Under the earlier provision, foreign investors were required to have operational coal mines in order to be eligible for getting coal blocks. This requirement was not there for domestic companies.
“By waiving off the eligibility conditions, the government has ensured that the flow of capital in the sector is eased and the mining capability is left to the successful bidder to organise and deploy,” said AK Jha, former chairman and managing director, Coal India, in a recent interaction with analysts.
The auction would be done in phases, and to begin with, mines with a potential to produce 250 million tonnes annually at their peak would be given the offer. “We are offering the mines for revenue share but the idea is not maximisation of government revenue but to have a good coal market so that domestic availability improves,” said an official.
The ministry of coal is looking at cities like Ranchi, Raipur and Nagpur to hold some of the investor meets and roadshows in order to attract investment. “We will see whether these roadshows would be digital or physical in order to adhere to social distancing norms. There will be 60 days before financial bids are put in so there is time at hand,” said an official.
After the Indira Gandhi government nationalised coal mining in 1973, the sector was opened up over decades to only those who had downstream projects linked to coal.
The Centre enabled commercial mining and sale of coal by private companies under the Coal Mining Special Provisions (CMSP) Act, 2015.
This meant that coal could be mined and sold openly in the market without putting up any consuming unit like a power, steel or cement plant. In 2016, the Narendra Modi government approved the methodology for auctioning coal mines for commercial purposes to private companies. Around 25 blocks were also identified for auction in 2019 but the bidding did not happen.
The new bidding regime, which was amended by the Cabinet in May, now aims at simplifying the process and attract more investors. Auctioned mines, under the new methodology, will be required to pay a reduced upfront fee staggered over four instalments. This is expected to attract smaller players also. The upfront fee was earlier a one-time payment to mine-bearing states – it used to be the bid amount multiplied by reserves of the mine.
So, larger the mine, the higher the upfront payment, sometimes running into thousands of crores.
Under the new methodology, the upfront amount will be 0.25 per cent of the value of estimated geological reserves of the coal mine. It will be payable in four equal instalments. Coal mines will be put on auction on the basis of revenue share instead of a fixed rupee amount for every tonne to ensure that bidders are protected from price fluctuations.
The price of coal will be market driven, with the creation of a new national coal index (NCI). It will estimate the price of coal to be sold in the open market from these mines and the revenue to be accrued to the mine-bearing states.
“Bidding will start at 4 per cent floor price. Bid increment will be in multiples of 0.5 per cent up to revenue share of 10 per cent, and thereafter, in multiples of 0.25 per cent,” said the coal ministry, in a statement.
According to Jha, however, there are two most important considerations needed for starting a coal mine; land acquisition, and law and order situation at the mining site and adjoining areas.
“Provided these two conditions are in place, the time taken to dig out the first ounce of coal will be 2-5 years. Currently, most coal blocks are available in the eastern part of India where land acquisition is very difficult and there are Naxal-related issues,” he said in his interaction with analysts from Emkay’s India Equity Research.
India is estimated to have about 320 billion tonnes of coal reserves and this can last for about 100 years at the current utilisation level.
However, the share of coal in power generation is expected to decline from the current 73 per cent to around 50 per cent. This is because the country is moving towards renewable sources of electricity.
The overall requirement would be 1.3-1.4 billion tonnes from the current levels of 600 million tonnes. Coal demand in India is expected to peak to 1.6-1.7 billion tonnes.