Supreme Court ruling on coal blocks raises questions over mining joint ventures

The Supreme Court ruling on Monday that all coal allocations made between 1993 and 2010 are illegal puts a question mark on the future of mining joint ventures between Government companies and private parties.

The model was designed by the now-unbundled West Bengal State Electricity Board, the first State Government utility to be awarded a captive block in 1995.

The Board formed a 26:74 joint venture with the Kolkata-based EMTA Ltd to extract coal from its captive mines.

The JV secured all regulatory approvals (including the mining lease) and appointed an EMTA outfit as the contract miner. The joint venture got the fuel from the mines at a discount to Coal India prices. In the next two decades, the JV route became popular among Government sector companies for captive mining.

In its 163-page judgment, the apex court has criticised the model. But the argument came with reference to State-run mining outfits selling the fuel in the open market.

The court held that it was a “breach of the provisions of the Coal Mines Nationalisation Act” for the Centre to allow State entities to engage in commercial mining.

“Moreover, the State PSUs… have also been allowed to form joint venture companies… However, in the joint venture agreements, mining operations have been given to private company,” the court observed. While the court refers to joint ventures in which the control is with the State outfits, the EMTA-model is in favour of the contract miner.

But sources in EMTA swear by the success of the model.

The unlisted entity runs 14 of the 32 captive mines, contributing nearly half of the captive production of around 40 million tonnes a year. Its client list includes State utilities of West Bengal, Karnataka, Punjab, and Jharkhand and Central Government-controlled Damodar Valley Corporation.

“This is a time-tested model and our track record in developing assets is a proof of the pudding,” a company source said.

With the Supreme Court ruling, all captive block allocations now stand cancelled. However, the court is expected to come up with some prescription to regularise the captive mines that are already operational or in an advanced stage of development.

But some fear that the judgment may raise a lot of dust on the fuel transfer agreements. A case in point is the electricity generation segment.

Whether in the State or private sector, the fuel is transferred to generation companies at a Coal India-parity price (not at the cost of production from captive mines). Thereby, the final consumer of electricity is deprived of the benefits of the lower cost fuel production.

In the case of contract miners, the private sector companies float mining outfits to pocket the difference between the actual cost of production and the price at which the fuel is transferred to power companies. The electricity regulator is deciding the tariff based on the final cost of the fuel to the utility.