This is first in the series of a three-part article tracking facts, issues and challenges confronting the Indian coal mining sector in attracting foreign direct investments. It recommends steps that the government ought to take to make commercial coal mining lucrative enough for global mining players.
Indian Coal Sector–Some Facts
India has the world's fifth-largest coal reserve. Our domestic coal consumption in Financial Year (FY) 2018-19 was 965 million tonnes against our annual production of 730 million tonnes. Our domestic coal demand continues to far outstrip our local supply despite our coal reserves' availability. We are seeing a large foreign exchange outflow for the coal import to make up the deficit in our coal production. In 2018, globally, imported coal bill summed up US dollars (US$)152 billion, out of which Indian coal import accounted for US$24.6 billion (16.2% of all coal imports). India was a close second to Japan which was marginally ahead at the first spot at US$25.4 billion (16.7% of all coal imports) 1.
India has a huge coal demand–and we have the reserves to back up the supply. So where is the obstacle?
Indian Coal–Moving from the Protectionist Regime to Free Market Economy: We Took One Step (less) at a Time
Indian Government nationalised the coal sector in 1973, and from that time onwards, the coal sector has virtually been a monopoly of Coal India Limited. Supreme Court of India (SC) through its order dated September 24, 2014 ordered cancellation of 204 blocks allocated between 1993-2011 (out of 218 allocated coal blocks) declaring those allocations vitiated in law. SC further ordered to auction the cancelled coal blocks in a transparent and accountable manner.
However, the Government put the restrictions of end-use for auctioned coal mines in the ensuing coal bidding process, 2015 onwards meaning that the coal mines auctioned were to be only for captive use. The auction design of allocating coal blocks to companies with specified end-use did not yield the desired effects of increasing coal production. In the following years, several of these auctioned blocks did not develop. The exorbitant prices paid by the successful bidders to beat the competition - for winning these coal blocks in the reverse-auction - made it commercially imprudent for the developers to throw more good money after bad. Further, lower requirements of coal from the linked end-use projects, with no flexibility to sell the excess coal in open markets, resulted in operational inefficiencies leading to limited production.
In the current FDI regime, coal mining for captive consumption by power projects, iron and steel and cement units and coal processing plants can receive 100% FDI under automatic route. It is further subject to the condition that processing units will not mine or sell coal in open markets. Because of this, the coal sector continued to be lacklustre with almost nil interest by foreign players who had the expertize and access to world-class coal mining technologies.
FDI in the coal sector could never really kick-start because of the shackles of end-use restrictions.
Government soon realised its folly. Such a move to allocate coal mines only to a specified end-use project and restricting FDI into coal mining only for captive projects inherently lacked economies of scale. Finally, the Government, on February 27, 2018, opened coal mining for commercial use by approving the methodology for the auction of coal mines (Coal Auction Methodology Order). It meant that the sector was now open to the domestic private sector to mine the coal for commercial sale for coal miners, with no end-use restrictions on its utilisation.
Our coal sector reforms have always been a step behind the need for the hour. But now with the sector for commercial mining opening up, are we now in tandem? Is it the panacea the government was looking for to attract coal miners?
The responses by the local players so far show that it did not enthuse them. Massive capital investments and technical expertise that the domestic companies do not have access to may have been the stumbling block.
FDI in Coal Sector–Yet-So-Near-Yet-So-Far
Interestingly, the Coal Auction Methodology Order also referred to the possibility of commercial coal mining being amenable to 100% foreign direct investment. It stated that the coal ministry should approach the relevant government department i.e., Department of Industrial Policy and Promotion.
All these bits-and-pieces incremental reforms did not resolve the problem of sub-optimal coal production.
It was about time to unshackle the coal mining space and give it access to capital at lower costs, access to high-end technology and global best practices in coal mining. Thus, on August 28, 2019, the Indian Union Cabinet approved the proposal for the review of FDI policy on coal mining. It permitted the review for approval of 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.
Allowing FDI–What are the Advantages for the Indian Coal Sector
It is a welcome move for India's coal sector. FDI in the commercial mining sector would help in bringing in the much-needed capital (at lower costs) and access to high-end technology for underground mining that so far has crippled developing the domestic coal sector. It would create better operational efficiencies through an upgraded mechanisation of mining operations, bring in competition and help to set up a new market structure where both the buyers and sellers have choices. Such an open energy market may just help reduce our foreign exchange outflow on coal imports. Also, our stranded power assets may heave a sigh of relief from the ad hoc manner of fuel supply they have grown accustomed to.
What are the Challenges for Attracting FDI in the Coal Sector?
There are some fundamental questions: Just by opening up the commercial coal mining space for the foreign direct investments would it ramp up our coal production?
Does one Right correct all Wrongs? Would it open the floodgates of overseas capital and high-end technological excellence for the Indian coal space? What are the challenges, weaknesses and threats that the Government needs to be mindful? What it Ought-To-Do?
The second part of this series of a three-part article shall examine the stumbling blocks that the Government needs to steer clear off for bringing in foreign direct investments in the commercial coal mining sector.
*Amitabh is a corporate and projects partner with LexRidge Partners, an Indian transactional law firm specialising in Indian Infrastructure, Energy and Natural Resources space.
September 16, 2019
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