Ind-Ra: Coal Re-allocation Draft Guidelines in line with Expectations

The draft guidelines issued for the auction of coal mines are in line with India Ratings & Research's (Ind-Ra) expectations outlined earlier. The Ministry of Coal is targeting the e-auctioning of coal blocks before the March 2015 deadline outlined by the Supreme Court for the reversion of operational coal mines. Ind-Ra expects the disruption in coal availability to the already operational end-use projects to be minimum, in case the re-allocated mines are vested with successful bidders before 31 March 2015.

Investment Risk Likely to be Reduced: The eligibility criteria, linked to the preparedness status of the end-use plants (EUP; 80% of investment made in the EUP for Schedule II mines and 60% of investment made in the EUP for Schedule III mines), accords priority to operational and near-completion end-users in participation in the bidding process. Thus, their fuel availability risk is likely to reduce significantly. The provision of a cap on bidding for multiple coal blocks is likely to ensure healthy competition, prevent monopoly and guarantee the allocation of mines to maximum number of interested EUPs. The cap is yet to be decided.

Transparency to Boost Investor Confidence: The entire process of e-auctioning through a nominated authority who may engage experts to recommend re-allotment is likely to provide the much-needed transparency to the allocation process. The transparency and robustness of the auction process to stand legal and judicial review will be key to build investor confidence and ensure a steady flow of investment in the power sector over the long run. In the spirit of the Supreme Court's orders, the existing allottees will still need to pay the additional levy (295/t) by 31 December 2014 for the coal mined till 24 September 2014 and pay the additional levy for the coal mined between September 2014 and March 2015 by June 2015, irrespective of their success in bidding process.

Deviation from the Earlier Policy: The earlier policy of allocation of captive coal blocks was based on the principle of mine linked to the specific end-use project. Even though the new guidelines require both end-use and end-use project to be specified, they allow the allottee to use the coal in other projects with the same end-use by giving prior intimation to the central government, and thus could help ramp up coal production.

Tentative Auction Schedule: According to the draft guidelines, the tentative schedule for e-auctioning of 74 coal blocks (either in production or ready to produce) proposes request for proposal finalisation by 22 December 2014, bid due date by 11 February 2015, technical bid qualification by 3 March 2015, e-auction by 6 March 2015 and the issue of letter of accord/vesting order by 16 March 2015.

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