In a judgment delivered on 24 September 2014, the
Supreme Court of India cancelled 214 coal block allocations that
had been in place since 1993. Out of the 214 cancelled allotments,
42 coal blocks with end-use plants that were already functional or
were about to become functional, have been allowed a six-month
window to wind down their operations. Cancellation with respect to
those coal blocks would come into force from 31 March 2015. In
addition, the Supreme Court of India has established a fine of
Indian Rupees 295 per metric ton of coal mined from the date of
commissioning of these blocks.
While the domestic impact of this judgment in terms of potential
legal redress by the affected companies is a different gamut
altogether, this Alert outlines some of the issues that
international investors may encounter.
Risk & Recourse Identification
Many of the cancelled coal blocks were running as joint ventures
between a domestic company and international joint venture
partners. It is essential to get an early steer on the remedies
available to the international joint venture partner where the main
asset of the joint venture has come under significant uncertainty.
It also may be worthwhile to investigate whether the host country
of the international joint venture partner had any sort of
bilateral investment protection agreement with India (such as
Singapore, the UK or Netherlands).
Given that the Supreme Court has also ordered criminal
investigations by the Central Bureau of Investigation into any
wrongdoing, including bribery and other illegal gratification, it
is possible for international joint venture partners to be involved
in protracted proceedings regarding this. Undertaking a sanity
check on the paper and audit trail that exists, documenting the
circumstances leading to formation of the joint venture
relationship, may be worthwhile.
International banks, alone or as part of a syndicate, have
extended credit facilities heavily in this sector, and given the
likely cash crunch that these companies may face in the very near
term, it is essential to look at the package of security
documentation and, in particular, if any recourse is available
against the promoters or parent companies.
Private equity players with direct exposure to these companies,
or in an ancillary capacity to steel, cement and others with
captive thermal power plants, may need to revise their estimates
for return on investments, as well as see what recourse they might
have in their documentation for a fundamental change of
circumstance such as this.
International companies doing business in India, in particular
in the manufacturing sector with heavy dependence on power, may
want to gear up for short-term cost and supply fluctuations for
This judgment could act as a binding precedent in relation to
the manner of allocation of public resources to private enterprise,
including land, spectrum, natural resources, infrastructure
concessions and others. International investors who have a
connection in some capacity with the commercial use of a resource
obtained from the Government of India should consider conferring
with their legal counsel to revisit the foundations of how that
resource was obtained and test it against the principles laid down
in this judgment (i.e., illegal and arbitrary allotment of
public resources for private gain).
A natural corollary of this judgment is that the Government of
India will be required to invite bids for re-allocation of the
cancelled coal blocks. While this appears to present an opportunity
for an international investor interested in this sector, it may be
worthwhile to explore the possibility of having a bespoke foreign
investment protection agreement with the Government of India to
potentially insulate against future shocks of this nature.
This judgment will likely result in significant supply
disruptions, as mining from these blocks will be hampered, further
exacerbating the coal shortages in India. This is likely to
necessitate coal imports from other countries and, accordingly,
open up supply-side business opportunities.
If you have any questions about the topics discussed in
this Alert, please contact Saionton Basu in Duane
Morris' London office.
Disclaimer:This Alert has been
prepared and published for informational purposes only and is not
offered, nor should be construed, as legal advice. For more
information, please see the firm's
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