image

Hindalco, which had clawed its way upto Rs. 200 in July, has fallen to below Rs. 150, even as it had a steep intraday fall today.

(Read: Rulings on Coal and Coal will take their Toll)

image

Rural Electrification Corporation (REC) has fallen about 10%. This company finances the power sector. It doesn’t have to pay fines, but the fear is that the companies or projects it has financed are in trouble.

image

Banks have fallen off a cliff. Every bank has some exposure or the other to the power and steel sectors, and the fall in three days, of about 1,000 points in the banking index, tells you how big this situation is.

We have a more detailed post on the impact on Coal India. (which is largely positive because Coal India will get all those coal blocks deallocated until fresh auctions are done).

The impact remains negative for banks currently, but it will be a good thing to clean up the system. Banks have other mechanisms for recovery (there are power plants, steel mills and promoter assets) and of course, there will be fresh auctions for the coal blocks which, if purchased, can make the plants operate again. However, this will involve a capital hit – we don’t know how much just yet.

The Problem of Going Back Till Forever

The problem is that the cancellations go back all the way to 1993. Imagine you got something allocated by the government even before there was a policy for such allocations. You invested money to get the coal out and sold it, and now, 21 years later, you must pay a fine because supposedly the allocation was illegal in the first place.

At some point we must have a statute of limitations. Even if it means some bad people will get away – remember, even now the UMPPs have gotten away. The point is that if you can’t be sure of a government decision today and it can be upturned by courts two decades later, then would you really want to invest?

Anyhow, this remains the only major issue, but if you look at the situation in detail it remains a mess involving corruption, shady deals and dirty politicians/industry. The hope is that that the judgement is a one-off – it’s quite unlikely that anything being done now, like spectrum auctions will remain legal even many decades later. (But you never know!)

The Actual Judgement

For those of you that are interested:

Verdict by Supreme Court Quashing Allocation of 218 Coal Blocks

We’ll cover this story in more detail as things move forward.

  • Krish says:

    Many questions are there in my mind and guessed some answers with best of my knowledge in this field.
    1. Why only 46 blocks got operational even after 21 yrs. For the rest of the blocks, those who got license, why they chose to wait this long to mine the coal? : Reason could be much of these blocks are junk and unviable
    2. Is losing licenses is a big concern for the companies such as JSPL or Hindalco? : Much of the juice is already extracted and only left over could be junk. Coal India Limited would get nothing by possessing these used mines and above undeveloped junk mines which even foreign mining companies were not interested.
    3. Does it effective balance sheet of these power and steel companies : Given 46 used blocks and 21yrs history, it takes ages to prove with limited govt babudom and vested interest of private owners in arriving at acceptable quantities that are mined. Estimation of consumption is not straight forward given the various grades of coal that gets mined and massive inert material that gets on the way before reaching the coal. This could lead to claims and counter claims and lengthy legal battle.
    4. Why there was no stiff resistance from industrial lobbies or big industrial houses : JSPL and HINDALCO having extracted good quality coal all these years, keeping these mines is of no use. They need good quality coal which CIL can supply. They don’t mind loosing these extracted mines because on this pretext, they can lobby good grade coal from CIL which is immensely beneficial.
    I some how see the whole scenario as big loss to CIL and Govt and great benefit to JSPL, HINDALCO or other players. Market analysts are not digging deeper and as usual market reaction could lead to buy back or increased stake by owners. As usual, retail investors loose.
    PS : Not invested in any of the stocks discussed. Would not pick up also as am not a big fan of cyclicals and power.

    • DJ says:

      If as you say, most of the remaining coal blocks are junk or unviable, it would be interesting to see how much debt was raised for those coal blocks and how much banks are on the hook for those “unviable” blocks. And, whether banks not do due diligence on the viability, or whether there was corruption there too.
      If policy makers were corrupt – arbitrary allocations, etc then they should go to jail (after the corruption has been proven). If there isn’t enough proof to prove corruption, then how do they have enough proof to cancel licenses? The coal blocks should have been left as is to ensure that policies are respected and instead penalties could have been imposed on guilty parties. I don’t feel that justice is served by just cancellation and it is in fact a shortcoming of the justice system that is unable to actually deliver justice by punishing the guilty.

    • catbert says:

      It is wrong to say only 46 blocks operational after 21 years. AFAIR, most of the blocks were allocated by UPA-1 so the time period is like 10 years. And then you can’t start digging immediately after allocation – like any other infra project, I believe there is some prep work included.
      Besides, there is a penalty of Rs 295 per tonne which would affect these operational blocks only. Those who did not dig out anything, lost the blocks but nothing else!!
      Finally, when these blocks were allocated, commodity prices were rising. Those who got the blocks used them (and rising coal prices) to raise money. And I wouldn’t be surprised to learn that the money went into speculating in real-estate, buying fancy cars etc a.la. NSEL scam.
      Like in every such case, PSU banks will be the losers. Time for govt. to get out of banking altogether.

  • Ashwin says:

    SBI 78K exposure, but other articles say much lesser at 4K…..http://www.moneycontrol.com/news/business/sc-coal-ruling-sbi-certain-rs-4k-cr-exposure-won39t-turn-bad_1189396.html, infact something admitted by SBI leadership. Are we missing something?

  • Krish says:

    They get to extract coal for another 6 months. Because of the fine, we can assume that all the coal gets extracted within the 6 months would not be reflected in any records.

  • The court should have spared those blocks where production has started and no criminality of any sort, such as corruption, misrepresentation of facts, diversion of end use etc was involved. When there was no policy of auction in the first place, I fail to understand how the allocation can be termed illegal and scrapped.

  • Kaka says:

    It is illuminating to compare how the SC behaved in two instances – the BCCI/IPL case and this one. In the BCCI case, it said that in the public interest the IPL should continue and Gavaskar was appointed the head during the last IPL season (its a giant wtf that the court can just appoint somebody at random, but lets leave that aside and only look at public interest). However, in the coal mining case, it did not deem it fit to keep the public interest in mind and continuing to maintain mining and coal supply? What a rotten republic we have?!!
    I hope to be charged with contempt of Indian courts some day and serve out a sentence. I’ll put it proudly on my resume.

  • Krish says:

    WoW, I am reading a news item today that CIL is not interested to take over deallocated blocks. Looks like even if they are not auctioned, CIL has released that it would not be beneficial by mining these blocks. As usual if govt auctions in future, there would not be any takers for many blocks in future and a day would come to think whether it was worthwhile to pursue all this saga.

  • Murty says:

    Uffffffff!
    Joke: A man was sitting in front of a man-hole , and counting 34, 34, 34…… A curious on-looker arrives and asks what’s going on…. The man pushes him into the hole and counts 35, 35, 35………
    Scam after scam, the scenario just repeats…..the scam is a big hole, the Parliament is that man, and the issue at hand is the victim …….
    Coming to Coal,
    1. Why would the cancellation coincide with the exit or entry of a new regime?
    2. Why there is no protest from them at all? After all they ran from pillar to post to get these allocations, and it is BLACK GOLD….they would even pay Rs.250 as penalty…..WHY? WHY? WHY?????
    3. The Supreme Court, not the lower ones decides to cancel these allocations , single handedly…….
    HERE IS SOME THOUGT!
    Take one allocation, see how much they mined, how much they sell , either domestic or international market…..why wouldn’t they be ready to pay a paltry penalty?????
    Now after thoroughly milching the cow, what’s the need? Send it to Kabela…
    This is interesting…..if the coal block allocations were the old cow, where is the Kama Dhenu for the fresh incumbent? Take a new route, cancel the existing blocks, without getting the hands dirty, create an artificial void, and LO!!!! Get the Coal imported……..
    Use the Executive bodies….be it SC or Parliament…….
    After all , it is our 543 brothers of a single family, who will be benefited…..we need to protect each other…….
    Long live Democracy…..