Coal India increases EMD by 150% for spot-e-auctions. What are its implications?

In its latest notification issued on 4 July, Coal India Limited (CIL) has increased the earnest money deposit (EMD) amount by 150% to INR 500/t against the previous INR 200/t for its spot e-auctions.

All registered bidders are now required to deposit the revised amount of EMD for participation in the upcoming spot e-auctions of CIL and its subsidiaries.

CIL and its subsidiaries collect pre-bid non-interest bearing EMD from the prospective bidders to enable them to participate in the e-auction. The EMD amount is paid  for each lot against the respective grade. The successful bidders, after winning the bid quantity, can cancel their orders by surrendering the EMD. They can opt for this under two scenarios:

• They are unable to sell the quantity won due to poor domestic demand; or
• In case they receive coal of lower quality against the promised specifications, they can opt to cancel the booked quantities.

Reason behind revision in EMD

Deter buyers from cancelling bookings: The revision has been made to deter buyers from cancelling their bookings in the spot auctions.

After the increase in the EMD, a coal trader  will now have to deposit around INR 590/t — INR 500/t plus 18% GST — and 2-3% interest if it is financed by a third party.

When imported coal prices touched new highs in March with the onset of the Russia-Ukraine crisis, domestic coal prices also increased in line with imported. Also, more- than-usual hot summers this year led to higher coal demand which increased its prices in India.

While imported thermal coal prices have cooled off from their highs amid tepid demand from China, the onset of the monsoon has also led to domestic demand for coal turning tepid especially from the non-power sector, resulting which many bidders are cancelling the coal booked at higher prices by surrendering their EMD. They are instead participating in the upcoming auctions to book coal at lower prices. This is adding to the financial burden of CIL and its subsidiaries, thus making them raise the EMD.

Curbs on speculative bidding: As per industry participants, CIL has raised the EMD to curb manipulative practices in the bidding process and check on artificial rise of bid prices by a few players.

As per this practice, a trader who has already had coal stocks from previous auctions tends to again participate in the fresh auction just to hike the prices by bidding higher. Later, he cancels the quantity booked in the fresh auction. Due to this, prices of his old coal stock increases. Even if he loses the EMD amount, his profit margin of stocked coal from the previous auction increases once he sells at the current higher price.

Thus, raising the EMD will demotivate speculators and investors to finance the bidding process in return for sharp gains.

CIL has been undertaking reforms to make the spot auction more transparent and devoid of manipulative practices. After the single window auction that was announced in March, the hike in EMD to INR 500/t is one more step towards the same goal.