Coal Mines issue: Finmin questions plan to sweeten bidding norms

The finance ministry has questioned the key proposals in a cabinet note moved by the coal ministry that seek to promote investor interest in captive coal mines, the latest round of auction for which have come a cropper. In a draft cabinet note prepared in this connection, the coal ministry had proposed allowing the bidders for captive coal mines to sell up to 25% of the production in the open market, without any premium chargeable on such sales.

In an office memorandum reviewed by FE, the finance ministry, however, pointed out a series of omissions in the coal ministry’s note and stated it (finance ministry) hasn’t “understood” why a successful bidder would need to resort to producing coal beyond what is required to meet his specified end-use. It, however, went on to suggest, rather at odds with this basic objection, that “it is desirable to put an additional premium on the proposed open-market sales” to safeguard the government’s revenue interest and establish an audit trail for such open market sales. “Otherwise, in times of scarcity, these (companies) may earn super-normal profits without any share being passed on to the government,” the finance ministry wrote. It also argued that the coal ministry’s proposal would lead to multiple prices for the same grades of coal, leading to market distortion, inefficiencies and cartel formation, thereby adversely affecting the spot market and Coal India.

The bidding for coal mines is on the basis of the revenue investors would share with the state government concerned over a 30-year period; besides, they pay royalties on the production and contribute to the so-called district mineral funds.

A premium for sales in the open market could impact the government revenue as the royalties are charged on the sale price; also, it is expected that the bidding on revenue share could get more aggressive if premium is allowed on open market sales.

After the Supreme Court cancelled 204 captive mines in September 2014 following the coal scam, 31 mines were bid out in the first two rounds of auction in 2015. (Production agreements have since been terminated for six of these mines.) As many as 58 mines have been allotted to PSUs and state governments.

The next two rounds of auction, where a total of 15 mines were offered, had to be cancelled due to the absence of the mandatory minimum number (three) of bidders. The waning investor interest has been attributed to delays in receiving forest clearances, mining-safety permissions, land acquisition and ongoing litigation which postpones the operationalisation of coal mines. Out of the 84 coal mines (54 allotted and 26 auctioned), only 23 are operational. Production from these mines in FY19 is 22 MT (annualised from April-October data), much lower 43 MT captive coal production recorded in FY15, before the cancellation of licences.

The finance ministry has also pointed out that the coal ministry’s draft cabinet note is ‘silent’ on how the issue of delays in operationalisation of coal mines could be dealt with in the context of the reasons for these lapses as identified by a high-powered committee.

The North Block also said the law ministry’s opinion may be sought on the extant laws that expressly prohibit sale of coal from captive mines. It also said that “to beef up the domestic supply of coal and to attract investments and private participation, and to promote the coal market, the ministry of coal needs to undertake a number of reform measures, including policy on setting up a coal regulator.”