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Companies reacted positively to the new coal auction rules announced by the Narendra Modi government on Monday.
They said it would help them to plan future investments properly and save those already made in the coal, power and cement sectors. Chief executive officers (CEOs) in the sectors concerned say a lot of uncertainty was created with the Supreme Court order cancelling coal block allotments made over the past 20 years. They say the new rules are fair to all and to the state governments, which will get royalties from the mines to be auctioned in future. The government has also decided to keep foreign companies out of the auction process, good news for Indian ones.
Among the big beneficiaries of the new rules will be the Adani Group, now the country's largest power sector company. The Ahmedabad-based group's coal mines for power projects in Maharashtra were cancelled by the SC.
Says Sushil Maroo, CEO of Essar Energy: "This was expected after the SC verdict. The best part is that the government came out with new norms so quickly. We have to still find out about the details of the blocks which will be put out for auction. This shows the government's resolve to sort issues quickly."
Essar and Hindalco had lost their Mahan coal block in Madhya Pradesh. Essar had already set up a 3,000 Mw power plant nearby. A Hindalco spokesperson declined to comment, saying they were waiting for the details but a group insider said they'd participate in the auction. A Tata Power spokesperson said they were studying the ordinance.
Giriraj Daga, senior analyst with Nirmal Bang, the equity trading brokerage, said the move was expected. "Though many are sceptical and feel it will take some more quarters for things to actually move, I think by March 2015, mines ready for production or already producing will get auctioned," he said.
One of the biggest losers in the cancellation was Jindal Steel and Power. With Monday's decision, it will be able to participate in the coal auction. However, the government has also said companies which are convicted will not be able to participate. So, a big question mark remains on what happens to companies which win a block in the auction to take place but get convicted on a later date.
CEOs say power companies will benefit from the decision but it will be a mixed bag for cement makers. On the brighter side, the move allows them to own a coal mine, providing energy security. On the downside, the decision to open bidding only for captive use will force them to invest in a mine. This will increase their capital cost, beside forcing them to divert resources into a non-core activity.
"It is certainly a better option than the current situation. The government is offering land along with the mining rights. This will greatly shorten the time taken to start a mine. Now, bidding will depend on the economics of owning a mine versus sourcing coal from the open market," said M H Bangur, managing director of Shree Cement.
To make bidding financially attractive, he wants the government to consider allotting mines for merchant production and also open it for independent mining companies.
"Logistics is one of the biggest costs for us. You can't expect a cement plant based in western or northern India to operate a mine in the east," he added.
Though, he added, Shree Cement might consider bidding for a mine if the economics works out in their favour.
