Coal Scam

For private interests

Print edition : February 07, 2014

Advocate Prashant Bhushan, petitioner in the coal block allocation case. Photo: Shiv Kumar Pushpakar

Attorney General Goolam E. Vahanvati. Photo: Manvender Vashist /PTI

In the coal blocks allocation case, the government tries to buy time citing inflated investment costs and putative losses of corporates as a defence against de-allocation of coal blocks that were allotted arbitrarily.

WITH the government clarifying its stand in the Supreme Court on the de-allocation of coal blocks allotted between 1993 and 2009 in the ongoing case of irregular allocation of coal blocks, the question of how a valuable natural resource is allocated to and utilised by corporates has become a subject of intense public debate.

A three-judge Bench headed by Justice R.M. Lodha had asked the government on January 8 if it was considering de-allocating the blocks given to private companies—29 allotted between 1993 and 2005 and 32 between 2006 and 2009—where no mining had started yet. On January 15, Attorney General Goolam E. Vahanvati informed the court that the government would give the owners of 41 of these blocks four to six weeks to get the necessary clearances, failing which the blocks would be de-allocated. He told the court that in 32 cases, where the allottees had not received stage 1 forest clearance, they would be given three weeks to get the necessary clearance and the decision on de-allocation would be taken a week thereafter. For the other nine blocks, the allottees would be given six weeks to get stage 2 environmental clearance from the Ministry of Environment and Forests. The decision on de-allocation would be taken subsequently, the government submitted. The Supreme Court has reserved its judgment in the case.

Several irregularities have surfaced in the allocation and functioning of other blocks, too, which have led to private parties making unfair commercial gains. There have been 38 cases since 2001 of State government public sector undertakings (PSUs) illegally entering into joint ventures with private parties, which in turn benefited from the commercial mining and sale of coal. Also, in 39 projects, coal blocks originally allocated only for end-use power projects were leased out for mining to private parties, which in turn sold coal at market rates. These instances have raised questions about the role of the state as a custodian of natural resources.

The corporate defence

With the government giving a timeline for a decision on the de-allocation of coal blocks, the question of how it will affect the larger public interest has come to the fore. Representations have been made to the Supreme Court by corporates citing massive investment figures and thereby huge losses that would be incurred in case of de-allocation. Senior advocate K.K. Venugopal, representing the group of private companies who were allotted coal blocks, argued on January 8 that the industrial and economic development of States was dependent on the discovery of new minerals and that a tremendous amount of expertise and industrial investment had been put in by the owners of the coal blocks.

Senior advocate Harish Salve, arguing on behalf of the Independent Power Producers’ Association, a group of 25 power companies, stated that a letter of allocation granted by the government could not be said to be of no statutory value and therefore could not be taken away arbitrarily.

In arguing for leniency for the owners of the coal blocks, corporate bodies citied investment figures obtained from the government’s submissions. In a submission on January 9, Vahanvati outlined the details of investments made by private companies in these blocks. The Attorney General said the companies had invested a total of Rs.2.8 lakh crore in the coal blocks and therefore de-allocation would be difficult. He stressed that the government had no choice but to involve the private sector given the abysmal power situation in the country in 1991-92. He said that in a country with huge reserves of resources that needed to be developed, giving them to the private sector was not necessarily a waste.

A close analysis of the government’s submissions, however, raises doubts about the authenticity of the investment figures cited and also calls into question the argument that private investments necessarily contributed to improving the power situation in any substantial way. This also raises questions about the sincerity of the private parties involved in carrying out mining operations.

Doubts have been raised about the veracity of the companies’ claims. Advocate and activist Sudip Shrivastava, who is one of the interveners in the public interest litigation (PIL) in the coal block allocation case, said, “The figures furnished by the government are based on the CA [chartered accountant] certificates provided by the companies themselves with no independent verification carried out by the government about the authenticity of these figures. There are instances where the investment figures have been inflated by the corporates.”

Exaggerated project costs

The figures of investment provided by the Attorney General include the project costs and investment made by 29 private companies in coal blocks and end-use plants (power, iron, steel).

Shrivastava told Frontline: “According to the figures provided by JSPL [Jindal Steel and Power Limited], the project cost for a 2 mtpa [million tonne per annum] end-use sponge iron plant is Rs.22,500 crore. This is grossly exaggerated. It becomes clear if you compare this cost with the cost of projects of similar capacity of the same company itself. The total project cost of a 1.32 mtpa sponge iron plant and several other facilities established by JSPL at Raigarh is Rs.1,249 crore. This project was developed from 1998 to 2007. Even if one factors in inflation, the project costs are not comparable. Also, the project cost for a 1.2 mtpa sponge iron plant set up by Monet Ispat in Utkal B2 in Odisha is shown to be Rs.498 crore.”

Monet Ispat was awarded the coal block Utkal B2 in 1999. JSPL was awarded the coal block Utkal B1 in 2003.

There are other such instances where investment figures of plants of similar capacity are vastly different. Bhushan Power and Steel Ltd was allotted the Jamkhani coal block in Odisha in 2003 for a 0.68 mtpa sponge iron plant and a 135 megawatt power plant. In the government’s submissions, the company is shown to have made an investment of Rs.27,079.54 crore until March 2013. The project cost for a 0.75 mtpa sponge iron plant developed by Corporate Ispat Alloys Ltd linked to the Chitrapur (Jharkhand) coal block is shown to be Rs.511 crore and the investment made until June 2013 is shown as Rs.476.46 crore.

There is also an instance of a new coal block awarded for an existing project being cited as a separate investment while calculating the total investments. According to the minutes of the 25th screening committee meeting held on January 10, 2005, the coal block of Bijahan in Odisha was awarded to Bhushan Power and Steel Ltd. The minutes clearly note that Bhushan had asked for the award of both the blocks of Jamkhani and Bijahan earlier but only Jamkhani was offered as the extractable reserves in the other block were not known at that time. Yet the screening committee decided to award the combined blocks of Jamkhani and Bijahan to the company. In the government’s final submissions, the investment figures for these two blocks are quoted separately. In fact, Bhushan Power and Steel Ltd is said to have incurred a project cost and made an investment of Rs.22,000 crore in the Bijahan coal block.

A number of companies already had existing power plants running on linkages to Coal India Limited (CIL) at the time when they were allocated coal blocks. Frontline has accessed the allocation letters awarded to these companies, which clearly show that they had pre-existing capacity when these projects were awarded. The total investment figures quoted in the government’s submission does not clarify whether investments made into the pre-existing projects are included. Some of these companies are: Vandana Global Ltd, Ind Agro Synergies Ltd, Shree Bajrang Power and Ispat Ltd (all allocated Nakia I and II coal block in Chhattisgarh), MSP Steel and Power Ltd (allocated Madanpur in south Chhattisgarh), and Anjani Steel Pvt Ltd (allocated Madanpur in north Chhattisgarh).

Shifting the blame

The Centre’s submissions also puts the blame on States for mining leases not being executed even in instances where the State followed legal procedure and there was a rational reason for non-execution of the mining lease. A case in point is the Utkal C coal block, which was allotted to Utkal Coal Ltd in 1998. The Attorney General’s final submissions state that the project was delayed because the mining lease was held up with the State government. An earlier submission of the Attorney General in September 2013 stated that Utkal Coal Ltd had proposed to increase its capacity to 1,000 MW, following which the screening committee advised it to get the necessary clearances. However, the Centre’s final submissions show that the company was only able to set up an end-use power plant of 120 MW. Therefore, the State government had a rational reason for not granting a mining lease.

Illegal mining

A written submission of the intervener Sudip Shrivastava on January 16 points out the major gains accruing to private players as a result of illegal joint venture projects entered into by State government PSUs with private companies where the entire mining operations were taken over by the latter. Advocate Sanjay Parikh, arguing on behalf of the intervener, informed the court that there had been 38 such instances since 2001 where mining operations were illegally taken over by private players.

According to Section 3(a) of the Coal Mines Nationalisation Act (CMN) of 1973, coal mining operations in India can only be carried out by the Central government or a government company or a corporation owned, managed or controlled by the Central government or a person to whom a sublease has been granted by the Central government. Commercial mining by State PSUs or companies is not permitted. Any allocation to the State government undertakings can only be made if they are engaged in any of the end-uses specified under Section 3(a) of the CMN Act. However, the Centre had allocated 38 coal blocks since 2001 to State PSUs that were not engaged in any specific end-use activity. The written submission of the intervener points out that these PSUs were allowed to form joint ventures (51 per cent shareholding of the PSUs and 49 per cent of private company). In all the joint ventures, the entire mining operations, including the mining and selling of coal, have been taken over by the private companies. Sample joint venture agreements and notices inviting tenders have been provided in the submission. As a result of this, private players are able to make substantial profits from the commercial mining and distribution of coal, and the purpose of developing coal blocks for end-use power projects is defeated.

Also, about 39 coal blocks allocated for end-use power projects from 1993 to 2009 have been exploited for commercial mining purposes by private players. In these projects, the State governments have entered into joint venture agreements, with State PSUs having 26 per cent shareholding and the private companies 74 per cent shareholding for mining operations. Under the joint venture, mining is controlled and operated by the private company and the State PSU purchases its own coal on the price fixed in the joint venture agreement, which is linked to the market price of the coal and not to the cost of mining. Under this arrangement, the private company makes profits, which leads to an increase in the cost of supply of electricity to the consumer.

The submission cites several instances where such arrangements have worked against the public interest. In the joint venture agreement of the Karnataka State Power Corporation with Eastern Mineral and Trading Agency (EMTA), the price of coal was fixed at Rs.1,550.47 a tonne in 2002, whereas the price as fixed by CIL was Rs.940 a tonne in the area where the mine was located. In an affidavit filed by West Bengal, the State government itself admitted that the cost of coal supply in the case of State PSUs was not linked to the cost of mining but the CIL rate.

There are also instances where a coal block meant exclusively for mining by CIL has been allotted to a private company through a joint venture. In the screening committee meeting on January 25, 2005, Hindalco’s claim for Talabira 2 coal block in Odisha was rejected. Thereafter, Hindalco secured a 15 per cent share in the Talabira 2 and Talabira 3 coal blocks, which were exclusively reserved for CIL.

Even though all the allotment letters contain a condition that the reject/middling coal generated during coal washing would be entirely consumed in captive power generation, private companies have been allowed to carry out mass sale of reject coal for commercial purposes under a Union of India order dated March 1, 1999.

Arbitrary allocation

The final rejoinder submissions on behalf of the petitioners on January 16 also point out several irregularities in the process of allocation of coal blocks. Advocate Prashant Bhushan, arguing for the petitioners, pointed out how allocation was made in the case of coal blocks that had reserves far in excess of requirement for the end-use project. This illustrates non-application of mind and arbitrariness of the decision-making process. The submission cites several instances of this. For example, coal requirement for a sponge iron plant is in the ratio 1:1.6, which means that to produce one tonne of sponge iron, 1.6 tonnes of F-grade coal is required. Raipur Alloys and Steel Ltd sought a coal block with an exaggerated requirement of 1.2 mtpa to produce 0.3 mtpa of sponge iron. The screening committee allotted the Gare IV/ 7 block with a coal reserve of 156 million tonnes. There are several instances where sketchy proposals without adequate details of the experience of applicants in mining and coal production were presented to the screening committee and allocations made despite objections from some Ministries. In the 26th screening committee meeting, it was observed that the application of Chhattisgarh Steel and Power Limited was sketchy and that the applicant was not strong enough, and yet the company was allocated a coal block. In the same meeting, the case of Akshaya Investment Pvt Ltd was discussed and it was noted that it was merely an investment company involved in coal trading with no experience of producing steel, and yet it secured an allotment.