(Updates with coal output in eighth paragraph.)
Sept. 2 (Bloomberg) -- India proposed canceling 172 unused permits to mine coal, while allowing 46 operational mines to keep working to address a Supreme Court ruling that struck down all coal-mine allocations made since 1993.
The government is prepared to auction off new licenses for the canceled mines, Attorney General Mukul Rohatgi said in his argument to court in New Delhi yesterday. The court said “it was leaving its options open” and set Sept. 9 for a final hearing.
The proposal would keep production of the fuel that powers more than 60 percent of India’s generation capacity going, while potentially jeopardizing several projects, including power plants, steel mills and aluminum smelters. Hindalco Industries Ltd. and Jindal Steel & Power Ltd. may be the most affected, Morgan Stanley said after the court’s ruling last week.
“We should be careful of considering auctions as a solution for the natural-resources sector,” said Kameswara Rao, executive director for energy and utilities at PricewaterhouseCoopers LLP. “The sector is dominated by some large players, and an auction policy can discourage competition.”
Because the court ruled that all coal allocations were illegal, it wasn’t clear how the 46 mines could be given legal validity, Rao said.
Of the 46, 40 are already in operation and six are on the verge of starting. Rohatgi didn’t identify the 46 mines or their owners by name.
The government suggested the court impose an additional royalty of 295 rupees ($4.87) a metric ton for coal that has already been taken from the operational mines.
India’s coal ministry expects domestic production of 53 million tons in the year to March 2015 from captive coal blocks run by companies, including Hindalco, Jindal Steel, Reliance Power Ltd., CESC Ltd. and Jaiprakash Associates Ltd., according to its website. That’s about 9 percent of the nation’s total annual production of the fuel.
Hindalco fell as much as 1.5 percent to 173.50 rupees as of 9:42 a.m. in Mumbai, while Jindal Steel declined 2.9 percent to 240.75 rupees.
“Irrespective of what the decision is, it will be in the interest of the nation,” Coal and Power Minister Piyush Goyal said Aug. 25, after the court’s ruling, adding the judgment will help the sector move on.
The allocations didn’t serve any common good, the court said in its 163-page ruling last week.
“The approach had been ad-hoc and casual,” the ruling said. “There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth.”
The coal ministry started allocating mines to companies for their own use after realizing monopoly miner Coal India Ltd. was failing to keep pace with demand. The ministry awarded 218 coal permits from 1993 to 2011. Of those, 80 were later canceled for not meeting output targets.
Criticism of the procedure forced the previous government of Prime Minister Manmohan Singh in 2010 to amend laws and adopt an auction process. No auctions have actually occurred since the new policy was introduced.
India’s state auditor in 2012 found that allocating the mines to companies without an auction may have cost the government 1.86 trillion rupees, worth $33 billion at the time.