Coal Mines (Special Provisions) Act, 2015

Reading time: 8-10 minutes.

The Mines and Minerals (Development and Regulation) Act, 1957 governs India’s mining industry and lays out the criteria for mining leases to be acquired and issued. The government reacted rapidly after the Supreme Court revoked the allocations of 204 captive coal blocs in September 2014.

It then enacted a new law as The Coal Mines (Special Provisions) Act, 2015 (hereinafter CMSPA), which is a statute that provides for the allocation of coal mines and the right, title and interest in and over land and mining assets along with mining leases to successful bidders with a view to ensuring consistency of coal mining and coal production activities.

This sets a new benchmark for efficiency and transparency regarding allocation of coal blocs. The government said that the allocations of coal blocks under the CMSPA were a ‘shining example of policy-driven governance for the establishment of free and open grafting mechanism.’ However, deeper study reveals that there is still a great deal to be done in terms of openness and transparency. Some legal and regulatory inconsistencies stand unresolved, in particular with respect to the distribution of blocks to government firms and the assessment of tariffs for electricity produced from these blocks, as well as uncertainty over the status of coal blocks until the corresponding end-use plant is shifted to another company.

Immediately after the 2014 SC decision relating to illegally keeping 214 proprietary mine licenses by holders, the Union provided an ordinance titled the Coal Mines (Special Provisions) Ordinance. Later the Coal Mines (Special Provisions) Act, 2015 replaced the Ordinance. The goal of this act is to enable the government to assign coal mines on the basis of fair bidding in order to ensure consistency of coal mining operations and to encourage optimum use of coal resources.

It is in the public interest of the Central Government to take urgent steps to allocate coal mines to active bidders and allocators, taking into account the country’s energy security and mitigating any effect on key industries such as steel, cement and power utilities that are vital to the nation’s growth.

  • Object of Amended Legislation: Reasons behind introducing it
  • Providing ownership of coal mines and right, title and possession in and around land and mine assets to successful bidders and allocated parties with a view to ensuring stability of coal mining and coal processing activities.
  • Start taking urgent action to bid or distribute coal mines to mitigate impact on key industries like steel, cement and electricity, which are critical to the country’s growth.
  • Modifying the Coal Mines (Nationalization) Act of 1973 and the Mines and Minerals (Development and Regulation) Act of 1957 thus eliminating the limitation on end-use from the authorization to conduct coal mining with the exception of certain limited coal blocks.

Salient features of the act

  1. The definition of 204 blocks cancelled were regarded as ‘Schedule-I coal mines.’
  2. 42 Production and output of coal mines from Schedule-I coal mines was identified as ‘Schedule-II coal mines.’
  3. Other 32 considerably developed coal blocks from Schedule-I coal mines are classified as ‘Schedule-III coal mines’ for particular end-use purposes.
  4. The Central Government took the right to identify mines known from coal mines under Schedule I as intended for a class of defined end-uses.
  5. The right to engage in the auction shall not be subject to end-use limits other than for coal mines in Schedule II & III.
  6. ‘Nominated Authority’ shall be approved on account of the effective bidder or allottee to execute the auction / allocation and protect and pass all interests, rights and titles of these coal mines. Nominated authority to allow consultants and other officer’s support.
  7. The bid funds are received by the Nominated Authority and are redistributed to the respective States.
  8. Compensation shall be entitled to the previous allottee only for property and immovable mining assets after paying secured creditors.
  9. ‘Commissioner of payments’ to be appointed who will be responsible for compensation disbursement.
  10. The Central Government may appoint Custodians to operate and manage the coal mines until such time as they are allocated by auction or allocation.
  11. Tribunal constituted under the Coal Bearing Areas (Acquisition and Development), Act, 1957 will adjudicate any dispute arising out of any action of the Central Government/ nominated authority or any dispute between the successful bidder or allottee and prior allottee arising out of any issue connected with the Act.

Critical analysis

  1. Schedule I, II and III Mines: The act describes all the 204 mines whose allocation has been cancelled by the Supreme Court as ‘Schedule-I coal mines.’ The 42 mines already produced and ready to produce coal were described as ‘Schedule-II coal mines’ from these. Other 32 coal mines were classified as Schedule-III coal mines which are at different stages of growth. Such coal mines are intended for limited end-use and have been allowed by the Central Government to transfer mines from Schedule I to Schedule III.
  2. No end use restriction to participate in auction: This Act specifies that there will be no end-use limits on eligibility to participate in the auction other than for Schedule II & III coal mines, in which mines will only be auctioned for end-use purposes in oil, steel & cement.
  3. Nominated Authority: The Act empowers the Central Government to appoint a Nominated Authority to the effective bidder under a individual with a joint secretary rank to perform auctioning / allocation and vesting and pass all privileges, rights and titles of those coal mines. Experts and other officers are assisted by Appointed Authority.
  4. Proceeds of auction: The Designated Authority will collect all auction proceeds and they will be disbursed to the respective states. The prior allots will be paid compensation for the land and the immovable assets built by them until their allotment is cancelled. A ‘Commissioner of Payments’ is to be appointed for disbursement of payments.
  5. Other Provisions: The central government is empowered to appoint custodian(s) for operation and management of the coal mines until they are allocated via auction. The act has provisions for rehabilitation and compensation for displaced persons. The act provides that any dispute shall be adjudicated by the Tribunal constituted under Coal Bearing Areas (Acquisition and Development), Act, 1957.

The goal behind the implementation of CMSPA 2015 amendment to coal mining is the growing availability of coal, because it accounts for about three-quarters of India’s energy mix and about 60% of our electricity mix. The same goal had been to open up the coal market by allocating new coal blocks to major electricity, steel, and cement consumers. Captive coal production, however, did not meet the goals as envisaged in the Five-Year Plans 11 and 12, falling short by a huge margin. It also dropped from 53 million tons in 2014-15 to 38 million tons in 2016-17 due to problems caused by the cancelation of coal blocks and subsequent government reallocation in 2015.

Therefore, the strategy of awarding broad consumers captive blocks has not automatically addressed the question of sufficient coal supply. Changing possession of a coal mine plays very little role in stepping up coal production. Factors such as land acquisition delays, multiple state and central government approvals, as well as issues related to coal transportation, account for stagnant or rising coal production and use.

Coal India Limited was also afflicted by the same factors but to a far lesser degree due to its advantage of being a government-owned corporation. Before solving these problems, the increased output of coal through industrial mining could not bring the desired results. Another factor to acknowledge is that India’s identified coal reserves and the amount that can be extracted cost-effectively have a major impact on country’s commercial and industrial growth.

  • Probable future

If India’s demand for coal continues to rise at a constant rate of 6% as seen in the last 10 years, in the next few years the country may run out of easily extractable coal down to the depth of 300 meters. That would mean companies would have to mine at deeper depths, which will entail increased mechanization with a rise in production costs. Both of these considerations mean a coal user can not consider coal as cheap as existing policymaking envisages. The effectiveness of the proposed auction mechanism is fundamentally related to coal demand. The auctions for the 204 blocks cancelled didn’t generate much interest beyond the 70 block sale. However, despite the ‘excess supply’ situation, which is in all probability temporary, the market for coal has fallen significantly in the power sector, too.

The decision to implement commercial mining came at a time when there is a growing change towards renewable resources in terms of both technology investment and physical assets and capability growth. In India, it is no different given India’s target of increasing renewable energy capacity by 2022. Given environmental issues as well as the future business opportunities of transitioning to renewable energy, major world players such as Rio Tinto are gradually leaving the coal-mining industry.

In view of these factors, the question is if, given all the negative sentiment around it, such a strategy would still draw investors in the sector? Until the coal companies were nationalized in the early 1970s, the coal industry consisted mainly of private coal mines. There was a need for nationalization to boost wretched working and living conditions, and weak workplace health standards. Today, apart from the worry for coal miners, there’s also stress on land availability. Local residents as well as civil society have protested against the purchase of land for mining, due to environmental concerns.

The size of a coal block is also essential to guarantee a private investor’s profitability. As compared to an earlier broad private coal industry market in agriculture, railways, defense, electricity, etc., the market has now shrunk only to electricity and cement sectors. Unless a private investor may join up with captive power utilities, a foray into an unknown market is highly unlikely for him. In fact, there is no mechanism for independent oversight apart from the Safety Regulator, Directorate-General for Mines Security for the coal industry.

There is also no redress process in place for addressing industrial mining issues or securing customers’ interests. Such a path to the auction for coal in the uncontrolled sectors has already yielded incredible values over and above CIL’s real production costs. Companies must pay the bid price to the state government on actual output as revenue according to the information available so far. These two points are intuitive to counter. Though private parties would like to deprive the auction price to compete with CIL, the government would prefer a higher bid price to gain higher income.

  • Conclusion

Contrary to the state’s claim to high standards of clarity, there is a large amount of pertinent information about assignments of coal blocks that should be publicly available but have not been released.

The measures by the government to intensify efficiency in the sector have not progressed as demonstrated by the reduced number of takers for captive coal blocks, the significant interest shown by state-owned companies in commercial mining and the weak response to coal-linkage allocations for non-captive power sectors. So make matters worse, the idea of seeking coal doesn’t look so promising.

End users have obtained minimal tariff-related advantages from the power sector-allocated blocks, with some concerns covering even those substantial benefits. More alarmingly, there is strong evidence of structural stagnation with almost no state ordering the relevant legislative commissions for electricity to conduct tariff revision in line with block allocations.

The government’s goal of causing minimal disruption regarding concerns raised was not achieved even two years after the CMSPA 2015 passed. Of course, income has also been lower than expected for the states. Maybe one may infer from this that the other goal of preventing the loss of ‘thousands of jobs’ could not have been achieved either.

The decision to implement industrial mining in the coal sector should be viewed in a positive light as it fosters competition as well as supporting those plants that have been stranded due to lack of fuel supply agreement over the last few years. Whether this move would lead to increased coal production is still in doubt, however, given that ownership of a coal mine is not the only issue that plagues the sector when it comes to supplying fuel. It may also be harmful to both producers and customers to implement commercial mining without taking care of the related issues of proper governance mechanisms such as independent regulators.

Moreover, it’s possible that even though we don’t see a spike in the cost of production, we certainly won’t see it falling far below current levels. However, considering the shifting trends in the energy sector and the long-term financial effects of coal mining and development, this change would be too low, very far from an investor’s point of view.

Author: Anilabh Guhey from Alliance University.

Editor: Arya Mittal from Hidayatullah National Law University, Raipur.

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