India’s Supreme Court May Void Two Decades of Coal Contracts

In a sweeping ruling that will upend a nation that depends on coal for 60% of its electricity, the Supreme Court of India ruled on Monday that the country’s previous process for awarding coal mine contracts was illegal.

Under the mine licensing process that ran from 1993 to 2010, mining blocks were handed out by government bureaucrats rather than by competitive bidding. Critics argued that the approach was arbitrary, opaque, and a breeding ground for widespread corruption.  A 2012 investigation by the nation’s Comptroller and Auditor General blasted the process, finding that the country lost more than $200 billion in revenue because the licenses were sold too cheaply.

In Monday’s decision, the court found that long-standing rules for allocation of coal leases were widely ignored, with licenses handed out to companies barred from holding them, to consortiums instead of individual applicants as required, and to state government and public sector companies in violation of a 1973 law.

“No applications were invited through advertisement and thus the exercise of allocation denied a level playing field, healthy competition and equitable treatment,” the court said. “There were no steps or measures taken to prevent possible misuse of end-use projects of private companies.”

The ongoing scandal, dubbed “Coalgate” in the Indian media, contributed to the heavy defeat the Indian National Congress Party suffered in the May general elections. The former prime minister, Manmohan Singh, was head of the national coal ministry during part of the period under investigation.

A total of 218 licenses are at stake. The court must still decide if they should be cancelled outright and what penalties should be levied, but the decision sent shock waves through the Indian coal industry. There is precedent for such a wholesale license cancellation—the same court voided more than a hundred licenses for the nation’s telecommunications spectrum two years ago for similar reasons.

A more transparent bidding process has been in place for the past several years. India’s coal sector is already under stress because of heavy demand and supply problems that have handicapped the power generation sector and sent coal prices upward. Observers expect the decision to exacerbate the problems, at least in the near term.

The decision also threw the country’s stock market into chaos, as stocks of mining companies, industrial concerns, and power generators plummeted on the news.

—Thomas W. Overton. JD is a POWER associate editor.

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