While the Coal Act appears to be well-intentioned, the haste to start with a clean slate led to some glaring omissions in the legal framework which appear to be getting addressed by the Courts.
Vishrov Mukerjee and Rohit Venkat
In August 2014, the Supreme Court cancelled 204 coal mining leases in a scathing indictment of the allocation process followed by successive governments since 1993.
Overnight, corporations in industries as diverse as power, cement and steel found themselves saddled with production units stranded without one essential element: coal. As in the case of the 2G scam, the broadsword of the Supreme Court had come crashing down, leaving questions and uncertainties in its wake.
It is commendable that the Union Government was quick to react and within two months, the Coal Mines (Special Provisions) Ordinance, 2014 (now Act) was promulgated, ushering in a new framework for auction of coal mines. However, several questions still remained unanswered.
One such issue related to compensation for prior allottees-entities, which having participated in the bidding process, were unable to secure mines once allocated to them.
Several prior allottees challenged the constitutional validity of the Coal Ordinance as well as valuation and compensation amount determined by the Nominated Authority. It was averred that the Nominated Authority failed to take into consideration cost of leasehold rights and mining infrastructure, including intangible assets integral to mining processes like environment clearances and geological reports.
However, two aspects were most glaring - limiting compensation for land to the price mentioned in the sale deeds without taking into account fair market value, and limiting compensation based on audited accounts for FY 2013-2014, five months prior to the actual cancellation and takeover of mining assets.
A recent judgment of the Delhi High Court appears to have put to rest (at least for now) some of these issues. In a batch of matters involving industries as diverse as power, steel and cement, a Division Bench of Delhi High Court has held that compensation has to be ‘just, fair and reasonable’ and not result in unjust enrichment of successful bidders. Accordingly, the High Court has directed that the fair market value of land be taken into consideration.
Similarly, for mining infrastructure, the court has held that the Coal Act provides an inclusive definition of mining infrastructure and prior allottees are permitted to claim all such elements before the Tribunal set up under the Act.
The High Court has also directed that valuation of mining infrastructure has to be done as on the date of issuance of the vesting order, i.e. on the date that the coal mine and all underlying assets were actually transferred to the successful bidders.
The judgment is important as it mandates a fair and just approach to determining compensation. While the Coal Act appears to be well-intentioned, the haste to start with a clean slate led to some glaring omissions in the legal framework which appear to be getting addressed by the Courts.
The war it seems is far from over. When the prior allottees had challenged the valuation process, the government had taken rearguard action by amending the auction terms to make the successful bidder liable for any increase in compensation on account of court orders.
While it is expected that the battle will now move to the Tribunal (and perhaps the Supreme Court), the principle of just fair and reasonable compensation ought to be respected by the government while considering the prior allottees’ claims. It should initiate a fair and transparent process where revised compensation orders are passed after hearing the prior allottees and successful bidders.
This judgment, if implemented effectively, may significantly shore up stressed balance sheets of not only affected entities but also banks and financial institutions which had financed these undertakings. Owing to reduced compensation and virtual shutdown on account of lack of coal, the affected entities’ ability to service their debt was compromised. Hopefully, they (and the banks) will finally see the colour of money almost three years after the Supreme Court judgment.
Vishrov Mukerjee is Partner, J Sagar Associates and Rohit Venkat is an Associate at J Sagar Associates.The authors' views are personal.