Yesterday, in a shocking ruling, the Supreme Court of India declared the allocations of all coal blocks between 1993 and 2010 as illegal.
A three-judge bench clarified that it was not for the court to evaluate the advantages of competitive bidding over other methods of disposal of natural resources, but it was the court’s duty to examine whether such disbursal did not trample upon constitutional mandates.
The bench maintained that the “common good and public interest have suffered heavily” as the screening committee was neither consistent nor transparent.
On September 1, the apex court will decide whether to cancel the allocations or impose a penalty.
Of course, everyone is doubtful as to whether there will be a mass cancellation, certainly the worst case scenario.
Morningstar’s equity analyst Piyush Jain makes three observations.
- The companies for which the coal blocks are essential are seeing their share prices hit. Take the case of Hindalco, where the smelter upgrade requires the coal block to make it cost competitive. Naturally this would have a negative impact. The company’s cost curve would shift from $1,800/tonne to somewhere around $2,000 plus.
- The ruling states that the coal blocks would be re-visited to determine how the allocation should be made. While it is not a complete cancelation, many companies, which obtained blocks in terms of joint ventures and transfer from the public ownership to their usage, are seeing the impact. Hence the negative view on many mining and power companies.
- Piyush also observes that the demand for coal from Coal India will increase alongside a rise in demand for imported coal. Macquarie estimates that complete de-allocation of the coal blocks would increase India's import bill by $3 billion. Naturally, this would lead to an increase in costs and disrupt the margins and returns of mining companies. This will also cause turmoil in the balance sheets of numerous banks as they are exposed to cash flows for these projects.
However, the above consequences are just an interpretation of the worst case scenario. Next week we will have to see how the court facilitates the allotment of coal from operational mines.
