Mining value from coal sector reforms

Arvind Sharma | Updated on November 26, 2020 Published on November 26, 2020

Centre-State relationship and related dynamics will have a huge bearing on the success of commercial mining reform   -  GN Rao

A transparent and efficient auction process will attract investments, boost competition & benefit consumers

Permitting commercial coal mining and auction of coal blocks have been among the most promising and impactful initiatives taken by the Union government as part of its Atmanirbhar Bharat initiative.

Prime Minister Narendra Modi had in June kicked-off the process for auction of coal blocks under the provisions of the of the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957. Since then, we have come a long way, and this initiative will have a lasting impact on the economy and add impetus to India’s quest to becoming self-reliant.

A slew of measures

As a run-up to the auction of the blocks and to increase private participation in the coal sector, the government introduced a slew of reforms such as easing participation norms for bidders, eliminating end-use restrictions, shifting from rupee per tonne model to revenue-sharing model and permitting 100 per cent foreign direct investment in the coal sector.

The eligibility criteria has been done away with, and no coal mining experience is required to take part in the auction process. Other relevant measures include promoting coal gasification through rebate in revenue share, and an investment of ₹50,000 crore to create transportation infrastructure for evacuating one billion tonnes of coal from state-run Coal India’s mines.

With the initial target set for auctioning 41 coal blocks, technical bids were submitted for 38 coal blocks, leaving three coal blocks out of the auction process due to environmental concerns. The government received 76 bids from 42 entities for 23 coal blocks. Finally, 19 blocks were sold to corporate groups including Adani Enterprises, Vedanta, Hindalco Industries and Jindal Power.

Notably new players entered the auction process, and have won bids offering good premiums over the floor price. With coal blocks mostly located in backward areas will give States total revenues of around ₹7,000 crore per annum.

Jobs, investments

The government expects more than ₹33,000 crore of capital investments over the next five to seven years in this sector, with a potential to generate close to three lakh jobs. Additionally, the coal-rich States would also receive around ₹20,000 crore per year as royalty payments.

The Covid-19 pandemic has stifled demand, and the coal sector, which is dominated by CIL, is no exception. With power demand down due to subdued industrial and commercial activities, CIL suffered an 11 per cent growth contraction in production and a 21 per cent slump in offtake during the first quarter of FY2021.

As the economy is leaping back to normalcy, CIL’s production in October matched its last year’s performance, clocking 20 per cent growth in output and a 24 per cent jump in offtake. The impact of the coal block auction process and commercial mining reforms on output and revenue of the state-owned major undertakings is yet not clear, and competition will be a game-changer.

Overall, the commercial mining reforms are expected to bring a sea change to the coal sector, with diverse investments coming in . Global players are no doubt watching the coal auctions, and the smooth, transparent and efficient process should attract many top investors.

Stamp duty

Efforts should be made to remove any road blocks in conducting the auction process. For instance, a major issue faced by the bidders is lack of clarity on payment of stamp duty, which differs from one State to other. Prior to 2015, leaseholders paid stamp duty on an estimate of royalty.

However, post auction, some States have started considering auction premiums quoted by successful bidders for calculating the stamp duty. This affects the viability of projects and bid premiums for mineral blocks. It is notable that the Ministry of Mines, as part of its reforms, is considering rationalisation of stamp duty.

The Centre-State relationship and related dynamics will have a huge bearing on the success of the sale of coal blocks, and a total alignment between them, and a mindset to facilitate hurdle-free and timely project implementation will be the key to make a success of the commercial mining reform.

As has been the experience across various sectors, competition is the key for ultimate stakeholder benefit, and permitting coal mining for sale will bring in a lot of competition in coal supply, and ultimately benefit the end-user.

The writer is Partner, SAM&CO

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Published on November 26, 2020
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