coal

E A S Sarma, Former Secretary to Govt of India has raised serious concerns about the coal block auctions. He raised strong reservations about allocating coal blocks to Adani Power.  In a series of letters, he questioned the rationale behind the allocation of coal blocks.

To

Shri A K Jain

Union Coal Secretary

 

Dear Shri Jain,

Please refer to my earlier letter dated 2-10-2020 in which I had expressed my concerns about the financial capability of the bidders for coal blocks. I have enclosed a copy of that letter for your ready reference.

I understand that the initial response for the auctions had not been encouraging and several of those who offered bids were already heavily indebted to the PSU banks. It is reported that your Ministry would be re-auctioning the remaining blocks.

Most of the blocks which are being auctioned are located in areas notified under the Fifth Schedule to the Constitution, where the Panchayat (Extension to the Scheduled Areas) Act (PESA) and the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act (FRA) are applicable. In such areas, it is the local tribal Gram Sabhas which are required to discuss whether coal mining should be undertaken and, if so, whether by the government or the tribals themselves, a legal requirement emphasised by the apex court in two important cases, namely, the case of bauxite mining by the Vedanta company in Odisha and another case of mining in the Scheduled Area of Visakhapatnam district in AP in the Samata case. I have enclosed copies of the relevant apex court judgements for your reference.

I get the impression that neither the Union Ministry of Coal nor the concerned States have exercised due diligence in this regard and the provisions of both PESA and FRA stand grossly violated. If that is the case, the auctions would be legally invalid.

I wonder whether your Ministry has consulted in this regard the Union Ministry of Tribal Affairs and the National Commission for the Scheduled Tribes (NCST), which is a body created by Article 338A of the Constitution.

In addition to the environmental implications of coal mining in river catchments and in dense forest areas, in my view, it is highly imprudent for your Ministry to ignore the interests of the tribals as indicated above.

I suggest that you consult both the Ministry of Tribal Affairs and the NCST before proceeding further in the matter. Auctions already concluded may have to be kept in abeyance till such time the above mentioned legal requirement is complied with.

Regards,

Yours sincerely,

E A S Sarma

Former Secretary to Govt of India

Visakhapatnam

9-10-2021


To

Shri A K Jain

Union Coal Secretary

Dear Shri Jain,

Financial capability of some winners in recent coal block auctions doubtful- The case of Adani Power

Kindly refer to my letter dated 22-5-2015 (copy enclosed) to your predecessor on the need to make sure that the bidders in the coal auctions are such that they were not heavily indebted to the financial institutions in respect of the loans obtained in the past. At that time, the Coal Ministry thought that it was for the bidders to exercise due diligence and it was not for the Ministry to examine their financial capability from that point of view.

You are aware of the fact that many private companies have become bank loan defaulters and, as a result, several PSU banks may have to forego the amounts due as the loanee companies are demanding debt restructuring concessions and other facilities.

Coal is a scarce natural resource that belongs to the people. Transferring control over the same to indebted private companies may pose serious problems in the future. The successful bidders will offer the coal deposits as security for raising additional bank loans which they may not be in a position to repay as usual. This will not only defeat the objective of the coal auctions but also saddle the PSU banks with more NPAs.

I have just come across an Economic Times report (“Adani Group bids for 8 commercial coal blocks“) the contents of which raise such concerns.

I thought that I should caution you on this so that you may put in place the necessary safeguards.

Regards,

Yours sincerely,

E A S Sarma

Former Secretary to GOI

Visakhapatnam

2-10-2020


Shri Anil Swarup

Union Coal Secretary

Dear Shri Swarup,

Subject:- Financial capability of some winners in recent coal block auctions doubtful- The case of Adani Power

I refer to my earlier letter dated 13-2-2015(enclosed) addressed to you on the need to exercise utmost care in pre-qualifying the bidders and the need to ensure maximum competition. I am not sure whether your Ministry has considered the points I had raised, since you have not acknowledged the receipt of my letter conveyed to you by email.

From the tender format available at your website, it is not clear whether your Ministry is ascertaining the financial capability of each bidder to undertake mining. Many PSU banks are stranded today with NPAs arising from non-performing coal mines and non-performing power projects. The financial strength of some companies who have bid for coal blocks is doubtful.

I cite below one example, that of Adani Power, whose financials as on 31-3-2014 were as follows.

(Rs Crores)

Net worth7787.16
Intangible assets3.07
Tangible Net Worth (TNW)7784.09
Investments in group companies4905.92
Loans to group companies4165.72
Adjusted TNW (ATNW)-1287.55
Total Outside Liabilities (TOL)30991.85
TOL/ATNW)-24.07

 

The company has a negative adjusted tangible net worth. It cannot even support its own working capital requirements at the existing level of operations. It depends completely on outside liability i.e. mainly bank loans. What makes it worse is that these figures were as on 31.03.2014. During the subsequent quarters in 2014, the position seems to have worsened, making it more difficult for the company to service its past debt. There is apparently no way that Adani Power can take on a new coal mining project. By any standard of financial scrutiny, the company cannot be considered as a sound candidate for mining a new coal block.

From your website, I find that Adani Power has “successfully” bid for Jitpur block! Has your Ministry looked into the financial capability of this company at all?

It is not as though these facts are not known to the government. When SBI rushed recently into signing an MOU offering a $1billion loan to Adani Group for its mining project in Queensland in Australia, I had cautioned the Finance Minister on 22-11-2014 on the problems faced by the group in servicing its existing debt and questioned SBI’s prudence in that matter. I enclose a copy of my letter for your information. What applied to SBI then would apply to any other financial institution.

Adani is only the tip of the iceberg. From the list of “successful bidders” displayed at your website, I find that the names of JP Associates (Mandla North Coal Block), OCL Iron & Steel (Ardhagram Coal Block) and Essar Power (Tokisund North). These companies are highly leveraged from the financial point of view. The risks involved are unreasonably high.

Anyone with a basic appreciation of corporate finance would hesitate to hand over a coal mine of great intrinsic value to a company with unsound finances. It can become a millstone around the neck of the banks that lend money and a non-performing asset for the Coal Ministry. What I apprehend is that, in all such cases, the government will, in order to demonstrate the success of the auctions, pressurise the PSU banks to extend loans to the financially weak companies. Such an approach will have macro-economic implications as it will affect the coal industry, the power sector and the PSU banks. It is the Indian tax-payer that will be forced to bear the brunt in the ultimate analysis.

My letter to the FM referred to the other dimensions of a company like Adani Group, which your Ministry cannot ignore, but my emphasis in this letter is on the financial side.

I suggest that, before your Ministry rushes headlong into more and more auctions, you should consult Secretary (Financial Services), RBI and other wings of the government to formulate a strategy. I am marking copies of this letter to Cabinet Secretary and others for information.

Regards,

Yours sincerely,

E A S Sarma

Former Secretary to GOI

Visakhapatnam


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