Indian coal allocation scam

Coal allocation scam or Coalgate as referred by the media, is a political scandal concerning the Indian government's allocation of the nation's coal deposits to public sector entities (PSEs) and private companies. In a draft report issued in March 2012, the Comptroller and Auditor General of India (CAG) office accused the Government of India of allocating coal blocks in an inefficient manner during the period 2004-2009. Over the Summer of 2012, the opposition BJP lodged a complaint resulting in a Central Bureau of Investigation probe into whether the allocation of the coal blocks was in fact influenced by corruption. The essence of the CAG's argument is that the Government had the authority to allocate coal blocks by a process of competitive bidding, but chose not to. ]As a result both public sector enterprises (PSEs) and private firms paid less than they might have otherwise. In its draft report in March the CAG estimated that the "windfall gain" to the allocatees was 1,067,303 crore (US$201.72 billion). The CAG Final Report tabled in Parliament put the figure at 185,591 crore (US$35.08 billion) On August 27, 2012 Indian Prime Minister Manmohan Singh read a statement in Parliament rebutting the CAG's report both in its reading of the law and the alleged cost of the government's policies While the initial CAG report suggested that coal blocks could have been allocated more efficiently, resulting in more revenue to the government, at no point did it suggest that corruption was involved in the allocation of coal. Over the course of 2012, however, the question of corruption has come to dominate the discussion. In response to a complaint by the BJP, the Central Vigilance Commission (CVC) directed the CBI to investigate the matter. The CBI has named a dozen Indian firms in a First Information Report (FIR), the first step in a criminal investigation. These FIRs accuse them of overstating their net worth, failing to disclose prior coal allocations, and hoarding rather than developing coal allocations. The CBI officials investigating the case have speculated that bribery may be involved. The issue has received massive media reaction and public outrage. During the monsoon session of the Parliament, the BJP protested the Government's handling of the issue demanding the resignation of the Prime Minister and refused to have a debate in the Parliament. The deadlock resulted in Parliament functioning only seven of the twenty days of the session. 1972-2010. Background to Coalgate: history of coal allocations In India Firms eligible for a coal allocation Historically, the economy of India could be characterized as broadly socialist, with the government directing large sectors of the economy through a series of five-year plans. In

keeping with this centralized approach, between 1972 and 1976, India nationalized its coal mining industry, with the state-owned companies Coal India Limited (CIL) and Singareni Collieries Company (SCCL) being responsible for coal production. This process culminated in the enactment of the Coal Mines (Nationalisation) Amendment Act, 1976, which terminated coal mining leases with private lease holders. Even as it did so, however, Parliament recognized that the nationalized coal companies were unable to fully meet demand, and provided for exceptions, allowing certain companies to hold coal leases:

1976. Captive mines owned by iron and steel companies. 1993. Captive mines owned by power generation companies. 1996. Captive.

The coal allocation process In July 1992 Ministry of Coal, issued the instructions for constitution of a Screening Committee for screening proposals received for captive mining by private power generation companies. The Committee was composed of government officials from the Ministry of Coal, the Ministry of Railways, and the relevant state government. A number of coal blocks, which were not in the production plan of CIL and SSCL, were identified in consultation with CIL/SSCL and a list of 143 coal blocks were prepared and placed on the website of the MoC for information of public at large.[ Companies could apply for an allocation from among these blocks. If they were successful, they would receive the geological report that had been prepared by the government, and the only payment required from the allocatee was to reimburse the government for their expenses in preparing the geological report. Coal allocation guidelines The guidelines for the Screening Committee suggest that preference be given to the power and steel sectors (and to large projects within those sectors). They further suggest that in the case of competing applicants for a captive block, a further 10 guidelines may be taken into consideration:

status (stage) level of progress and state of preparedness of the projects; net worth of the applicant company (or in the case of a new SP/JV, the net worth of their principals); production capacity as proposed in the application; maximum recoverable reserve as proposed in the application; date of commissioning of captive mine as proposed in the application; date of completion of detailed exploration (in respect of unexplored blocks only) as proposed in the application;

technical experience (in terms of existing capacities in coal/lignite mining and specified end-use); recommendation of the administrative ministry concerned; recommendation of the state government concerned (i.e., where the captive block is located); track record and financial strength of the company.

Results of the coal allocation program The response to the allocation process between 2004 and 2009 was spectacular, with some 44 billion metric tons of coal being allocated to public and private firms.[ By way of comparison, the entire world only produces 7.8 billion tons annually, with India being responsible for 585 million tons of this amount.[16] Under the program, then, captive firms were allocated vast amounts of coal, equating to hundreds of years of supply, for a nominal fee. Year of Government allocation Companies Private Companies

Power Projects

Total

No. of GR blocks MT)

(in No. of GR blocks MT)

(in No. of GR (in No. of GR blocks MT) blocks MT)

(in

Up to 2005 29

6,294.72

41

3,336.88

70

9,631.6

2006

32

12,363.15 15

3,793.14

1,635.24 53

17,791.53

2007

34

8,779.08

17

2,111.14

972

52

11,862.22

2008

509.99

20

2,939.53

100

24

3,549.52

2009

337

12

5,216.53

1,339.02 16

6,892.55

2010

800

800

Total

99

28,283.94 105

17,397.22 12

4,846.26 216

50,527.42

Out of the above 216 blocks, 24 blocks were de-allocated (three blocks in 2003, two blocks in 2006, one block in 2008, one block in 2009, three blocks in 2010, and 14 blocks in 2011) for non-performance of production by the allocatees, and two de-allocated blocks were subsequently reallocated (2003 and 2005) to others. Hence, 194 coal blocks, with aggregates geological reserves of 44.44 billion metric tons, stood allocated as at March 31, 2011. Source: Draft CAG Report, Table 5.1. Given the inherent subjectivity in some of the allocation guidelines, as well as the potential conflicts between guidelines (how does one choose between a small capacity/late stage project and a large capacity/early stage project?) it is unsurprising that in reviewing the allocation process from 1993 to 2005 the CAG says that "there was no clearly spelt out criteria for the allocation of coal mines." In 2005 the Expert Committee on Coal Sector Reforms provided recommendations on improving the allocation process, and in 2010 the Mines and Minerals (Development and Regulation) Act (MMDR Act), 1957 Amendment Bill was enacted, providing for coal blocks to be sold through a system of competitive bidding. The foregoing supports the following conclusions:

The allocation process prior to 2010 allowed some firms to obtain valuable coal blocks at a nominal expense The eligible firms took up this option and obtained control of vast amounts of coal in the period 2005-09 The criteria employed for awarding coal allocations were opaque and in some respects subjective.

March 2012. Coalgate explodes: the Draft CAG Report Overview The CAG report, leaked to the press in March as a draft and tabled in Parliament in August, is a performance audit focusing on the allocation of coal blocks and the performance of Coal India in the 2005-09 period. The Draft Report, stretching to over 100 pagesfar more detailed and containing more explosive allegations than the toned-down Final Report of some 50 pageswas the document that sparked the Coalgate furor. The Draft Report covers the following topics: 1. Overview (pp. 12) 2. Audit Framework (pp. 34) 3. Institutional Framework (p. 5-10) 4. Gaps in Supply and Demand (p. 11-17) 5. Coal Blocks-Allocation and Production Performance (p. 18-55)

6. Production Performance of CIL (p. 56-83) 7. Conclusion and Recommendations (pp. 8488) 8. Annexures (pp. 89110) As far as Coalgate is concerned, the key passages of the Draft Report are in Chapter 5, where the CAG charges that:

In 2005 the Government had the legal authority to allocate coal blocks by auction rather than the Screening Committee, but chose not to do so. As a result of its failure to auction the coal blocks, public and private companies obtained "windfall gains" of 1,067,303 crore (US$201.72 billion), with private companies obtaining 479,500 crore (US$90.63 billion) (45%) and government companies obtaining 507,803 crore (US$95.97 billion) (55%).

First CAG charge: the Government had the legal authority to auction coal blocks The most important assertion of the CAG Draft Report is that the Government had the legal authority to auction the coal, but chose not to do so. Any losses as a result of coal allocations, then, between 2005 and 2009 are seen by the CAG as being the responsibility of the Government. The answer to this question turns on whether the Government could institute competitive bidding by anadministrative decision under the current statute or whether it needed to amend the statute to do so. The CAG devotes ten pages of its report to reviewing the legal basis for an auction, and comes to the following conclusion: "In sum there were a series of correspondences with the Ministry for Law and Justice for drawing conclusion on the legal feasibility of the proposed amendments to the CMN Act/MMDR Act or through Administrative order to introduce auctioning/competitive bidding process for allocation of coal blocks for captive mining. In fact, there was no legal impediment to introduction of transparent and objective process of competitive bidding for allocation of coal blocks for captive mining as per the legal opinion of July 2006 of the Ministry of Law and Justices and this could have been done through an Administrative decision. However, the Ministry of Coal went ahead for allocation of coal blocks through Screening Committee and advertised in September 2006 for allocation of 38 coal blocks and continued with this process until 2009." Other parts of the report, however, suggest that while an administrative decision might be sufficient legal basis for instituting competitive bidding, the "legal footing" of competitive bidding would be improved if the statute were amended to specifically provide for it. i.e. there were some questions around the legality of using an

administrative decision as the ground for an auction process under the current statute. Quoting the Law Secretary in August 2006: "there is no express statutory provision providing for the manner of allocating coal blocks, it is done through a mechanism of Inter-Ministerial Group called the Screening Committee ... The Screening Committee had been constituted by means of administrative guidelines. Since, under the current dispensation, the allocation of coal blocks is purely administrative in nature, it was felt that the process of auction through competitive bidding can also be done through such administrative arrangements. In fact, this is the basis of our earlier legal advice. This according to the administrative Ministry has been questioned from time to time for legal sanction. If provision is made for competitive bidding in the Act itself or by virtue of rules framed under the Act the bidding process would definitely placed on a higher level of legal footing." So while the CAG certainly makes the case that the Government had legal grounds on which to introduce competitive bidding into the coal allocation process, saying that there was "no legal impediment" to doing so perhaps overstates their case. Second CAG charge: "windfall 1,067,303 crore (US$201.72 billion) gains" to the allocatees were

If the most important charge made by the CAG was that of the Government's legal authority to auction the coal blocks, the one that drew the most attention was certainly the size of the "windfall gain" accruing to the allocatees. On pp. 3234 of the Draft Report, the CAG estimates these to be 1,067,303 crore (US$201.72 billion) with details in the following table:

Windfall Gains to Allocatees (in

crore)

Calenda Government r Year Companies

Private Companies

Government + Private Companies

90% of GR in MT

Windfa Windfa ll gain ll gain Mar historic 2011 rates rates

90% of GR in MT

Windfa Windfa ll gain ll gain Mar historic 2011 rates rates

90% of GR in MT

Windfal Windfa l gain ll gain Mar historic 2011 rates rates

2004

1,709 45,807

56,949

1,709 45,807

56,949

2005

1,388 34,056

45,561

1,776 39,146

85,523

3,163 73,203

131,084

2006

8,660 185,119 259,547 3,011 62,085

111,764

11,67 247,204 371,311 1

2007

7,000 64,066

207,098 1,747 38,284

51,502

8,746 102,350 258,599

2008

288

6,704

7,364

2,682 54,445

80,137

2,970 61,149

87,501

2009

303

2,438

11,285

4,605 99,735

150,574 4,908 102,174 161,859

Total

19,34 13,82 33,16 1,067,30 337,471 587,803 293,695 479,500 631,166 9 0 9 3

The table employs the following calculations for windfall gain:

windfall gain/ton = market price/ton - production cost/ton

windfall gain = windfall gain/ton x number of tons allocated x 90% (to reflect 90% confidence in the geology of the reserve) Note that while the windfall gain/ton is fairly modest 322 (US$6.09), because of the vast size of the coal allocations, the total figure for the windfall gain is very large. Note also that the figure stated as a windfall gain would in fact accrue to the allocatee over the life of the reserve, which would likely exceed 100 years. Thus, using any reasonable discount rate, the Present value of the windfall gain will be dramatically smaller (perhaps one tenth) of the windfall gain stated in the CAG Report. While the headline number of 1,067,303 crore (US$201.72 billion) was sure to attract the attention of the public, in the Annexures to the report the CAG listed the windfall gains by company, allowing readers to see who exactly benefited from the allocation program, and by how much. The resulting list, a veritable Who's Who of Indian commerce, ensured that the topic of coal allocations would be one of the most written about stories of MarchAugust 2012. Coalgate grows: the media, the BJP, and the CBI investigation

On March 22, the Times Of India, broke the story on the contents of the Draft CAG Report: NEW DELHI: The CAG is at it again. About 16 months after it rocked the UPA government with its explosive report on allocation of 2G spectrum and licences, the Comptroller & Auditor General's draft report titled 'Performance Audit Of Coal Block Allocations' says the government has extended "undue benefits", totalling a mindboggling Rs 10.67 lakh crore, to commercial entities by giving them 155 coal acreages without auction between 2004 and 2009. The beneficiaries include some 100 private companies, as well as some public sector units, in industries such as power, steel and cement. The story listed the following companies as the leading beneficiaries of the coal allocations: Windfall Gains to Allocatees (in crore)

Private Sector

Public Sector

Company

Gain Company s

Gain s

Strategic Energy Tech System (Tata-Sasol)

33,06 35,0 NTPC Limited 0 24

Electro Steel Casting

26,32 TNEB 0 MSMCL

& 26,5 84

Jindal Steel and Power

21,22 NTPC 6

22,3 01

Bhushan Power & Steel Ltd & others

15,96 JSEB 7 BSMDC

& 18,6 48

Ram Swarup & others

15,63 MMTC 3

18,6 28

JSPL & Gagan Sponge Iron Ltd

12,76 WBPDCL 7

17,3 58

MCL/JSW/JPL & others

10,41 CMDC 9

16,4 98

Tata Steel Ltd

7,161

MSEB GSECL

& 15,3 35

Chhattisgarh Captive Coal Co Ltd

7,023 JSMDCL

11,9 88

CESC Ltd & J&S Infrastructure Allegations against S Jagathrakshakan See also: S. Jagathrakshakan

6,851 MPSMCL

9,94 7

In September 2012, several news reports alleged that family of S Jagathrakshakan, Minister of State for Information and Broadcasting in the UPA government is a part of a company named JR Power Gen Pvt Ltd which was awarded a coal block in Orissa in 2007. It was the same company which formed a joint venture with a public sector company, Puducherry Industrial Promotion Development and Investment Corporation (PIPDIC), on January 17, 2007. Barely five days after, PIPDIC was allotted a coal block. According to the MoU, JR Power enjoyed a stake in this allotment. However, JR Power had no expertise in thermal power, iron and steel, or cement, the key sectors for consumption of coal. Later, in 2010, JR Power sold 51% stake to KSK Energy Ventures, an established player with interests in the energy sector. In this way, the rights for the use of the coal block ultimately passed on to KSK. Reacting to this, Jagathrakshakan admitted to getting a coal block, and said that, "It is true that we got a coal allocation but it was a sub-contract with Puducherry government and then we gave it away to KSK company. Now, we have got nothing to do with the allocation but if the government wants to take back the allocation it can do so." Allegations against Subodh Kant Sahai See also: Subodh Kant Sahay In September 2012, it was revealed that Subodh Kant Sahay, Tourism Minister in the UPA government sent a letter to Prime Minister Manmohan Singh trying to persuade

him for allocation of a coal block to a company, SKS Ispat and Power which has Sudhir Sahay, his younger brother, as honorary Executive Director. The letter was written on 5 February 2008. On the very next day,Prime Minister's Office (PMO) sent a letter to the coal secretary on February 6, 2008, recommending allotment of coal blocks to the company. However, Sahay denied these allegations, citing that the coal block was allocated to SKS Ispat, where his brother was only an "honorary director". On 15 September 2012, an Inter Ministerial Group (IMG) headed by Zohra Chatterji (Additional Secretary in Coal Ministry) recommended cancellation of a block allotted to SKS Ispat and Power. Allegations against Ajay Sancheti and his link with Nitin Gadkari Ajay Sancheti's SMS Infrastructure Ltd. was allegedly allocated coal blocks in Chhattisgarh at low rates. He is a BJP Rajya Sabha MP and is believed to be in close relation with Nitin Gadkari. According to the CAG, the allocation of the coal block to SMS Infrastructure Ltd. has caused a loss of Rs. 1000 crores. Allegations against Vijay Darda and Rajendra Darda Vijay Darda, a Congress MP and his brother Rajendra Darda, the education minister of Maharashtra, have been accused of direct and active involvement in the affairs of three companies JLD Yavatmal Energy, JAS Infrastructure & Power Ltd., AMR Iron & Steel Pvt. Ltd, which received coal blocks illegally by means of inflating their financial statements and overriding the legal tender process. Allegations against Premchand Gupta UPA partner Rashtriya Janata Dal's leader Premchand Gupta's sons' company, new in the steel business applied for a coal block when Premchand Gupta was the Union minister for corporate affairs and bagged it about a month after his tenure ended along with that of his government. The company in question is IST Steel & Power - an associate company of the IST Group, which is owned and run by Premchand Guptas two sons Mayur and Gaurav. IST Steel, along with cement majors Gujarat Ambuja and Lafarge, was allocated the Dahegaon/Makardhokra IV block in Maharashtra. The company, which applied for a block on January 12, 2007, and was awarded it on June 17, 2009, is sitting on reserves of 70.74 million tonnes. The reserves it controls are more than the combined reserves held by much larger companies - Gujarat Ambuja and Lafarge. Gupta, who belongs to the Rashtriya Janata Dal headed by Bihar leader Lalu Prasad Yadav, was the minister of state for corporate affairs in UPA-I when his party was a constituent of the Congress-led coalition with 21 seats in Lok Sabha. However Mr Gupta maintains he had no involvement in IST Steel and denies influencing the coal-block allocation process. Allegations against Naveen Jindal

Congress MP, Naveen Jindal's Jindal Steel and Power got a coal field in February 2009 with reserves of 1500 million metric tones while the government-run Navratna Coal India Ltd was refused. On February 27, 2009, two private companies got huge coal blocks. Both the blocks were in Orissa and while one was over 300 mega metric tones, the other was over 1500 mega metric tones. Combined worth of these blocks was well over Rs 2 lakh crore and these blocks were meant for the liquification of coal. One of these blocks was awarded to Jindal. Naveen Jindal's Jindal Steel and Power was the company which was allotted the Talcher coal field in Angul in Orissa in 2009, well after the self-imposed cut off date by the Centre on allocation of coal blocks. The Opposition alleged that the Government violated all norms to give him coal fields. Naveen Jindal, however, denied any wrongdoin. On 15 September 2012, an Inter Ministerial Group (IMG) headed by Zohra Chatterji (Additional Secretary in Coal Ministry) recommended cancellation of a block allotted to JSW (Jindal Steel Works), a Jindal Group company. BJP Response In response to the Times of India story there was an uproar in Parliament, with the BJP charging the government with corruption and demanding a court-monitored probe into coal allocations: "'The CWG scam is (to the tune) of Rs 70,000 crore, 2G scam is Rs 1.76 lakh crore. But, now the new coal scam is Rs 10.67 lakh crore. It is a government of scams... from airwaves to mining, everywhere the government is involved in scams,' party spokesperson Prakash Javadekar told reporters."[ The BJP governments themselves were embroiled in this, since the states ruled by BJP had also opposed public auctions of the mines CBI Investigation On 31 May 2012, Central Vigilance Commission (CVC) based on a complaint of two Bharatiya Janata Party Member of Parliament Prakash Javadekar and Hansraj Ahir directed a CBIenquiry. There were leaks of the report in media in March 2012 which claimed the figure to be around 1,060,000 crore (US$200.34 billion).It is called by the media as the Mother of all Scams. Discussion about the issue was placed in the Parliament on 26th Aug, 2012 by the Prime Minister Manmohan Singh with wide protests from the opposition According to the Comptroller and Auditor General of India, this is a leak of the initial draft and the details being brought out were observations which are under discussion at a

very preliminary stage On 29 May 2012, Prime Minister Manmohan Singh offered to give up his public life if found guilty in this scam. Formation of Inter-Ministerial Group (IMG) At the end of June 2012, coal ministry decided to form an Inter-Ministerial Group (IMG), to decide on either de-allocation or forfeiting the Bank Guarantees (BG) of the companies that did not develop allotted coal blocks. Zohra Chatterji, additional secretary, coal ministry was named as Chairman of the IMG. Other IMG members include representatives from power, steel, departments of economic affairs, industrial policy and promotion, and law and justice Significantly, the decision was taken after the CVC had already ordered a CBI enquiry into alleged irregularities As of 26 September 2012, the IMG has reviewed 31 coal blocks. Out of these, it has recommended de-allocation of 13 coal blocks and encashment of bank guarantees of 14 allottees Recommendation (Cancellation or deduction of BG)

Sr No

Name of Company

Location

Remarks

Castron Mining Ltd

Bramhadih, Jharkhand

Deallocate

Was allocated in 1996

Chinora and Warora Field Mining (Southern Deallocate and Ispat Ltd part), Maharashtra

Was allocated in 2003

the Lalgarh Domco (North) West Smokeless Deallocate Bokaro, Fuels Pvt. Ltd Jharkhand

Was allocated in 2005

Monnet Ispat Utkal & Energy Ltd. Orissa

Asked to submit BG of 3 years royalty, B2, Was allocated in failing which the 1999 block may be deallocated

Sr No

Name of Company

Location

Recommendation (Cancellation or deduction of BG)

Remarks

Marki Mangli-II, III Shri Virangana and IV blocks Deduction of BG Steels Ltd in Maharashtra

Adhunik Metaliks, Adhunik Corporation, Orissa Sponge Iron, New Deepak Steel Patrapara, & Power, Orissa SMC Power Generation Ltd, Metaliks Ltd, Visa Steel Ltd.

Deallocate

SKS Ispat

Rawanwara North, Madhya Pradesh

Deallocate

Tata Sponge

Radhikapur East, Orissa

Deduction of BG

Bhushan Steel

Bijahan, Orissa

Deduction of BG

10

Himachal EMTA Power Gourangdih Ltd & ABC JSW Steel Ltd

Deallocate

Was allocated in 2009

Sr No

Name of Company

Location

Recommendation (Cancellation or deduction of BG)

Remarks

11

Gupta Metaliks & Nerad Power Ltd & Malegaon Gupta Coalfields Ltd

Deduction of BG

12

Usha Ltd

martin

Lohari

Deduction of BG

13

Electrosteel Castings

North Dhadu Deallocate

14

Choritand Telaiya

Deallocate

15

Maharashtra Seamless

Gondkhari

Deallocate

16

ArcelorMittal and GVK Seregarha Power

Deduction of BG

17

Jayaswal Neco Moitra

Deduction of BG

18

Neelachal Iron Dumri & Steel

Deduction of BG

19

DB Power

Durgapur Sariya

II/

Deduction of BG

20

IST Steel and DahegaonPower Ltd, Makardhokra Deallocate Gujarat IV,

The block was allocated on 17 June 2009. IST

Sr No

Name of Company

Location

Recommendation (Cancellation or deduction of BG)

Remarks

Ambuja Maharashtra Cement and Lafarge India

Steel and Power is owned by Mayur and Gaurav Gupta, sons of former Union corporate affairs minister Prem Chand Gupta.

21

Electrotherm (India) Ltd and Bhaskarpara, Deallocate Grasim Chhattisgarh Industries

The block was allocated on 21 November 2008

August 2012. Coalgate reaches Parliament: the Final Report and Manmohan Singh's rebuttal in Parliament The CAG Final Report Overview On 17 August the CAG submitted its Final Report to Parliament. Much less detailed than the Draft Report, the Final Report still made the same charges against the government:

The Government had the authority to auction the coal blocks but chose not to As a result allocatees received a "windfall gain" from the program.

The Final Report had the following outline:

Preface (pp. i-ii). Executive Summary (pp. iii-viii) Chapter 1. CoalAn Overview (pp. 16) Chapter 2. Audit Framework (pp. 78) Chapter 3. Augmentation of Coal Production (pp. 920) Chapter 4. Allocation of Captive Coal Blocks (pp. 2132) Chapter 5. Productive Performance of Captive Coal Blocks (pp. 3342) Chapter 6. Conclusion and Recommendation (pp. 4345)

First CAG charge: the Government had the legal authority to auction coal blocks In Chapter 4 of the Final Report, the CAG continued its contention that the Government had the legal authority under the existing statute to auction coal by making an administrative decision, rather than needing to amend the statute itself. Pages 2227 chronicle key correspondence between the Secretary (Coal), the Minister of State (Coal), the Prime Minister's Office, and the Department of Legal Affairs from 2004 to 2012. From this record, the CAG draws the following conclusions:

The Government decided to bring transparency and objectivity in the allocation process of coal blocks, with 28 June 2004 taken as the cutoff date.

The DLA advice of July 2006 was sufficient grounds upon which to introduce competitive bidding, by means of an administrative decision.

Despite this DLA advice, there was prolonged legal examination as to whether an administrative decision or amendment of the statute was necessary for competitive bidding to be introduced. This stalled the decisionmaking process through 2009.

In the period between July 2006 and the end of 2009, 38 coal blocks were allocated under the existing process of allocation, "which lacked transparency, objectivity, and competition."

Second CAG charge: "windfall gains" to the allocatees were 185,591 crore (US$35.08 billion) The biggest change from the Draft Report was the dramatic reduction in the windfall gains from 1,067,303 crore (US$201.72 change is due to:

billion) to 185,591 crore (US$35.08

billion) This

windfall gain/ton decreased 8% from 322 (US$6.09) in the Draft Report to 295 (US$5.58) in the Final Report
number

of tons decreased 81% from 33.169 to 6.283 billion metric tons of coal. This is because the Final Report considers "extractable coal" (i.e. coal that could actually be used in production) as against the Draft Report, which considered coal in situ (i.e. coal in the ground without taking into account losses that occur during mining and washing the coal). Extracta Particula ble rs Reserves of OC Average CIL Sale Price/Ton ne Average CIL Cost Price/Ton ne Financin Net Net g Benefit/T Benef Cost/Ton on it ne

OC Mines

3,970

1,028

583

150

295

117,2 75

Mixed Mines, 1,011 mine plan avail

1,028

583

150

295

29,85 3

Mixed Mines, 1,302 mine plan unavail

1,028

583

150

295

38,46 3

Total

6,283

1,028

583

150

295

185,5 91

Source: CAG Final Report, p. 31. Note, these are still huge coal volumes compared to India's annual production and represent many decades of the actual coal needs of the captive firms. The headline number of 185,591 crore (US$35.08 billion) is the gain that would accrue to captive firms over these decades, and there is no attempt to derive a Present value of the gain. However, considering inflation rate equaling discount rate, the gain calculated reflects the nearly accurate value. Manmohan Singh's Rebuttal in Parliament Overview Typically once a CAG Report has been tabled (submitted to Parliament) it is received by the Public Accounts Committee (PAC). The PAC then calls in the relevant minister to discuss the report, and the PAC prepares its own report, which is then discussed in Parliament as a whole. In an unusual step, on 27 August, the Prime Minister bypassed this process and made a statement to Parliament directly, addressing the findings of the Final CAG Report. Hereafter, Prime Minister's Statement. Stretching to 32 paragraphs, Singh's argument makes three main points:
From

a policy perspective, he agrees with CAG that all parties consented to a move from allocation by screening committee to competitive bidding should begin.

 From

a legal perspective, he disputes the CAG's understanding of the law, and says, indeed,

that such a conclusion could only have been arrived at by a selective reading of the evidence.
From

a practical perspective, he notes that even were the legal path clear, it was not simply possible to introduce the competitive bidding process by fiat. There were multiple parties whose consensus was required in the transition to competitive bidding with varied, and sometimes divergent interests.

The major coal and lignite bearing states like West Bengal, Chhattisgarh, Jharkhand, Orissa and Rajasthan that were ruled by opposition parties, were strongly opposed to a switch over to the process of competitive bidding as they felt that it would increase the cost of coal, adversely impact value addition and development of industries in their areas and would dilute their prerogative in the selection of lessees The CAG, Singh argued, had simply ignored the practical realities of policy implementation in their accusation that the Government did not move fast enough in transitioning to competitive bidding First CAG charge: the Government had the legal authority to auction coal blocks Singh addresses the question of legal authority in paragraphs 14-18 of his Parliamentary statement: 14. The CAG says that competitive bidding could have been introduced in 2006 by amending the existing administrative instructions. This premise of the CAG is flawed.

15. The observation of the CAG that the process of competitive bidding could have been introduced by amending the administrative instructions is based on the opinion expressed by the Department of Legal Affairs in July and August 2006. However, the CAG's observation is based on a selective reading of the opinions given by the Department of Legal Affairs.

16. Initially, the Government had initiated a proposal to introduce competitive bidding by formulating appropriate rules. This matter was referred to the Department of Legal Affairs, which initially opined that amendment to the Coal Mines (Nationalisation) Act would be necessary for this purpose.

17. A meeting was convened in the PMO on 25 July 2005 which was attended by representatives of coal and lignite bearing states. In the meeting the representatives of state governments were opposed to the proposed switch over to competitive bidding. It was further noted that the legislative changes that would be required for the proposed change would require considerable time and the process of allocation of coal blocks for captive mining

could not be kept in abeyance for so long given the pressing demand for coal. Therefore, it was decided in this meeting to continue with the allocation of coal blocks through the extant Screening Committee procedure till the new competitive bidding procedure became operational. This was a collective decision of the centre and the state governments concerned. 18. It was only in August 2006 that the Department of Legal Affairs opined that competitive bidding could be introduced through administrative instructions. However, the same Department also opined that legislative amendments would be required for placing the proposed process on a sound legal footing. In a meeting held in September, 2006, Secretary, Department of Legal Affairs categorically opined that having regard to the nature and scope of the relevant legislation, it would be most appropriate to achieve the objective through amendment to the Mines & Minerals (Development & Regulation) Act.

Second CAG charge: "windfall 185,591 crore (US$35.08 billion)

gains"

to

the

allocatees

were

26. Let me humbly submit that, even if we accept CAG's contention that benefits accrued to private companies, their computations can be questioned on a number of technical points. The CAG has computed financial gains to private parties as being the difference between the average sale price and the production cost of CIL of the estimated extractable reserves of the allocated coal blocks.

Firstly, computation of extractable reserves based on averages would not be correct.

Secondly, the cost of production of coal varies significantly from mine to mine even for CIL due to varying geo-mining conditions, method of extraction, surface features, number of settlements, availability of infrastructure etc.

Thirdly, CIL has been generally mining coal in areas with better infrastructure and more favourable mining conditions, whereas the coal blocks offered for captive mining are generally located in areas with more difficult geological conditions.

Fourthly, a part of the gains would in any case get appropriated by the government through taxation and under the MMDR Bill, presently being considered by the parliament, 26% of the profits earned on coal mining operations would have to be made available for local area development.

Therefore, aggregating the purported financial gains to private parties merely on the basis of the average production costs and sale price of CIL could be highly misleading. Moreover, as the coal blocks were allocated to private companies only for captive purposes for specified

end-uses, it would not be appropriate to link the allocated blocks to the price of coal set by CIL September 2012. Coalgate reaches Supreme Court of India You may have well laid down policy but was it implemented? Is it a sheer coincidence that a large number of beneficiaries were either politicians or their relatives or associates? Justice R M Lodha and Justice A R Dave, Supreme Court of India Advocate M L Sharma filed a Public Interest Litigation (PIL) in the Supreme Court seeking to cancel the allotment of 194 coal blocks on grounds of arbitrariness, illegality, unconstitutionality and public interest. Defending the CAG, a Supreme Court bench of Justices R M Lodhaand A R Dave dismissed the Solicitor General Rohinton Narimans objections that petition relies heavily on the CAG report by saying, the CAG is a "constitutional authority" and that its report is "not a piece of trash" Moreover, the court ordered the government to inform it of reasons for not following the 2004 policy of "competitive bidding" for coal block allocation. The apex court wanted to know not only the steps that have been taken but also proposed against companies that have breached the agreement.