India: Auction Of Coal Mines: The Government Rushes To Meet The Deadliness

Last Updated: 30 September 2015
Article by Ajay Shaw and Ashish Pahariya

In a view to send across a message of positivity as regards the functioning of the Central Government and its commitment to usher in economic growth, the process of auctioning and reallocation of the coal blocks has been put on fast-track. In the preceding months, the Central Government has taken various actions in this regard. Firstly, the Coal Mines Special Provisions Ordinance was issued in October, 2014 (Coal Ordinance) after which an amendment bill in line with the Coal Ordinance was introduced in Parliament

and was passed by Lok-Sabha. The amendment bill as approved by the Lok Sabha is yet to be cleared by Rajya Sabha. Despite this the Central Government in order to keep the momentum of ushering in economic reforms and meeting the deadlines set by the Hon'ble Supreme Court re-promulgated the Coal Ordinance in December, 2014.

Pursuant to the Coal Ordinance, the Central Government has appointed a nominated authority which will carry out the entire process of auction and reallocation of the coal blocks. The process of auction has commenced with a tender notice being issued on December 25, 2014. The Government is optimistic of completing the auction before the deadline set by the Hon'ble Supreme Court i.e. March 31, 2015. In this article we have highlighted the key aspects of the auction process as introduced by the Coal Ordinance.

EARMARKING OF MINES

The amendments introduced by the Coal Ordinance permits auction and allocation of coal mines without any restriction on end use. However, in the on-going auction of coal mines the Central Government has been earmarked the allocation of coal mines for 2 specific end uses, firstly for the power sector and secondly for non-regulated sector (iron and steel, cement and captive power plants). A bidder in his bid for a coal mine has to specify the end-use plant for which it is bidding.

However, upon a coal mine being allocated to a successful bidder, the coal mine can be used for other common end-use plant by the said bidder. The Central Government may also permit special arrangements between the successful bidders for optimum utilisation and cost efficiencies of coal mine. Arrangement can also be entered into with coal linkage holder. Such arrangements will be permitted only for the same end uses.

Though there is no clarity on kinds of arrangement permitted under that, but coal swap arrangements to save transportation cost in our view would be one such permissible arrangement.

BIDDING METHODOLOGY

The auction of mines is being implemented through two bidding methods i.e. forward bidding and reverse bidding.

Forward Bidding

The mines meant for iron & steel, cement and captive power plants are being auctioned through forward bidding. The forward bidding involves fixation of a floor price for each mine based on net present value (NPV) of the coal mine. The NPV will be calculated by the discounted cash flow method based on the prices of coal notified by Coal India Limited. 10% of such NPV will be payable upfront and the balance NPV will be annuitized to become equal to a unit ratio in terms of Rs/tonne which shall be considered the floor price for bidding. Presently Rs. 150/tonne has been set as minimum floor price. The bidder who quotes the highest price above the floor price will get the coal block.

Reverse Bidding

The reverse bidding is being used for mines earmarked for power sector (other than the captive power plants). The Government will fix a ceiling price and the bidders will be required to quote below such ceiling price. The bidder who quotes the lowest price will be allocated the coal block. The idea is to grant the maximum benefit of coal mine to the consumers of power as the cost of coal is ultimately passed on to the consumers. The successful bidder will have to pay a fixed reserve price of Rs. 100/tonne. If the successful bidder is undertaking sale of power on merchant basis, it will have to pay additional reserve price (which will be calculated on net present value basis) for the quantum of coal utilised for generation of such power sold on merchant basis. The successful bidder has to cap its merchant capacity at 15% of the installed power capacity. While, the reserve price will be payable to the Government, the aggregate of the bid price and the reserve price will be used for computation of energy charge for determination of tariff under the power purchase agreement entered into with distribution utilities.

Each quoted price will be subject to escalation as per the prevalent Wholesale Price Index. It is to be noted that the royalty will be payable additionally as per Second Schedule of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act). The bidders will also have to factor in the amounts payable to the District Mineral Foundation and National Mineral Exploration Trust as stipulated in the Coal Ordinance.

FUTURE TARIFF DETERMINATION OF POWER PROJECTS HAVING PPAS

The Ministry of Coal has contemplated revision of energy charge' under the existing power purchase agreements (PPAs) for the successful bidders. The aggregate of the bid price and the reserve price together with allowable expenses and levies will be considered Run of Mine' cost of coal. The bid price will be subject to escalation in accordance with the formula prescribed in the existing PPAs. Since, the reverse methodology is being used for determination of bid price, it is expected that the auction will not increase the electricity tariffs. The revision of energy charge will be done under change in law'. However, the Ministry of Power is yet to notify detailed guidelines in this regard.

ELIGIBILITY TO PARTICIPATE

For eligibility purposes the mines have been divided in two categories i.e. Schedule II mines and Schedule III mines. Schedule II mines are those 42 mines which are already operational or ready for operation as per the Supreme Court judgment. A person who has incurred at least eighty per cent of total project cost of end use plant can bid for Schedule II mines. Schedule III mines are all other mines which are yet not ready for operation and still require further development. For these mines, a person who has incurred at least sixty per cent of total project cost of end use plant can bid. The capacity of the end-use plant should be proportionate to the capacity of the coal mines.

TAKEOVER OF LAND AND MINE INFRASTRUCTURE

The successful bidder is mandatorily required to takeover land and mine infrastructure for a notified fixed price. The value of land is determined based on value shown in the registered sale deeds with twelve per cent interest. The written down value in the balance sheet will be used for determining the value of the mine infrastructure. The mine infrastructure would include all fixed installations and structures, land demarcated for afforestation and R&R purposes and would exclude all movables which can be separately bought by the successful bidder from the prior allottees.

SECURED CREDITORS' RIGHTS

As the allocation of the coal blocks have been cancelled by the Supreme Court, the security interest of the existing secured creditors has consequentially fallen away. However, the Coal Ordinance grants first right to the secured creditors of the prior allottees over the compensation which will be received by the prior allottees form the successful bidder for land and mine infrastructure. The secured creditors will thus have no right in the land and mine infrastructure of the coal mine and their only recourse will be against the prior allottees including the secured lenders' first right on the cash flow that may be received by the prior allotee from the successful bidder.. If the prior allottees become the successful bidder, then the secured creditors will continue to enjoy the security interest on coal mines.

The Coal Ordinance and the rules framed thereunder cover most of the aspects on the way to deal with the de-allocated coal blocks. However, there are a few issues the Coal Ordinance does not provide any clarity on. The Coal Ordinance does not make any provision for smooth transfer of the existing approvals/ permits of the coal mines to the successful bidder. Such transfer will have to be dealt in accordance with applicable laws of such approval/permits, which may be time-consuming exercise and thus, delay the entire coal mining activity. Further, the successful bidder will have to assume the risks involved in the existing land acquisition proceedings. While, the Coal Ordinance promises lifeline to the projects stuck due to cancellation of allocation, however, it is to be noted that not all coal mines whose allocations were cancelled are being auctioned. Remaining mines may be allotted under tariff based competitive bidding for power projects based on the recommendation of the ministry of power. Further, the future of the Coal Ordinance will most importantly hinge on the Government's ability to ensure that the bill is approved by the Parliament.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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