The Coal Block allocation issue will place pressure on Power Producers and Power Intensive companies as the whole allocation process will be redone with fresh tenders. It is best to stay away from companies in these sectors.
Supreme Court on 25th Aug 2014 has termed all the 218 coal blocks allocated since 1993 as “illegal and arbitrary”. The apex court has not objected to the 12 blocks, which were allocated on the basis of competitive bidding to UMPPs, but has barred them from diverting coal to other projects. The apex court will take its final decision on 1st Sept 2014.
These coal blocks were allocated in both UPA and NDA regime and out of total 218 coal blocks 190 were allocated in UPA regime.
Court decision on barring UMPP to supply coal to other project was because of ongoing case between Reliance Power and Tata Power, in which Tata Power has challenged the government decision of allowing Reliance Power to use coal from its subsidiary Sasan UMPP.
The apex court can either cancel the whole allocation or impose some sort of penalty. In case the court decides on de-allocating the coal blocks, then this decision will result in more import of coal from international market. India’s coal import in FY14 was 160mt. The extra import of coal will negatively affect the country’s trade balance. In July 2014 coal import stands at around 4% of the country’s total import.
Power companies like Jindal Steel and Power Ltd., Tata Power, NTPC, Reliance Power will be directly affected if de-allocation of coal blocks happens. The private power companies will have to look towards other market to import coal in order to meet their coal consumption or their production will take a hit. In either case the profitability of power companies is going to come under pressure. The heat of which has already been witnessed in the share prices of the companies.
Banking sector is expected to face further pressure on asset quality from the de-allocation of the coal blocks as the major public sector banks are already having huge NPA on their books. The gross bank credit to power and iron & steel sector was Rs 7.73 trillion in June. Out of which the power sector’s exposure was Rs 5.08 trillion and the iron and steel sector’s was Rs 2.65 trillion, according to Reserve Bank of India data.