The Narendra Modi government’s decision to allow 100% foreign direct investment (FDI) in coal mining has been opposed by the Left on the ground it would enable multinational mining companies to “plunder” the country’s mineral resources.
Those supporting the move, however, argue that foreign investment in coal mining is needed because the public sector Coal India Limited (CIL) is “over-stretched” and will not be able to increase domestic production substantially to curtail imports.
At the same time, they contend that the impact of the policy decision can be ascertained only after the Union Ministry of Coal notifies the new policies for allocation and auction of mines and pricing of coal.
Those skeptical of the government’s decision point towards the “dirt” in this sector that is notorious for corruption. The influence of mafia gangs on coal mining operations has been extensively documented. They allege that foreign players may end up obtaining a share of the “loot.”
According to the press note released by the government, as per the existing FDI policy, 100% FDI was permitted in the case of “captive” mines, which are dedicated to supply coal to specific power plants and projects manufacturing iron, steel and cement. The change in FDI policy now means that foreign companies can mine coal for commercial purposes for sale in the open market.
Further, under the old policy, 100% FDI under automatic route was permitted for setting up coal processing plants, like washeries, subject to the condition that the company would not mine coal and not sell washed coal or sized coal from its coal processing plants in the open market and would supply the washed or sized coal to those who were supplying raw coal to coal processing plants.
The government has now decided to permit 100% FDI under automatic route for sale of coal, for coal mining activities, including associated processing infrastructure subject to provisions of the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957. The term “associated processing infrastructure” would include coal washeries and coal crushing, handling, and separation (using magnetic and non-magnetic techniques).
Coal mining in India has been racked by controversies in recent years. The “Coalgate” scandal on the misallocation of coal-bearing areas to “captive” users of the mineral over a period of nearly two decades from 1993 came to light during the tenure of the second Congress-led United Progressive Alliance government.
In August 2012, the Comptroller and Auditor General of India sharply indicted the Union government for the arbitrary and non-transparent manner in which coal blocks were allotted to private and public companies. In September 2014, the Supreme Court ordered the cancellation of 214 coal blocks out of the 218 that had been allotted.
Many have argued that this scandal for which former Prime Minister Manmohan Singh was sought to be held at least partly responsible, contributed to the downfall of the government he headed for 10 years till May 2014.
In 2015, the Bharatiya Janata Party-led National Democratic Alliance government passed two key pieces of legislation – the Coal Mines (Special Provision) Act and an amendment to the Mines and Minerals (Development and Regulation) Act. The first stipulated that the coal blocks, whose allotments had been cancelled, would now be re-allotted to private and public sector companies either through auctions or allotted directly to public sector companies. But the new rules had gaping loopholes.
The Supreme Court judgment had nullified all joint venture agreements between public-sector undertakings or PSUs set up by state governments and private companies. While all the state PSUs cancelled their joint venture agreements, one company, Parsa Kanta Collieries Limited (PKCL), has continued to function in violation of the apex court’s verdict. This company was formed in 2007 as a joint venture between Rajasthan Rajya Vidyut Utpadan Nigam Limited (RRVUNL), the power generation company set up by the Rajasthan government and Adani Enterprises Limited (AEL) headed by Gautam Adani.
Companies in the Adani group also figure in the allegations made by the Directorate of Revenue Intelligence against 40 of the country’s biggest energy companies in both the public sector and the private sector, alleging tax evasion of ₹29,000 crore since 2014 by over-invoicing imports of coal (mainly from Indonesia).
Speaking to NewsClick, Partha S Bhattacharyya, former Chairman and Managing Director of CIL, supported the government’s decision. He described it as an “enabling provision for international coal mining companies to enter India.” The change in policy was the first step, he said, pointing out that “now the Ministry of Coal will have to devise policies for allocation of coal blocks via auction, create a single-window clearance policy for environment and forest clearances, land allocation and so on and also set allocation, auction and pricing policies.”
Bhattacharyya added that international coal mining companies would only be willing to enter India if the investment conditions are attractive, and that they are not likely to be interested in bidding to mine coal under contract.
However, there is another view that with the change in the FDI policy announced on August 28, international companies may not be averse to becoming mine development operators (MDOs).
The extant FDI policy provides for 100% foreign direct investment under the automatic route in the manufacturing sector. There is no specific provision for contract manufacturing in the policy. In order to provide clarity on contract manufacturing, the government has now decided that it would allow 100% FDI under the automatic route in contract manufacturing in India as well.
The government’s press note states: “Subject to the provisions of the FDI policy, foreign investment in (the) ‘manufacturing’ sector is under (the) automatic route. Manufacturing activities may be conducted either by the investee entity or through contract manufacturing in India under a legally tenable contract, whether on principal-to-principal or principal-to-agent basis.”
It is not clear whether the new FDI policy will apply to contract mining as well.
Speaking to the Economic Times, Kameswara Rao of PriceWaterhouseCoopers India, said that power companies would benefit from the decision “as they can now attract larger global operators with lower cost of capital to undertake end-to-end coal mining of their allocated blocks to reduce the fuel costs.”
Some major international companies and groups that may be interested in coal mining in India include BHP (formerly known as Broken Hill Proprietary), Rio Tinto, Peabody, Anglo American plc, Glencore and Xstrata.
Bhattacharyya said that CIL accounts for roughly 83% of total coal that is produced in India, and 67-68% of the coal that is consumed in the country – the rest being imported.
A total of 965 million tonnes of coal was consumed in India in 2018-19, of which 730 million tonnes was domestically mined, with CIL accounting for 607 million tonnes.
Of the remaining 235 million tonnes, 110 million tonnes had to be imported, argues Bhattacharyya, as India does not possess high quality coking coal (or metallurgical coal) used in steel plants and certain thermal power plants located near the coast – including the ones in Mundra, Gujarat, owned by the Adani, Tata and Essar groups – were built on the assumption that these would only use superior quality imported coal.
The remaining 125 million tonnes, Bhattacharyya argues, was “unnecessarily” imported by India at a cost that was 25-30% higher than what the prices would have been if domestic coal had been used. “The country could save $8-9 billion if imports are curtailed,” he said.
He added that although CIL performed very well in 2018-19 by adding 40 million tonnes of incremental output, the company was “over-stretched” and could not be expected to expand coal mining capacity to the extent required. Hence, Bhattacharya contends that it is necessary for the government to allow the entry of foreign investors.
Opposing the government decision and demanding that it be reversed, the Communist Party of India (Marxist) issued the following statement:
“The Polit Bureau of the CPI(M) strongly opposes the decision of the Union Cabinet to allow 100 per cent FDI in coal mining for all commercial purposes along with 100 per cent FDI in contract manufacturing. This reckless measure will enable foreign companies to plunder the mineral resources of our country.
“This decision will also have a harmful effect on Coal India Ltd. which is the premier national coal miner. The Modi government is bent upon weakening the public sector coal company. It had already opened coal mining to Indian private entities during its last tenure. The BJP government is surrendering national control over the mineral resources which is highly detrimental to the country’s interests.”
Meanwhile, a source familiar with the government’s investigation into the alleged over-invoicing of imported coal by Indian companies, speaking on condition of anonymity to NewsClick, apprehended that “there is a possibility that money obtained through over-invoicing and parked abroad in tax havens, may be routed back into India in the form of FDI into coal mining operations.”