Coal Mining Sector: Road To De-Nationalisation

Background

India is the world's second-largest producer of coal after China, having cumulative total coal resources of 319.020 billion tonnes (till 2018) and is dependent on coal for many of its core sectors. For instance, coal is the largest source of electricity generation in India and as per reports, fuels approximately 74% of India's electricity. In addition to power and electricity, sectors like iron and steel, cement and other industries like fertilisers, pulp and paper are also among the largest consumers of coal in India.

The Government of India (GoI), on its part, has been making earnest efforts to shift its focus to renewable energy, including solar and wind and is focused on achieving its target of 175 GW of renewable power capacity by 2022. Despite the ambitious plans to shift to renewable energy, India is expected to be dependent on coal for more than 45% of its electricity generation even in 2040.

A brief update on the Amendment and the key facts leading up to it are discussed in this article.

From Nationalisation to Ad-hoc Allotments to Cancellation of Allotments

The Mines and Minerals (Development and Regulation) Act, 1957 along with the rules and regulations under it (MMDRA) read with the Coal Mines (Nationalisation) Act, 1973 (Nationalisation Act) regulated the coal sector in India. Coal mines were nationalised pursuant to the Coal Mines (Taking Over of Management) Act, 1973 and the Nationalisation Act to permit only public sector participation in the sector.

Coal India Monopoly

As a result of the nationalisation, Coal India Limited and its subsidiaries (Coal India) gained a monopoly over coal mining activities until 1993 when the Nationalisation Act was amended to allow restricted private sector participation in coal mining activities, i.e. for captive purposes in certain industries like steel, power, cement, etc. Under the Nationalisation Act, the allotment of coal mines for captive use was based on the recommendation of a high-powered committee chaired by the Secretary, Ministry of Coal. As a result, 216 coal blocks were allotted by the GoI from 1993 to 2010 through this committee.

Whilst limited private sector participation was allowed in coal mining for captive consumption, Coal India continued to have a monopoly on commercial coal mining. In 2010, the process of allotment of coal mines to private parties was changed and MMDRA was amended to end the ad-hoc allotment regime. It required GoI to allot coal mines through auction by competitive bidding to companies recognised for private participation in coal mining, i.e., for captive use in iron and steel, power, washing of coal, etc.

Comptroller and Auditor General Report & Cancellation of Allotments

In 2012, the Comptroller and Auditor General published its report on allotments of coal mines in India and remarked that the high-powered committee had not followed a transparent method of allocation of coal and the process lacked transparency and objectivity. The legality of the allotments was also challenged before the Supreme Court in a common cause public interest litigation, which started hearing the matter in September 2012. The Central Bureau of Investigation (CBI), the federal investigative unit of the GoI was also directed to investigate the criminality of the allocation of coal blocks, commonly referred to as the infamous 'coal scam'.

Pursuant to these, in August and subsequently in September 2014, the Supreme Court held that all allotments of coal blocks made during 1993 to 2010 (except (i) allotment for ultra mega power plants which was by way of a public auction; and (ii) two allocations made to the GoI public sector undertaking not having any joint venture) were illegal and cancelled them (collectively, the Supreme Court Judgement).

In the meantime, the Supreme Court continues to monitor the investigations being conducted by the CBI and other investigative authorities for irregularities in the allotment of coal mines between 1993 and 2010. Per the reports, three preliminary enquiries and 53 cases have been registered by the CBI.

Road to De-Nationalisation

In the aftermath of the Supreme Court Judgement, the Coal Mines (Special Provisions) Act, 2015 (CMSPA) was enacted to deal with the cancelled blocks. The CMSPA amended the Nationalisation Act and the MMDRA and introduced three categories of coal mines specified in Schedule I, II and III. The CMSPA is a forward-looking enactment and paved the way to allow greater private participation and end the monopoly of Coal India. It provided for allocation of coal mines to successful bidders and allottees through a transparent bidding process. The CMSPA also sought to promote optimum utilisation of coal resources consistent with the requirements of the country.

Schedule I, II & III Blocks

Schedule I coal mines were all the blocks that were cancelled by the Supreme Court Judgement. Schedule II coal mines include the 42 producing and ready to produce coal mines forming part of the Schedule I coal mines. Schedule III include 32 coal mines of the Schedule I coal mines which were substantially developed coal blocks. Schedule II and III mines were reserved for allocation only for specified end use (i.e., power, steel, cement, etc.). In the years since the enactment of CMSPA till the end of 2017, 84 coal mines (53 through allotment and 31 through auction) have been successfully allocated by the GoI.

The CMSPA paved the way for change in the coal sector. While earlier only those companies which could use the coal for captive purposes were eligible to participate in the auction, the CMSPA partially removed this restriction and allowed companies having prior experience and already engaged in coal mining in India to participate in the auction for Schedule I coal mines either for its own consumption or for sale. However, Schedule II and III coal mines were reserved for companies engaged in specified end-use and therefore a large number of mines could not be used for commercial sales.

Captive Coal Mining Issues

The policy on captive use of coal blocks has had some major drawbacks. For one, it did not result in optimal utilisation of an important natural resource of the country given that the use was dependent on the industry for which a coal block was allotted. If such an industry did not do well because of market forces or other factors, the coal production suffered. For example, steel can be cyclical and if there was a downturn in the steel industry, there was a resultant impact on captive coal blocks which could not be used for an industry that was operating at better capacity, leading to an increase in the import of coal by industries. The lack of competition in commercial coal mining meant that the sector and associated industry/infrastructure (washery, separation, etc.) did not benefit from best practices, technologies, equipment, etc. and efficiencies decreased unlike sectors like telecommunications, construction and power which have all benefited from increased competition and foreign investment. Cleaner coal is also the need of the hour and is an area where India continues to lag.

The GoI having taken note of these issues approved the methodology for auction of coal mines under the CMSPA in 2018 (2018 Order). Prior to this, the GoI had also issued the methodology to fix the floor or reserve price for auction of coal mines in 2014. The 2018 Order provided for commercial coal mining for private sector with no restriction on the sale and/or utilization of coal from the coal mine. The auction of the coal mines was sought to be based on prescribed bidding parameters. In line with the 2018 Order, the foreign direct investment (FDI) policy was also amended to reflect the policy change in the coal sector.

Foreign Investment Policy

The FDI policy was amended in 2006 to allow 100% FDI under the automatic route for coal and lignite mining but only for captive consumption by power projects, iron and steel, cement units and coal processing plants. It was further subject to the condition that processing units would not mine or sell coal in open markets.

In line with the object of the 2018 Order, the GoI amended the FDI policy in 2019 and approved 100% FDI under automatic route for sale of coal, coal mining activities including associated processing infrastructure, which would include coal washery, crushing, coal handling and separation.

Reforms Under the Amendment

• Composite prospecting licence-cum-mining lease

The MMDRA and the CMSPA contemplated a two stage concession, prospecting/reconnaissance and thereafter mining. The Amendment allows for grant of a composite prospecting licence-cum-mining lease in respect of coal blocks. This is expected to allow mining of unexplored or partially explored blocks and increase the inventory of coal blocks in India.

• Eligibility of bidders

The Amendment removes the restriction of prior engagement in coal mining operations in India as an eligibility criterion for grant of mining lease and other related licenses (Mining Concessions). The Amendment allows all companies, irrespective of their prior experience in coal mining operations in India to be selected for grant of the Mining Concessions through auction by competitive bidding. Any company which proposes to carry on coal reconnaissance, prospecting or mining operations, for own consumption, sale or for any other purpose is now permitted to get the Mining Concessions.

This move is likely to see foreign companies which do not have prior experience in coal mining in India participate in the competitive bidding. This is further complemented by 100% FDI which has been allowed for coal mining activities in this sector.

• Schedule II and Schedule III opened up

As mentioned, the CMSPA only allowed allocation of operating or substantially developed coal mines (Schedule II and Schedule III) for specified end-use. Consistent with the 2018 Order, the Amendment removes this restriction to permit companies which are not 'engaged in specified end-use' to participate in auctions for these coal mines, effectively allowing these mines to be used for commercial mining.

• Reallocation of coal mines

The CMSPA defines a 'prior allottee' and gives power to the nominated authority to cancel the vesting or allotment order granted under the CMSPA. Prior allottees are the coal allottees of Schedule I mines whose allotments were cancelled pursuant to the Supreme Court Judgement.

The Amendment puts an allottee whose allocation has been terminated under CMSPA at the same footing as that of a 'prior allottee' and permits such allottee to participate in the immediate next auction provided that it meets all the prescribed criteria applicable to a 'prior allottee' under the CMSPA.

• State government's power to allot

A state government cannot grant Mining Concessions for coal mines except with the previous approval of the GoI. The Amendment allows for an exception to this and permits the state government to grant the Mining Concessions for coal without the previous approval of the GoI if (i) the GoI has issued an allocation order; (ii) the area has been reserved by an order of the GoI or the state government; or (iii) a vesting order or an allotment order has been issued by the GoI under the CMSPA.

This could substantially cut down on the time required for new lessees to obtain the necessary approvals, licences and clearances in order to start their mining operations and in turn, facilitate sustained production of coal.

• GoI to appoint a custodian

The Amendment also empowers the GoI to make rules for the Amendment and appoint a designated custodian in respect of Schedule II mines whose auction or allotments are not complete or where a vesting/allotment order has been cancelled for a coal mine under production.

• Captive use expanded

The Amendment permits a successful allottee to utilize the coal mined by it in the plants of its holding or subsidiary company so long as the holding/subsidiary company is engaged in the same specified end use.

The Amendment is significant as it seems to be the culmination of years of efforts of the GoI to de-nationalise the coal mining sector and make the sector more attractive for private capital. The sector has lagged behind considerably and the reforms under the Amendment will hopefully give it the much need shot in the arm attracting not just local private participation but also foreign investment. The Supreme Court Judgment was a turning point in the coal mining sector and the clear directive of the Supreme Court was to ensure sufficient transparency and fairness. The GoI's response to the Supreme Court Judgment has been equally laudable with the GoI enacting CMSPA as an ordinance within a month of the Supreme Court Judgement and the tender process for allotment of Schedule II mines being initiated soon thereafter and quite successfully at that. The removal of restriction of captive mining and 100% FDI are bold steps which demonstrate GoI's resolve to reform the sector. While the long-term effect of the Amendment will have to be seen, it does set a level playing field to attract private capital and fester better competition and collaborations in the sector, improving and boosting the coal mining sector overall.

Saket Shukla is a Co-Founding Partner of Phoenix Legal who specializes in strategic advisory work through various phases of the business cycle including the inherent complexities of the Indian legal and regulatory environment and Maryam Naaz Quadri is an Associate in the corporate team of Phoenix Legal and has worked extensively on corporate and commercial law matters.