Why Adani Group has placed highest number of bids in India’s coal mine auctions

India’s first commercial coal mine auctions are currently underway, with the highest number of bids placed by the Adani Group. The Gujarat-based infrastructure conglomerate led by Gautam Adani bid for as many as 12 of the 19 mines that go under the hammer. Next are the Aditya Birla Group and JMS Mining with five bids each, followed by four bids from the Naveen Jindal Group.

With these auctions, India is opening up commercial coal mining to the private sector after five decades. The sector was nationalised in the 1970s. A policy change in the 1990s allowed select Indian private sector steel, cement and thermal companies to mine coal for use in their industrial units. But the mine allotments were cancelled by the Supreme Court in 2014 on grounds that they were made arbitrarily.

In 2015, India introduced competitive auctions for coal mines, but the end-use restrictions remained: winners could only use the coal in their industrial units. This year, the government amended the law to remove these restrictions and allow commercial coal mining – that is, auction winners will now be able to mine and sell coal both domestically and globally, without any restrictions.

Unveiling the auctions in June, Prime Minister Narendra Modi described them as “historic”. He claimed business activity in the country was “normalising rapidly” after the shock caused by the coronavirus pandemic and there could not be a better time to “unshackle coal mining”.

But the government’s hopes stand belied: the mines have found few takers.

Shallow competition

Originally, the coal ministry had plans to auction 41 coal mines but the list was subsequently whittled down to 38. Technical bids – in which companies furnish details to show they meet the eligibility criteria – closed on September 29. The next day, the ministry announced it had received bids for just 23 mines.

Fifteen mines did not attract a single technical bid. Four mines fetched just one bid each. This places 19 mines out of the auction process.

Among the 19 mines that remain in contention for final financial bidding, three mines have only two bidders, five mines have three.

Concerns over shallow competition had been raised by the Jharkhand government in a suit filed in the Supreme Court in July. The state, where nine of the 38 mines are located, had said holding auctions in the middle of a pandemic would dampen participation and keep bid prices low.

Independent analysts had agreed, as reported by Scroll.in in August.

Tim Buckley, Director of Energy Finance Studies at the Institute for Energy Economics and Financial Analysis, had ruled out participation by global firms in the auctions, citing the declining corporate and financial interest in coal, given the rising concerns over its environmental and social fallouts.

As he predicted, not a single foreign firm has placed a bid.

Even domestic firms were unlikely to line up for the mines, analysts had said, particularly in a year when the economy has contracted, coal demand has plummeted, and few firms have the capital to make investments.

Poor quality of participation

The coal minister had claimed earlier in the year that commercial coal mining would “transform Indian mining sector” by bringing in foreign investment and global expertise. “Such mines would be more efficient if they are run by expert miners,” he said in an interview.

But most firms participating in the auctions lack any mining experience. On the list of the bidders are several trading companies, a construction firm, a pharmaceutical manufacturer, even a refrigerant gas filler.

As many as six bidders are new companies that were incorporated in the past year, lawyer and activist Sudiep Shrivastava pointed out in an application filed as part of a petition in the Supreme Court, which is yet to be admitted and heard.

Officially, any company can participate in the auctions, even if it has no previous mining experience – a move aimed at widening the pool of applicants. But the energy think-tank Prayas had said in feedback to the government in January: “The experience of block allocations for captive use... when many non-serious players acquired coal blocks which were never developed, should be a useful reminder in this regard.”

In the 2000s, captive coal mines were seen as part of a valuation game: marginal firms, shadowy entrepreneurs and politically-connected players acquired them as assets to leverage in the market, without any intention of actually mining them.

The think-tank emphasised that the eligibility criteria for the commercial coal mine auctions “should ensure that only serious players participate in bidding and win mines”.

But most Indian infrastructure companies have been cash-strapped and stressed in recent years, as Scroll.in has reported. Besides, coal mining is difficult terrain even for government firms other than Coal India Limited, said Rohit Chandra, an assistant professor at the Indian Institute of Technology, New Delhi, who researched India’s coal sector for his doctoral degree at Harvard.

“Winning a coal auction does not give you immediate access to a greenfield coal block,” he said. “There is still an entire ecosystem of state and mining permits, as well as rehabilitation and resettlement with all of the politics surrounding displacement that needs to be managed. Very few firms in India today have the deep pockets and risk management capabilities to go through all of this.”

Adani Group’s aggressive bidding

Which raises the question: what explains the Adani Group’s greater enthusiasm for the auctions compared to other infrastructure and mining firms?

Strikingly, in August, the chief financial officer of the group had said the group was not interested in the coal mine auctions.

Yet the group went on to place bids for 12 mines: seven bids by Adani Enterprises Limited, the group’s flagship company, three bids by subsidiary Stratatech Mineral Resources Private Limited, one bid each by subsidiaries, Adani Power Resources Limited and Chendipada Collieries Private Limited.

Questions sent to a spokesperson of Adani Group on what prompted the change of strategy have gone unanswered.

At one level, the group’s interest in these coal auctions is easy to understand.

It already has considerable experience in coal mining. It is currently the mine developer and operator of nine coal mines across three Indian states, which means government companies that hold the mining licences have subcontracted the actual mining operations to Adani.

It is also India’s largest thermal power producer in the private sector, with four existing thermal power projects and three upcoming projects. Currently, Adani Power meets its coal requirements through both domestic purchase from the government-run Coal India Limited as well as through imports.

Winning the auctions would give the Adani Group direct access to coal reserves, which it could use to fire its thermal power stations, said an analyst who studies the sector but did not want to be identified.

The coal mines would not only enhance Adani’s fuel security, they would add to its portfolio of assets. This would help the group raise more capital from domestic banks, if not international financial organisations that view coal less favourably, he said.

Unlike most other infrastructure firms which have shrunk in recent years, the Adani Group has seen a massive expansion. In a two-part series published in Scroll.in in 2019, M Rajshekhar mapped its dizzying growth in the past six years, as it expanded and diversified its businesses, acquiring a position of dominance in key sectors of the Indian economy, from thermal power, gas distribution, ports, airports, agro commodities.

A look at the financial statements of key Adani firms showed the group was not generating enough money to support its growth. Yet, it was furiously expanding by taking “larger bets on growth than other companies could have, seeking to capitalise on a set of favourable factors – including perceived proximity to political power, access to capital and a dip in fortunes of rival companies in the infrastructure space”, the report stated.

The Adani Group’s aggressive bidding in the coal mine auctions fits into this pattern. It is better placed than other companies to pick up mineral assets for cheap in a pandemic-struck economy.

Outcomes

The electronic auctions, where companies make their financial offers for the coal mines, began on November 2 and will conclude on November 9. The winners will be announced on November 11.

While the winners stand to benefit from the lukewarm participation in the auctions, larger public interest may not be served, say observers.

For one, the coal mines could be auctioned at “throwaway prices”, said the lawyer-activist Sudiep Shrivastava. “The loss due to lower bids would be incurred by the coal bearing states while Centre would sit pretty by obliging its cronies,” he said.

What adds to the concerns, he said, is that the government has retained immense discretionary power even in what is meant to be a transparent auction. Clause 5.12.2 of the tender document allows the coal ministry to “reject any Bid without assigning any reasons”.

Two, even the stated aim of increasing domestic coal production to reduce India’s dependence on imports is unlikely to be met, said Rohit Chandra, the assistant professor at IIT Delhi. “A handful of companies will participate and win coal blocks, but the real test will be if they can bring them into production in a reasonably efficient, time-bound manner,” he said. “If we see a flurry of mine openings in 2-4 years, then maybe the auctions will have been successful. But given the last half decade of delays, revisions and tepid demand in coal auctions, it is difficult to be optimistic.”

Questions emailed to the coal ministry by Scroll.in went unanswered. This article will be updated if a response is received.