Can the 'coalgate' verdict benefit India? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Can the 'coalgate' verdict benefit India? 

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In this issue:
» Will the illegal coal blocks impact the Indian banking sector?
» Dr. Rajan expresses his concerns over farm waivers
» Will you take Suzlon's bait this time around?
» Chris Hyzy believes that the US bull market has just begun!
» ....and more


00:00
 
In what may seem like the latest crackdown against crony capitalism, the Supreme Court has termed the 200 odd coal block allocations between 1993 and 2009 as 'illegal'. As per the ruling, these were done in an 'arbitrary and illegal' manner.

What is more surprising is that the screening committee that was brought together for this particular role seemed to have done its task in an 'ad-hoc' and 'casual' manner. As highlighted by the judge, "there was no fair and transparent procedure, all resulting in unfair distribution of the national wealth. Common good and public interest have, thus, suffered heavily." The ruling went on to add that the committee was not transparent and acted on no material in many cases, with guidelines having seldom guided it.

However, the court has not pressed for de-allocation yet. The next hearing, which is a few days away, will make things clearer on the way forward.

But can we see a similar scenario such as the outcome of the 2G scam, where licenses were outright canceled?

Well, the impact of that outcome weighed heavily on the sector back then. Something that an already under pressure debt ridden sector such as power would find it difficult to digest currently. Not to mention that about a tenth of India's coal production will be hit due to the same.

Further, it is believed that the total amount invested - spent towards exploration, mining and end use projects - by various companies stands at about Rs 2 to 3 trillion; or low single digit percentage points when compared to India's GDP.

Having said that, an article in the Economic Times mentions that the figure may be an exaggeration as a year ago, only 15% of the allocated captive coal blacks had begun production; and that the costs involved at initial stages of coal mining are not so significant.

Nevertheless, the above mentioned incident simply showcases yet another incident of corruption and disregard for the people of the country. There have been a handful of parties that have benefited from this activity over the past many years and thus strict action must be taken against them.

As for the steps going forward, what this could mean is a fresh start for the sector. As highlighted by the business daily, this gives India a chance to not allow concentration in ownership of coal blocks and thus could be used as a development to increase competition in the sector and thereby lead to lower costs. We could not agree more; at the end of the day, the ultimate winners would be the people!

Do you think there is a possibility of de-allocation of coal blocks? Let us know in the Equitymaster Club or share your comments below.

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01:40  Chart of the day
 
Stock prices of power and metal companies with captive coal mines reacted negatively in the past few days. However, implications of this decision are much wider. And one of the key casualties would be the public sector banks. As per RBI, the lenders' overall exposure to the power and steel sector stands at around Rs 7.7 trillion. These sectors, facing tough times due to poor fuel and raw material supply, are already a major cause of stressed assets on the lending books of the banks.

Will illegal coal blocks impact the banking sector?

As the final verdict on the matter is yet to be given, one can only guess the likely impact on some of the key sectors of the Indian economy. Nevertheless, this development only further highlights the need for banks, especially PSUs, to adopt a more rational lending approach.

02:15
 
No sooner did the RBI Governor Raghuram Rajan warn of an impending global financial market meltdown, he has come out with yet another warning. Well, not exactly a warning but few words of caution. And at the receiving end of his caution is the Indian banking sector. Rajan has expressed concern about the farm loan debt waivers proposed by some state Governments. As it is, the banks' capital needs have increased due to enhanced prudential requirements. Not to forget the deterioration in asset quality. And now with the rise in non-performing assets in the case of farm loans in a couple of states, the situation could worsen further. This even as the farm yields haven't been affected to the extent that they require rescheduling under the RBI norms. Consequently, this can be considered more of a political stunt than any genuine help. Certainly not a good sign for the sector whose turning around is so crucial for the entire economy as a whole.

02:50
 
It seems that wind turbine major Suzlon Energy will be knocking on investors' doors once again. This time around, the company is looking to raise Rs 40 bn from the equity markets. And as with any company looking to raise money from investors, Suzlon too will be busy marketing itself to prospective investors. Positives will be highlighted; negatives and risks will be downplayed. Investors will do well to keep this tendency of marketing pitches in mind.

In Suzlon's case, the company has just come out of an extensive debt restructuring exercise in FY14. A constantly shifting landscape of incentives for wind turbine generation along with certain overambitious decisions made by the management have meant that Suzlon has struggled to make money over the last few years. Whether the company will be able to convince investors that the bad times are truly behind it is what will be interesting to see.

03:15
 
First it was the cement sector that had to bear the brunt of the Competition Commission of India (CCI). And now it is the automobiles sector. As per a leading business daily, the competition watchdog has slapped a fine of around Rs 2.5 bn on major auto players for violating trade norms in the spare parts and after sale service market. The allegation is that major car makers have attached restrictive clauses in contracts with dealers. This means that independent workshops or dealers do not have access to certain spare parts and complements in the market. They are then compelled to source these from authorized dealers at much higher costs. The reason why authorized dealers charge so much is that their margins get squeezed when there are discounts offered on new vehicles. So they look to protect margins by enhancing servicing costs. As a result of these independent garages and workshops are resorting to using spurious spare parts available at lower rates. This then raises safety risks for consumers and robs the exchequer on account of lower realisation of excise duties. According to estimates, nearly 35% of spares in the Rs 330 bn after-sale service market are counterfeit products. One will have to wait and see of the kind of impact this will have on the sector as a whole and companies in particular.

04:05
 
Common sense says that the US finances are in a mess. The policymakers have distorted market forces by suppressing interest rates and pumping huge sums of liquidity into the financial system. Even after doing all that, they are still not confident that the US economic recovery is for real. And there is every reason for people to worry about the future of the US economy. Someone will eventually have to pay for these excesses, isn't it?

But stock markets function in a very capricious way, to the point that they can be outrightly deceptive. Look at the benchmark US stock index, the S&P 500. From its March 2009 low, the index is up nearly three times and has reached a new record high of around 2,000. Some market participants are worried if the US markets are nearing the end of the bull run.

But there is one gentleman who seems to have a very different view of the US economy and stock markets. His name is Chris Hyzy and he is the chief investment officer of Bank of America's U.S. Trust unit. What he says seems not just unbelievable, but pretty outrageous too. He believes that the US bull market has just begun. According to him, the current bull run has covered just about 25% of the upswing, which he believes could go on for the next 15 years. He believes that the US manufacturing sector is set to pick up in the coming decade. He sees the rapidly increasing US oil and gas production as a very positive sign. You would be surprised to know that many American investors are increasingly becoming bullish about the US stocks. It will be interesting to see how events pan out in the coming times.

04:50
 
After opening the day on a flat note, the Indian stock markets slipped into the red during the post noon trading session. At the time of writing, the BSE-Sensex was trading down by 83 points (0.3%). Majority of the sectoral indices were trading weak led by power and engineering stocks. FMCG and pharma stocks were trading positive today. Most of the Asian markets were trading in the red with China and Japan being the biggest losers. European markets have opened the day on a negative note.

04:55  Today's investing mantra
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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8 Responses to "Can the 'coalgate' verdict benefit India?"

Ashis

Sep 1, 2014

I would like to hear from equitymaster on the impacts of coalgate verdict on the power sector. As many of us invested in the power sector, this pose a big question mark on their revival.
I definitely look forward to a feasible solution to this wrong doing of previous govts but not at the cost of power sector going for a toss altogether!

Like 

surinder singh

Aug 28, 2014

all coal
blocks
must
cancelled
if there
is rule
of law in
india

Like 

surinder singh

Aug 28, 2014

all coal blocks must cancelled if
there is rule of law in india

Like 

Chemburkar

Aug 27, 2014

In my opinion Chris Hyzy is quite right about the US oil and gas production, especially due to humongous shale gas discovery. It will definitely have positive effect on the US manufacturing sector. Whether the bull market will last for 15 years, only time will tell.

Like 

A.B. Pereira

Aug 27, 2014

Hats off to such crusaders like Prashant Bhushan of AAP for his numerous PILs exposing the corruption and crony capitalism by these governments for ages, our hope rests firmly with the Honourable Supreme court, since the country has lost trust with our ministers and elected representatives forming the government that favour the corporate entities by benefiting themselves.
In the instant case, it may be hard to cancel the allocations, but the court can find an unique solution/judgement (out of the box or out of the rules) through which it imposes a huge penalty which should be paid into the govt coffers, or added to the CSR kitty or contributed to the PM National Relief Fund. Or these companies can be made to spend the money on improving environment (enhancing water resources, afforestation etc), or rural hygiene/toilets and such other rural development schemes.
The penalty amount should be equal to the amount lost by the country at international prices since the date of allocation + for the next 20 years. This will automatically bring down high level corruption played out in the highest echelons of governance in the country. Also, Head of every government since 1993 and the concerned minister responsible for this (living!) should be jailed for at least 1 day as a symbolic measure.

Like 

R.Ramesh

Aug 27, 2014

Why not?? It it is obtained in illegal way then it should be deallocated. These very same coal blocks should be auctioned openly for bidding. It is people's money and all rich persons and political goondas swindle them jointly. SC should be very tough.

Like 

Ashok Kumar Sethi

Aug 26, 2014

The recent judgement of the honourable Supreme Court of our country on Coal Blocks Allocations is vague as on date because the comments have been mainly made on the functioning of the Screening Committee appointed by the UPA Govt. for allocation of Coal Blocks. Though, the cancellation word stands in judgement but not in straightforward manner. It would be clear in the next hearing. But, it is very clear that those 15% of capitalists who have started the actual digging process would have to face the beam fall over their heads if the outright cancellation is announced. Rest 85% capitalists are shrewd as they have not done any mining etc'. A lot junk of allocaters are those who have come to the dealings as third party ie; not to do the work themselves but to give on lease to others and many of them are Benami also. This is going to open the secret nexus in between politicians and the capitalist class. All political parties are in the fray, what to say of UPA, NDA is also as well as respective State Govts. too of various political parties. Now, it is clear as to why "Coal is known as Gold" and the other saying that" Brokering in Coal makes the face black". Let us watch the next judgement of the Honourable Judge of the Supreme Court. The judgement is crystal clear and not influenced anywhere, hence the praise stands for honourable Judge. It is right time for the judiciary to teach lessons to the defaulters of our national economy. Sometimes, the mind goes to think as to why Judicial appointment was converted to Parliament and that too at the time when many more judgements of misdeeds done by UPA and NDA have to come up.

Like 

venugopal

Aug 26, 2014

The farm loan waiver is a gimmick the political parties to woo the voters before elections to garner the votes by befooling the voter by their articulate speech. When it comes to implementation they do not to which pocket they have to lay their hands on. This game should end and any political party making such false promises should be warned by the Election commission to not go beyond a limit which will kill the banking system and make the public always look for easy money. The AP and Telengana govts have to raise their own resources to waive the farm loans as it is their responsibility to do it. The Central Govt and RBI should sound a bugle that no politician need to
play dirty politics to come to power.

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