By Krishna N Das and Abhishek Vishnoi
NEW DELHI/MUMBAI (Reuters) - A Supreme Court ruling this week that India's decades-old method of granting coal mining concessions is illegal could herald much-needed reforms in a sector long dogged by the inability of state-run Coal India to raise output fast enough.
In declaring scores of coal block allocations made since 1993 unlawful and arbitrary, the Supreme Court has put investments worth billions of dollars at risk.
If it goes the next step and cancels the concessions after a further hearing due to start on Monday, India may have to import vast amounts of coal to keep the lights on.
In the long run, however, the decision could bring clearer rules to a sector that has failed to provide India with enough power because it has been so hamstrung by confusion and scandals over concessions allegedly handed to government cronies.
Coal India has a monopoly over coal that is mined for sale. The scandal, dubbed "Coalgate" by the media, concerns concessions sold to steel, cement and power firms to dig up coal for their own use.
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The furore erupted after the Comptroller and Auditor General's report in 2012 found that underpriced sales had cost the exchequer as much as $33 billion.
The court ruled that 218 coal blocks were awarded illegally. Because of the uncertainty, only 30 are operational. Their capacity is less than 10 percent of the 565 million tonnes produced in India as a whole in the last fiscal year to March.
The government has already said it would consider allowing private firms to mine coal for sale instead of their own consumption and the court ruling may pave the way for that.
"The government may convert this crisis into an opportunity and now should take all bold reforms such as permission for commercial mining, fair auction policy, regulatory reform," said Rakesh Jain, associate director at consultancy Feedback Infrastructure.
Accusations that resources from coal to mobile telephone bandwidth were routinely allocated as backhanders plagued the government of former Prime Minister Manmohan Singh, whose Congress party suffered its worst defeat in elections this year.
Singh's successor, Narendra Modi, has pledged to tackle 'crony capitalism' and provide power for all in a country that sits on the world's fifth-largest reserves of coal.
Sources told Reuters before Modi came to power that he could consider breaking up Coal India to help end its near-monopoly and bring more competition, although unions have threatened street protests to thwart such a move.
Legal wrangling and investigations into the concession process meant there was a tepid response to India's first coal block auction in February. The government withdrew the auction after only two firms bid for one of the three blocks on offer.
But the Supreme Court's intervention should bring the clarity that will make future auctions more successful.
"It is possible that an early resolution of the issue could pave the way for much-awaited auctioning of mineral resources in India," said Chirag Shah, an analyst with Barclays.
PROGRESS, BUT AT A COST
If the court does reverse the allocations, several banks stand to make heavy losses. State Bank of India and Power Finance Corp Ltd are among financial institutions that have together lent $10-$12 billion to the coal, power and steel sectors.
Metals and power companies Jindal Steel and Power Ltd , Hindalco Industries Ltd and Sesa Sterlite Ltd would also be badly hit, having already spent billions of dollars around blocks awarded to them.
"A clean slate will come, but with a huge cost," said G. Chokkalingam, founder of Equinomics, a research and fund advisory firm. "Legally it will be right, but practically it will be a disaster."
Columnist T.K. Arun wrote in the Economic Times that the court should only cancel allocations where firms have failed to develop the blocks and should let off those that have already started mining and built infrastructure.
A mass cancellation of awards would further raise shipments of coal to India, already the third-largest importer of the fuel. Coal is used to generate more than two-thirds of India's electricity.
Australian bank Macquarie estimates that scrapping all the allocations would increase India's annual import bill by $3 billion.
But Power and Coal Minister Piyush Goyal, a former investment banker, sought this week to reassure investors that the Supreme Court's ruling would remove a "shadow of uncertainty" around a sector whose troubles have contributed to a sharp slowdown in economic growth.
"We've come with fresh thinking and an open mind," he said.
(Additional reporting by Aman Shah in MUMBAI and Manoj Kumar in NEW DELHI; Editing by John Chalmers and Alan Raybould)