Section-C, Business Law, Privatization of Coal Mining

8/12/2019 Section-C, Business Law, Privatization of Coal Mining

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Business LawPresentation on

Privatization of Coal Mining

Presented By : Section-C, PGDM 13-15

Nikita Chaudhary (13DM115) Prashaant Ram Natar

Onkar Kumar (13DM122) Priyadarshini

Nipun Aggarwal (13DM119)


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Coals Role In India

Due to abundance of coal resources compared to oil and gas Indian energy supply is laron coal

Coal contributes to about 55 % of the commercial energy consumption as compared to

average

India is the 3rd largest coal producing country after China and USA.

More than 65% of electricity generation capacities are coal based.

Industries like steel, cement, fertilizers, chemicals, paper and thousands of medium an

industries are also dependent on coal for their process and energy requirements Surging oil and international coal prices compels coal Industry to play key role for energ

country

Coal Vs Other Energy resources in India


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Coals Role In India

60%

5%

5%

20%

10%Electricy

Steel

Cement

NonElecttricty

Sector Wise Coal Consumption in India

60%

5%

5%

20%

10%E

S

C

NE

Estimated Consumption (2016- 2017)

Source: India Energy Book 2012


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History of Coal Mining

Coal mining in India has a long history of commercial exploitation covering nearly 220 y1774 by the East India Company in the Raniganj Coal fields in West Bengal

India could produce 6.12 million metric tons per year by 1900 and 18 million metric to

1920.

The production got a sudden boost from the First World War but went through a slump

thirties.

The production reached a level of 29 million metric tons by 1942 and 30 million metric

After Independence, at the beginning of the 1st Plan, annual production went up to 33tons and during this period itself, the need for increasing coal production efficiently by

scientific development of the coal industry was being felt

Setting up of the National Coal Development Corporation (NCDC) in 1956 with the colli

the railways was the first major step towards planned development of Indian Coal Indu

Along with the SCCL which was already in operation since 1945, India thus had two Gov

companies in the fifties


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Current Scenario of Coal Reserves

State Coal Reserves (MT)

Jharkhand 80,366

Orissa 71,447

Chhattisgarh 50,846

W Bengal 30,615

Andhra Pradesh 22,154

Madhya Pradesh 24,376

Maharashtra 10,882

India has a total of 2,94,437 Mt of Coal

spread across 15 major states in the

country


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MAJOR COAL HUBS IN INDIA


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NATIONALIZATION OF COAL MINES

Modern Times the commercial coal mining in modern times in India has been dictated by the needs o

consumption

On account of the growing needs of the steel industry, a thrust had to be given on syst

exploitation of coking coal reserves

Adequate capital investment to meet the energy needs of the country was not forthc

private coal mine owners,Unscientific mining practices adopted by some of them and

conditions of labor in some of the private coal mines became matters of concern for th On account of these reasons, the Central Government took a decision to nationalize th

mines which was done in two phases

First with the coking coal mines in 1971-72 Non-coking coal mines in 1973


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NATIONALIZATION OF COAL MINES.. CONT

Modern Times In1972 coking coal mines and the coke oven plants other than those with the Tata Iro

Company Limited and Indian Iron & Steel Company, were nationalized on May 1, 197

under BCCL, a new Central Government Undertaking

In 1973 The Coal Mines Act was established which extended the right of the Governm

over the management of the coking and non-coking coal mines in seven States includi

mines taken over in 1971

All non-coking coal mines were nationalized in 1973 and placed under Coal Mines Aut1975, Eastern Coalfields Limited, a subsidiary of Coal India Limited, was formed. It too

earlier private collieries in Raniganj Coalfield.

Eastern Coalfields puts the reserves at 29.72 billion metric tons which makes it the se

coalfield in the country in terms of reserves


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INSTITUTIONAL STRUCTURE OF THE

COAL SECTOR

CENTRAL LEVEL INSTITUTION INCLUDES :Ministry of Coal (MoC)

Ministry of Environment and Forest (MoEF)

Ministry of Mines (MoM)

Ministry of labour (MoL)

Other Ministries that don't have direct responsibility but have potential to impact the

coal industry are:Ministry of Finance (MoF)

Ministry of Railways (MoR)

Ministry of Power (MoP)

Ministry of Industry (MoI)

Ministry of Surface Transportation (MoST)

Ministry of Steel (MoS).


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COAL SECTOR

STATE LEVEL INSTITUTIONS INCLUDE:

Department for mining

Department for forest

Department for environment

State Pollution Control Boards.

These institutions are responsible for the review of applications for mineral titles, gran

clearances and compensatory afforestation.

LOCAL LEVEL INSTITUTIONS INCLUDE:

Municipalities

Panchayats

They are responsible for the environment management like soil conservation, land imp

management of non-renewable resources like water at district level.


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COAL SECTOR

INFORMAL INSTITUTIONS/TRADE UNIONSIndian National Trade Union Congress (INTUC)

Hind Mazdoor Sabha (HMS)

Bharatiya Mazdoor Sangh (BMS)

To these central unions, a large number of local and regional unions are affiliated.

These Trade Unions are governed by Trade Union Act,1926 .

Every company whether government or private involved in exploration, mining or wash

coal mines have to follow the instructions enforced bythese institutions and the Acts a


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MINES AND MINERALS REGULATION &

DEVELOPMENT ACT , 1957

Under this Act, the resources are jointly managed by Central and State Government.

While the ownership of mines is with State Government and the mining activities are c

Central Government

All the rules are framed under MMRDA and Mines Act which ensures development ofm

in consonance with national policy goals.

COAL MINES ACT, 1976

This Act terminated mining leases of pvt. Companies in coal bearing region with excep

captive mining by pvt. Companies involved in production of Iron & Steel like TATA Stee

Coal industry was reorganised into 2 large public sector companies:

1. Coal India Limited (CIL)

2. Singareni Colliery Company Ltd. (SCCL)


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ENVIRONMENTAL IMPACT ASSESSMENT ACT,

It enforces 2 stages of clearances: Site Clearance

Environment Clearance

It conducts assessment of impact on forest & environment including air & water polluti

details on restoration schemes, land reclamation, closure and other details

FOREST CONSERVATION ACT , 1980

For any area lost due to development, the mining companies have to pay for purchase oof non-forest land or twice the degraded forest area


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COAL BEARING AREAS (ACQUISITION AND

DEVELOPMENT) ACT, 1957

It provides acquisition of land containing or likely to contain coal deposits. Under this Agovernment declares its intention to do exploration. All notifications are issued to Govt

publication which describes procedure and checklists involved for processing the propo

avoidable delays

COAL INDIA (REGULATION OF TRANSFERS AND VALIDATION) ACT, 2000

It empowers the Central Government to direct the transfer of land or the rights in or o

the right, title or interest in relation to a coal mine or coke oven plant vested in the CILcompany, or where such land or mine are vested in a subsidiary company, to another s

company


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ELIGIBILITY FOR COAL MINING IN INDIA

2 . Damodar Valley Corporation (a captive coal mining company in the public sector) IndiaCompany Limited (a captive coal mining company in the public sector)

3. Bihar State Mineral Development Corporation Limited (a non-captive coal mining

company, a Government company under the control of Government of Bihar)

4. Jammu & Kashmir Minerals Limited (a non-captive coal mining company,

Government company under the control of Government of J&K)

5. Bengal Emta Coal Mines Limited (a captive coal mining company in the private

sector)

6. Jindal Steel and Power Limited(a captive coal mining company in the private sector)


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Scope for Privatization

The change in industry structure has been driven by a number of factors need to meet increased demand, bring in new technologies and modern mining m

financing new development, bring corporate capabilities to exploration and opera

Current existence of Private ParticipationContract Mining with MDO (mine Develope

Model, Joint Venture (PPP)

Contract Mining - This outsourcing was necessary as many end-user companie

power generation or steel and cement making and had no prior experience in c

gave rise to the mine developer cum operator (MDO) model. MDOMainly done to bring mining expertise, improve productivity, simply fina

development.


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Governance challengesCoal Sector

Beyond well-known environmental and social issues, Indias coal sector faces consideraits own

Monopolistic Market Structure - The challenges arise from lack of accountability and t

weak planning and inter-agency coordination

Lack of Technology- Despite Government announcements a decade ago that India wo

modern method of estimating its coal reserves, Indian coal reserves continue to be cla

outdated methodology

In many countries the known and extractable reserves of coal have been significantly downwards by modern methods of reserve classification

Lack of Planning - During allotting captive blocks governments objective was not to m

but to rapidly increase coal production and reduce electricity tariffs.

However, it did not impose any conditions on coal block allottees to pass on the benef

to consumers, as a result neither did the production increase nor did the electricity tar


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Area Specific Problems

Negligence shown in reconstructing and reorganizing old mines During nationalization more emphasis was placed on new projects than on reverting t

the purpose of increasing production

Old Mines had sufficient coal deposits left, but no effort was made to reconstruct the

outdated, useless machines, were not replaced

productivity of the old mines could have been improved by much less capital than was

undertaking the new project

Use of capital-intensive projects dependent on foreign technology In many cases, the use of foreign technology, imported machines, and foreign assistan

increase in the cost of production

Mine technicians of India do not have enough acquaintance with ultra-modern weste


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Area Specific Problems.continued

Inability to determine the market rate of coal Due to the pressure of the industrialists who utilise coal, the government has never b

selling price of coal

At the open market, the price of high-calorific coal is very high

Due to government control, there was no correlation between the selling price of coa

production price of coal

the import duty on coal has been reduced from 85% to 35%. As a result, Indian compa

compete on unequal terms with both foreign and indigenous companies.

Theft of coal Illegal activities include theft of coal and explosives, besides illicit extraction of the fu

Eastern Coalfields, also a subsidiary of Coal India, saw recovery of stolen coal

crore during 2011-12 14,918 tonnes of coal, worth about Rs 3.16 crore, in 2011-12 had been recovered thro

conducted by security personnel as well as joint raids with the and law and order authconcerned state overnments


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Advantages of Privatization

Private sector participation will not only help increase the supply, but will also leinvestments towards developing integrated coalfields, Logistics & infrastructure

sectors

Tangible benefits to private sector participation in coal mining include employm

contribution to GDP, control over inflation, greater self- sustenance in energy se

Private investors are also more likely to pick up coal assets for mining in areas

government is reluctant to invest, for lack of technology and infrastructure or be

seams are deeply embedded Greater domestic production from the private sector will, in turn, lower the burd

current account deficit and balance of payment, control subsidies and create al

terms of its impact on power tariff, cost of steel and cement.

Privatization will usher competition and bring in the much needed latest mining

In Annual Budget for 213-2014 the Finance Minister has announced for Public

Partnership (PPP) mode for raising coal for bridging the demand supply gap in

This would benefit large coal-consuming industries such as thermal power, stefertilizers and chemicals


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FDI in coal mining

100 % for captive consumption for power generation

100 % for investing in equity of a company working only in coal process

coal should be sold back to raw coal provider.

74 % for captive consumption in production of steel and iron.

Automatic approval by RBI in case of 50% equity investment in aboveapproval from FIPB is required.


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FDI in coal mining

Limited FDI in mining

sector. Equity inflow

of 998 million USD forthe period of 2000 to2013.


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Global trends in mining industry

A number of country have taken steps to reform and open their industand overseas investments. These steps are not to privatize already

industries, but to promote establishment of new greenfield industries.

Country Coal Production

(MT)

Thermal Coal

exports (MT)

Thermal coal exports

as percentage of

production

Total coal

exports

Indonesia 386 315 82% 338 Australia 431 159 37% 303

Russia 355 108 31% 120

USA 922 42 5% 107

Columbia 89 80 90% 81

South Africa 260 75 29% 78

Canada 67 5 8% 33


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Global trends in mining industry

Taxation

Australia

Queensland 7 % to 12.5%

South Australia 5% of the value of the mineral

New South Wales

8.2 % of value of open cut coal

7.2 % of value of underground Coal

6.2 % of value of deep underground coal

India 14% Ad Valorem on price of coal (except West BengIndonasia 13.5% Ad Valorem

USASurface mining: 12.5% of gross value of coal produc

Underground mining: 8% of gross value of coal prod

South Africa 0.5 - 7 %

Ghana 5%

Columbia

10%: exploitation > 3MTPA

5%: exploitation < 3MTPA


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COAL BEARING AREAS (ACQUISITION AN

DEVELOPMENT) ACT, 1957

The land is acquired for Government Companies only for coal mining and activities inmining purposes.

Initially Government declares its intention to do exploration/ prospecting through a n

Section 4(1). This notification is valid for 2 years and is extendable by 1 year.

Subsequently on completion of prospecting, by notification under Section 7(1) of the

Government declares its intention to acquire the land. Validity 3 Yrs.

Objections invited and processed.

the Government issues notification under Section 9(1) of the CBA Act for acquiring th

and titled of the land are transferred to Coal PSUs / Govt. Company by notification un

11(1) of the CBA (A&D) Act, 1957.

All notifications are issued to Govt. Press, for publication in the official Gazette of the

India, only after vetting by Legislative Department, Ministry of Law.


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CURRENT MARKET SITUATION OF THE INDIAN COAL I

Coal production in the Asia Pacific region has grown tremendously and accounts for

total production globally (2011) as compared to about 27% in 1981

The countrys coal production has increased from approximately 408 MT in 2005-06,

2012-13,while on the other hand, its demand has grown at a CAGR of more than 7% i

and has reached around 600 MT.

Currently, the Indian government enjoys a monopoly in producing coal with over 90%

production coming from government-controlled mines, under CIL and SCCL and the re

players.(Table 1 and Fig1)

While the chart on the right(Fig2)shows the gaps between the production and consum

from 1980-2011.

The report of the Working Group of Coal and Lignite for the 12th Five Year Plan projec

demand in India to grow at a CARG of 7.1%.


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COAL PRODUCTION IN INDIA

Year 1980-81 1990-91 1995-96 2000-01 2005-06 2010-11 2011-12 2012-13

Others 3.05 6.47 9.38 15.29 27.48 50.41 51.95 52.16

SCCIL 10.01 17.71 26.77 30.27 36.14 51.33 52.21 53.19

CIL 100.86 189.68 237.27 268.14 343.39 431.32 435.84 452.18

Production in MT

0

100000

200000

300000

400000

500000

600000

700000

800000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

20060

100

200

300

400

500

600

CIL

SCCIL

Others


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PROJECTED GAPS BETWEEN DEMAND & SUPPLY

and Reasons thereof

Inadequate or delayed receipt from Coal India;

Plants running at above-planned PLFs(Plant load factor)

Inadequate import of coal;

Issues in acquiring land and strict rules and regulations (R&R);


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Bottlenecks in domestic coal transportation and off take: lack of proper road connectidemand and supply of rail wagons;

Obtaining forestry clearances: according to the data proved by CIL, 179 forestry propoclearances and if all approvals are secured on time, it can more than double its outpu

Delay in mining activities at captive coal blocks;

Concerns relating to the increasing ash content of run-of-mine (ROM) coal

Increasing depletion of coal located at shallow depths and absence of any long term punderground mining;

Depletion of good quality coal seams (coking as well as thermal coal) and subsequentproduction from lower seams.

PROJECTED GAPS BETWEEN DEMAND & SUPPLY

and Reasons thereof.continued


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STEPS TO OVERCOME THE LAG

Allowing privatization and captive mining-the adjoining figure shows the proportion

participation;

The private companies who have the maximum coal block allocations:

Jindal Steel and Power Ltd.

Monnet Ispat and Energy Ltd.

Hindustan Zinc Ltd

Tata Steel Ltd.

BALCO

Usha Martin Ltd

Hindalco

Essar Power and Steel Ltd

Number of Coal B

Public and Private

India (20

Year

Governm

Compan

2004 4

2005 9

2006 32

2007 34

2008 3

2009 1

2010

2011 1


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Price Deregulation: The price of domestic coal is determined by the level of supply anHowever, the response of overall demand and supply to price variations is slow due tothe coal industry as well as the nature of the user industries

Carbon pricing influences the demand for coal globally, which in turn affects domesti

Imports :India meets nearly one-fifth of its total demand for coal, used in electricity gthrough imports.

Import dependence has increased from 13 million tonnes in 2002 to 30 million tonne

coking coal.India imported 20% of its coal requirements in the year ended 31 Maccording to the state Planning Commission. Imports may rise to more than 232017

Indonesia accounts for 70 per cent of Indias annual thermal coal import of arotonnes (mt). The bulk of Indonesian coal imported by Indian power firms is in t3,600-4,200 kcal per kg. Australia and South Africa are the other major contrib


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Details of import of coal and related products (i) During the last five years ;(ii)From 1980 to

Coal2008-

09

2009-

10

2010-

11

2011-

12

2012-

13

Coking

Coal21.08 24.69 19.48 31.8 32.56

Non-coking

Coal

37.92 48.56 49.43 71.05 105

Coke 1.88 2.35 1.49 2.36 3.07

Total

Import60.88 75.6 70.4 105.21 140.63


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COAL EXPORTS

Coal is under Open General Licence (OGL) list

Export of coal to the neighbouring countries was earlier canalised through the Mineratrading Corporation, but for the last few years it has been decanalised; Export of coal through tender route.

While the traditional buyers of Indian coal are Nepal, Bangladesh and Bhutan, China aamong the new importers. But most government officials had been clueless about thof 2012.(according to Business Standard issue of July 6,2012).

Indian coal exports jumped 50 per cent in 2009-10 and 83 per cent in 2010-11,accordofficial estimate, more than 20 million tonnes (mt), worth about Rs 4,000 crore, has bdespite the country itself facing an acute shortage.


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Country Wise Export 2010-2011

Quantity

(MT) Value (Crores)

China 2.3 702

Bangladesh 1.1 246

Nepal 0.6 121

japan 0.2 186

Bhutan 0.008 24

Total 4.208 1279

Indian coal exports: (i)country-wise( Source: Business Standard July 2012)(ii)on a year to year growth fro


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FUTURE PROSPECTS FOR PRIVATIZATION OF COAL MIN

Following are the areas which may help in increasing coal supplies in India:

Improvements in innovation and technology:

A move from smaller capacity shovel to bucket sizes of 25-80 cu.m. capacities, having

capacities of the order of 11,000 MT per hour;

Development of operational practices whereby the extraction percentage is maximis

just surface mining methods (open cast method) but also underground mining metho

extraction percentage can go upto 70%;

Combining smaller mining areas to develop these into one single mine of large capaci

Meeting targets of mining projects not only in terms of production (per annum), but a

annum level of extraction to match with the overall mineable reserves of a mining pro


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FUTURE PROSPECTS FOR PRIVATIZATION OF COAL

MINING..CONTD

Improvements in transport facilities and infrastructural requirements:

Enhanced road connectivity across mineral zones and consumers

Infrastructure developments driven by PPP

Restructuring and/or reallocation of railway networks to connect with the coal bearin

Doubling of railway routes at places where coal movement is higher

Enhancing port capacities as well as evacuation efficiency and augmenting the existin

existing ports.


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SUSTAINABLE OVERSEAS ACQUISITION STRATEGIES

Overcoming acquisition challenges in foreign lands like Mozambique, Columbia, like lack of concerns over stability of political and fiscal regime, unavailability of skilled manpower, etc

Due Diligence of asset: While due diligence of source is necessary for reliability of coal supmost important in case of asset acquisition, to assess the correct price.

Commercial Contract: For reliability of long term supply, it is necessary that detailed contraensure that roles and responsibilities of the parties are clearly identified. This should also deand provisions for non performance;

Coal Prices: FOB price of coal forms more about 60-80% of landed cost of coal. Over past coal prices has seen about 300% increase and standard deviation of coal prices has been avarious coal indices. (RB Index, NEWC Index, ICI Index);

Charter Cost: It forms about 50-60% of total transportation cost and about 10-15% of total lcoal. In past years, charter rates have seen fluctuation of over 1000%.


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Thank You

Section-C, Business Law, Privatization of Coal Mining

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