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Would the SC verdict on coal block allocation affect India's economic progress? - Outside View by PersonalFN

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Would the SC verdict on coal block allocation affect India's economic progress?
Sep 30, 2014

We all often talk about how bad politics and bad policies can get the nation down. But many of us rarely appreciate decisions taken to discourage bad policies. The Supreme Court of India (SC) recently delivered judgment on misallocation of coal mines. In a landmark verdict, SC struck down allocation of 218 coal blocks. This slammed down the Governments and politicos who run it and gave corporates a free hand over resources that belonged to the nation. So, the judgment also comes as a strict warning to corporates trying to leverage their businesses with political nexus.

While the Government may re-auction these coal blocks after March 2015, the apex court has shown no mercy (and rightly so) to companies running coal mines. The apex court has directed to pay penalties at the rate of Rs 295 per tonne for the coal they will extract and have already extracted. SC has allowed companies to extract coal from 42 mines till March 2015. This has been done in public interest and with a perspective of keeping mega power plants running.

If someone treats public property as his own and gives it away by writing a will on it, he deserves heavy punishment. India has a bad reputation in awarding licenses, contracts and projects. This happens because the process of allotment is often fraudulent, arbitrary and unjust. You see, political nexus has played a crucial role in securing licenses and contracts from the Government; and whether merits are paid any attention is debatable. As you may be aware, India imports most of its oil and depends heavily on the Middle East nations. But it may come to your surprise that India is the second largest importer of coal as well. This is really sad that mismanagement, misallocation and environmental issues have forced India to depend on imports despite the country being fifth largest in terms of coal reserves. Given the importance of coal in the energy consumption of India, any big decision related to coal affects the economy as a whole.

Impact of the judgment on the economy

The SC judgment may prove to be a negative development in the short term but would be a positive over the long term. You see, the short term negative is that financial health of companies having extraction rights may substantially deteriorate. Most of the metal companies are running coal blocks and India produces nearly 60% of electricity using coal as a feedstock. Therefore, any coal shortage arising on account of SC verdict may cause disruption in electricity production. Similarly, steel companies may lose their profitability due to de-allotment of coal mines. Companies operating in coal mines have made huge investments running in billions. Not only these investments are at stake, but also companies would have to rework their financial resources to be able to bid afresh. Government may think of allocating these coal blocks through e-tendering at higher price; and if it does so, cost of electricity generation may go up substantially, which could turn unaffordable. Moreover, if companies feel importing coal is more economical, they might import higher amount of coal which may cause a strain on India's import bill.

Another worry is that, lenders to such companies may also lose money if companies find it impossible to repay. Due to cancellation of coal block allocations, loans given by banks nearly worth Rs 2.5 lakh crore may turn bad which would be a massive burden on bank assets...and the impact is expected to be greater on public sector banks.

How bad situation may get?

PersonalFN is of the view that SC has given a tough verdict which would act as an eye opener to companies that make huge investments in projects obtained by non-transparent means. Having said this, considering the potential of estimated loss, it appears new investments in the sector would be hard to come. Lower coal output may have some impact on economic growth and thus, the Government will have to figure out a quick escape. The Government would have to closely monitor the impact on asset quality of Indian banks which is in a delicate state at present.

Will there be any impact on mutual funds?

PersonalFN always advocates that one shouldn't invest in sector or thematic funds for this very reason. You never know what may go wrong when. If you want to benefit from sector specific opportunities, you may invest in opportunities oriented funds. Speaking in current context, fund managers may review every company present in the portfolio that is affected by SC verdict on case to case basis. Not all companies are equally affected. This is where their expertise may come into play.

Mutual fund managers are experts in the domain of asset management and are supported by a team of experts tracking different sectors. Investing in equity assets may help you grow your wealth. Mutual funds have made many investors rich but what matters is careful selection.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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