India's Supreme Court verdict on coal blocks could trigger reforms in the sector: S&P

S&P says country can take a big step toward resolving issues plaguing the mining sector for the past few years

The recent cancellation of coal block allocations by the India's highest court provides an opportunity for the government to reform the process of awarding coal mines in the country. A report titled "Supreme Court Ruling Could Ignite Reforms In India's Coal Sector," was released by Standard & Poor's Ratings Services.

"The Supreme Court ruling could lead to an improved process for allocating coal mines and boost the supply of coal in a country that faces a severe shortage of the fuel," said Standard & Poor's credit analyst Mehul Sukkawala.

The Supreme Court cancelled most of the 218 coal blocks that the government had allocated between 1993 and 2010. The court observed that the allocation was arbitrary, illegal, and resulted in unfair distribution of national wealth.

"We believe the cancellation of coal blocks increases near-term uncertainty for the operations and investment plans of companies that were either allocated the mines or were expecting to source coal from them," said Mehul Sukkawala. "It could also hurt the significantly improved investor sentiment in India following the change in the government earlier this year."

Standard & Poor's believes a transparent allocation policy will play an important role in determining the profitability and strategy of coal consuming companies. This, combined with a streamlined process for getting environmental clearances and approvals for land acquisition, would give these companies the confidence to invest and revive their long-pending projects.

A transparent process to allocate coal mines is likely to involve an auction, just as the government did for telecom spectrum. The government could also extend the solution for coal miners to the mining of iron ore, bauxite, and other minerals. Doing so can help the country take a big step toward resolving issues plaguing the mining sector for the past few years.

Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

Powered by Capital Market - Live News