Coal is the most important fossil fuel in India and accounts for approximately 55% of India’s energy needs. Coal has contributed significantly to India’s industrial heritage ever since the introduction of steam locomotives in 1853, and continues to do so, due to India’s ever increasing energy consumption and needs. Through a sustained programme of investment and greater thrust on application of modern technologies, it has been possible to raise the production of coal from about 70 million tonnes at the time of nationalisation in the early 1970’s to about 478.18 million tonnes in 2007. It is envisaged that India’s current coal production of over 450 million tonnes would go over 600 million tonnes by 2012, requiring an investment outlay of upto approximately $15 billion.

Legislative History

Coal mining was brought under the public sector between 1971- 1973 with the passing of the Coal Mines (Nationalisation) Act, 1973. Nationalisation was done in 2 phases; the first with coking coal mines (by The Coking Coal Mines (Nationalisation) Act, 1972, under which coking coal mines and coke oven plants other than those with the Tata Iron & Steel Company Limited and Indian Iron & Steel Company Limited, were nationalised in May, 1972) and then with non-coking coal mines in 1973, with the enactment of the Coal Mines (Nationalisation) Act, 1973 (hereafter the “1973 Act”), which continues to be the Central legislation determining the eligibility of coal mining in India. The 1973 Act categorically states that “no person, other than the central government or a government company or a corporation owned, managed or controlled by the Central Government shall carry on coal mining operation in India, in any form.”

India’s Coal Reserves

As a result of exploration carried out up to the depth of 1,200m, as on April 1 2009, India has estimated hard coal reserves of around 267.21 billion tonnes – one of the richest in the world, of which 105.82 billion tonnes are proven.

Nodal Authority

The Ministry of Coal has the overall responsibility of determining policies and strategies in respect of exploration and development of coal and lignite reserves and sanctioning of important projects. These key functions are exercised through its public sector undertakings, namely, Coal India Limited (“CIL“) and Neyveli Lignite Corporation Limited (“NLC“) and Singareni Collieries Company Limited (“SSCL“).

Coal India Limited

The Coal Mines Authority Ltd. (“CMAL“) was set up in 1973 to operate the nationalised non-coking coal mines. In September 1975, the nationalised coal industry was restructured with the establishment of CIL. CIL now has eight subsidiary companies. At present, with its monopolistic position, CIL accounts for 85% of coal production, followed by SCCL (8.5%), and captive producers (6.5%).

Private Sector Investment

The 1973 Act was amended in 1976 terminating all mining leases on coal held by private lessees to allow (a) captive mining by private companies engaged in the production of iron and steel, and (b) sub-leasing to private parties of isolated small pockets not amenable to economic development and not requiring rail transport.

In 1993, the 1973 Act was further amended to allow captive coal mining in the private sector for power generation, washing of coal obtained from a mine and such other end uses as notified by the Central Government from time to time. Coal gasification and coal liquefaction have also been notified as specified end uses.

In March 1996, the Central Government allowed captive mining of coal for production of cement. The restriction of captive mining does not apply to state-owned coal mineral development undertakings. Commercial coal sales can legally only be undertaken by and through public sector coal companies (and their subsidiaries) and coal produced from captive mines by the private sector cannot be sold on the open market.

In February 1997, the cabinet approved a proposal to amend the 1973 Act to allow non-captive coal mining, which met with stiff opposition from trade unions, who expressed concerns that pre-nationalization ills like unscientific mining practices, environmental degradation and labour exploitation, would re-occur. Due to this, it took at least three years for the Bill to be re-formulated after taking care of the concerns of the trade unions, and it was introduced in Parliament in 2000. The Bill is, however, yet to be passed.

Foreign Direct Investment

Currently, foreign direct investment has been allowed upto 100% under the automatic route as follows:

  • Coal and lignite mining for captive consumption by power projects, iron, steel and cement units and other eligible activities permitted under and subject to provisions of the 1973 Act;
  • Setting up coal processing plantslike washeries subject to thecondition that the Indian company will notundertake coal mining and will not sellwashed coal or sized coal from itscoal processing plants in the openmarket. In addition, the Indian company will supply the washedor sized coal to those entities who aresupplying raw coal to coal processing plants for washing or sizing.

Allocation of Coal Blocks

Under the existing provisions of the 1973 Act, coal blocks for captive mining are allocated to public/private companies engaged inmanufacture of iron and steel, generation of power, coal washery and production of cement. Allocationof captive mining blocks is decided by an inter ministerial and inter governmental body known as the Screening Committee, headed by the Secretary,Ministry of Coal. Though there are detailed guidelines for the allocation of coal blocks (as well as for blocks for underground coal gasification mines), it is now proposed to introduce an auction based system through competitive bidding as a selection process for allocation of coal blocks for mining for captive consumption.

As on December 31, 2009, the Ministry of Coal has effectively allocated 208 coal blocks, of which 84 coal blocks have been allocated to the power sector. So far production has commenced in only 25 blocks.

Under the captive dispensation framework, a company engaged in specific end use, viz. power, cement, washery, steel, etc. can apply for allocation of a captive coal block. Further, acompany(ies) engaged in any of the approved end-uses can mine coal from a captive block through an associated coal company formed with the sole objective of mining coal and supplying the coal on exclusive basis from the captive coal block to the end-user company(ies), provided the end-user company(ies) has at least 26% equity ownership in the associated coal company at all times. In addition, there can be a holding company with two subsidiaries, i.e., (i) a company engaged in any of the approved end-uses, and (ii) an associated coal company formed with the sole objective of mining coal and supplying the coal on exclusive basis from the captive coal block to the end-user company, provided the holding company has at least 26% equity ownership in both the end-user company and the associated coal company. Thus, in view of the permitted ownership structures, investors may consider several collaborative options and strategies within the guidelines.

General Conditions of Allocation

Coal blocks are generally awarded subject to compliance with several conditions including that:

  • the allocation is made to meet the coal requirement of the permitted end use project, and is meant for captive use in the allocate company’s own specified end use projects or that of associates/end use company(ies) in case of a mining company.
  • coal production from the captive blocks is required to commence within 36 months (42 months in case the area falls under forest land) of the date of allocation in opencast mine and in 48 months (54 months in case the area falls under forest land) from the date of allocation in underground mine.
  • in respect of fully explored blocks, the allocatee company will need to buy the geological report from the Central Mine Planning & Design Institute Limited within 6 weeks of the date of allocation.In respect of an unexplored block, the allocattee company will need to apply for a prospecting license within 3 months of the date of issue of allotment. Exploration would need to be completed and geological report prepared within 2 years from the date of issue of prospecting license.
  • in respect of explored blocks, the allocatee company would need to submit a mining plan for approval within six months.In respect of unexplored blocks, the mining plan should be submitted for approval within two years and six months from the date of issue of the letter of allocation.
  • The allocate company would also have to make its own arrangement for transportation of coal mined.

In addition to the above, the allocate company would need to approach the Central Government/concerned State Government for necessary permissions/clearances, etc., for attaining mining rights and related matters (for example, environmental clearance, forest clearance, land acquisition, etc.), a process that could take between 2 to 5 years. While building a coal mine and the accompanying infrastructure is indeed a time-consuming process, it should however be borne in mind that normative timelines for commissioning of coal blocks are far higher in India compared to international benchmarks as approvals are required at multiple stages from various agencies. The Government is considering a slew of measures and reforms to combat this, with the objective of giving faster approval to coal projects (including providing alternative coal blocks to projects that do not get environmental clearance).

It is to be noted that the Central Government periodically monitors and reviews the development of allocated blocks as well as end use plants by coal companies. Wherever delays are noticed, show cause notices for de-allocation or advisories are issued to the coal companies cautioning them to bring the coal blocks into production as per the guidelines and milestones chart. Allocation/mining lease of the coal block may be cancelled, inter-alia, if it is determined that progress of coal mining project or implementation of specified end uses is unsatisfactory, or breach of any conditions of allocation.

Mining lease

The allocatee company will be required to obtain a coal mining lease from the concerned State Governments under the Mines and Minerals (Regulation & Development) Act, 1957. State Governments can grant coal mining leases only with the previous approval of the Central Government. Before the approval of the Central Government is accorded, the allocatee mining company is required to get its mining plan for the proposed coal mining area approved from the Central Government. Coal mining leases are now granted for 20-30 years initially and can be renewed for a further period of 20 years with the previous approval of the Central Government. Coal mining leases are ordinarily subject to a ceiling of 10 sq. kms. of area.

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