States to get more royalty on coal: Common man to pay more for power? - Quoted in the Ecnomic Times

The government on Thursday approved new rates for royalty on coal and lignite, a development that will on one side enrich states like Jharkhand, Chhattisgarh and Andhra Pradesh by over Rs 1,000 crore, but on the other hand may result in higher electricity prices.


"The Cabinet Committee on Economic Affairs today approved the proposal for adoption of ad-valorem regime, in place of the present hybrid formula, for charging royalty on coal and lignite at the rate of 14 per cent and six per cent respectively," an official statement said.

Royalty rates on coal and lignite have not been revised since 2007.

"The major coal producing states will now earn revenue of about Rs 6,980 crore in place of Rs 5,950 crore, being earned at present at existing rates, resulting increased combined earning by more than Rs 1,050 crore," the statement said.

An analyst with a leading research firm said higher royalty means higher coal prices, which will trickle down from power companies to common man.
"Royalty on ad valorem basis with higher proportion of mine mouth price of coal is certain to increase the cost of coal procurement for consumers. This will impact the tariffs of power...," said another analyst with research firm Deloitte, Dipesh Dipu.

Coal India, which accounts for almost 80 per cent of the domestic production, however, did not comment on the development.

Royalty for both the minerals is now calculated through a formula consisting of ad-valorem plus a fixed component, which depends on the grade of coal.

Ad-valorem rate is calculated at basic pit-head price and has been fixed at 5 per cent of the invoice price, excluding taxes and other levies.

India demand may hike coal prices globally - Quoted in the Financial Express

The growing demand of coal in the domestic market is likely to push up its international prices. Coal industry experts feel that the prices may go up significantly in near future, driven mainly by the demand in China and India.

Coal prices in the international market have gone up from over $80 per tonne in 2009 to over $110 per tonne at present.This, the experts, feel may cross $150 per tonne.

“China, which was earlier exporting coal, became net importer in 2008, while India's coal import is continuously rising. The two countries together will play an important role in international coal pricing, which is expected to grow further,” Dipesh Dipu, director (energy & resources consulting) at Deloitte Touche Tohmatsu India, said.

India is one of the top ten coal producers as well as consumer in the world and contributes over 8% of the total international coal trading. It produced 538 million tonne in 2010-11, of which CIL alone produced around 431 mt. It imported 70 mt coal during 2010-11. While this was earlier expected to cross 100 mt in 2011-12, as per the latest estimate, the coal import for 2011-12 is likely to be 76-78 mt.

The estimates were revised after the new taxes were imposed by Australia and Indonesia on coal exports - the two major coal exporting countries for Indian steel, power and cement companies.

The new taxes will further jack up the coal prices which have been on a rise since 2009. The domestic demand for coal is going to go up to meet the higher energy requirement. The government-owned CIL has already indicated that it will have to look at importing to meet its commitments under the new fuel supply agreements (FSAs). Planning commission estimates that by 2016-12, India would need to import about 200 mt of coal to meet the energy requirement.

“The soaring demand and new taxes in Australia and Indonesia will send the prices up. Though, it is difficult to estimate the quantum of immediate increase in prices, the companies will have to buy it from abroad as there is no other option. May be, the imports would come down post 2017,” Dilip Kumar Jena, coal analyst at PwC, said.

Coal India Limited and Corporate Governance Issue - My article in the Mining India

1. The concern over CIL’s corporate governance

Coal India Limited and its board of directors have been in the spotlight in the recent months due to the allegations of The Children’s Investment (TCI) Fund of UK that CIL and its board is failing to serve and protect the interest of minority shareholders. This has led to a debate ranging from the issues of corporate governance in Indian companies on one hand and the very philosophy of government owned company to serve the social causes.

2. The history of CIL

Coal India Limited is a majorly government owned publicly listed company which accounts for nearly 85% of Indian coal production. It has its origins in the coal mines nationalization of the early 1970s. The Coking Coal Mines (Emergency Provisions) Act 1971 was promulgated by Government of India on 16 October 1971 under which; except the captive mines of IISCO, TISCO, and DVC; the Government of India took over the management of all 226 coking coal mines and nationalized them on 1 May, 1972 creating Bharat Coking Coal Limited. Further by promulgation of Coal Mines (Taking over of Management) Ordinance 1973 on 31 January 1973 the Central Government took over the management of all 711 non-coking coal mines. In the next phase of nationalization these mines were nationalized with effect from 1 May 1973 and a public sector company named Coal Mines Authority Limited (CMAL) was formed to manage these non-coking mines. In 1975-76, the name of company was changed to Coal India Limited (CIL). Government’s intention was to prevent unscientific mining, ensure compliance with the safety and environmental standards, ensure the welfare of the miners, facilitate public investment and enhance integrated nationalistic planning for coal development.

CIL was awarded 'Navratna' status by the Department of Public Enterprises, Government of India, after assessment of their operational efficiency and financial strength, which affords greater operational freedom and autonomy in decision making.

CIL now operates mines through its subsidiaries and has increased its production substantially from the initial days. CIL ended fiscal 2011-12 with a production of 435.84 million tonnes, more than 4.52 million tonnes compared to previous fiscal, but short of the revised target of 447 million tonnes set for fiscal 2012. In comparison to the AAP (Annual Action Plan) target of 447 million tonnes set in the beginning of the year 2012, the achievement is 96.5 %. The contribution from opencast mines was 91 % of total coal production, which has improved to 397.45 million tonnes compared to 391.30 million tonnes in 2010-11.

3. Public listing

After much deliberation Government of India proposed public listing of CIL shares to meet its disinvestment objectives and to fund the government’s budgetary deficits. CIL's initial public offer (IPO) closed on 21 October 2010, revealing the market value and the potential of CIL.

CIL's IPO was one of the largest in Indian capital market and was over-subscribed 15.3 times. The over-subscription of the issue happened in all the three major segments - Qualified Institutional Buyers (QIB), High Networth Individuals (HNI) and retail. The QIB for which there was a reservation to the extent of 50% of the net issue of the shares, the over-subscription was as much as 24.62 times. In the retail segment was not as enthusiastic but nonetheless received nearly 16.36 lakhs applications amounting to more than Rs.63,000 Crores. Also, the foreign investors had invested in around US $ 27 billion.

The IPO was considered a success by the capital markets and Government. On the 4th of November CIL share was listed at Rs.291/- and it closed over Rs.342/- on the first day of trading, bringing cheers to the investors.

Post the IPO, 90% of CIL’s shares are owned by the Government of India and 10% is held by public including institutional investors. This has changed CIL’s character as a government owned apparatus for public good. Being no longer a 100% government-owned company and being listed in the stock exchanges, the company is now subject to the norms of corporate governance that is equally applicable to several private enterprises which are driven by shareholders wealth creation motives.

4. Corporate governance issues

The corporate governance issue has been widely discussed in the recent past due to vocal and active advocacy for price deregulation for coal products of CIL by The Children’s Investment (TCI) Fund, a UK based fund which by virtue of holding 1% equity stake in CIL is the second largest shareholder of the company. These primarily involve two aspects of CIL’s business – pricing of coal and fuel supply commitments to consumers.

4.1 Pricing of coal

Energy content of the Indian Coal is expressed in “Useful Heat Basis (UHV)”. Indian coal (non-coking) is classified by grades (A-G) defined on the basis of Useful Heat Value (UHV). UHV is an expression derived from ash and moisture contents for non-cocking coals as per the Government of India notification. UHV is defined by the formula:

UHV kcal/kg = (8900-138×[percentage of ash content +percentage of moisture content])

In the case of coal having moisture less than 2% and volatile content less than 19%, the UHV shall be the value arrived as above, reduced by 150 kcal/kg for each 1% reduction in volatile content; and below 19% fraction pro-rata. Both moisture and ash shall be determined after equilibrating at 60% relative humidity and 40°C temperature as per relevant clauses of the Indian Standard Specification No. IS: 1350-1959.

Gross Calorific value is mostly determined by experimental measurements. And GCV is also a globally acceptable measure of pricing coal.

Even when the UHV basis is considered, coal prices in India have been rising at an average of 5-6% year on year, although the prices rises have taken place sporadically. This, of course does not compare with the global coal prices that have risen substantially in the last decade. The average discount over global coal prices for various grades of coal produced by CIL range between 30-60% varying over the years. The consumers post the issue of New Coal Distribution Policy have been classified into regulated and non-regulated industries and for non-regulated the prices are fixed on import parity. However, close to 70% of CIL’s coal production still continues to be sold through ‘notified prices’ which are typically determined on a cost-plus basis. It is another matter that the cost-plus bases have been opaque and there have pressures on CIL to reveal those for regulatory purposes to electricity regulators in the country. Nonetheless, there does exist a discount over the globally traded coal products on energy equivalence basis.

When CIL announced a move to GCV based pricing, it was aimed to have advantages such as measurable heat released by the combustibles in coal, and globally accepted mechanism for pricing; price could be fixed for energy content; and it could incentivize coal producers to beneficiate, which have become increasingly important from the points of view of climate change and reduction of load on Indian Railways transportation network. The new mechanism was expected to replace the existing seven grades, each divided by a broad bandwidth of 600-1100 kilo calorie per kilo gram (kcal/kg) useful heat value (UHV), by large number of products of 300 kcal bandwidth each beginning 2200 kcal/kg to over 7000 kcal/kg. The new system has done away with the anomalies in pricing of same grade coal produced by different collieries as well as subsidiaries.

Although CIL maintained that the new pricing mechanism would be revenue neutral, there were reports of estimated 15-30% increase in cost of coal procurements by power generation companies. There were also concerns about the quality of coal being supplied by CIL while it was less than prepared to supply coal for promised GCV bands. CIL stated that cconsidering that the company was yet to procure and install adequate calorie meters to measure the gross calorific values and coal would be sold in the immediate period by converting existing products from UHV to GCV by using available formula. This also led to a suspicion in the industry that CIL would benefit with no effective enhancement in quality of delivered coal.

Consequently, in response to pressures from the consumer industries, most notably power generation sector, the government directed CIL to reconsider the change in pricing mechanism. The change in pricing regime would have favored the shareholders by increasing the revenue realizations, while the government which is majority owner chose to focus on the ‘national interest’ of keeping the prices lower for power tariffs to remain lower.

4.2 Fuel Supply Agreements

It is given that coal will remain in shortage in India. The projections of demand supply for thermal coal in India indicates that the gap will reach a level of nearly 450 million tonnes by 2017, which is almost equal to current level of CIL production. The gap has already crossed 100 million tonnes for the year 2012. Given the high prices of internationally traded coal the economics of coal based power generation is heavily tilted in favor of domestic coal and hence, there is a rush to secure coal supplies from CIL.

It may be noted that coal distribution is governed by New Coal Distribution Policy, which has the following salient features:

• There is no open market for coal – coal is rationed by the Government to user industries like power, steel, cement, and others

• Classification of the users – regulated/strategic businesses and unregulated businesses

• CIL notified prices for regulated/strategic businesses and import parity prices for the others

• Merchant power plants are not yet a separate group.

• Fuel Supply Agreements – Letters of Assurance (LOA) issued by CIL subsidiary on the directive of the Ministry of Coal (MoC) to be converted into FSA between the buyers and CIL within 24 months, subject to the fulfilment of all milestones for power project development according to LOA.

• Bank guarantee (equal to 5% of value of annual coal requirement) required by the linkage allocatee – linked to milestones in power project development.

The current practice of issue of LOA involves application by the power or other approved user company to the Standing Linkage Committee that has representation from Ministries of Power, Coal, Railways, Steel and other stakeholders. The application is processed through recommendations received from these stakeholders that typically depend upon the degree of progress made on the end-use plant. The process, certainly, has a degree of discretion and may have subjectivities involved in assessments. However, within the constraints, the system worked well historically. However, with swift pace of growth in capacity additions in power generation, which outpaced growth in coal production, the scarcity in the market resulted, which in turn resulted in the LOAs being issued to a tune of 700 million tonnes per annum before there was a halt in awarding more LOAs. The current levels of production and expected growth are unlikely to meet this LOA demand. However, some of the demand also be subdued in view that the plants for which coal was required have faced delays and some have been shelved altogether. However, suffice it to say that CIL may not be able to honor the commitments that the FSAs will entail should LOAs (even after considering failure of some of them) get converted into FSAs.

This has also led to severe fuel risk perception in power generation sector leading to difficulties in financial closures and lack of disbursements of loans even after the financial closures were done for almost 20,000 MW power capacities, with a larger proportion of these capacity additions now being contributed from private sector generation companies. With these the investment environment in the sector has turned gloomy.

It is in this light that the Prime Minister’s Office issued a directive to CIL to sign FSAs committing to 80% threshold for invoking penal clauses in case of failure to meet the supply requirements. CIL board could not commit to this and hence, the Presidential Directive was issued to bid CIL to this effect.

CIL may find meeting the commitment of supplies when physical availability of coal has been a concern. The development of new projects has extended gestation period in view of approvals and clearances taking longer and land acquisition, rehabilitation & resettlement being increasingly challenging. In such a case, the impact of the Presidential directive may be in terms of CIL having to pay penal charges for likely failures in meeting supply commitments or attempting to meet the supplies through imports. In case of imports, which have become expensive and are likely to remain so, the customers have shown reluctance in the past and there is slight uncertainty on how CIL would be able to allocate the shortfall and import prices to several of its customers.

On the positive side if CIL attempt wholeheartedly to expand production base through capacity additions and enhance productivity and efficiencies, it may be in long term good of the country, particularly in light of Indonesian regulations on ownership, pricing, domestic market obligations and export duties, Australian Mineral Resources Rent Tax and such resource nationalism elsewhere creating concerns about availability and affordability of coal from international sources.

The negative impact on CIL’s financials more likely, the minority investors have found themselves at the receiving end again and raised the issue of corporate governance, threatening to take CIL to courts for failing to honor commitments to the shareholders.

5. The pertinent questions

The Children’s Investment (TCI) Fund has raised valid concerns about CIL’s corporate governance, although it can be safely stated that the Board’s decision to not go with PMO’s directive could well be good intentioned and in line with the governance principles, which eventually led the government to take the extreme route of presidential directive. However, the question more fundamentally is about the typical inclination of the Board to toe the lines of the Government, with little regard to the decision’s impact on the minority stakeholders. This may not be specific to CIL though as there are instances of government-owned companies resorting to unrelated diversifications, bailing out other loss-making government owned entities, keeping the product prices severely suppressed and such other steps that could not asserted as being in the best interest of the shareholders.

That said, it is agreed that the government-owned companies have always been run like that. Not many years ago, profit motive was considered blasphemous for public sector undertakings (PSUs), as the government owned companies are called in India. With time, the PSUs have tended to look at self-sustenance and being profitable, but profit seeking like the capitalist and private entrepreneurs has never been in sight. That, however, does not mean that the listed PSUs have not been meeting the investors’ expectations. On the contrary, some of them have performed really well and exceeded returns from the markets in downturns when the broad based markets did not perform that well.

CIL too has had healthy financial ratios – high gross profit margins, healthy returns on equity and good dividend pay-out ratio. This when seemingly there are conflicting requirements – as listed company to be fully oriented to shareholders’ wealth maximization and as a government-owned company to be a social apparatus of the government. CIL has several national obligations that are imposed on it by the government. New Coal Distribution Policy squarely puts the responsibility of supply of coal to consumer industries on CIL and even expects CIL to import coal if it cannot supply from domestic sources. CIL is also obligated to sell its coal at the discounted prices to the electricity utilities. By virtue of ownership and the right to appoint the executives and members of board of directors, the government has kept a tight control over these and several other matters of CIL.

Maharatna status accorded to CIL has liberated CIL from some governmental control; however, where it counts the status does not really matter. It is in this light that questions about corporate governance and protection of minority interests come into prominence.

The counter argument has been that the investors knew about the characteristics of the government-owned publicly listed companies in general and the specific obligations of CIL in particular. The prospectus of CIL specified these in the risks of investment in its IPO, stating CIL’s national obligations and vulnerability to government’s diktats. While on purely economic and commercial parameters, CIL’s decisions may not favor the best outcomes for its shareholders, but having made these assertions in the IPO it may be assumed that the investment decision in CIL’s shares should have taken the governmental constraints into account. Does that mean CIL can continue to operate as it did before going public?

6. Conclusion

It is likely that the matter will go to the courts for trial. While the legal structure may have statutes for protection of minority stakeholders in publicly listed companies, it may be interesting to analyze the application in case of a government owned company. Given the larger implication on the public sector undertakings, the case is no longer CIL-specific but has a wider ramification for government and may change substantially how they run the PSUs. Till all these are settled, the debate on TCI’s concerns and CIL’s obligations will go on.

My views on Power Distribution Sector Issues - Power Watch India magazine

Question 1: What are the accumulated losses of the state distribution companies as of now?


The accumulated losses as of March 2010 estimated by the High Level Panel on Financial Position of Distribution Utilities that studied the 15 state utilities (accounting for nearly 91% of power consumed) were Rupees 107,000 crores. On an average, the losses accruing per annum, after provision for subsidies, can be estimated at Rupees 27,000 crores. Along with these, there are some concerns about the quality of debtors and other current assets on the books of accounts of the distribution utilities, which if examined and assessed prudently, may reveal possibly a substantially higher value of accumulated losses.

Question 2: Given the current position of the power distribution companies, are the banks/financial institutions are now wary of lending fresh loans to them?


Certainly. The banks have concerns about NPAs which can affect their performance and may even lead to greater systemic issues. The lenders to distribution utilities have typically been government owned banks, who may have had some political compulsions to extend loans to distribution companies, with some hope hinged on guarantees provided by the states. The financial condition of the distribution utilities appears gloomy, as these are not able to recover their cost of operation, owing to the mismatch in costs and tariffs. Even though the costs have risen substantially, there has been no substantial increase in power tariffs in the last several years which has led to distribution utilities resorting to loans to fund their operations. Quality of these loans obviously being suspect has given the banks a concern about extending further loans when the pace of reforms in the sector have been slow.

Question 3: Discom's financial losses are much debated. There can't be competition without economic freedom. What are the real problems with Discoms? Who is to blame – regulators, state government or power utilites?

One of the most critical and fundamental problems of the electricity sector in India has been the unwillingness of the consumers to pay for electricity and pay higher for higher quality of supply. This has led to the political classes to continue to look at electricity as a free give-away to please their constituencies. It is this fundamental consumer behavior that has led to devising of ways and means to keep the tariffs artificially suppressed and not allow the regulators to regulate cost-reflective tariffs. To this end, the regulatory mechanism itself has been subverted in several cases by compromising on the independence of regulators, poor quality of management of the distribution companies and not implementing prudent and appropriate technologies to establish effective billing and collection. To summarize, the blame can be distributed among the market participants but the unwilling consumer of electricity may well be the biggest culprit.

Question 4: Do you think, the recommendations made by the Shunglu committee report will help the utilties to come out the mess?

The recommendations of the High Level Panel puts the onus on the state governments for distribution losses including paying up for the debt in case SEBs are unable to meet payment obligations even after restructuring and moving the debt to the SPV. The Panel also proposes to establish independence of regulators and applications of mechanisms and business models for effective reduction in AT&C losses.

The Panel observed that there was wide disparity between the T&D losses reported across various areas within the state. Hence it has been suggested that the regulator impose a surcharge over the basic tariff based on actual losses in a particular area, which would vary. The committee observed that several regulators avoided tariff shocks despite having validated the costs incurred. The gap creates regulatory assets intended to be converted into cash in due course of time. This gap has reached significant proportions in several states like Tamil Nadu, West Bengal and Haryana. The committee has recommended an end to this practice. These recommendations mostly address the long term concerns and may have significant impact on the outlook for power sector in India, since the distribution sector being the weakest link has also reflected the strength of power sector in general.

Question 5: Shunglu Committee has proposed to create the Special Purpose Vehicle (SPV) to deal with the defaulting utilities/State Governments. How far this move would be beneficial to achieve the purpose?

The High Level Panel has proposed the formation of special purpose vehicle with RBI contributing 76 per cent of the share capital, while the rest of the capital contributed by the two state-run power lenders — Power Finance Corporation and Rural Electrification Corporation. The Panel recommended that the lenders may jointly negotiate with the distribution utilities to restructure the loan and invoke state government guarantees to recover parts of the loan extended. The central bank may extend a line of credit to the SPV and the interest on this account may be charge to the utilities whose assets are transferred to the SPV. The transfer of these assets from utilities to SPV would be subject to the state governments agreeing to a plan to move to cost-reflective tariffs, payment of electricity dues by the state departments, payment of outstanding agriculture subsidies, and also supporting the operational plans of the distribution companies to franchise services and upgrade of assets. Through this take-out provision, the distribution companies may get fresh capacity to borrow and upgrade their assets focused on reducing AT&C losses, while the restructured loans are paid to the lenders with no hair-cuts.

Question 6: Pune has successfully implemented the franchise model. What are the hinderances in implementing similar models in other parts of the country?



Other than 5 major known operating urban Input Based distribution franchises in the country (Bhiwandi, Agra, Nagpur, Aurangabad, Jalgaon), there are various other operating distribution franchises in the country in states like Orissa and MP. The models can vary depending upon the financial feasibilities and risk appetite of the state governments/distribution utilities. The High Level Panel observed that the franchise model was more successful in implementation as well as loss reduction. In case of Bhiwandi Franchise model, the Panel reported that loss reduction had been effected through better service to customers as also due to better management practices and improved surveillance. While attempts are being made to adopt models with appropriate modifications to suit the local requirements, hindrances have been observed from the political will to resistance from the distribution utilities.

Question 7: It's been noted that despite mounting losses, power utilities have not curbed their capex. Over 2006-09, consolidated capex is increased from Rs 26,100 crore to Rs 52,200 crore. In present financial burden, how important for the utilities is to take control of the cost?

Capital expense is inevitable to upgrade the distribution networks and assets, and for effective implementation of loss reduction programmes. These need to be looked at from the perspective of investment in sustainability of business. The take-out of accumulated losses through the SPV may be directed at this objective as well. However, there is no denying that better control is required on costs and expenses.

My views on Import Duty on Power Equipment

A large volume of power equipment is procured from China and therefore, the impact of this import duty on power equipment imposition will be in the form of higher project costs and likely higher power tariffs. Through my association as consultant with several of the bidders on projects like UMPPs, and other Case 1 and Case 2 tariff based competitive bidding projects, I have had the chance to observe that many players prefer to use Chinese equipment. This preference is not merely because of the price advantage associated with the Chinese equipment, which in any case tend to be substantial and critical for winning bids, but because there are better efficiencies associated with these manufacturers in terms of rare delays. With these companies, if orders are placed for a set of equipments with a certain time frame, it can be reasonably assumed that the Chinese will deliver the order on time. Pricing competitiveness and manufacturing efficiencies therefore have been seen to tilt the scale in favor of the Chinese equipment manufacturers and suppliers. There have been concerns raised on the quality of the Chinese equipment. However, in this context suffice it to say that China provides a large bandwidth of quality equipment and there are quality and pricing options available. Also, another interesting observation is that several global and reputed manufacturers have licensing arrangements with the Chinese suppliers, and under such licenses, the equipment produced may be as good as the one produced elsewhere.


Also, the technology transfer argument may not hold good entirely because several of the large equipment contracts placed with the Chinese manufacturers and suppliers have been observed to include a clause for creation of local facilities in India for manufacturing. This objective of technology transfer may be achieved through such arrangements where the large equipment procurers form alliances and partnerships with foreign OEMs or licensees to develop local facilities in India within a prescribed timeframe.

The prime concern that has been cited in favor of imposition of duties is that the Indian domestic market players, especially the government-owned manufacturers might lose out unless some kind of trade barrier is created. Import duty imposition is one such trade barriers. This import duty is possibly contemplated to be a short term measure which is likely to create a so-called level playing field between Indian and Chinese equipment manufacturers.

However, in principal, it is generally agreed that globalization has had positive impacts on Indian economy and Indian manufacturing sector is being opened up, as several other industries and sectors, for foreign participation and competition. While inviting and enabling private and foreign developers and investors for larger participation in power sector is a stated policy objective, the imposition of trade barriers seems like taking a step back in the equipment sector.

My views on coal block allocation rules - Published in the Power Line magazine April 2012 issue

• What according to you is the best mechanism of awarding captive coal mines--auction method, selective allotment or a combination of the two--and why?


- The objectives of the allocation of coal mines should typically determine the method of allocation, together with other factors like the market environment and risks. Hence, distinction should be made on account of the degree of exploration, elasticity of demand and impact on pricing of final products (electricity, steel, cement and such others).

- While for steel and cement sectors, which are non-regulated, auction method may seem appropriate, for electricity sector it may not, more so in the light of the fact that henceforth electricity procurements are competitive as well.

- For all these, however, the degree of accurate information available may be an important criteria. A regionally or partially explored coal block may not suit the bill for typical auction as information asymmetry is likely to distort the market. Geotechnical risks in such cases may cause auction to result in faulty price discovery – either the Government or the successful bidder would be an eventual loser. Such exploration assets may better be allocated through revenue or production sharing mechanisms like the NELP regime.

- Another important consideration is for the level of preparatory work done. In cases of coal blocks with perceived risks of land acquisition, delays in rehabilitation & resettlement, delays in environmental and forest clearances, and such others, the auction prices discovered will tend to be suppressed. In all cases, it will obviously help the Government and bidders to ensure that the preparatory works are concluded before the coal blocks are auctioned so that the asset on the block is fully comprehended by all market participants.

- For electricity sector, it is a good idea to run Case 2 type tariff based competitive bidding by packaging the coal block with appropriate power generation capacity creation. This will ensure that there are no hiking impact of coal asset bidding on electricity tariffs. However, the recently published rules for allocation seem to keep the already developed or advancing power plants in the lurch. While coal linkages for such power plants do not seem to ensure sufficient realization, the new rules seems to keep them out of the race to acquire coal block for captive consumption.

- On a different account, the mechanism of coal allocation may also be the cost of coal excavation, where selection is done for the lowest such cost. This mechanism may not have a restriction for captive consumption and allow for foreign and independent miners’ participation. Coal India Limited or any other designated agency can be the counterparty for procurement of coal from all such mines and then the distribution of such coal produced may continue to be on the Standing Linkage Committee route. Such contracts are widely used in countries like Malaysia although the scale of mining in Malaysia is smaller. Large projects can be awarded on these lines, which in comparison may look similar to UMPPs of the electricity sector and may be christened as Ultra Mega Coal Mines (UMCM).

• Should captive coal block owners be allowed to sell surplus coal in the open market?

- Competition through open markets is the need of the hour in coal sector where the policy distortions have resulted in large gap between demand and supply. While there is no deny that large number of market participants will ensure fairer degree of competition, it would be good to set the rules of the game at the beginning. For the coal blocks already allocated, the rules have been determined which do not allow for sale of surplus coal. For coal blocks attached to Case 2 type bid power projects, the bidding conditions have already been formalized. In such cases, post facto changes in rules for allowing them to sell or utilize surplus coal for thus far unspecified usages seem to appear unfair to other participants in the bid.

- However, with the new rules for allocation, through competitive bidding, it can be stipulated at the beginning that the successful bidders may have the right to produce, use or sell surplus coal. This will ensure that bidders look at the asset with potential for expansion and generating additional cash flows. This would also ensure greater realization for the government through higher commitment and for the consumers of electricity through lower tariffs.

• What needs to be done to accelerate the production from captive coal mines?

- For sure, the first and foremost is to ensure fiscal stability, else investment environment may remain uncertain. The profit share clause proposed in the MMDR hasn’t helped investments.

- There must be a state and union coordination agency for coal mining which should facilitate all approvals and clearances and assist in identification of project affected people for rehabilitation and resettlement. This coordination agency should work in collaboration with the coal mine allocattee and other stakeholders.

- If coal mining for power generation is included in the definition of infrastructure, which has been the demand of the industry for a while, it may facilitate easier financing of the projects.

Government likely to appoint regulator for natural gas pricing - Quoted in the Mint

The Indian government may appoint a regulator to help it determine the price of natural gas that is supplied by oil and gas explorers, such as Reliance Industries Ltd (RIL), to power and fertilizer firms.
An empowered group of ministers (eGoM) looking into the issue of allocating gas to fertilizer, power and some other companies has directed the oil ministry to “suggest an appropriate regulatory authority to aid and advise eGoM on the issue”.

The suggestion follows a plea by RIL in 2010 to increase the price of gas midway through its five-year supply contracts with consumers on the grounds that the price it is charging is at a discount to global prices.
RIL started supplying gas from its D6 fields in the Krishna-Godavari (KG) basin in April 2009 to power and fertilizer companies at a base price of $4.2 (around Rs. 214 today) per million British thermal units. The supply contracts end in 2014, after which they have to be renegotiated.
“EGoM further noted that the gas prices fixed in 2009 were valid for a period of five years, and on this ground, the request of the contractor for revised prices was turned down in 2010 itself when international prices were comparatively lower,” according to the minutes of the meeting.
An oil ministry spokesperson declined to comment.
“We are not privy to such eGoM-ministry communications, therefore, cannot comment,” an RIL spokesperson said in a response to an emailed query.
To be sure, the oil and gas industry is already governed by two regulatory bodies. The Directorate General of Hydrocarbons (DGH) advises the oil ministry on technical and economic issues related to the sector. It comes under the oil ministry’s administrative control. The Petroleum and Natural Gas Regulatory Board (PNGRB) oversees transportation tariffs and other costs of petroleum commodities related to refining, processing, storage, transportation, distribution, marketing and sale.
Unlike DGH, PNGRB was created by an Act of Parliament and functions independently.
S. Krishnan, chairman of PNGRB, said he was not sure if the agency would be asked to regulate gas pricing. “I cannot say if such a move would contravene any existing guidelines,” he said.
Sunjoy Joshi, a former oil ministry official and director of the New Delhi-based Observer Research Foundation, said that in all likelihood, the government would go in for a new regulatory body. Observer Research Foundation is funded by RIL.
“The government needs an independent upstream regulator to regulate prices. So, it might go in for a new body,” Joshi said.
Dipesh Dipu, director of the consulting practice at Deloitte Touche Tohmatsu India Pvt. Ltd, disagreed.
“If the government does want to regulate natural gas prices, it will probably modify regulations to mandate the existing regulator (PNGRB) for that, otherwise there could be turf issues,” Dipu said.
RIL is facing criticism for declining gas production from the KG-D6 basin, and is involved in a dispute with the oil ministry over the denial of $1.24 billion in costs claimed by the company for developing the D6 field.
The group of ministers has also sought the advice of the law ministry and the attorney general on the issue.
On Friday, Prime Minister Manmohan Singh said that his government may change the gas pricing policy to offer incentives to producers of natural gas.
“We are conscious that remunerative energy prices are needed to ensure expanded energy supply,” Singh said at the 7th Asia Gas Partnership Summit 2012 in New Delhi on Friday. “Oil and gas are national resources and, therefore, should be within the framework of government and regulatory oversight.”
EGoM has also provided a temporary reprieve to non-urea fertilizer plants by declining to suspend gas supply from the KG-D6 field to them till at least May.
The proposed move has been “kept in abeyance” till 24 May and the fertilizer ministry has been asked to come up with guidelines on the move, which will then be reviewed by the group of ministers, according to the minutes of the eGoM meeting.
The oil ministry has held that companies producing non-urea fertilizers should be ordered to buy gas at market prices since the retail prices of non-urea fertilizers have been freed from the government control, and they can pass on the changes in input prices to consumers.
Prices of non-urea fertilizers, including diammonium phosphate, muriate of potash and various categories of complex fertilizers, were freed in April 2010.
The government still regulates the retail price of urea, but is working on a draft policy to free this from its control.
The group of ministers also accepted the oil ministry’s view that existing and future allocations of gas discovered under the new exploration licensing policy to power plants be subject to the condition that the entire electricity produced shall only be sold at tariffs determined by the tariff regulator of the power plant.

Mukherjee proposes to address infrastructure deficit - Quoted in the Mint

To address deficits in India's infras­truc­ture, finance min­is­ter Pranab Mukherjee on Friday proposed measures, including exten­sion of grants giv­en by the govern­ment to make unprof­itable projects viable for private compa­nies to new sectors, increas­ing the lim­it on over­seas borrowing and reduc­ing with­holding tax on for­eign invest­ments. This comes at a time when the govern­ment has dou­bled the infras­truc­ture invest­ment tar­get in the 12th Five-Year Plan (2012-17) from the $500 billion ('25 trillion today) fixed for the 11th Plan that ends this month. Re­inforc­ing infras­truc­ture is key to achieving the govern­ment's tar­get of 9% annual growth for Asia's third largest econ­o­my. The grant, also known as viability gap funding (VGF), has been ex­tended to ir­rigation (including dams, channels and embank­ments), agri­cul­ture mar­ket infras­truc­ture, fertilizer, oil and gas (including liqui­fied nat­ural gas, or LNG) stor­age fa­cilities and pipe­lines, and the telecom sector.

VGF is at the centre of India's infras­truc­ture-cre­ation plans through public-private partner­ships and will help in meeting India's infras­truc­ture tar­get of '50 trillion for the 12th Plan as half of this funding is expected to come from private sector compa­nies. "Lack of adequate infras­truc­ture is a major constraint on our growth," Mukherjee said in his bud­get speech.

The bud­get focused on pro­viding respite to the cri­sis-hit Indian power and civ­il aviation sector. To bail out the fu­el short­age-hit power sector, the bud­get proposed scrapping the import duties on coal and LNG, enhance­ment of external commercial borrowing (ECB) lim­its to part-finance rupee debt of exis­t­ing power projects and reduc­ing with­holding tax on for­eign invest­ments.


Scrapping import lev­ies on coal will help meet the growing de­mand for the fu­el in a country where 70% of electricity is generated from it. In addition, a con­ces­sion­al counter­vailing duty of 1% on thermal coal till March 2014 was also an­nounced in the bud­get, along with customs duty exemption for coal mining projects. "The import duty waiv­er is likely to bring re­lief to power projects, partic­ularly those which are case II tariff-based com­pet­itively-bid projects where the bid clauses re­strict pass-through of high imported coal costs to the power pro­curers," said Dipesh Dipu, di­rector (consul­ting and mining) at consul­ting firm De­loitte Touche Tohmatsu India Pvt. Ltd.


While such exemptions will increase the de­mand for imported coal and help utilities such as Tata Power Co. Ltd and Re­liance Power Ltd that are setting up imported coal-based plants, they will also help state-owned Coal India Ltd's mining plans. An­a­lysts said reduc­ing the with­holding tax to 5% from 20% will boost over­seas invest­ment in the sector. This tax is charged on the repa­triation of income from eq­ui­ty or debt. "Abo­lition of customs duty on coal, coupled with reduction in CVD (counter­vailing duty) on coal imports, will reduce electricity cost for consumers and is a strong pos­itive," said Gautam Adani, chairman of Adani Group, which is among the largest coal importers in the country. "The waiv­er for thermal power compa­nies will be ben­e­ficial for upcom­ing projects. The re­moval of customs duty on imported coal, nat­ural gas, LNG, and the in­centives for the mining sector will marginally improve coal supply, but is still a far cry from achieving adequate fu­el secu­rity," said Anil Sardana, man­aging di­rector of Tata Power.


In addition, the bud­get also proposed ex­tending a tax hol­iday under section 80-IA of the Income-Tax Act for power projects, which ends on 31 March, by an­oth­er year. The law al­lows a devel­op­er to claim tax exemption of up to 10 years with­in the first 15 years of a project's op­erations. An additional de­preciation of 20% in the initial year, which has been ex­tended to newly acquired projects, will help consol­idation in the sector. In addition, the bud­get also an­nounced in­centives to promote the use of energy-ef­ficient appli­ances and light-emitting diodes. These an­nounce­ments were likely to be made in the bud­get, reported on 1 March.

Mukherjee al­lowed air­lines to access ECBs for working cap­ital require­ments for the year starting 1 April. Such a dispen­sa­tion, with a ceiling of $1 billion, will help financially stretched air­lines such as Kingfish­er Air­lines Ltd, Jet Airways (India) Ltd, SpiceJet Ltd and Air India Ltd. In addition, the finance min­is­ter also scrapped customs duty on aircraft parts and test­ing equip­ment for promoting third-party main­tenance, re­pair and overhaul indus­try.

Howev­er, Ajit Kr­ishnan, tax partner and lead­er of infras­truc­ture practice for consultancy firm Ernst and Young Pvt. Ltd, said the govern­ment had focused more on the power sector, where­as in the oth­er sectors, it did not make too many an­nounce­ments.
To boost the hous­ing sector, the bud­get al­lowed ECBs for low-cost affordable hous­ing projects and set up a cred­it guar­antee trust fund to pro­vide in­stitution­al cred­it for hous­ing loans. It also ex­tended the scheme that sub­si­dized inter­est on low-cost hous­ing by 1% by an­oth­er year. This will help compa­nies such as Tata Hous­ing Devel­op­ment Co. Ltd, Usha Breco Re­alty Ltd, Raheja Devel­op­ers Ltd and Val­ue and Bud­get Hous­ing Corp. "Op­erationalization of cred­it guar­antee trust fund could help lenders mobi­lize long-term funds and, therefore, reduce as­set liability mis­matches; diversify their funding sources and improve access to cap­ital mar­kets," said consul­ting firm Icra Ltd.

In addition to power and air­lines, Mukherjee acknowl­edged that sectors such as roads, bridges, ports, shipyards, hous­ing, fertilizer and dams were "stressed", and an­nounced a reduction in the with­holding tax to 5% from 20% for three years for the same.

In addition, the invest­ment re­strictions on ven­ture cap­ital funds will also be re­moved and full exemption be pro­vided to certain construction equip­ment such as tunnel bor­ing mach­ines that will aid in road-building. The bud­get also al­lowed over­seas borrowing for main­tenance and op­erations of toll systems for roads and high­ways. To enable access of cheap finance for infras­truc­ture projects, Mukherjee also an­nounced dou­bling the mon­ey to be raised through tax-free bonds next fiscal to '60,000 crore. In what will af­fect the financials of oil explorers such as Oil and Nat­ural Gas Corp. Ltd, Oil India Ltd and Cairn India Ltd, which has been acquired by Vedanta Resources Plc, the cess on crude oil under the Oil Indus­tries Devel­op­ment Act was increased by 80% to '4,500 per tonne. "The excise duty struc­ture for most petroleum prod­ucts has been ratio­nalized, with an ad val­orem levy of duty at the rate of 14% on most prod­ucts, while diesel, light diesel oil, etc., con­tinue to have a spe­cif­ic levy per litre in addition to the ad val­orem levy," Sa­loni Roy, tax partner at Ernst and Young.
The finance min­is­ter also al­lowed fertilizer compa­nies to raise mon­ey through ECBs.