De-coding Commercial Mining in India

India while being the world’s fourth largest country in terms of availability of coal reserves, still imports around 240 million tonnes (mt.) of coal valued at about ₹1.7 lakh crore, each year. A key raw material for steel, coking coal, is imported to meet almost the entire demand, as the domestic supply of high-quality coking coal is not adequate to meet the burgeoning demand.  

While the share of renewable energy in India’s energy basket is on the rise, coal-fired plants still generate 72% of India’s electricity. Due to high demand, the allocation of coal mines has often courted controversies. Accordingly, based on an incriminating CAG Report indicating less than honourable coal allocation, the Hon’ble Supreme Court vide its order dated August 25, 2014, read with its order dated September 24, 2014 ordered the cancellation of allocation of 204 coal mines. 

In 2015 Government of India enacted the Coal Mines (Special Provisions) Act, 2015 (CMSP Act), which provided the mechanism to auction and/or allot coal and lignite mines under the provisions of the Act. Thereafter, the Press Note 4 of 2019, issued by the Central Government, amended FDI Policy 2017, to permit 100% FDI under automatic route in coal mining activities, including associated processing infrastructure subject to the Act and other Applicable Laws, for sale of coal.  

Subsequently, the Mineral Laws (Amendment) Act, 2020 (“Act”) was notified on March 13, 2020, with effect from January 10, 2020 to amend the Act so as to permit auction of Coal Mines for own consumption, sale or for any other purpose as may be determined by the Government. 

With coming into effect of Mineral Laws (Amendment) Act, 2020, the government has effectively ended state-owned Coal India Limited’s monopoly over mining and selling of coal. The Centre last week launched the auction of 41 coal mines, which is being touted as a significant step towards making India self-reliant in the energy sector. According to the Coal Ministry, the 41 mines opened for auction now can hit a peak production of 225 mt in 2025-26, substantially cutting the import bill. 

Before beginning to talk about the newly permitted commercial mining in India, a bit of context to the build-up to commercial mining in India. 

Pertinent to note here that the nationalisation of call mines was done in two phases, from 1971-1973, the first with the coking coal mines in 1971-72 and then with the non-coking coal mines in 1973. While three legislations were enacted between 1971-73, to commence the process of nationalisation of coal mines, the nationalisation of all coal mines was completed in May 1973 with the enactment of the Coal Mines (Nationalisation) Act, 1973. 

Post-liberalisation in 1991, in order to cater to the increasing energy demand, the government in 1993 decided to allocate coal mines to various players for captive consumption or own use with a bar to sell the coal in the market. 

With the power sector reforms of 2003, resulting in significant growth of the power sector, the demand for Coal increased manifold exerting pressure on the state-run Coal India Limited, forcing the govt to import coal to meet demands of the domestic power sector. As the demand for coal progressively increased with every year, by 2012 there was a 20% demand-supply gap. Enactment of a number of legislations like the Land Acquisition Relief and Rehabilitation Act, Forest Rights Act posed a great challenge to further expansion of coal mines. 

The Cabinet Committee on Economic Affairs (CCEA) on 17th May 2017 cleared the New Coal Linkage Policy known as SHAKTI or the Scheme to Harness and Allocate Koyla (Coal) Transparently in India. The Policy aimed to provide coal linkages to power plants which lack fuel supply agreements (FSAs), through coal auctions. 

Thereafter, in early 2018, Cabinet Committee on Economic Affairs permitted entry of private firms in commercial coal mining in the country. In April 2018, The Ministry of Coal launched UTTAM (Unlocking Transparency by Third Party Assessment of Mined Coal) Application for coal quality monitoring. 

Commercial Mining 

Commercial mining allows the private sector to mine coal commercially without placing any end-use restrictions. The private firms have the option of either gasification of the coal or exporting it. They can also use it in their own end-use plants or sell them in the markets. The government expects more than Rs 33,000 crore of capital investments over the next five to seven years in the sector.  

Further, with 100 percent foreign direct investment allowed in the coal sector, global companies can also participate in the auctions. The complete freedom to decide on sale, pricing, and captive utilisation are expected to attract many private sector firms to participate in the auction process.  

Auction Conditions Likely To Foster Private Sector Interest 

In a departure from the previous coal allocation policy and practices the govt. has in fact allowed a number of relaxations under the new regime. Some of the relaxations are as follows: 

1. Removal of restriction on end-use of coal:  The auction conditions remove end-use restrictions on the use of coal mined by companies acquiring coal mines through auctions. Companies will now be allowed to carry on coal mining operations for own consumption, sale or for any other purposes, as may be specified by the central government.
     

2. Eligibility for auction of coal and lignite blocks: To participate in the auction of coal and lignite blocks, the companies need not necessarily possess any prior coal mining experience in order to participate. Further, the competitive bidding process for auction of coal and lignite blocks will not apply to mines considered for allotment to: (i) a government company or its joint venture for own consumption, sale or any other specified purpose; and (ii) a company that has been awarded a power project on the basis of a competitive bid for tariff. 

3. Composite license for prospecting and mining: In the present scenario, separate licenses are provided for prospecting as well as mining of coal and lignite, namely prospecting license, and mining lease, respectively.  Prospecting involves exploring, locating, or finding mineral deposits. There will now be a composite license providing for both prospecting and mining activities.
     

4. Non-exclusive reconnaissance permit holders to get other licenses: Currently, the holders of non-exclusive reconnaissance permit for exploration of certain specified minerals are not entitled to obtain a prospecting license or mining lease.  Reconnaissance is preliminary prospecting of a mineral through certain surveys.  The Act provides that the holders of such permits may apply for a prospecting license-cum-mining lease or mining lease. This will apply to certain licensees as prescribed in the Act.
     

5. Transfer of statutory clearances to new bidders: The Act provides that the various approvals, licenses, and clearances given to the previous lessee will be extended to the successful bidder for a period of two years.   During this period, the new lessee will be allowed to continue mining operations.  However, the new lessee would need to obtain all the required clearances within this 2 years period.
     

6. Advance action for auction: Under the MMDR Act, mining leases for specified minerals (minerals other than coal, lignite, and atomic minerals) are auctioned on the expiry of the lease period, however now the state governments can take advance action for auction of a mining lease before its expiry. 

What Govt. Gains in the Bargain 

The new methodology for coal mine auctions will entail reduced upfront payment, and the bidders will be required to bid for a percentage share of revenue payable to the government. 

The floor price shall be 4 percent of the revenue share. Bids would be accepted in multiples of 0.5 percent of the revenue share till the percentage of revenue share is up to 10 percent; and thereafter, the bids would be accepted in multiples of 0.25 percent of the revenue share. There will be a 50 percent rebate to the mine owners in the revenue share they pay to the state, in case of early production,” the coal ministry said in a statement. 

It expected that commercial mining of coal would help tap into the domestic reserves and increase the availability of coal in the Indian market at much cheaper rates making India less dependent on imports. 

Private sector involvement is likely to realise Rs.33,000 crore worth of capital investment in the next 5 years. If the private investments flow in as expected, it will boost the economic activity within the country and play an important role in job and income creation. 

Besides, higher production and surplus availability of coal may lead to a fall in its prices, which may ultimately reduce the cost of electricity consumed by the households and industries.  

Alternate View 

India’s energy mix is already shifting towards cleaner renewables. The cost of producing power through cleaner fuels has been steadily falling as compared to coal and global players are seen to be shying away from polluting fuel. 

India as we know has committed to ensuring that fossil fuels shall contribute no more than 60% of its energy production by 2030 as per the 2015 Paris Agreement. Therefore, companies seeking blocks would need to comply with existing environmental provisions and in the backdrop of diminishing demand for fossil fuel, climate commitments, environmental compliance cost and the high cost of generating electricity using coal, the private sector interest could be little cautious initially although we feel that given the relaxations there will be a strong private sector interest in mid to long-term. 

Conclusion 

India’s developing economy is an energy guzzler and till such time that the renewable energy capacity is expanded, coal will remain a necessary evil and the present reforms are a step forward in becoming self-reliant in meeting the country’s energy needs.