The end of crony capitalism in the black diamond sector

By Vivek Vashi and Aditya Deolekar, Bharucha & Partners
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The Supreme Court through its recent judgments in Manohar Lal Sharma v The Principal Secretary & Ors has delivered a severe blow to private sector entities which had invested heavily in various captive coal blocks across the country. A bench comprising Chief Justice RM Lodha, Justice Madan B Lokur and Justice Kurian Joseph passed these judgments on 25 August and 24 September.

Vivek Vashi
Vivek Vashi

While the first judgment considered the legality of the process of allocation of coal blocks by the government’s screening committee and also by the dispensation route from 1993 to 2010, the second judgment dealt with consequences of first judgment, namely, cancellation of the allocation to various private sector entities of 214 out of the 218 coal blocks allotted. The affected entities face major financial turmoil on account of losing the coal blocks which belonged to them.

The first judgment is reminiscent of the Supreme Court’s order in the 2G telecom spectrum allocation case, where the court annulled all 122 licences awarded to telecom companies in 2008 and denounced the “first come-first served” allotment process.

First judgment

Sharma contended that the government’s mechanism for the allocation of captive coal blocks was not in consonance with the provisions of the Mines and Minerals (Development and Regulation) Act, 1957 (as amended), and the Mineral Concession Rules, 1960, and suffered from “constitutional vice and legal infirmity”. The government rejected these contentions and argued that it had strictly followed the letter of law while allocating captive coal blocks and had not exceeded the power conferred on it by the act and the rules.

The Supreme Court accepted Sharma’s arguments and ruled that the government was in breach of provisions of the act and rules, as it had traversed beyond the scope of the act by not taking into consideration eligibility criteria and the process of allotment prescribed by the act while allocating of captive coal blocks.

The court further held that the process of allocation of captive coal blocks was arbitrary, inconsistent and lacked transparency and application of mind. It also held that the issue of ensuing consequences required further hearing.

Second judgment

The government contended that there would not be any severe adverse impact due to cancellation of the allocation of 214 coal blocks and in addition to such cancellation, proposed an additional levy of ₹295 (US$4.80) per tonne of coal extracted. The allottees contended that the cancellations would have a serious adverse impact on India’s economy and set back the process of coal extraction and its effective utilization by seven to eight years. The allottees also condemned the additional levy proposed by the government.

Aditya Deolekar
Aditya Deolekar

After analysing the arguments put forth by both sides, the Supreme Court concluded that the allocation of all 218 captive coal blocks, except for the two blocks allotted to Ultra Mega Power Projects and the two blocks allotted to a central government public sector undertaking, ought to be cancelled as the process for their allotment was marred by arbitrariness and illegality. However, the court made the judgment effective from 31 March 2015, to give the allottees adequate time to manage their affairs and to facilitate a smooth handover of the captive coal blocks to the government.

Further, the court imposed an additional levy of ₹295 per tonne payable by every allottee for the coal they extract until 31 March 2015.

Analysis

The above decisions are intended to bring about more transparency in the process of allocation of natural resources by the government. They put in question the sanctity of government policies and have cast a shadow of uncertainty over the stability of investments in India and caused unease among the business community.

It is said that “one person’s misery is another person’s merriment”. On the one hand, the business community has been adversely affected by these decisions, but on the other hand, the government stands to gain greatly from the additional levies to be paid by the private sector companies that have started or are about to start operating their mines. Since the companies have mined a total of about 300 million tonnes of coal, the estimated amount which they will have to pay is around ₹90 billion. Such a levy coupled with earnings from auction of the coal blocks in coming years will not only boost the government’s revenue but will also help to bring its fiscal deficit under control.

The irony here is that while private sector entities are facing economic loss for their rightful acts, the government of India is reaping the benefits of its own wrongdoings.

Vivek Vashi is the mainstay of the litigation team at Bharucha & Partners, where Aditya Deolekar is an associate.

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