Business Ethics CoalgateScam

8/9/2019 Business Ethics CoalgateScam

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Business Ethics Assignment

Coalgate Scam:Ethical

issues in allocating

coal blocks

Submitted by,

Anjanayan A. R.,

Reg No: 0051/51,

Section A


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Coalgate Scam:Ethical issues in allocating coal blocks

February 8, 2015

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the spark of a flame. But as the energy conservation law says we can’t create that

energy, again those petroleum products are converted to its usable form from crude oils

which are again got deposited from fossils of animals lived in this planet 10,000 years

back. So it gives us a small picture of how important or difficult is to get the products

which are easily convertible and hence useful for the human.

A general classification of energy resources can be done as below3

1. Primary energy resources : resources in their raw form that need to be processed

for utilization

Minded coal

Crude oil

Uranium Ore

2. Secondary energy resources : these are transformed primary energy resources in

a form of final fuels or energy supply. Many technological processes are involved

in these transformations; thus, the energy content of primary energy sources is

partly spent on the way to energy consumers.

sized coal

refined crude oil products - gasoline, petrol

enriched uranium in fuel rods

electricity

3. Alternative energy sources - those ones that their application is not typical in

contemporary technologies. They are not necessarily renewable; however, their

application in a new way can bring some benefits. Some examples follow:

wood - from very traditional energy source to an option to fossil sources

natural gas involved in transportation systems instead of crude oil

products

geothermal resources substituting fossil energies

4. Renewable energy resources - such energy resources that cannot be depleted in avery long time horizon; from the mankind history point of view, they seem to renew

their capacity to infinite levels.

the dominant source of such energy is solar energy

anyway, geothermal energy represents another example


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5. Waste energy resources - the same as materials can by recycled, there is a

potential to reuse some energies originally considered to by a "waste" energy by

primary and secondary energy resources utilization

energy from cooling systems of electricity production (have you ever seen

a nuclear power plant cooling towers?)

utilization of these sources leads to higher energy intensity , practically it is

accomplished by combined heat and power (CHP)

From above classification we can see how important coal as an energy resources. In the

case of India4 we may approximately calculate the energy production and various

components as shown in below table,

Total Installed Electricity Capacity (2012) 211,766 MW

Coal 57.4%

Hydro-electric 18.6%Renewable Sources 12.2%

Natural Gas 8.9%

Nuclear 2.3%

Oil 0.6%Total Primary Energy Supply (2011) 675,830 MW

Coal/Peat 42.3%

Hydro 1.4%Natural Gas 7.2%

Renewable (Geothermal, Solar and Wind) 0.3%Nuclear 0.7%

Oil 23.6%

From the table above we can refer that India is depended on Coal to meet its energy

requirements.

Coal blocks in India

Coal is the key contributor to the Indian energy scenario. From the table it’s clear that

Coal meets more than 50% of the current commercial energy demands of the country.

Out of the four major fuels resources, viz Oil, Natural gas, Coal and Uranium coal has the

largest domestic reserves. A far large percentage of coal demand in the country is met


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by the domestic production as compared the other major fuels like Oil and Natural gas.

This scenario is expected to remain the same in the foreseeable future unless alternate

energy sources occupy the center stage5.

The nationalization of coal blocks were done in India in two phases, on phase 1 (1972)

coking coal mines, and in phase 2 (1973) non coking coals. On November 1975 Coal

India Limited (CIL), a holding company under the Ministry of Coal (MoC) was set up. In

1976, The Coal Mines Amendment Act was enacted which terminated all the mining

leases with the private parties. But act allowed the mining for captive use to produce

steel and iron. To implement the captive mining of Coal blocks, a screening committee

was set up on 1992 by MoC under the chainman ship of Secretary (Coal) through an

administrative order to consider the applications made by various companies. A list of

143 coal blocks were prepared and placed under the website of MoC for information ofpublic at large. In 1993 the act was amended to allow Indian companies engaged in

Power production to carry out coal mining in captive use. In 1997, Cabinet approved a

proposal to amend the Coal Mines Act to allow non-captive mining by an India

Company. In 2000, another amendment bill was introduced in Rajya Sabha which allows

commercial mining of Coal blocks but met stiff opposition from trade unions who

expressed concern over the possibility of possibility of unscientific mining and labor

exploitation2. On 2005, a seven expert committee headed by Mr. T. L. Sankar, chairman

of Energy Group Administrative Staff College of India , constituted by Government of

India prepared and submitted a report to then Prime Minister Dr. Manmonhan Sing,

about a comprehensive road map for the modernization of coal sector.

The major recommendations made by the committee was as follows,

Continue to regulate the price of coal to ensure least cost of supply of coal for

power generation while allowing a competitive and transparent to supply the

needs of the consumers

Emphasis on the role of captive mining to contribute significantly to the

production of the coal in the short to medium term

The procedure and processes of allocation of coal blocks needed to be improved

to expedite the allotment of captive coal blocks in a transparent and effective

manner

Releasing coal blocks with inferred and indicated category of reserves for captive

mining may not result in the increasing number of players in coal mining


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Production from captive mines during mine development or periodic surpluses

during mine operations must be sold to CIL/SCCL at negotiated price

Encashment of bank guarantees of non-serious players

Launching a program for detailed exploration and drilling for increasing Proved

Reserves

De-reservation of CIL that cannot be put into production before 2026-27

Setting up a permanent task force for monitoring progress of clearances and

project implementation to enhance the domestic coal capacity

On 2006 Government permitted 100 percent FDI under the Automatic Route for captive

coal mining by companies in the power, iron, steel and cement sectors and other eligible

activities permitted under the coal mines act. In October 2008, The Mines and Minerals

Development Regulation (MMDR) bill was introduced in the Parliament. It was to bring a

competitive bidding system to get the lease agreement, applicable to all mineral

covered under that Act. In 2010 the MMDR amendment act was enacted. In 2012, MoC

notified the auction by competitive bidding of Coal mines rules. This concludes a brief

history of different acts and amendments just before the CAG audit report on Coal

mining allocation done by the Government of India in 2012.

Coalgate Scam

The coal allocation scam, or ‘Coalgate’ as it is popularly referred to in the media, is a

political scandal that engulfed the UPA government in 2012. The scam came to light

after the Comptroller and Auditor General of India (CAG) accused the government of

India for allocating 194 coal blocks to public and private enterprises for captive use in a

flawed, ad hoc manner between 2004 and 2009. If we’ve observe the history of

different acts and amendments passed related to the Coal mining allocation, we could

see government was favoring different corporates by including more sectors to apply for

coal block mining. Government claimed they were looking for more revenue options,but for that they could’ve introduced the competitive bidding scheme which will create

more competition in the industry at the same time exchequer can collect more revenue.

CAG alleged the government’s policies were non transparent and favoring the public

and private entities. It also found that many politicians lobbied for allotment to certain

private players raising questions about crony capitalism. CAG also said some private


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companies were able to get hold of coal blocks more than they might require for their

operations and sold it in open market for higher price and made huge profits. CAG

initially estimated a Rs. 10.6 lakh crore loss to the exchequer but the final report

avoided the public sector entities and reduced the amount to Rs.1.86 lakh crore.

As per the CAG draft report, the objective of the report was

i) To assure and cross verify the procedure followed for allocation of coal blocks

for captive mining ensured objectivity, transparency, and reasonable gain

share to the gain to the allocatees

ii) The coal blocks allocated for captive mining augmented production of coal as

envisaged

iii) CIL augmented its production capacities as planned

These objectives in a way are the objectives of government per se. At the end of audit,

then CAG Mr. Vinod Rao found out that government didn’t meet any of its objectives

while doing business in coal block mining allocation.

CAG figured out the amount of allocation made to private and public companies as

below8,

Year

of

Allo

cati

on

Government Companies Private Companies

Power projects

Total

No.of

blocks

Geological

Reserve(in MT)

% ofTotal

Geological

Reserve

No. ofblocks

GeologicalReserve(in MT)

% of TotalGeological

Reserve

No. ofblocks

Geological

Reserve (in MT)

No.of

blocks

GeologReserv

MT

Upo

200529 6,294.72 65.35% 41 3,336.88 34.65% 0 0 70 9,6

2006 32 12,363.15 69.49% 15 3,793.14 21.32% 6 1,635.24 53 17,72007 34 8,779.08 74.01% 17 2,111.14 17.80% 1 972 52 11,82008 3 509.99 14.37% 20 2,939.53 82.81% 1 100 24 3,5

2009 1 337 4.89% 12 5,216.53 75.68% 3 1,339.02 16 6,82010 0 0 0.00% 0 0 0.00% 1 800 1

Total 99 28,283.94 55.98% 105 17,397.22 34.43% 12 4,846.26 216 50,5


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The response to the allocation process between 2004 and 2009 was spectacular, with

some 44 billion metric tons of coal being allocated to public and private firms. By way of

comparison, the entire world only produces 7.8 billion tons annually, with India being

responsible for 585 million tons of this amount. Under the program, then, captive firms

were allocated vast amounts of coal, equating to hundreds of years of supply, for a

nominal fee8. The allocatees had a windfall gain as tabulated below because of that

8

Windfall Gains to Allocatees (in crore)

Calendar Year

Government Companies Private Companies Government Companies+Private Companies

90%of GRin MT

Windfallgain

historic

rates

WindfallgainMar2011

rates

90%of GRin MT

Windfallgain

historic

rates

WindfallgainMar2011

rates

90%of GRin MT

Windfallgain

historic

rates

Windfallgain Mar

2011

rates2004 1,709 45,807 56,949 0 0 0 1,709 45,807 56,9492005 1,388 34,056 45,561 1,776 39,146 85,523 3,163 73,203 131,084

2006 8,660 185,119 259,547 3,011 62,085 111,764 11,671 247,204 371,3112007 7,000 64,066 207,098 1,747 38,284 51,502 8,746 102,350 258,599

2008 288 6,704 7,364 2,682 54,445 80,137 2,970 61,149 87,501

2009 303 2,438 11,285 4,605 99,735 150,574 4,908 102,174 161,859Total 19,349 337,471 587,803 13,820 293,695 479,500 33,169 631,166 1,067,303

The table employs the following calculations for windfall gain:

windfall gain/ton = market price/ton – production cost/ton

windfall gain = windfall gain/ton x number of tons allocated x 90% (to reflect 90%

confidence in the geology of the reserve)

After the report and allegations made by CAG, major political parties started

questioning the government and asked CBI to initiate a probe into the matters. The CBI

has so far lodged 14 cases against individuals and firms including high profile

industrialists like Naveen Jindal and his company JSPL, Kumaramangalam Birla, Congress

MP Vijay Darda and his brother Rajendra Darda, JLD Yavatmal Energy Limited, AMR Iron

& Steel Private Limited, Vini Iron & Steel Udyog among others6. An Inter-Ministerial

Group also formed to decide on the de-allocation of coal blocks that were not

developed on time. The IMG recommended de-allocation of 13 blocks and forfeiture of

bank guarantees of 14 allottees including the likes of Tata Sponge, GVK, Arcelor Mittal,

Monnet Ispat & Energy, Adhunik Metaliks etc.6


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The then prime minister Dr. Manmohan Sing was handling the Coal portfolio during that

time. Former Coal Secretary P C Parakh who has now been charged by the CBI along

with Birla hit out at the PM last year for overruling his call for auctions and continuing

arbitrary allotments of coal blocks. 142 blocks were allotted during the PM’s tenure as

Coal Minister6.

The facts which prove hidden interest of politicians and corporates involved in the coal

block allocation was the missing files which CBI was asking for. As many as 157 files,

crucial evidence for the CBI probing the scam, have gone missing including those

containing minutes of screening committee meetings, allocation records etc. While the

coal ministry says it has deposited a bulk of the files with the CBI, reports suggest 18-20

crucial files still remain untraceable. Because of lack of evidences CBI may not be able to

conduct the investigation properly and as we know, Indian legal system gives everybenefit of doubts to the person whom crime has been accused.

On August 25, 2014, the Supreme Court passed the judgment, terming all coal

allocations between 1993 and 2010 illegal. It observed that as per the recommendations

made by the Screening Committee from July 14, 1993, in 36 meetings the allocation

through the government dispensation route suffers from the vice of arbitrariness and

legal flaws. The apex court pointed out that the scam resulted in the heavy suffering of

common good and public interest.

The important paragraph from the SC verdict is as follows10

,

The allocation of coal blocks through Government dispensation route, however laudable

the object may be, also is illegal since it is impermissible as per the scheme of the CMN

Act. No State Government or public sector undertakings of the State Governments are

eligible for mining coal for commercial use. Since allocation of coal is permissible only to

those categories under Section 3(3) and (4), the joint venture arrangement with

ineligible firms is also impermissible. Equally, there is also no question of any

consortium/leader/association in allocation. Only an undertaking satisfying the eligibilitycriteria referred to in Section 3(3) of the CMN Act, viz., which has a unit engaged in the

production of iron and steel and generation of power, washing of coal obtained from

mine or production of cement, is entitled to the allocation in addition to Central

Government, a Central Government company or a Central Government corporation.


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Analysis on ethical grounds

While judging on any issue we should heat both side arguments. Government of India

argued that the delay in introducing the auction process was a result of coalition

politics. It also alleged that opposition ruled states opposed the auction methodology.So if that’s the case then what was the motive behind inclusion of other sectors in coal

mining, why they allowed non captive use of coal blocks?

From the energy production table which was given above, we can refer that our country

is very much dependent on Coal. So in such a situation allocation of coal for non-captive

purposes is a matter of concern. Also lack of transparency in the processes followed is

again highly unethical and severely penalized.

The only flawless argument from a people oriented government point of view might be

the point made by Government saying maximization of revenue shouldn’t necessarily be

the government’s prime motive, as an auction can lead to higher prices hurting

consumers. But if we see the timing when they’ve liberalized the policies, most of them

were done nearer to the election timings at different locations across the country. It is

skeptical in a way that some politicians were favoring the corporates to benefit their

political party funding to meet the election expenses. Again if it was for the benefit of

public then the extra money the government getting by introducing the competitive

bidding can be used for the infrastructure development or creation of employment

opportunities. Since the market is perfectly competitive, the increase in price of coal willnot increase the price of the final products from the companies. It was the opinion of

macroeconomic experts. So the government had no valid reasons for not following the

bidding process in allocation of coal blocks.

As per the comments made by CAG government got a lot of opportunities to introduce

the competitive bidding scheme. But they failed to do as the corporate have already

lobbied the politicians to act according to their interest.

We take a look at some of the scathing observations that the apex court made on theCBI affidavit in the Coalgate case

10:

CBI has become a caged parrot speaking in master's voice. It's a

sordid saga that there are many masters and one parrot


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The heart of the report was changed on the suggestions of

government officials

CBI must know how to stand up against all pulls and pressures by

government and its officials

No substantial progress has been made in the coal scam probe after

registration of the case

Probe report is not a progress report to be shared with government

and its officials

Job of CBI is not to interact with government officials but to

interrogate to find the truth

We want thorough & qualitative investigation in the case

No interaction with any person without the permission of the court

Conclusion

Who should be blamed for the unethical practices followed during Coal block allocation?

Should the government take complete responsibility in this matter and resigned from its

position?

If we take a look into the history we can get many people who has taken responsibility

of the failure of their acts and resigned from their positions. Vishwanath Pratap Singh

was one such a politician. He was appointed by Indira Gandhi as the Chief Minister of

Uttar Pradesh in 1980, when Gandhi was re-elected after the Janata interlude. As Chief

Minister (1980 –82), he cracked down hard on dacoitry, a problem that was particularly

severe in the rural districts of the south-west Uttar Pradesh. He received much favorable

national publicity when he offered to resign following a self-professed failure to stamp

out the problem, and again when he personally oversaw the surrender of some of the

most feared dacoits of t he area in 19837.

So should Dr. Manmohan Sing also have followed a similar step that shown by V.P. Sing

? The primary or most important expectation people will have from a person who bears

a position is taking up responsibilities of their own actions. Person who is in a position as


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that of a prime minister shouldn’t fail in their actions, because it has got direct impact

on millions of people. These are applicable only in case of incautious actions. But if

things are done deliberately, then they are criminal offense and should be severely

punished especially they are holding a very high position and cheated the millions of

people who have put their faith in them.


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References

1. http://www.yourarticlelibrary.com/organization/5-important-characteristics-of-

organisation/946/

2. Annexure 1-5 of Performance audit report on allocation of Coal blocks and

augmentation of coal production, Government of India 2013

3. http://web2.mendelu.cz/af_291_projekty2/vseo/stranka.php?kod=308

4. en.openei.org/wiki/India

5. Draft report of CAG about Coal allocation auditing

6. http://www.business-standard.com/article/companies/7-things-you-wanted-to-

know-about-coalgate-113101500366_1.html

7. http://en.wikipedia.org/wiki/V._P._Singh

8. http://en.wikipedia.org/wiki/Indian_coal_allocation_scam#1992.E2.80.932010._

Background_to_Coalgate:_history_of_coal_allocation_in_India

9. http://smallbusiness.chron.com/importance-ethics-organizations-20925.html

10. Supreme Court judgment dates 25th August 2014 regarding Coalgate scam
http://www.yourarticlelibrary.com/organization/5-important-characteristics-of-organisation/946/http://www.yourarticlelibrary.com/organization/5-important-characteristics-of-organisation/946/http://www.yourarticlelibrary.com/organization/5-important-characteristics-of-organisation/946/http://www.yourarticlelibrary.com/organization/5-important-characteristics-of-organisation/946/http://www.yourarticlelibrary.com/organization/5-important-characteristics-of-organisation/946/http://web2.mendelu.cz/af_291_projekty2/vseo/stranka.php?kod=308http://web2.mendelu.cz/af_291_projekty2/vseo/stranka.php?kod=308http://www.business-standard.com/article/companies/7-things-you-wanted-to-know-about-coalgate-113101500366_1.htmlhttp://www.business-standard.com/article/companies/7-things-you-wanted-to-know-about-coalgate-113101500366_1.htmlhttp://www.business-standard.com/article/companies/7-things-you-wanted-to-know-about-coalgate-113101500366_1.htmlhttp://www.business-standard.com/article/companies/7-things-you-wanted-to-know-about-coalgate-113101500366_1.htmlhttp://www.business-standard.com/article/companies/7-things-you-wanted-to-know-about-coalgate-113101500366_1.htmlhttp://en.wikipedia.org/wiki/V._P._Singhhttp://en.wikipedia.org/wiki/V._P._Singhhttp://en.wikipedia.org/wiki/Indian_coal_allocation_scam#1992.E2.80.932010._Background_to_Coalgate:_history_of_coal_allocation_in_Indiahttp://en.wikipedia.org/wiki/Indian_coal_allocation_scam#1992.E2.80.932010._Background_to_Coalgate:_history_of_coal_allocation_in_Indiahttp://en.wikipedia.org/wiki/Indian_coal_allocation_scam#1992.E2.80.932010._Background_to_Coalgate:_history_of_coal_allocation_in_Indiahttp://en.wikipedia.org/wiki/Indian_coal_allocation_scam#1992.E2.80.932010._Background_to_Coalgate:_history_of_coal_allocation_in_Indiahttp://en.wikipedia.org/wiki/Indian_coal_allocation_scam#1992.E2.80.932010._Background_to_Coalgate:_history_of_coal_allocation_in_Indiahttp://smallbusiness.chron.com/importance-ethics-organizations-20925.htmlhttp://smallbusiness.chron.com/importance-ethics-organizations-20925.htmlhttp://smallbusiness.chron.com/importance-ethics-organizations-20925.htmlhttp://en.wikipedia.org/wiki/Indian_coal_allocation_scam#1992.E2.80.932010._Background_to_Coalgate:_history_of_coal_allocation_in_Indiahttp://en.wikipedia.org/wiki/Indian_coal_allocation_scam#1992.E2.80.932010._Background_to_Coalgate:_history_of_coal_allocation_in_Indiahttp://en.wikipedia.org/wiki/V._P._Singhhttp://www.business-standard.com/article/companies/7-things-you-wanted-to-know-about-coalgate-113101500366_1.htmlhttp://www.business-standard.com/article/companies/7-things-you-wanted-to-know-about-coalgate-113101500366_1.htmlhttp://web2.mendelu.cz/af_291_projekty2/vseo/stranka.php?kod=308http://www.yourarticlelibrary.com/organization/5-important-characteristics-of-organisation/946/http://www.yourarticlelibrary.com/organization/5-important-characteristics-of-organisation/946/

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