Mining law: Auction rules may benefit previous coal block owners

The stalemate in the coal sector is finally over. The Union Cabinet has approved re-promulgation of the coal Ordinance. This will pave the way for auctioning of coal blocks. In the first phase, 24 mines will be e-auctioned. But the question lingers: Given the stringent selection parameters, will there be an aggressive bidding?

India Ratings & Research expects the guidelines outlined under the approach paper for the auctioning of coal mines to evince strong participation by serious developers, with operational and likely to be operational end-use projects. The operative word is "serious". New provisions allow a bidder to be technically eligible only if they have incurred 80 per cent of the total project cost for a Schedule II coal mine or an under-production mine.

WHAT TO LOOK OUT FOR

• Will the stringent rules inhibit bidders? India Ratings & Research feels the new rules will evince serious buyers
• Forward bidding for the non-regulated sectors. Bidders have to quote prices more than at least Rs 150 per tonne
• Backward bidding for power sector blocks.  Bidders to quote below ceiling price

Only 50 per cent of the qualified bidders from the technical stage will be allowed to participate in the e-auction process. "The mines that are being auctioned in the first phase have operating projects. Companies that had blocks will do their best to keep them and bid till internal rate of returns goes negative," a steel producer said. Among the 24 mines (part of the 204 block allocation cancelled by the Supreme Court), seven are reserved for the power sector, 16 for end-users like iron and steel, cement and captive power plants, and one for the steel sector. The revenue maximisation, however, is expected is mines allocated for non-regulated sectors, where the forward bidding methodology is to be applied. Bidders in the non-regulated sectors will have to quote a price above the floor prices (not less than Rs 150 per tonne). The bid prices would be considered as a base for the year of bidding and would be escalated linked to a reference index.

The floor price under forward bidding would be based on the net present value of the block, calculated on the basis of the notified price of Coal India for the corresponding gross calorific value. Royalty would be an additional pain.

For tariff rationalisation, the government has decided in favour of a reverse bidding process for the power sector blocks. Bidders will have to quote a price below the ceiling price, which would be fixed at the run-of-mine price of equivalent grade as specified by Coal India for the power sector. Reserve price is fixed at Rs 100 a tonne while royalty would be paid in addition.

There is, however, a fear of the problem of plenty. A miner said the e-auction mechanism would facilitate previous allotted. For Schedule III mines (ready to commence production), the bidder should have incurred an expenditure not less than 60 per cent of the total project cost. "Only established players are project-ready, but there are many blocks to be reallocated," the miner said. But these clauses could probably be tweaked over time. Stakeholders are more or less unanimous that the current guidelines were the only way to correct anomalies in the earlier process. For example, under the previous allocation, blocks with large reserves were allotted to a single company, in the non-regulated sector, for a small project. Now, the annual coal requirement of the specified end-use plant over a period of 30 years will be the parameter. Clearly, the intent is good; the verdict will rest on the outcome.