Modi honeymoon may sour as India court nixes mine giveaways

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(c) 2014, Bloomberg News.

NEW DELHI — Prime Minister Narendra Modi’s honeymoon period with big business since taking office three months ago may be about to sour. He has India’s Supreme Court to thank.

The court this week declared the handing of state-owned coal mines to companies over the past two decades “arbitrary and illegal.” The implications of that decision is mining licenses may be rescinded, upending an economy that gets 60 percent of its electricity from coal. It could also derail $47 billion in industrial investment, a centerpiece of Modi’s plan to get the economy back on track.

How Modi handles the court’s challenge will be a key test for his pro-business credentials. Thankfully for the prime minister, and India’s economy, the court is likely to give him a get-out-of-jail card.

“It’s clear the court has left a window open,” said Debasish Mishra, senior director of Deloitte Touche Tohmatsu India Pvt.‘s energy practice in Mumbai. Some of the mines may lose licenses, but they could then be auctioned off to power plant projects, he said.

What the court will do could take months to decide. It will meet again on Sept. 1 and may form a panel of retired judges to look at the options, Chief Justice R.M. Lodha said on Aug. 25.

The court-appointed panel will need to look at solutions that do not have “collateral damage,” on the economy, Amit Kapur, a partner at law firm J. Sagar Associates, said in a Bloomberg Television India interview yesterday.

India’s state auditor in 2012 found that allocating the mines to companies without an auction may have cost the government 1.86 trillion rupees, worth $33 billion at the time.

“One of the things the court could decide is to calculate the value of mines given over the past two decades at current prices, get the companies to pay that as a penalty and regularize the allocations,” said Milind Sathe, a Supreme Court lawyer. “The final ruling may take a few months as there’s likely to be many arguments in court.”

Giving away mines happened well before Modi’s watch.

The Coal Ministry started allocating state mines to companies for their own use in the early 1990s. The stated plan was to reduce the monopoly of state-run Coal India Ltd. and bring in private sector companies to ramp up production.

The ministry gave away 218 coal permits from 1993 to 2011. Of those, 80 were later canceled for not meeting output targets. Criticism of the procedure forced the previous government of Prime Minister Manmohan Singh in 2010 to amend laws and adopt an auctioning process. The nation has yet to auction its first coal mine.

An investment of 2.87 trillion rupees ($47 billion) has already been made on the basis of the captive coal mines, said Ashok Khurana, director general at the Association of Power Producers, an industry lobby that represents non-state power producers.

Regardless of that investment, India’s highest court took a tough stance to the giving away of state assets in its decision announced on Aug. 25.

“The approach had been ad-hoc and casual,” the court said in its 163-page ruling. “There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth.”

India’s Supreme Court has been here before.

In 2012, it rescinded 122 mobile-phone permits given in 2008 without an auction, saying their allocation had been corrupted by “money power” and those “who have been able to manipulate the system.”

Later that year, the federal government auctioned off some of the permits in line with the court’s order.

“While ruling on the coal case, the court will bear in mind that billions of dollars in investment is at stake,” said Mishra of Deloitte. “If coal blocks were to be canceled, it will leave a much deeper dent on investor sentiment than the telecom case.”

Two calls each to Coal Minister Piyush Goyal and his top bureaucrat Coal Secretary S.K. Srivastava weren’t answered Wednesday. Four calls to Jagdish Thakkar, the prime minister’s public relations officer, weren’t answered.

“Irrespective of what the decision is, it will be in the interest of the nation,” Goyal said on the day of the ruling.

Of the mines declared illegal, 33 are in operation and expected to produce about 53 million metric tons in the year ending March 31, CLSA Asia-Pacific Markets analysts Abhijeet Naik and Nitij Mangal wrote in a note. That’s more than 9 percent of India’s annual production.

Hindalco Industries, controlled by billionaire Kumar Magalam Birla, and Jindal Steel & Power Ltd. may be the worst hit by the judgment, Morgan Stanley said in an Aug. 25 note.

Jindal Steel’s Gare Palma mine feeds a 3 million metric ton a year steel plant in the state of Chhattisgarh, while it needs a final permit for its Utkal B1 coal block to fuel its Angul steel plant in the eastern state of Odisha.

Jindal Steel shares have lost 17 percent of their value since the court’s ruling. Hindalco has declined 6 percent.

“Our own mine is critical to the plant and losing that mine will have a major negative impact on us,” Jindal Steel Managing Director Ravi Uppal said in an interview with Bloomberg TV India Wednesday in reference to the Angul plant.

Hindalco’s Talabira-1 coal mine may be affected along with its Mahan mine, which will fuel an aluminum smelter and power plant, according to Morgan Stanley.

Hindalco spokeswoman Pragnya Ram declined to comment on the court ruling Wednesday.

bc-india

Asia - India - South Asia - Manmohan Singh - Narendra Modi - India government - Coal India Ltd - Jindal Steel & Power Ltd

First Published August 26, 2014 8:00 PM

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