10/02/2014 02:23 pm ET Updated Dec 02, 2014

Indian Supreme Court Rebuffs Coal Lobby Arguments

Last week's decision by the Supreme Court of India to cancel 214 coal allocations made between 1993 and 2010 was a stunning rebuff to the legal arguments advanced by the Indian coal lobby.

While the Supreme Court heard and rejected the industry's arguments on two occasions, many of the same claims are being advanced once more in an effort to shape the Indian government's response to the court's decision.

The case before the Supreme Court had its origins back in 2012, when the comptroller and auditor general (CAG) released a draft report on the allocation of coal blocks.

The CAG report found that after 1993 coal allocations had been granted to private companies or joint public-private consortia by a special federal government "screening committee" that, for over a decade, had no criteria to assess bids against. Worse still, many potential coal mining areas were allocated on the basis of no more than a letter of recommendation from a state government.

While procedures were tightened up later on, most coal blocks were allocated to private companies without any competitive bidding. In its final report CAG estimated that the lack of competitive bidding had cost the public approximately US$33 billion and delivered windfall gains to the coal license holders.

The findings caused a political firestorm that came to be popularly referred to in India as "Coalgate."

Following the initial report many questions were raised, including whether it was actually legal to allocate publicly owned coal to private companies.

The recent Supreme Court case, which was initiated by the public interest lawyer Manohar Lal Sharma raised just this question. (Sharma's case was later joined with a separate action brought by Common Cause, which sought a court-monitored investigation into the coal allocations.)

The Coal Industry Goes to Bat

In January 2014, legal representatives for the Coal Producers Association, the Independent Power Producers Association of India and the Sponge Iron Manufacturers Association -- industry lobby groups representing most of the beneficiaries of the allocations -- all argued their case before the Supreme Court. In short, they argued that the coal allocations were legal and that the status quo should prevail.

However, the Supreme Court of India was unimpressed with the coal lobby's line of argument.

In its 163-page August 25 judgment the court ruled that the allocation of coal resources by a committee of the Indian government was "arbitrary and illegal."

The court also found that several allocations to public sector companies, such as those that had been allocated by competitive tender for Ultra-Mega Power Projects -- 4,000-megawatt behemoths -- were unaffected by the decision on the grounds that the benefit of the allocation was retained by the public, which owned the resource.

The ruling sent shockwaves through the India's coal lobby and political establishment.

While the coal industry was stunned, the Supreme Court judgment left open the question of what to do about the allocations it found to be "illegal," especially as many of them were claimed to be operating or very close to being commissioned. To address this issue, the court stated that "the matter requires further hearing."

Strike Two Against the Coal Lobby

Undeterred by the rejection of their initial argument, the three coal industry lobby groups went back for a second bite at the cherry.

In its latest ruling the Supreme Court judges summarized, in the best part of nine pages, the suite of claims advanced by the coal industry lobby groups.

It was claimed that there would be terrible economic consequences for India if the initial decision stood and the coal allocations revoked. They warned that there would be coal shortages for power stations, the possibility of blackouts and huge investments put at risk.

They warned that the decision could lead to the unemployment of up to a million people and massive losses on non-performing loans for banks. They also argued that the decision would damage the standing of India in the eyes of potential international investors.

There were other dire warnings too. If the "illegal" blocks were re-allocated by auction, the Coal Producers Association claimed that it would set back the extraction of coal by seven to eight years, that an auction process may fail for lack of interest and that companies could only fund their "corporate social responsibility" programs if they were allowed to continue mining.

They even claimed that a decision canceling the licenses would deny them natural justice. Each company, they argued, was entitled to be heard on the circumstances of their own allocation through a court-appointed committee.

Nor did the coal lobby consider that the proposed penalty of 295 rupees, or approximately US$5, on every metric ton mined from the blocks was justified.

The Supreme Court dismissed the suggestion of a court-appointed committee to hear arguments from each company with an allocation as this would "virtually amount to nullifying the judgment."

As for the coal lobby's claim that they were entitled to "natural justice," the Supreme Court pointed out that "it was incorrect to say that these associations which represented the bulk (if not all) the allottees or beneficiaries were not heard" when in fact they had been.

In summarizing its view, the Court stated that "it is expected that the Government will not deal with the natural resources that belong to the country as if they belong to a few individuals who can fritter them away as their sweet will."

In his submission to the court, the attorney-general was more restrained than the coal lobby.

He had submitted that one option for the court was to cancel all the coal allocations apart from those identified in the original decision as being exempt because they had either been allocated to publicly owned entities or via competitive bidding.

Alternatively, the attorney general submitted, the court could allow all 46 mines in production or near production to proceed subject to paying the 295-rupees-per-metric-ton penalty. Forty coal allocations were currently being mined -- producing an estimated 53 million metric tons of coal -- for power stations, steel mills and cement plants. A further six were scheduled to commence production in 2014 and 2015.

The attorney general made plain that whatever the court decided, the government could accommodate provided it had sufficient time to develop a policy to minimize the impact of the decision.

In its final decision the Supreme Court determined that 214 coal blocks be canceled. Of the 40 that the attorney general had identified as being in production and able to be "saved," only three -- two allocated by competitive bidding and one the publicly owned steel company -- were spared. Of the six nearing production, only one -- allocated to the publicly owned National Thermal Power Corporation -- was excluded from sanction.

All 37 mines in production found to be illegal would have to pay a penalty of 295 rupees on every metric ton produced since they were commissioned. The companies that owned the illegally operating projects, the court determined, would have to pay the penalty by no later than December 31.

The court also ruled that the cancellation of the licenses would take effect six months after the ruling to allow the government and Coal India to make plans for re-allocation or otherwise. After March 31, Coal India would take the mines over pending the government's finalization of whether to put them up to tender or otherwise.

As for the 12 coal blocks being investigated by the Central Bureau of Investigation, the Supreme Court made clear the current inquiries "will continue and be taken to their logical conclusion."

It was a humiliating defeat for the coal lobby.

Will the Coal Lobby Strike Out?

Immediately after the decision was handed down, many of the dire warnings the coal lobby made to the judges were rewarmed and served up once more for public consumption.

One week on, however, calmer views are coming to the fore. Prime Minister Narendra Modi has signaled that he wants to use the Supreme Court decision as an "opportunity to move forward and clean up the past."

While Modi and his ministers have signaled their intention to reorganize coal supply for those plants consuming coal from the mines ruled illegal, an even bigger question: What will he do with the vast number of coal allocations that aren't currently being developed?

Greenpeace International estimates that the carbon dioxide emissions from 142 of the blocks alone would amount to five years' worth of India's emissions.

Greenpeace India has suggested that the decision provides Modi with the chance to make a break from increasing the country's reliance on climate-busting coal-fired power generation.

Despite the antagonism towards the group by the Modi government -- including draconian restrictions on its funding and refusing to allow entry to staff from Greenpeace International -- his government has also recognized the potential for solar energy and wind power to avoid the heavy costs that come with importing expensive coal.

Offering the canceled coal allocations up for re-allocation via competitive tender -- including the hugely controversial Mahan coal block -- may ultimately not yield much interest.

Since the coal boom of the last decade, many of India's debt-laden private power producers are now paying for past excesses. GMR Infrastructure, a company that was stripped of two coal blocks as a result of the Supreme Court decision, epitomizes the sober mood of some private power industry players.

"Most power companies are under tremendous financial stress to deal with their day-today liabilities. It is very unlikely that they will bid aggressively, or bid at all, for these mines," said Madhu Terdal, GMR Infrastructure's group chief financial officer.