India: Lowdown on Government’s Commercial Coal Mining Reforms

Taking a paradigm shift in the approach from being oriented to maximum revenue from coal to making maximum coal available in the market at the earliest, Finance Minister has introduced structural reforms in the proposed commercial mining.

Most important being the transition from old regime of rupee per tonne auction to a more specific revenue share methodology. In order to discuss the new reform, CoalMint has prepared a snippet of the modalities involved in the transformation.

1. Bid parameter:

(a) Bidders would be required to bid for a percentage share of revenue payable to the government.

(b) Floor price fixed at 4% of the revenue share.

(c) Bids accepted in multiples of 1% of the revenue share till the percentage (%) of revenue share is up to 10% and thereafter bids would be incremented in multiples of 0.5%.

Auction process:

The auction would be conducted on an electronic platform through a two stage process:

(a) Technical Bid in which the bidders are required to provide details regarding compliance with the eligibility conditions;

(b) Financial Bid comprising of: (i) the Initial Price Offer (IPO); and (ii) the Final Price Offer (FPO).

First round involves opening of IPO and ranking them on the basis of descending order for determination of the qualified bidders. Thereafter, the competent bidders eligible to participate in next round would submit their FPO.

Determination of preferred bidder

The applicable floor price for subsequent round would be the highest IPO received in the first round. Then, the participant that submits the highest FPO would be declared as the preferred bidder.

2. Payments involved in operating the coal mine

(a) Monthly payment

The successful bidder has to make monthly payments with respect to the coal produced from the mine on the basis of the FPO (% revenue share quoted) and total revenue.

The revenue share for this purpose would be determined as product of: (i) FPO (ii) quantity of coal produced during the month and (iii) price of relevant grade(s) of coal.

Illustration: Assuming that the winning bidder has quoted a revenue share of 10%, the monthly revenue share payable to the government would be estimated in the following manner:

Production in MnT
Coal Price in INR/MT
Revenue in INR Crore
Royalty and other taxes under applicable laws shall be payable additionally.

Earlier, the successful bidder had to make monthly payments for the extracted coal on the basis of FPO pursuant to which the mine was secured.

(b) Upfront Amount

The amount levied at 0.25% of the value of estimated geological reserves of the coal mine has to be paid in four equal instalments.

Value of estimated resources determined as per the product of (i) mineral resources in the coal mine, and (ii) applicable price based on coal index.

However, actual payment would be finalized based on above calculation or as per ceiling mentioned below, whichever is lower:-

3. Additional Benefits

In order to attract participation, the government has also relaxed some of the norms that were present in the previous version.

(a) Terminating end-user restriction: Earlier, only consumers with end-use ownership could bid. Now, any party can bid and sell coal in open market.

(b) Exploration-cum-production regime: Against earlier provision of fully explored coal blocks, now even partially explored blocks would be auctioned.

(c) It also permits commercial exploitation of the CBM (Coal Bed Methane) present in the mining lease area.

(d) Provision of Incentive: The successful bidder would be incentivized by way of offering rebates in revenue share in events of early production of coal than the scheduled program and the total quantity of coal consumed or sold or both for gasification or liquefaction on an annual basis.

Conclusion

Aimed at increasing the utilization of coal blocks, the latest reforms would assist in discovering market prices for the blocks and mitigate avoidable delay in its development. The measures are expected to raise participation in the coal auctions, which have not fetched satisfactory result in recent times.