Coalgate: India’s Supreme Court Confronts Dodgy Mining Licenses

Dubbed “Coalgate” by the Indian media, the investigation into allegations of corruption and cronyism in the coal licensing process is making progress.

The Indian Supreme Court has decided that 218 coal field licenses allocated by the government to dozens of private groups between 1993 and 2009 were illegal.

It’s reported in The New York Times that the on-going investigation began after a 2012 report by the federal auditor. The report concluded that the process of allotting coal leases during a 16-year span of time was murky and questionable, and then did not engage in competitive bidding, then transferred rights too cheaply –or with no payment at all. The coal industry may have cost the government $33 billion.

These accusations and the resulting investigation have been damaging to the former prime minister, Manmohan Singh, who directed the coal industry for part of the time period under investigation. The Singh administration has been damaged previously by accusations of corruption and, as a result, was replaced in May’s general election.

A member of the three-judge special bench, India’s chief justice Rajendra Mal Lodha, said in his remarks:

“There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth. Common good and public interest have, thus, suffered heavily.”

Piyush Goyal, the minister for coal and power, lauds the decision as clarifying.

“I think in fact they should have been immensely pleased that the economy can now move forward rapidly rather than being cast with the shadow of uncertainty.”

However, canceling those licenses could put a serious dent in India’s coal production industry, pushing energy prices up. After the ruling of possible corruption, shares of Hindalco (a leading Asian producer of aluminum) fell by 10 percent. It’s being predicted that, should those licenses be removed, the economy will suffer a heavy blow as prices rise in the steel, power and coal industries.

The Supreme Court’s decision of “arbitrary and illegal” license processing came at the same time that India’s Central Bureau of Investigation announced that it would close a criminal misconduct case against Indian industrialist Kumar Mangalam Birla and P.C. Parakh, the former coal secretary. The agency has found no evidence of criminal conspiracy in the matter of a coal field which was licensed in 2005 to Hindalco Industries.

The Financial Times reports that shares in Jindal Steel and Power dived 14 percent after the ruling was made public. This fall in stock prices affected several other major Indian business groups. Sesa Sterlite Ltd ended the trading day down by 10 percent while both Tata Steel and energy company Reliance Power were down by 5 percent.

The world’s third-largest coal producer, India is experiencing shortages, forcing steel and aluminum manufacturers to import foreign energy sources. The shortage has also affected the power industry as the production of electricity is held hostage by a lack of sufficient domestic fuel.

Most of the licenses in question have not been developed due to operational costs and environmental restrictions; however, more than two dozen operational mines may have to cease production if Hindalco and Jindal Steel and Power licenses are revoked. Canceling the coal licenses could send India’s industrial economy into a rapid and devastating decline as more coal must be procured from outside sources. This ruling has only added urgency to the issue.

Only the latest in a series of corruption rulings to sweep the Indian industrial economy, this blow comes just as investor confidence was returning to the sector following the election of Narendra Modi as prime minister. This ruling on improper resource allocation is the second of its kind in less than three years.

The BBC explains that India’s coal fields are mainly found in eastern states like Orissa, Jharkhand, and Chhattisgarh, with some smaller pockets in both the central and southern regions of the country. Large areas of coal are leased to mining companies in blocks, and that’s where the problem arises. Private companies lease the land to produce coal for their industries but have paid little or nothing for the rights, robbing the government and, ultimately, the people. There are few regulations governing coal mining and questions of environmental damage often go ignored.

The Indian branch of Reuters has revealed, through conversations in the financial district that the cancellation of the illegal licenses could cost India up to $3 billion in added imports.

Samir Arora, a fund manager at Helios Capital in Singapore, voiced his concerns over the financial future of Indian coal:

“The ruling creates uncertainty and has to resolve quickly. I hope the Supreme Court gives a clear roadmap in September.”

The global banking provider Macquarie is urging investors to be patient and wait for more answers.

“The government will impress upon the Court about coal shortages, power cuts and derailment of the investment process.”

The court will decide on September 1st in the matter of invalidating those licenses under scrutiny, but business analysts are already expecting that most, if not all, of the illegal coal licenses, will be canceled.

[Image Courtesy of Noah Seelam/AFP/Getty Images]