COAL ALLOCATION SCAM: AN ANALYSIS OF

Transcription

1 2014] COAL ALLOCATION SCAM 25 [2014] 128 SCL 25 (Mag.) COAL ALLOCATION SCAM: AN ANALYSIS OF Manohar Lal Sharma v. Principal Secretary (Writ Petition No.120 of 2012) Introduction GAURAV ARORA, ABHINAV MISHRA 1. In 1993, owing to the inability of the public sector undertaking, Coal India Limited ( CIL ) meeting the power-related requirements of the nation, an Amendment to section 3(3) of the Coal Mines (Nationalization) Act, 1973 ( CMN Act ) was made, denationalizing the coalmine operation sector by allowing private sector participation 1. Thereafter, India witnessed a surge of coal block allocations which were devoid of auctions, made by the Government to the public and private sector companies (including consortiums and joint ventures) amounting to a total of 218 allocations until In 2010, the Mines and Minerals (Development & Regulation) Act, 1957 ( MMDR Act ) was amended to introduce allocation of coal blocks by auction through the process of competitive bidding. Hansraj Ahir, MP from the Bharatiya Janata Party (BJP), blew the whistle over the alleged illegality of the aforementioned coal block allocations. His claims were further strengthened by the Comptroller & Auditor General s report to the Parliament in 2012, citing, inter alia, the volume of losses suffered by the State exchequer as a result of such allocations. Thereafter, writ petitions in the nature of public interest litigation (PIL) were filed principally by one Mr. Manohar Lal Sharma and another by Common Cause in the Supreme Court ( Court ) wherein the aforementioned allocation was the subject matter of litigation. The Court in an order dated September 24, 2014 ( Consequence Proceedings ) in Manohar Lal Sharma v. Principal Secretary 2 ( Coal Block Allocation Case ) quashed 214 of 218 allocations. The principal basis of this order was the judgment ( Judgment ) delivered in the same case on August 25, 2014 wherein the Court held, inter alia, that the allotments of coal blocks made by the Government were arbitrary and illegal. The pronouncements of the Court made in the Coal Block Allocation Case have far-reaching economic, political and legal consequences. These have been explored in this article. 1. By way of the amendment made in 1993 to section 3(3)(a)(iii) of the Coal Mining (Nationalization) Act, 1973, provision was made for companies engaged in (1) the production of iron and steel, (2) generation of power, (3) washing of coal obtained from a mine, or (4) such other end use as the Central Government may, by notification specify, to engage in coal mine operations in India. 2. Writ Petition No.120 of 2012, dated SEBI AND CORPORATE LAWS DECEMBER 1 - DECEMBER 14,

2 26 SCL - MAGAZINE [Vol. 128 Judgment Declaring Coal Block Allocations Illegal (Dated August 25, 2014) 2. In order to analyze the order of the Court in the Consequence Proceedings (which led to the eventual cancellation of the 214 coal block allocations), it is imperative to first discuss the judgment delivered on August 25, 2014, which principally rendered the allocations illegal, forming the basis of the order. During the hearing before the three Judge Bench of the Court two questions were raised, namely, first, whether the Central Government was empowered to carry out the coal block allocations by virtue of the CNM Act and the MMDR Act and second, assuming that it was so empowered, whether the allocations made by it were done by following a legal process? The crux of the submissions by the learned Attorney General, Mr. Goolam E. Vahanvati and the counsels for the intervening parties, Mr. Harish Salve and Mr. K. K. Venugopal, was that the Central Government was empowered to make allocations of coal blocks by virtue of sections 1A 3 and 2 4 of the CMN Act and MMDR Act respectively. These provisions, they contended, vest the powers of regulation and development of coal mines in the Central Government. The Attorney General further submitted that section 1A of the CMN Act regulates the allocation of coal blocks by acting as the procedure to be followed under section 3(3) which states, inter alia, the types of persons eligible to carry on coal mine operations in India. These contentions were vehemently rebutted by Mr. Prashant Bhushan, learned counsel for Common Cause. He argued that the CMN Act could not empower the Central Government to call applications, select and allocate coal blocks, and, it was, in fact, the MMDR Act which governed the procedure of coal block allocations. He supported his argument by stating that the reason why amendment to section 11A of the MMDR Act was brought in 2010 (which provided for allocation of coal blocks by auction through competitive bidding) was because it was this Act which provided for the procedural regime of coal block allocations. The Court, concurring with Mr. Bhushan, held that the power to make coal block allocations did not vest in the Central Government and that such an administrative route adopted by it was illegal. Relying on State of Assam v. Om 3. Declaration as to expediency of Union Control (1) It is hereby declared that it is expedient in the public interest that the Union should take under its control the regulation and development of coal mines to the extent hereinafter provided in sub-sections (3) and (4) of section 3 and sub-section (2) of section 30. (2) The declaration contained in sub-section (1) is in addition to, and not in derogation, of the declaration contained in section 2 of the Mines and Minerals (Regulation and Development) Act, 1957 (67 of 1957 ). 4. It is hereby declared that it is expedient in the public interest that the Union should take under its control the regulation of mines and the development of minerals to the extent hereinafter provided. SEBI AND CORPORATE LAWS DECEMBER 1 - DECEMBER 14,

3 2014] COAL ALLOCATION SCAM 27 Prakash Mehta 5 and Tara Prasad Singh v. Union of India 6, the Court in answer to the first question stated as follows: In view of the foregoing discussion, we hold, as it must be, that the exercise undertaken by the Central Government in allocating the coal blocks or, in other words, the selection of beneficiaries, is not traceable either to the 1957 Act (MMDR Act) or the CMN Act. No such legislative policy is discernible from these two enactments. Insofar as Article 73 of the Constitution is concerned, there is no doubt that the executive power of the Union extends to the matters with respect to which the Parliament has power to make laws and the executive instructions can fill up the gaps not covered by statutory provisions but it is equally well-settled that the executive instructions cannot be in derogation of the statutory provisions. The practice and procedure for allocation of coal blocks by the Central Government through administrative route is clearly inconsistent with the law already enacted or the rules framed. In response to the second question before it, the Court held that the allocations made by the Central Government not only amounted to largesse, but were also arbitrary, illegal and devoid of application of mind. The Central Government allotted the coal blocks by way of two methods, namely, (1) through the Screening Committee, and (2) through government dispensation route (i.e., the allocations made post-2001 by the Ministry of Coal). The Court, by elaborately analyzing 36 relevant minutes of meetings of the Screening Committee, came to the conclusion that since -firstly, no comparative (or otherwise) assessment of the merit of the applicants had been carried out before the allocation of the coal blocks to them; secondly, no uniform application of norms for allocation had been adopted by it; and thirdly, no advertisement for application had been made so as to allow applicants to be on a level-playing field, thereby rendering the criteria of allocation apparently subjective, instead of having sufficient objective parameters, the allocations made by the Screening Committee were arbitrary and illegal. Moreover, allocations made to consortiums, State public undertakings and joint ventures were held to be in contravention of section 3(3)(a)(iii) of the CMN Act on grounds of ineligibility. Insofar as the allocations made through the Government Dispensation Route were concerned, the Court held them to be illegal too, as per the CMN Act. It made the following observations: To sum up, the entire allocation of coal block as per recommendations made by the Screening Committee from in 36 meetings and the allocation through the Government dispensation route suffers from the vice of arbitrariness and legal flaws The Screening Committee has never been consistent, it has not been transparent, there is no proper application of mind, it has acted on no material in many cases, relevant factors have seldom been its guiding factors, there was no transparency and guidelines have seldom guided it. On many occasions, guidelines have been honoured more in their breach. There was no objective criteria, nay, no criteria for evaluation of comparative merits. The approach had been ad hoc and casual. There was no fair and transparent procedure, all resulting 5. [1973] 1 SCC [1980] 4 SCC 179. SEBI AND CORPORATE LAWS DECEMBER 1 - DECEMBER 14,

4 28 SCL - MAGAZINE [Vol. 128 in unfair distribution of the national wealth. Common good and public interest have, thus, suffered heavily. Hence, the allocation of coal blocks based on the recommendations made in all the 36 meetings of the Screening Committee is illegal. 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. Consequence proceedings leading to cancellation of allocations (Order dated September 24, 2014) 3. The Judgment, holding the allocation of coal blocks as illegal and arbitrary, was bound to entail grave consequences for the nation. The question as to the practical outcome of the Judgment was thus left open for hearing. In the affidavit filed by the Union of India prior to the hearing, it was stated that there were 40 coal blocks from which coal was actually being mined (also comprising of 2 coal blocks allotted to Ultra Mega Power Projects which were not held to be illegal in the Judgment). Furthermore, it was stated that there existed 6 additional coal blocks which had obtained Mine Opening Permission from Coal Controller s Organization (under rule 9 7 of Colliery Control Rules, 2004), and were set for production of coal with virtually immediate effect. The pertinent question before the Court, therefore, was whether to cancel all of the 214 allocations, (including the above mentioned 44, except those excluded by the Judgment 8 ) or to allow the 44 allocations which had begun operations/were on the verge of beginning operations, to continue? The crux of the Attorney General s submission was that the Union of India was fully prepared to face the socio-economic consequences of cancellation if these were to take place. He submitted specifically that, firstly, even if the above mentioned 44 allocations were cancelled, the Central Government could very well ensure the continuance of the coal extraction from those blocks through CIL, which would take over the activities from the allottees after a certain period of time; and secondly, that the allottees of coal blocks should be directed to pay a fine of Rs. 295 per metric ton of coal extracted starting from the date of extraction [calculated on the basis of the report of the Comptroller and Auditor General (CAG), based on the loss caused to the exchequer as a result of the illegal and arbitrary coal block allotments up to 2010]. 7. Requirement of prior permission to open a coal mine, seam or section of a seam. (1) No owner of a colliery shall open a coal mine, seam or a section of a seam without the prior permission in writing of the Central Government. (2) No owner of a colliery shall also commence mining operations in a colliery or seam or a section of a seam, in which the mining operation has been discontinued for a period exceeding one hundred and eighty days, without the prior permission in writing of the Central Government. 8. The Court in the Consequence Proceeding, stated that.. it is made clear that the judgment delivered on 25th August, 2014 does not concern lignite blocks at all and their allotments are not covered by the said judgment.. SEBI AND CORPORATE LAWS DECEMBER 1 - DECEMBER 14,

5 2014] COAL ALLOCATION SCAM 29 In response to the submissions of the Attorney General, Mr.Venugopal, appearing on behalf of Coal Producers Association (intervener), brought out a 4- pronged argument highlighting the possible detrimental outcome of the cancellation of all coal blocks - firstly, discussing the economic impacts, he stated that there would be an adverse impact on the economy of the country as the government was not in a position to supply the required amount of coal through CIL, or meet very high standards of coal quality. He stated that as many as 10 coal-fired power plants had been shut down recently due to the shortage of coal, which paved the way to inflation of costs of power and greater import of coal. He further mentioned that total monetary investments to the tune of Rs lakh crores had been made in 157 coal blocks and about Rs.4 lakh crores in the end-use plants, which stood to go bad upon cancellation of the blocks. He also mentioned that such cancellation would put the jobs of almost 10 lakh people in jeopardy. Even the banks and financial institutions, he stated, would be at a severe loss due to having lent money in connection with the coal blocks. Secondly, while discussing the administrative problems associated with the cancellation, he asserted that it would take anywhere around 7 to 8 years to put the whole process of coal extraction back to where it was at present, due to the administrative inefficiencies in the country and the lack of enthusiasm among the investors, which elongated the process of auction. Thirdly, discussing the social impacts, he mentioned that the allottees of the coal blocks had made significant contributions not only by exercising their willingness to operate coal mines in the places where CIL itself did not wish to, but had also invested significantly as a part of their corporate social responsibility in the form of playgrounds, residential colonies, water facilities, etc., and had led to the creation of lakhs of jobs. The cancellation would put a halt to such investment and lead to the regression of such areas. Fourthly, he mentioned that some of the coal blocks which had not yet begun operations had failed to do so owing to the administrative process such as the clearances required from various ministries, which took a long time. He stated that instead of being made to suffer for the inefficiency of the administration, the peculiarities of each one of cases of allotment should be examined by Committee set-up by the Court and they should be treated in accordance with the principles of natural justice. He also argued against the imposition of the fine of Rs.295 per metric tonne of coal extracted, on the ground that it was arbitrary and incorrect. 3.1 On the principles of Natural Justice - The Court, in response to the plea of hearing of each and every allottee, stated that the basis of cancellation of the allotments was the illegal and arbitrary process used in allotting the same and, therefore, such re-examining of each case would be redundant and would also amount to reopening of the Judgment, which could not be permitted. Also, creation of a Committee was out of question as at the given juncture, the Court could neither have called for nor needed to call for an inquiry. The Court further mentioned that various States and three intervening parties, namely, Coal Producers Association, Sponge Iron Manufacturers Association and Independent Power Producers Association of India, were also heard and, therefore, it SEBI AND CORPORATE LAWS DECEMBER 1 - DECEMBER 14,

6 30 SCL - MAGAZINE [Vol. 128 would be incorrect to say that the bulk (if not all) of the parties had not been heard. Reiterating on the point of natural justice, the Court observed as under: Our judgment highlighted the illegality and arbitrariness in the allotment of coal blocks and these consequence proceedings are intended to correct the wrong done by the Union of India; these proceedings look to the future in that by highlighting the wrong, it is expected that the Government will not deal with the natural resources that belong to the country as if they belong to a few individuals who can fritter them away at their sweet will; these proceedings may also compensate the exchequer for the loss caused to it On the cancellation of 172 coal blocks - Insofar as the coal block allotments, which were not a part of the 46 blocks which were proposed to be saved by the Attorney General, were concerned, the Court held that it was wholly irrelevant as to what stage of proximity they were with regard to production of coal. Their allotment was illegal and, therefore, liable to be quashed. It observed as follows: As far as the first category of coal block allotments is concerned, they must be cancelled (except those mentioned in the judgment). There is no reason to save them from cancellation. The allocations are illegal and arbitrary; the allottees have not yet entered into any mining lease and they have not yet commenced production. Whether they are 95% ready or 92% ready or 90% ready for production (as argued by some learned counsel) is wholly irrelevant. Their allocation was illegal and arbitrary, as already held and, therefore, we quash all these allotments. 3.3 On the cancellation of the remainder of 44 coal blocks - Treating the 46 blocks that could be saved, at par with the rest 172, the Court held that they too would be liable to be quashed with the exception of 4 blocks in total. However, having regard to the submission of the Attorney General, that the Central Government would need some breathing time to get things in order and undertake the activities at the abovementioned 44 coal blocks, and also noting that the allottees would also require some time to wind up the activities at the coal blocks, the Court pronounced the date of cancellation in respect of these 42 blocks to be March 31, 2015 (6 months from the date of the order). It stated as follows: Learned Attorney General identified 46 coal blocks that could be saved from the guillotine, since all of them have commenced production or are on the verge of commencing production. As these allocations are also illegal and arbitrary they are also liable to be cancelled. However, the allotment of three coal blocks in Annexure 1 is not disturbed and they are Moher and Moher Amroli Extension allocated to Sasan Power Ltd. (UMPP) and Tasra [allotted to Steel Authority of India Ltd. (SAIL)], a Central Government public sector undertaking not having any joint venture). As far the 6 coal blocks mentioned in Annexure 2 are concerned, the allotees have not yet commenced production. They do not stand on a different or better footing as far as the consequences are concerned. These allotments are also liable to be cancelled. The allocation of the Pakri Barwadih coal block (allotted to National Thermal Power Corporation (NTPC), being a Central Government public sector undertaking not having any joint venture) is not liable to be cancelled. SEBI AND CORPORATE LAWS DECEMBER 1 - DECEMBER 14,

7 2014] COAL ALLOCATION SCAM On the fine imposed on the allottees - The Court, while concurring with the figure mentioned by the Attorney General on the basis of the CAG Report, i.e., Rs. 295 per metric tonne of coal extracted starting from the date of extraction, stated that in such matters as the one at hand, it is difficult to arrive at a mathematically precise figure and, therefore, Rs.295 per metric tonne of coal was accepted. It further mentioned that the coal which would be extracted hereinafter, till the period of March 31, 2015, would attract the same amount of penalty. Conclusion 4. The landmark order dated September 24, 2014 reinforces the belief of fiat justitiaruatcaelum 9. It upholds the right of the public towards public property and protects the public s money from being pocketed by a few rich, powerful and shady persons and organizations. While it brings along greater transparency and certainty in the State, it also carries the length of various grave legal, social and economical consequences which would have to be resolved by the Legislative, Judicial and Executive bodies of the country without further ado. Firstly, while the fines as per the CAG s Report, inspired from the losses it has incurred, have been solely levied on the allottees, the legal or financial liability of the UPA and the NDA Governments (including the then-prime Minister, Dr. Manmohan Singh), who have been in power during the periods of the disputed coal block allocations, has not been determined. The Court should have considered the strong possibility of collusion among the Government officials and between them and the private corporations, at least to the extent of deciding the fines to be imposed, regardless of the fact that the question of collusion was not raised in the writ petition (as it would still be a relevant fact). Secondly, as a corollary to the first consequence, the Coal Block Allocation case necessitates that in the future, in acquiring public resources from the Government, one would have to take proper legal precaution as even if it is the government authority which is primarily at fault for the allocation of a public resource to a private individual, the private individual would be made to compensate for any losses caused to the State as a result thereto. Thirdly, even though legal justice to the public appears to have been done, yet such apparent legal justice may come at the cost of compromised economic justice. All the stakeholders involved - be it the Government, private companies, investors or banks and financial institutions, will in all likeliness bear the financial brunt of this order. It is estimated that at the given rate, in the absence of timely action by the Central Government and its authorities in rectifying the situation, the Coal Import Bill might witness an inflation of 3 billion US dollars. Immediately after the Judgment on August 25, 2014, the stock market witnessed a massive downward movement, especially in respect of the stocks 9. Let justice be done even though heavens may fall. SEBI AND CORPORATE LAWS DECEMBER 1 - DECEMBER 14,

8 32 SCL - MAGAZINE [Vol. 128 of steel, cement and power companies (although it soon thereafter recovered) 10. Insofar as the banks and financial institutions are concerned, SBI and IDBI, among other banks and institutions, stand to possibly lose Rs. 50,000 crores and Rs.2,000 crores as a result of this order 11. Fourthly, this order is not consistent with the current Make in India ideology being floated by Prime Minister, Mr. Narendra Modi for the reason that the multitude of losses which would be suffered by various stakeholders would negatively affect the investor s sentiment in India, thus shaking its faith in the stability of the republic. Lastly, what is keenly awaited is the action of the Central Government in execution of this Court order. While the Court, placing faith in the Government s claims of being capable of handling the situation, has left it to them to take further action, it will have to be seen as to what actions it takes in the existence of only market-driven forces and no definitive Court directions. Excessive delay in undertaking of the coal blocks would impact the socio-economic status of the country. Also, allocation to those companies which are currently the allottees, and would also be eligible under section 3(3)(a)(iii) of the CMN Act to operate coal mines, should ideally be given the coal blocks, as that also entails an opportunity to recover the amount of money lost. However, as per the current law, since open auction must take place, the scope of economic justice which can be done to the innocent allottees also remains to be seen. Also, what is uncertain is the period when the auction for the 44 coal blocks shall take place C SEBI AND CORPORATE LAWS DECEMBER 1 - DECEMBER 14,