The ongoing coal block auctions have given rise to figures of a total of Rs 15 trillion as proceeds for all the coal blocks auctioned. The auction could well be strong success given the response to the bids for the first set of blocks auctioned. However, the auction amount would not be immediately realised as it has three components, upfront payment, annual payments and royalty.
Terms of Payment
For the Upfront Payment the necessary terms and conditions are mentioned below:-
The highest bidder needs to pay 10% of the total net present value for a block upfront to the government. The rest will be paid over the life of the block depending on the volume of coal it is expected to produce each year and the price the company had quoted for each ton.
The net present value is arrived at by evaluating total revenue the block would earn over its life by selling coal over the next 30 years, minus expenses it incurs, including infrastructure cost and costs involved in moving the coal. This value will be discounted by an estimated inflation rate for the next 30 years, and its present value will be arrived at. The NPV will then be divided by the volume of coal that the block is expected to produce in its life time and a per-tonne net present value of coal will be arrived at.
First Instalment of fifty per cent
The first instalment of fifty per cent of the Upfront Amount shall be deposited by the Successful Bidder in the Designated Bank Account in the manner provided in Clause 3.1(b) as a Vesting Condition.
Second Instalment of twenty five per cent
The second instalment of twenty five per cent of the Upfront Amount shall be deposited by the Successful Bidder in the Designated Bank Account, on or prior to expiry of six months from the Vesting Date.
Third Instalment of twenty five per cent
The third instalment of twenty five per cent of the Upfront Amount shall be deposited by the Successful Bidder in the Designated Bank Account, on or prior to expiry of twelve months from the Vesting Date.
Monthly Payments, Annual Payments and Escalation
The Successful Bidder shall be required to make monthly payments with respect to the coal extracted from the Coal Mine on the basis of the Final Price Offer. The Royalty has to be paid on a monthly basis and the total bid amount apart from the upfront payment has to be made annually by the companies to the respective State Governments.
The Monthly Payment is required to be made within 20 calendar days of expiry of each month with respect to coal extracted from the Coal Mine in that calendar month.
The Monthly Payment is subject to an escalation every financial year, on the basis of the Wholesale Price Index (the “Reference Index”) and the Monthly Payment shall stand increased by the per cent increase of the Reference Index on a year-on-year basis.
Company Specific Example
Hindalco Ltd. has won the non-regulated Gare Palma IV/4, Gare Palma IV/5 and Kathautia coal blocks for which the company would be required to pay Royalty and the E Auction amount in total. The Company won the bid for Kathautia coal block as they bid the lowest rate of Rs.2860 per ton and they would be required to pay a total amount of Rs.68.5342 billion over a period of 30 years, the annual payment of which comes out to be Rs.2.288 billion as a payment for auction. The Royalty payment is calculated to be a total of Rs.11.7083 billion over a period of 30 years, for which the annual payment comes out to be Rs.390.9 million. Royalty payment is on account of extraction of natural resources (coal) and is calculated for every ton of coal extracted.
Background to Coal Block Auctions
CAG’s Observation and Supreme Court’s Decision
The Comptroller and Auditor General (CAG) of India is an authority, established by the Constitution of India under article 148, who audits all receipts and expenditures of the Government of India and the state governments, including those of bodies and authorities substantially financed by the government. The CAG is also the external auditor of Government-owned corporations and conducts supplementary audit of government companies, i.e., any non-banking/ non-insurance company in which the state and Union governments have an equity share of at least 51 per cent or subsidiary companies of existing government companies.
In 2012 CAG reported that the bidding process in the allocation of coal mines to public and private sector companies lacked transparency and deprived the Government of receipts worth Rs.1.86 lakh billions. A total of 194 blocks were allocated to private establishments without any formal procedure. The Supreme Court in its decision termed all the coal block allocations made from 1993 to 2010 as illegal. According to the CAG report, about 25 big industrial company names such as Tata group, Naveen Jindal group, Essar group, Abhijeet group, Laxmi Mittal’s Arcelor and Vedanta were involved. All of them allegedly made major gains due to the lack of bidding between 2004 and 2006.
The Supreme Court order cancelling 204 mines had asked the government to auction 42 operational mines by March 2015 in a formal and transparent procedure. The coal ministry is well on its way to not only auction the mandated 42 blocks but 58 more blocks in addition.
The Auction Process
The first round of coal block e-auction that ended on 22nd February 2015 saw some of the key names in the industry bagging 18 mines with a combined extractable reserve of 90 million tonnes, along with attached end-use infrastructure. According to the auction amount and royalty payable, six mineral-rich states are likely to earn a little more than Rs.1 thousand billion over the next 30 years.
Of the 18 operational blocks seven were kept aside for the power sector and the rest for unregulated sectors like iron, steel and cement. There was reverse bidding for power sector end-use and forward bidding for the unregulated sectors.
Non-mineral-rich states would benefit from tariff concessions, or reduction in power rates arising out of stiff bidding for coal. Stiff bidding in case of Coal Auction means that the lowest bidder who is more competitive in terms of managing mining costs would be the winner. By the coal ministry’s rough estimates, for every decline of Rs.100 a tonne in a bid, the power rate gets reduced by 6 paisa per unit. The auction saw companies making even Rs.0 bids; that implies the bidding company concerned is ready to take the fuel cost on its account books and pass on the rate reduction to power consumers.
The e-auction amount is Rs.836.62 billion but the coal blocks would also entail an income to the states by way of royalty which comes to Rs.128.01 billion. Madhya Pradesh would get Rs.399 billion, Chhattisgarh Rs.264.25 billion, Jharkhand Rs.144.98 billion, West Bengal Rs.132.10 billion, Maharashtra Rs.18.19 billion and Odisha Rs.6.07 billion.
E Auction Results
The table below gives the details of the Coal Blocks Available with the amount of Extractable Reserves in Million Tonnes followed by the number of bids for the specific block with the e-auction start price and the awarded price in Rupees per Ton by the Winner Company.