What Does Coal Block SC Ruling Mean for Economy and the Investors?

What Does Coal Block SC Ruling Mean for Economy and the Investors?

In a landmark judgment, the Supreme Court of India decided to cancel 214 out of 218 coal block allocations made between 1993 and 2011. Apparently, the change will come into effect after March 2015 when the de-allocated blocks would be handed over to Coal India till such time that government can arrange for a fair auction of these blocks. Coal India is a government undertaking involved in coal production and the 4 coal blocks left unaffected by the SC ruling were managed by Coal India. SC has also imposed a penalty of Rs 295 per tonne of coal produced on companies managing the now de-allocated blocks.

This would translate into estimated total penalties of around Rs 10,500 crore based on a figure of around 350 million tonnes of coal to be produced by March 2015. Most experts are wary that this verdict can severely impact investor sentiment in view of the fact that a total of Rs 3 lakh crore have so far been invested by power and steel companies for development of coal blocks. No doubt, the SC move is a laudable step in the direction of bringing in greater transparency in allocation of coal blocks but it can have far-reaching economic implications for the country.

It is to be noted that power, steel and mining companies stand to bear the greatest brunt of this de-allocation process as industrial mass consumers of coal. Power sector can especially be affected as coal based power represents nearly 60 percent India’s total power production capacity. In wake of the latest SC ruling, 23 major power and steel companies have lost nearly 26,000 crore in terms of their market capitalization in just a couple of days. It is true that the situation could have been worse if SC had ruled for immediate de-allocation of coal blocks but even in the current situation, it is bound to negatively impact relevant sectors and financial markets in general.

However, on the positive side, SC has said in its ruling that coal supply for power generation and other industrial uses would not be stopped before or after de-allocation is completed. Having said that, the economic repercussions do not stop right there and extend to banking sector as well. This must be understood in terms of the exposure of banks to power companies which amounts to nearly Rs 5 lakh crore and the exposure to steel and power companies, standing at around Rs 2.65 lakh crore. This can impact the performance of banking sector as well and in addition import of coal is also likely to increase by around Rs 18,000 crore to make up for any losses in production which would be an additional burden on the exchequer.

Despite these negative consequences, experts agree that it is a good thing that the confusion over this long overdue matter is cleared by SC by coming up with a clear-cut verdict which is bound to send a message that no compromises would be made when it comes to ensuring transparency in matters of such critical import. Another positive is that Central Government has already responded to the ruling and assured that it would take every possible step for re-allocation of coal blocks before March 2015.

For investors with enough foresight, it can also represent an opportunity to get hold of assets with good potential in the long-term while the markets are not performing at their best and wait and watch for their investments to come to fruition.