Supreme Court's coal block ruling may have wider economic impact, may increase import bill

A mass cancellation of coal blocks awarded since 1993 could cost the country up to $3 billion in additional imports and hurt financial firms that have lent to the sector, broking firms said on Tuesday.

The Supreme Court ruled on Monday that the allocation of more than 200 coal blocks at the centre of a cronyism scandal was illegal. The apex court is due to decide on September 1 whether to cancel the allocations, or to impose some sort of penalty.

Analysts said a mass cancellation of the blocks would be a worst-case scenario and add to a shortage of coal for power plants. Coal is used to generate more than two-thirds of India's electricity.

Macquarie estimated in a note that complete de-allocation of the coal blocks would increase India's import bill by $3 billion.

De-allocation could also impact financial firms, Credit Suisse said, with companies such as State Bank of India and Power Finance Corp Ltd (PWFC.NS) lending some $10-$12 billion to the coal, power and steel sectors.

Shares in resource stocks fell further following a broad sell-off on Monday after the ruling, which jeopardised projects built around the blocks and threatens to exacerbate a shortage of the fuel.

Jindal Steel and Power shares fell as much as 8.1 percent, after falling 13.9 percent on Monday, while Tata Power fell as much as 4.6 percent. Some other firms rebounded, with Hindalco edging up after a 9.7 percent fall in the previous session.

Macquarie urged investors to wait for more clarity to emerge.

"The ruling creates uncertainty and has to be resolved quickly. I hope the Supreme Court gives a clear roadmap in September," said Samir Arora, a fund Manager at Helios Capital in Singapore.

The government's awards of the blocks to steel, cement and power companies has been at the centre of a scandal that media has dubbed "Coalgate", with the Comptroller and Auditor General (CAG) report in 2012 saying the underpriced sales had cost the exchequer up to $33 billion.

"The government will impress upon the Court about coal shortages, power cuts and derailment of the investment process," it said.

Power and Coal Minister Piyush Goyal said on Monday he looked forward to a resolution of the issue, which has kept the sector in limbo for several years.

The uncertainty surrounding the allocations has made it difficult for firms to develop the coal. Dipesh Dipu, partner with Jenissi Management Consultants, said only 30 of the blocks are operational with annual capacity of about 40 million tonnes.

India produced 565 million tonnes of coal in the year to March 31.

(Reuters)