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INDEX OF CONTENTS

Chapter/Para

No.

Contents Page

Preliminary i ii

Abbreviations iii iv

Executive Summary v xvii

Chapter I Introduction 1 2

Chapter II Overview of the Coal Sector 3 6

2.1 History 3

2.2 Types and Uses of coal 3

2.3 Size of the Coal Market 3 42.3.1 Coal Reserves 3 4

2.3.2 Demand 4 5

2.3.3 Supply 5 6

2.3.4 Imports 6

Chapter III Regulatory Overview 7 26

3.1 3.3 Major legislations, Policies, Practices 7 8

3.4 Constitutional Scheme 8

3.5 Overview of the major legislation that have or are

likely to have an adverse effect on competition

8 28

3.5.1 Mines and Minerals (Development & Regulation) Act

1957, Amendment Act 2010, Amendment Bill 2011,

and Mineral Concession Rules 1960

8 11

3.5.2 Coal Mines (Nationalization) Act 1973, Notifications,

Amendment Bill 2000

11 13

3.5.3 The Coal-Bearing Areas (Acquisition and

Development) Act, 1957

13 14

3.5.4 Colliery Control Order 2000 and the Colliery Control

Rules 2004

14 15

3.5.5 Land Acquisition Act 1894 15 16

3.5.6 Environment related Legislation 16 19

3.5.7 Import Policy 20

3.5.8 New Coal Distribution Policy, 2007 20 21

3.5.9 Pricing 21 23

3.6 Competition Issues 23 28

Chapter IV Analysis & Recommendations 29 37

4.2 Inadequate data and lack of accessible data on

extractable coal reserves

29

4.3 Prohibition on private sector participation in Coal 30 31


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reconnaissance, prospecting or mining

4.4 Allotment of coal blocks, surface rights and mining

clearances

31 32

4.5 Changing environmental policies 32

4.6 Incumbency benefits enjoyed by CIL 32 34

4.7 Price Distortions 34 35

4.8 Impediments on Captive Mining 35 36

4.9 Bottlenecks for import of coal 36

4.10 Lack of adequate coordination between ministries

and agencies administering the different statutes

governing the coal sector at the Central and State

Level & Absence of a sectoral regulator

36 38

Chapter V Conclusions & Agenda for Competition Policy

Advocacy

39 44

Select Bibliography 45

Annexure A Other coal related legislation reviewed that does not

appear to have any adverse effect on competition

46 50


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PRELIMINARY

1.1 The Ministry of Corporate Affairs, Government of India, vide notification

F.No.5/15/2005-IGC/CS dated 8th June 2011, constituted a committee, namely the

Committee on National Competition Policy and Related Matters (C-NCP), for the

purposes of:

(a) Framing of a National Competition Policy (NCP)

(b) Strategy for competition advocacy with government and private sector

(c) Changes required in Competition Act for fine tuning it and

(d) Any other matter relation to competition issues

1.2 The Committee has submitted its draft report on Competition Policy and will shortly

be submitting a report on the Competition Advocacy Strategy and the proposed

changes in the Competition Act, 2002.

1.3 In order to develop a strategy for competition advocacy with the Government and the

private sector, the Committee seeks to have specific inputs and undertake evidence-

based advocacy, for which, a review of distortive provisions in policies, laws,

regulations, practices etc is required. The sector research studies aim to provide

illustrative examples of those laws, regulations and policies which either exert or have

the potential to exert anti-competitive effects on those sectors.

1.4 The studies are to be managed by the Indian Institute for Corporate Affairs. CUTSInstitute for Regulation and Competition (CIRC) is assisting IICA in this project through

specific activities.

1.5 Aequitas Legal (we, us, or our) has prepared this report for the Ministry of

Corporate Affairs at the request of CIRC. The terms of reference require a review of

legislation and policies in the coal sector in India in order to highlight those policies

and provision that affect competition and competitiveness in the sector, and

recommending changes that would promote and protect competition in the

concerned sector while balancing the social objectives sought to be achieved. The

timeline for this exercise was thirty days starting September 15, 2011.

1.6 Towards this end, we have reviewed the various legislations, Acts, Rules, Regulations,

Notifications, as well as Ministry guidelines, memorandums, and practices, that

operate on the coal sector in India, as well as reviewed relevant sector specific studies

and reports prepared by expert committees and research institutes.

1.7 Given the short time frame within which this Report was to be prepared, we have

concentrated on the major provisions and practices that have a material bearing on

the competitiveness in the coal sector, and a preliminary analysis of the issues and

recommendations based on the literature survey, have been provided. A detailedreview may be needed to further identify and analyse the effects of practices that


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impede, or may impede, competition in specific areas relating to the production,

distribution, and sale of coal.

1.8 This report has been prepared on the basis of the examination of documents publicly

available.

1.9 This report is strictly limited to the matters stated in it and does not extend, and is not

to be read as extending by implication, to any other matter. Without limiting the

generality of this statement and save as otherwise expressly indicated, this report

does not advise on, nor should it be construed as an assessment of conduct,

agreements, or practices by any of the entities referred to in the report. This report

should not be regarded as forming a legal opinion concerning any matter referred to

in it.

1.10 We would like to thank the Ministry of Corporate Affairs, the Indian Institute of

Corporate Affairs, and the CUTS Institute for Regulation and Competition for theopportunity to prepare this Report.

Adithya Krishna Chintapanti Abdullah Hussain


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ABBREVIATIONS

In this report certain frequently used words or expressions that may appear, have, for

convenience and clarity, been given the following meanings which apply generally

throughout this document unless the contrary is clearly stated:

Dates Dates are in the date/month/year format. Thus for example,09.03.2011 would mean 9

thMarch 2011.

CEPI Comprehensive Environment Pollution Index

Chapter refers to a Chapter in the various Parts of this Report

CIL Coal India Limited

CMPDIL Central Mine Planning & Design Institute Ltd.,

Contract Labour Act Contract Labour (Regulation and Abolition) Act, 1970

CPP Captive Power Plant

FSA Fuel Supply Agreement

FSTA Fuel Supply and Transport Agreement

FY Financial Year (beginning 1st April and ending 31st March)

GCV Gross Calorific Value

IEP Integrated Energy Policy Report of Expert Committee, August2006

INR or Rs. Indian Rupees

IPP Independent Power Producer

Kcal Kilo Calories

Kg Kilograms

Ltd. Limited

MCA Ministry of Corporate Affairs

MoC Ministry of Coal

MoEF Ministry of Environment and Forests

MoP Ministry of Power

MoST Ministry of Surface Transport

MT Million Tonnes

p.a. Per Annum

Pvt. Private

RBI Reserve Bank of India

ROC Registrar of Companies

Rs. or INR Indian Rupees


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SCCL Singareni Collieries Company Ltd.

Shankar Committee

Report

Report of the Expert Committee on Road Map for Coal Sector

Reforms Part I, December 2005 or Part II, October 2007

TERI The Energy and Resources Institute

TOR Terms of ReferenceU/s or u/s Under Section

UHV Useful Heat Value

w.e.f. with effect from

w.r.t. with respect to


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EXECUTIVE SUMMARY

Coal remains the primary source of fuel in India, at least for the next few decades,

contributing to over 50 per cent of Indias power supply generated from coal based power

plants. However, the industry is monopolized by a single producer due to the operation of

the Coal Mines Nationalization Act of 1973. Although a bill was introduced in Parliament in

2000 to amend the Act in order to allow private participants in the field on coal mining and

production, the bill has failed to garner the necessary support required to see it through.

Other major legislation affecting coal mining and production are the Mines and Minerals

(Development and Regulation) Act, land acquisition laws, and environment related

legislation. The policies and practices of the Ministry of Coal and Ministry of Power also

have a direct bearing on the production chain, priority of sales, price, etc. In the absence of

legislative amendments required to induct competition, the sector is vulnerable to the ill

effects in the absence of competition, viz. lack of quality technology and production

methods, lack of transparency in coal block allocations, falling production, price increases

etc. Within the last three years there have been three price increases notified by Coal India

Ltd. (the most recent on the 1st

of January 2012, resulting from a re-categorization of coal

on the GCV method) resulting in domestic prices virtually levelling with import prices.

Production on the other hand has remained largely stagnant compared to the last fiscal. The

upshot of these figures shows a projected gap of approximately 200 MT of coal by the end

of the 12th Five Year Plan.

The primary findings of this report along with the source legislation, policy, or practice, have

been tabulated and included in the following table. These include measures that have

recently been taken to promote competition in the sector whilst enhancing production as

well as those steps that may be taken to pending passage of the Coal Mines Nationalization

(Amendment) Bill of 2000:


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No. Act / Rule /

Regulation / Policy /

Practice / Issue

&

Concerned Ministry

Text of the Provision (section/clause)

Or

Sectoral Practice / Feature

Checklist Code from Annexure 3 of

the TOR &

Analysis of the Anticompetitive

Effect or Market Distortion

Recommendation/s

1. The Coal Mines

(Nationalisation) Act,

1973

Ministry of Coal

Sec.3. Acquisition of rights of owners in

respect of coal mines

(3)On and from the commencement ofsection 3 of the Coal

Mines (Nationalisation) Amendment Act,

1976 (67 of 1976)-

(a) no person, other than--

(i) the Central Government or a

Government, company or a corporation

owned, managed or controlled by the

Central Government, or

(ii) a person to whom a sub-lease,

referred to in the proviso to clause (c),

has been granted by any suchGovernment, company or corporation,

or

(iii) a company engaged in-

(1) the production of iron and steel,

A1

Grants exclusive rights to a supplier

(Ministry of Coal / CIL / SCCL) to

provide goods or services (i.e.mining, production, and sale of

coal).

A3

Limits (statutorily) the number of

firms permitted to enter the

market.

B3

Only state-owned enterprises

operate in the market. They

receive benefits or preferential

treatment not available to other

firms which have the effect of

limiting competition in the coal

sector.

Pending the passing of the Coal

Mines (Nationalisation) Amendment

Bill, 2000, other avenues permitted

under existing legislation need to beresorted to so as to increase the

number of players in the sector. The

same include

Encourage mining by StateGovernment public sector

companies;

Increase captive user industries; Captive users must be allowed to

sell incidental coal surpluses;

Group captive mines must beallowed for small end users;

Those allotted captive blocksmust work the block within astipulated period of time failing

which the allotment either stands

cancelled or a penalty is imposed.


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No. Act / Rule /


Practice / Issue

&

Concerned Ministry


Or



the TOR &



Recommendation/s

(2) generation of power,

(3) washing of coal obtained from a

mine, or

(4) such other end use as the CentralGovernment may, by notification, specify

(b) excepting the mining leases granted

before such commencement in favour of

the Government, company or

corporation, referred to in clause (a), and

any sub-

lease granted by any such Government,

company or corporation, all other mining

leases and sub-leases in force

immediately before such

commencement, shall, in so far as they

relate to the winning or mining of coal,

stand terminated;

(c) no lease for winning or mining coal

shall be granted in favour of any person

other than the Government, company or

corporation, referred to in clause (a):

The present legal regime reduces

the incentive of suppliers to

compete. Coal companies havebeen slow in adopting new

techniques or increasing the size of

equipment, the companies to

adopt modern technology to

increase productivity.


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No. Act / Rule /


Practice / Issue

&

Concerned Ministry


Or



the TOR &



Recommendation/s

Provided that the Government, company

or corporation to whom a lease for

winning or mining coal has been granted

may grant a sub-lease to any person inany area on such terms and conditions as

may be specified in the instrument

granting the sub-lease, if the

Government, company or corporation is

satisfied that-

(i) the reserves of coal in the area are in

isolated small pockets or are not

sufficient for scientific and economical

development in a co-ordinated and

integrated manner, and

(ii) the coal produced by the sub-lessee

will not be required to be transported by

rail.

2. The Coal-Bearing

Areas (Acquisition

and Development)

Act, 1957

Ministry of Coal

Sec. 11. Power of Central Government to

direct vesting of land or rights in a

Government company.

(1)Notwithstanding anything contained

in section 10, the Central Government

may, if it is satisfied that a Government

B3

State-owned enterprise/s operate

in the market/s being assessed and

receive benefit/s and preferential

treatment not available to other

The said provision must be amended

to extend the vesting of the land

acquired in pursuance of the

enactment to private players as well.


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No. Act / Rule /


Practice / Issue

&

Concerned Ministry


Or



the TOR &



Recommendation/s

thereof being the entire period for which

such a lease could have been granted by

the State Government under those rules;

and all the rights and liabilities of theCentral Government in relation to the

lease or the land covered by it shall, on

and from the date of such vesting, be

deemed to have become the rights and

liabilities of the Government company.

3. Mines and Minerals

Development and

Regulation Act, 1957.

Ministry of Mines

Sec. 11A. Procedure in Respect of Coal

and Lignite.

The Central Government may, for the

purpose of granting reconnaissance

permit, prospecting license or mining

lease in respect of an area containing

coal or lignite, select through auction bycompetitive bidding on such terms and

conditions as may be prescribed, a

company engaged in,-

(i) production of iron and steel;(ii) generation of power;

A1 , A4 , D2

Reinforces the exclusive rights

granted to government companies

to provide coal by restricting

private player participation in the

grant of reconnaissance permit,

prospecting license or mining leaseto sectors where captive mining is

allowed. Moreover, the section is

silent on the kind of coal blocks

that will be put up for auction and

the Government is empowered to

reserve coal blocks for government

This provision mirrors the captive

mining related provision of the Coal

Mines (Nationalisation) Act, 1973

[Sec 3.(a)(iii)]. It is opined that the

same would have to be amended

after the proposed Amendment Bill

of 2000 is given effect to by the

Union Parliament.

The amendment is a salutary step as

it seeks to grant coal blocks

impartially and transparently on the

basis of auctions. Further,

participating firms are likely to


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No. Act / Rule /


Practice / Issue

&

Concerned Ministry


Or



the TOR &



Recommendation/s

(iii) washing of coal obtainedfrom a mine; or

(iv) such other end use as theCentral Government may, bynotification in the Official

Gazette, specify,

and the State Government shall grant

such reconnaissance permit,

prospecting license or mining lease in

respect of coal or lignite to such

company as selected through auction

by competitive bidding under this

Action :

Provided that the auction by

competitive bidding shall not be

applicable to an area containing coal

or lignite ,-

(a)where such area is considered forallocation to a Governmentcompany or a Corporation for

mining or such other specified

end use;

(b)where such area is considered forallocation to a company or

companies. This again results in CIL

and SCCL being allocated prime

coal blocks while private

companies have to participate inan auction. With respect to the

Mines and Minerals Bill 2011,

proposed Clause 4(2) exempts

government companies from the

requirement of obtaining a

reconnaissance or prospecting

licence. This grants an unfair

advantage to companies

competing in the market, i.e. CIL

through CMPDIL, and Singareni

Collieries Ltd.

develop the block won in the

auction as soon as possible and not

delay progress has been the case

with the many coal blocks allocatedto the private sector. However, the

provision may be amended to

include public sector companies in

the bidding process, i.e. remove the

power of the Government to reserve

coal blocks for allocation to CIL and

its subsidiaries. The pro-competitive

implementation of the provision

would also depend of the scheme of

auction, which is presently being

formulated by the Ministry.


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No. Act / Rule /


Practice / Issue

&

Concerned Ministry


Or



the TOR &



Recommendation/s

5. Sectoral Issue Inadequate data and inaccessibility of

data on extractable coal reserves forprivate players.

A4

Limits the ability of some types ofsuppliers to provide a good or

service

D2

Firms in the market suffer from the

unequal application of laws or

regulations.

All the data related to coal retained

by CMPDIL should be kept in thepublic domain and only such data

which is relevant for the work of CIL

must be retained.

In those areas not covered by

Proven Reserves with Geological

Reports the private sector must be

invited participate in exploration

and mine development at their risk

partly shared with the government

on the lines of New Exploration

Licensing Policy (NELP) followed in

the oil sector.

At present detailed coal exploration

is done exclusively by CMPDIL which

is a subsidiary of CIL. CMPDIL must

be made an autonomous

organisation.


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No. Act / Rule /


Practice / Issue

&

Concerned Ministry


Or



the TOR &



Recommendation/s

6. Sectoral Issue The various advantages granted to CIL

due to nationalization in 1973 and the

incumbency benefits enjoyed by CIL overthe last 35 odd years.

B3

State-owned enterprise(s)

receiving benefits and preferentialtreatment not available to other

firms which appear to have the

effect of limiting competition in the

relevant market.

Measures must be taken to ensure

that CIL does not exploit its

dominant position.

7. Sectoral Issue

Ministry of Coal

Non Working of Coal Blocks and Mining

Licenses by CIL does not invite

cancellation.

B3

State-owned enterprise(s)

receiving any benefit(s) or

preferential treatment not

available to other firms which

appear to have the effect of

limiting competition in the relevant

market.

Legal measures should be evolved to

cancel the licenses issued earlier if

the allottee has not taken adequate

steps to bring the allotted mines to

production or in setting up end use

units.

8. Sectoral Issue

Ministry of Coal

Price Distortions B1

Limits sellers ability to set the

prices for goods or services.

B5

CILs pricing decisions are influenced

by Government policies. Eg.

Differential pricing for defence,

fertilizers and power. (We are of the

view that these sectors may figure in

the social welfare related


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No. Act / Rule /


Practice / Issue

&

Concerned Ministry


Or



the TOR &



Recommendation/s

The under-development of

transport and other infrastructure

appears reinforces the monopoly

status of the incumbent firms andreduces any potential competition.

exemptions enshrined in the

Competition Policy. To quote from

the Draft Policy , The National

Competition Policy is not dogmatic

and is mindful of appropriate

balance in matters having bearing

on social, environmental, security

and other strategic issues of national

importance; the only thing is that a

conscious view may have to be taken

but the concerned authorities in

balancing the competing

considerations. )

Freight rates of railways for

transport of coal need to be

rationalised. Alternative modes of

movement of coal be promoted forex. coastal shipping, river/canal

movement, movement of coal slurry

through pipeline etc.

9. Sectoral Issue Bottlenecks for import of coal. B5

The under-development of

Setting up of coastal power plants

based on imported coal must be


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No. Act / Rule /


Practice / Issue

&

Concerned Ministry


Or



the TOR &



Recommendation/s

rules adopted in the failed

experiment of the recent Go-No

Go and CEPI policies have added

to the uncertainty and have beenblamed for the fall in production

levels. While this is primarily an

issue concerning the removal of

bottlenecks it acts as a disincentive

for other potential suppliers to

enter and compete in the sector.


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CHAPTER I : INTRODUCTION

1.1 Coal is a combustible compact black or dark-brown carbonaceous sedimentary rock

formed from compaction of layers of partially decomposed vegetation and occurs in

stratified sedimentary deposits,1 primarily used as a solid fuel to produce electricity

and heat through combustion. The other major fuel resources are oil, natural gas,

and uranium.2 However coal is most widely spread and available fossil fuel around

the globe.

1.2 India has the fifth largest proved coal reserve in the world after the United States,

Russia, China, and Australia. Coal is the primary source of supply of commercial

energy in India and ranks third amongst the primary producers of coal. 3 78 per cent

of Chinas However, coal has the largest domestic reserve base and the largest share

of Indias energy production and consumption.4 As on June 2010, coal accounted for

82.4% of the total thermal generating capacity in India,5 representing approximately

52.4% of Indias total energy needs followed by oil and gas at 41.6 per cent.6

1.3 In India, most utilities were, and continue to be, dominated by public sector

companies. As pointed out by TERI7, in the electricity sector, government

companies/corporations account for 87% in generation (With NTPC accounting for

approximately 80%), 100% in transmission, 86% in distribution and retail supply and

93% in trading activity, while in the Oil & Gas sector the national oil companiestogether hold about 86% of Indias crude oil exploration & production, 77% of the

natural gas production, 74% of oil refining capacity, and 86% of the marketing

infrastructure.

1.4 The coal sector is no different. Coal India Limited (CIL) accounts for approximately

80-82% of the production while Singareni Collieries Company Limited (a joint venture

between the Central Government (49%) and the State of Andhra Pradesh (51%))

accounts for approximately 9.5-11.5% of Indias coal production in the 2010 fiscal.

1The Geological Survey of India, Coal.http://www.portal.gsi.gov.in/portal/page? _pageid=

127,721708&_dad=portal&_schema=PORTAL, Last accessed on 01.10.2011.2

Report of the Expert Committee on Road Map for Coal Sector Reforms, Part I, Ministry of Coal,

Government of India, December 2005, p.6 . http://www.coal.nic.in/expertreport.pdf, Last accessed on

03.10.2011.3

Coal India Limited, Draft Red Herring Prospectus, October 26, 2010, p. 54.

http://www.sebi.gov.in/dp/coaldrhp.pdf, Last Accessed on 05.10.2011.4

Supra n.2, p.6.5

Supra n.3.6

Supra n.3.7 Competition in Indias Energy Sector, Final Report, TERI, New Delhi, June 2007, p. xix,

http://www.cci.gov.in/images/media/completed/5teri_20080508111155.pdf, Last accessed on22.09.2011.
http://www.portal.gsi.gov.in/portal/page?%20_pageid=%20127,721708&_dad=portal&_schema=PORTALhttp://www.portal.gsi.gov.in/portal/page?%20_pageid=%20127,721708&_dad=portal&_schema=PORTALhttp://www.portal.gsi.gov.in/portal/page?%20_pageid=%20127,721708&_dad=portal&_schema=PORTALhttp://www.portal.gsi.gov.in/portal/page?%20_pageid=%20127,721708&_dad=portal&_schema=PORTALhttp://www.coal.nic.in/expertreport.pdfhttp://www.coal.nic.in/expertreport.pdfhttp://www.sebi.gov.in/dp/coaldrhp.pdfhttp://www.sebi.gov.in/dp/coaldrhp.pdfhttp://www.cci.gov.in/images/media/completed/5teri_20080508111155.pdfhttp://www.cci.gov.in/images/media/completed/5teri_20080508111155.pdfhttp://www.cci.gov.in/images/media/completed/5teri_20080508111155.pdfhttp://www.sebi.gov.in/dp/coaldrhp.pdfhttp://www.coal.nic.in/expertreport.pdfhttp://www.portal.gsi.gov.in/portal/page?%20_pageid=%20127,721708&_dad=portal&_schema=PORTALhttp://www.portal.gsi.gov.in/portal/page?%20_pageid=%20127,721708&_dad=portal&_schema=PORTAL


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1.5 Since liberalization, the Government has been taking steps to increase competition

in various sectors. The Competition Act was introduced in 2002 and the Government

adopted a Working Report towards adoption of the National Competition Policy in

2007 which was incorporated in the 11th

Five Year Plan document with the approval

of the Cabinet and the National Development Council.

1.6 According to the draft National Competition Policy 2011, the term competition is

said to refer to a situation in a market place in which firms/entities or sellers

independently strive for the patronage of buyers in order to achieve a particular

business objective, such as profits, sales, market share, etc.8

1.7 Annexure III of the Draft provide an illustrative list of parameters against which an

existing or proposed legislation, policy, or practice can be measured in order to

assess whether it is likely to have an effect on competition. These are to examine

whether the legislation, existing to proposed, or policy, or practice has, inter alia, anyof the following effects:

Limits on the number or range of suppliers by granting exclusive rights,establishing a license, permit or authorisation process, significantly raising cost

of entry or exit, creating geographical or other barriers, etc.

Limits the ability of suppliers to competeby limiting a sellers ability to set theprices for goods or services, limiting freedom to advertise or market, setting

standards for product quality that provide an advantage to some suppliers over

others, significantly raising costs of production for some suppliers relative to

others (especially by treating incumbents differently from new entrants), etc.

Reduces the incentive of suppliers to compete by limiting the ability ofconsumers to decide from whom they purchase and so on.

1.8 The Report seeks to identify those legislations, policies, and practices that have the

above mentioned effect(s) in the coal sector in India. The Report is divided into five

Chapters. This, Chapter I provides an introduction to coal, its importance in Indias

energy sector, and also looks at the meaning of competition, and the parameters by

which competition in the sector may be analyzed. Chapter II provides a brief

overview of the coal sector in India, including a brief history, and the demand and

supply situation. Chapter III provides an overview of the regulatory frameworkgoverning the sector and identifies the provisions that affect competition, while

Chapter IV provides an analysis of the identified provisions and certain

recommendations on possible steps that could be taken to infuse and improve the

level of competition in the sector. Chapter V summarises the conclusions and the

possible agenda for competition policy advocacy.

8

The Draft National Competition Policy 2011, Ministry of Corporate Affairs, Para 2.1,http://www.mca.gov.in/Ministry/pdf/Draft_National_Competition_Policy.pdf, Last accessed on

01.10.2011.
http://www.mca.gov.in/Ministry/pdf/Draft_National_Competition_Policy.pdfhttp://www.mca.gov.in/Ministry/pdf/Draft_National_Competition_Policy.pdfhttp://www.mca.gov.in/Ministry/pdf/Draft_National_Competition_Policy.pdf


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CHAPTER II : COAL SECTOR OVERVIEW

2.1 History

2.1.1 Prior to 1970, several hundred private participants were engaged in the mining and

production of coal in India. With the objective of achieving sustainable growth in the

coal sector and prevent wasteful mining, optimize resources, and improve mine

standards and working conditions, all activities related to coal, including exploration,

mining, production, distribution and sale, were nationalized by the Government of

India in the early 1970s. Subsequently, in the context of safety, conservation and

scientific development, the GoI acquired all coking coal mines on October 16, 1971

and nationalized them on May 1, 1972 vide Coking Coal Mines (Nationalization) Act

1972. The Coal Mines (Taking Over of Management) Act, 1973, extended the right of

the Government of India to take over the management of the coking and non-coking

coal mines in seven States including the coking coal mines taken over in 1971. This

was followed by the nationalisation of all these mines on May 1st

1973 with the

enactment of the Coal Mines (Nationalisation) Act, 1973.

2.1.2 In 1972 the central government transferred the 226 coking coal mines then existing to

Bharat Coking Coal Ltd., and a year later transferred the 711 non-coking coal mines

then existing to the Coal Mines Authority Ltd., which later became Coal India Ltd. 9

Since the passing of the Nationalization Act of 1973, only government companies are

allowed to engage in activities related to coal, save for an exemption in order to allowcaptive mining in certain sectors.

2.2 Types & Uses of coal

2.2.1 Coal is primarily of two types (a) coking coal, and (b) non-coking coal. Energy content

and sulphur content are the most important coal characteristics that to determine the

use of coal.10 Non-coking coal is typically low on sulphur content and low on calorific

value11and makes up the bulk of Indias coal reserves and production. Non-coking coal

is primarily used in the power sector whereas coking coal, which is higher on calorificvalue, is used in the steel industry.

2.3 Size of the Indian coal market

2.3.1 Coal Reserves

9Bharat Coking Coal Ltd. became, and continues to be, a subsidiary of Coal India Ltd. Coal India Limited,

http://www.coalindia.in.http://www.coalindia.in/Company.aspx?tab=5, Last accessed on 03.10.2011.10Supra n.3.

11Supra n.2.
http://www.coalindia.in/http://www.coalindia.in/Company.aspx?tab=5http://www.coalindia.in/Company.aspx?tab=5http://www.coalindia.in/Company.aspx?tab=5http://www.coalindia.in/Company.aspx?tab=5http://www.coalindia.in/


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Power Utilities 380.13 405.00 473.00

Captive Power 38.47 40.00 47.06

Cement 20.80 25.98 33.35

Steel DR 22.89 28.80 28.96

BRK & others 88.82 85.00 62.43

Sub-total Non-

coking

542.86 584.78 644.74

Total 582.25 624.78 713.24

It can be seen that the power sector (utilities and captive power) accounted for

71.89 % of the total demand in the country in 2009-2010. As on June 2010, coal

accounted for 82.4% of the total thermal generating capacity in India,14 representingapproximately 52.4% of Indias total energy needs.15

2.3.3 Supply (including imports)

India is the third largest coal producer in the world.16 In FY 2009-2010, 514.50 MT of

coal was produced. As mentioned above, since nationalization government

companies were statutorily conferred with the right to mine and produce coal. All

existing mines at the time were brought under the umbrella of one behemoth,

namely, Coal India Ltd. The situation remains the same today. CIL (along with itssubsidiaries) accounted for 415.88 MT representing over 80 per cent of all coal

produced in that fiscal while Singareni Collieries Ltd. accounted for 49.37 MT. Other

producers, i.e. captive miners in the power, iron and steel, and cement sectors,

produced 49.25 MT. However, demand continues to outstrip supply. The following

table shows the quantities produced in India along with the demand-supply gap:17

All figures in Million Tonnes

Source 2009-2010

(Actual)

2010-2011

(Revised

assessment)

2011-2012

(Revised as per

mid-termappraisal)

CIL 415.88 433.50 486.50

SCCL 49.37 52.50 47.00

Others 49.25 52.05 96.41

14Supra n.3.

15

Supra n.3.16Supra n.3.

17Supra n.12.


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Total 514.50 536.05# Actualnumbers stand at

532-533.08 MT

according to CMPDI

Annual Report 2010-

11 and Coal India

Annual Report 2010-

11.#

629.91

Demand 597.98# This figurediffers marginally

from the earlier

figure of 582.25

mentioned in the

Annual Report 2010-

2011 for the same

period.#

624.78 713.24

Gap 83.48 88.73 83.33

At first glance, the gap in demand appears to be static at slightly over 80 MT.

However, if compared to the actual figures for the FY 2008-2009, the gap has

increased from 59.98 MT to 83.48 MT in 2009-2010. The figures of 88.73 and 83.33

are estimates. Based on the actual production figures of 369.41 MT upto December

2010, it remains to be seen whether the production can come up to the estimate of

536.05 MT for the FY 2010-2011. Further, the gap of 83.33 MT for the FY 2011-2012

is based on estimated production figures of 96.41 MT by private participants as

against 52.05 MT estimated for the FY 2010-2011. The estimated gap of 83.33 MTcould therefore turn out to be much higher when actual figures are available.

According to the draft Approach Paper to the 12th

Five Year Plan (2012 2017)

prepared by the Planning Commission of India, the shortfall is expected to reach to

over 200 MT by 2017 even assuming the domestic production could be enhanced

substantially in that period.18

2.3.4 Imports

The shortfall in supply is expected to be met by imports. Imports accounted for69.94 MT in FY 2009-2010.19 Of this, non-coking coal accounted for 44.28 MT and

coking coal for 23.46 MT.20 As a percentage of the total coking coal demand, coking

coal imports are substantially higher due to that fact that India has small reserves of

coking coal which are generally of low quality and hence imports coking coal to meet

its requirement.21

18Faster, Sustainable and More Inclusive Growth, An Approach to the Twelfth Five Year Plan, Para 3.37, page

36, available at http://planningcommission.gov.in/plans/planrel/12appdrft/appraoch_12plan.pdf, Last

accessed on 12.12.2011.19

Supra n.12, p.53.20Supra n.12.

21Supra n.3.
http://planningcommission.gov.in/plans/planrel/12appdrft/appraoch_12plan.pdfhttp://planningcommission.gov.in/plans/planrel/12appdrft/appraoch_12plan.pdfhttp://planningcommission.gov.in/plans/planrel/12appdrft/appraoch_12plan.pdf


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CHAPTER III : REGULATORY FRAMEWORK

3.1 We have reviewed the following major legislations related to mining, and to the coal

sector:22

(a) Mines Act 1952 along with the Mines Rules 1955, and the Coal Mines Regulations

1957;

(b) Mines and Minerals (Development & Regulation) Act 1957 along with the

Mineral Concession Rules, 1960, and the Mineral Conservation and Development

Rules, 1988, and the Mines and Minerals (Development & Regulation)Amendment Act 2010;

(c) Coal Mines (Nationalization) Act 1973, and the Coal Mines (Nationalization)

Amendment Bill 2000;

(d) Coal India (Regulation of Transfers and Validation) Act 2000;

(e) Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948, along with

the Coal Mines Provident Fund Scheme 1948, the Coal Mines Deposit Linked

Insurance Scheme, 1976, and the Coal Mines Pension Scheme 1998;

(f) Coal Mines (Conservation and Development) Act 1974 along with the Coal Mines

Conservation and Development Rules 1975;(g) Coal Bearing Areas (Acquisition and Development) Act 1957 along with the Coal

Bearing Areas (Acquisition and Development) Rules 1957;

(h) Colliery Control Order 2000 (issued under the Essential Commodities Act 1955)

and the Colliery Control Rules 2004 (issued under the Mines & Minerals

(Development and Regulation) Act 1957);

(i) Offshore Areas Mineral (Development & Regulation) Act 2002 and the Offshore

Areas Mineral Concession Rules 2006

3.2 Other statutes that affect coal production and sales are:

(j) Land Acquisition Act 1894;

(k) Environment Protection Act 1986 and other environment related legislation;

22We have excluded certain Acts, Rules, or Regulations, as being either no longer relevant or prima facie

outside the scope of this project. Examples are the Coal Mines Pithead Bath Rules 1959, the Coal Mines

Advisory Board Rules 1973, the Mines (posting up of Abstracts) Rules 1954, the Mine Crche Rules 1966,

the Mines Rescue Rules 1985, the Mining Leases (Modification of Terms) Rules 1956, Mines Vocational

Training Rules 1966. We have also excluded the Coal Mines (Taking Over of Management Act) 1973 andthe Coking Coal Mines (Nationalization) Act 1972 as the Coal Mines (Nationalization) Act 1973 covers

both coking and non-coking coal mines (See Mahindra Nath v. State of Bihar, AIR 1980 SC 1308).


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(l) Foreign Direct Investment Policy;

(m) Import Policy.

3.3 In addition, the Ministry of Coal has issued certain notifications, orders,

memorandums, which govern production quantities, distribution, and have a bearing

on the price of coal as well. Primary amongst these are:

(o) the New Coal Distribution Policy 2007, and

(p) the Pricing Policy.

3.4 Constitution of India: Before embarking on a brief review of the legislation, it would

be useful to mention the constitutional provisions under which the coal related

legislation has been passed. Under the Constitutional scheme, the Centre isempowered by virtue of Article 246(1) of the Constitution and Entries 54 and 55 of

List I (Union List) of the Seventh Schedule to legislate on regulation of mines and

mineral development and regulation of labour and safety in mines and oilfields.

However, the State is also empowered by virtue of Article 246(3) and Entries 23 and

50 of List II (State List) of the Seventh Schedule to legislate on Regulation of mines

and mineral development subject to the provisions of List I with respect to regulation

and development under the control of the Union and taxes on mineral rights subject

to any limitations imposed by Parliament by law relating to mineral development. It

will be noted that both entries give due deference to the Unions overriding

authority. The Parliament has legislated extensively on the area of coal mining andproduction, including providing for the role of the States and the taxes and royalties

payable to the States.

3.5 Brief Overview

Based on a brief overview of the aforementioned legislations, we have extracted in

this chapter those legislations, policies, and practices that have or are likely to have

an adverse effect on competition in India. The brief overview and observations

relating to the legislations which were thought to have little or no effect oncompetition have been detailed in Annexure A.

3.5.1 (a) Mines and Minerals (Development & Regulation) Act 1957

3.5.1.1 Preamble: As per the preamble, the Act aims at regulation of mines and

development of minerals under the control of the Central Government. The Act is

umbrella legislation applicable to all the mining activity to the exclusion of minor

minerals which are administered by the State Government. It deals with

reconnaissance operations, grant of prospecting licenses and mining lease.


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3.5.1.2 Main Provisions: Coal and Lignite are mentioned in Part A of the First Schedule titled

Hydro Carbons Energy Minerals, which are administered by the Central

Government. The sections discussed below are both general and specific to the

items in First Schedule to the Act which includes Coal and Lignite.

3.5.1.3 Any State Government may, after prior consultation with the Central Government

can undertake reconnaissance, prospecting or mining operations with respect to coal

and lignite in any area within the State which is not already held under any

reconnaissance permit, prospecting license or mining lease23. The State Government

is not permitted to grant any prospecting license or mining lease for Coal and

Lignite, except with the previous approval of the Central Government24. Similarly no

prospecting license granted for Coal and Lignite can be renewed except with the

previous approval of the Central Government25. The permit holder of a

reconnaissance permit or a prospecting license is given a preferential right for

obtaining a prospecting license or mining lease, as the case may be, in respect of

that land over any other person26. No mining lease granted for Coal and Lignite canbe renewed except with the previous approval of the Central Government27. A

mining license lapses upon the expiry of two years from date of execution of lease in

the case of non-commencement of mining operations or two years from the date of

discontinuation of mining28. The holder of a mining lease is required to pay to the

State Government an annual dead rent at the specified rates29. There is a waiver of

royalty on the coal in respect of any coal consumed by a workman engaged in a

colliery provided that such consumption by the workman does not exceed one-third

of tonne per month30.

3.5.1.4 Moreover, the Act empowers the Central Government to make rules for regulatingthe grant of reconnaissance permits, prospecting licenses and mining leases with

respect to Coal and Lignite31. The Central Government is further empowered to

make rules for grant of prospecting licenses or mining leases in respect of territorial

waters or continental shelf of India32. The Central Government is also empowered to

undertake reconnaissance, prospecting or mining operations in certain areas33, and

to take all steps as may be necessary for the conservation and systematic

development of minerals in India and for protection of environment34. To achieve

this, the Central Government can authorise the Geological Survey of India to

investigate as directed.35 These powers can be delegated to other authorities as

23 Section 4 (3) of the Mines and Minerals (Development and Regulation) Act, 195724

Proviso to Section 5 (1) of the Mines and Minerals (Development and Regulation) Act, 1957.25

Second Proviso to Section 7 of the Mines and Minerals (Development and Regulation) Act, 1957.26

Section 11 (1) of the Mines and Minerals (Development and Regulation) Act, 1957.27


Section 4A (4) of the Mines and Minerals (Development and Regulation) Act, 1957.29

Section 9A of the Mines and Minerals (Development and Regulation) Act, 1957.30

Section 9 (2A) of the Mines and Minerals (Development and Regulation) Act, 1957.31


Section 13A of the Mines and Minerals (Development and Regulation) Act, 1957.33

Section 17 of of the Mines and Minerals (Development and Regulation) Act, 1957.34Section 18 of the Mines and Minerals (Development and Regulation) Act, 1957.

35Section 18A of the Mines and Minerals (Development and Regulation) Act, 1957.


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well.36

3.5.1.5 Mines and Minerals (Development & Regulation) Amendment Act 2010: The Act was

amended in 2010 to make a special provision for granting reconnaissance permit,

prospecting license or mining lease for companies engaged in captive mining of coal

or lignite, though auction and competitive bidding37. These include companies

engaged in production of iron and steel, generation of power, washing of coal

obtained from a mine and such other end use that the government may by

notification in the official gazette specify. The proviso to the section nevertheless

makes it clear that competitive bidding shall not be applicable to an area containing

coal or lignite, where such area is considered for allocation to a Government

Company or Corporation for mining or such other specified end use or where such

area is considered for allocation to a company or corporation that has been awarded

a power project on the basis of competitive bids. The significant aspect of the 2010

amendment is that it allows for participation of foreign companies in the said

competitive bidding process.

3.5.1.6 Mineral Concession Rules, 1960: The Mineral Concession Rules, inter alia, specify the

form, manner, and the person to whom the applications for licenses are to be made,

the authority by which reconnaissance permits38, prospecting licenses or mining

leases in respect of land in which the minerals vest in the Government may be

granted39; the conditions to be contained in such reconnaissance, prospecting and

mining licences40; preparation of mining plans by recognized persons41 the procedure

in the case such lands vest with a private person42; the requirement of previous

approval of the Central Government by the State Government43; period for disposal

of applications44

; royalties payable45

; requirement to submit all geophysical data tothe Geological Survey of India and the Department of Atomic Energy46.

3.5.1.7 Mineral Conservation and Development Rules, 1988: The Rules, inter-alia, specify the

requirement for scheme of reconnaissance and prospecting operations47, approval of

mining plans48 to be prepared by qualified persons, authority to direct beneficiation

studies49, notice of opening, temporary discontinuance, abandonment, re-opening50,

36Section 26 of the Mines and Minerals (Development and Regulation) Act, 1957.

37Section 11A of the Mines and Minerals (Development and Regulation) Act, 1957.

38

Rules 4-7 of the Mineral Concession Rules 196039Rules 8-21 of the Mineral Concession Rules 1960 regarding prospecting licence and Rules 22 40 regarding

mining leases.40

Rules 7, 14, and 27 respectively of the Mineral Concession Rules 1960.41

Rule 22B of the Mineral Concession Rules 196042

Rules 41-55 of the Mineral Concession Rules 196043

Rule 63 of the Mineral Concession Rules 196044

Rule 63A of the Mineral Concession Rules 196045

Rules 64B-64D of the Mineral Concession Rules 196046

Rule 66 of the Mineral Concession Rules 196047

Rules 3 and 4 of the Mineral Conservation and Development Rules, 198848

Rules 9-13 of the Mineral Conservation and Development Rules, 1988 and Rules 23A 23F for closure plans,

and Rules 27-30 regarding contents and types of plans and section.49Rule 20 of the Mineral Conservation and Development Rules, 1988

50Rules 22, 23, 24 of the Mineral Conservation and Development Rules, 1988


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requirement to employ geologists and mining engineers, their qualifications and

duties51, returns to be filed, and penalties for violations. The Rules also mandate that

all research reports in geology and mining must be shares with the authorities.52

3.5.1.8 Mines and Minerals (Development & Regulation) Bill 2011: On 30.09.2011, the Union

Cabinet approved the draft Bill of the new law which seeks to consolidate and

replace the existing Mines and Minerals Act 1957. The primary additions in the

proposed legislation is the sharing of 26% of the net profit of coal mining companies

and 100% of royalty for other mineral mining companies with the people displaced

due to such mining activities53. The Bill also proposed to establish a National Mineral

Fund54, establish national and state mining regulatory authorities55 and tribunals at

state and central levels56. Clause 4 of the Bill states that no person shall undertake

reconnaissance, prospecting, exploration, or mining, in respect of any mineral

without obtaining an appropriate licence or lease. Sub-clause (2) of Clause 4

however, exempts the Geological Survey of India, Mineral Exploration Corporation

Limited, Singareni Collieries Limited, Central Mine Planning and Design InstituteLimited, the Directorate of Mining and Geology of any State Government, and such

other government agencies as may be notified by the Central Government, from the

need to obtain a licence in respect of reconnaissance or prospecting operations.

3.5.1.9 Observations: As discussed earlier, the Act is an umbrella legislation dealing with

minerals administered by the Central Government and the State Government. Coal

and Lignite are minerals administered by the Central Government. Under Section

11A of the Act incorporated in 2010, the Government has introduced competitive

bidding for allocation of coal blocks. However, this is limited to the notified

industries of steel, power, and washeries, for captive consumption. Moreover, thesection is silent on the kind of coal blocks that will be put up for auction and the

Government is empowered to reserve coal blocks for government companies. This

again results in CIL and SCCL being allocated prime coal blocks while private

companies have to participate in an auction. With respect to the Mines and Minerals

Bill 2011, proposed Clause 4(2) exempts government companies from the

requirement of obtaining a reconnaissance or prospecting licence. This grants an

unfair advantage to companies competing in the market, i.e. CIL through CMPDIL,

and Singareni Collieries Ltd.

3.5.2 (b) Coal Mines (Nationalization) Act 1973

3.5.2.1 Preamble: The preamble to the act states that it is a legislation to provide for the

acquisition and transfer of the right, title and interest of the owners in respect to the

51Rules 42-44 of the Mineral Conservation and Development Rules, 1988

52Rule 61 of the Mineral Conservation and Development Rules, 1988

53Clause 43 of the draft Mines and Minerals (Development & Regulation) Bill 2011

54

Clause 50 of the draft Mines and Minerals (Development & Regulation) Bill 201155Clause 58 and 70 of the draft Mines and Minerals (Development & Regulation) Bill 2011

56Clause 75 and 89 of the draft Mines and Minerals (Development & Regulation) Bill 2011


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coal mines specified in the schedule with a view to re-organizing, and re-constructing

such coal mines so as to ensure rational coordinated and scientific development and

utilization of coal resources consistent with the growing requirements of the country,

in order that the ownership and control of such resources are vested in the State and

thereby so distributed as best to subserve the common good, and for matters

connected therewith or incidental thereto.

3.5.2.2 Main Provisions: As stated in the Preamble to the Act, the purpose of the legislation

was to acquire the existing mines at the time and the provisions relate to taking over

the management, accounts, and compensating the owners of the mines. The key

provision of the Act which is still relevant today is Section 3(3)(a) of the Act. The said

provision prohibits any person other than

(a) the central government, government company, or corporation,

(b) a sub-lessee of the government, or

(c) a company engaged in (i) production of iron and steel, (ii) generation of power,

(iii) washing of coal, (iv) such other uses as may be specified,from carrying on coal mining operations in any form. Sub-clause (c) of Section 3(3)

enhances the prohibition by mandating that a lease for winning or mining coal may

be granted only to a government company or corporation, however provides further

that a sub-lease may be granted by the government company or corporation to

private parties in isolated small pockets not amenable to economic development and

not requiring rail transport. Vide notifications dated 15.03.1996 and 12.07.2007

production of cement and production of syn-gas obtained through coal gasification

(underground and surface) and coal liquefaction, were notified by the central

government as an approved end uses under Section 3(3)(a)(iii)(4).

3.5.2.3 By virtue of Section 4 the Central Government became the deemed lessee of such

mines as granted by the state governments under the Mineral Concession Rules

196057. Moreover the lease is renewable for the maximum available period that is

allowed by the Mineral Concession Rules. All mines and adjoining properties and

assets were transferred (subsequently to CIL) free of any mortgages and any other

encumbrances58, which were dealt with by the Commissioner of Payments59under

the Coal Mines (Intimation regarding mortgages, charges, lien or other interests)

Rules 1974.

3.5.2.4 Coal Mines (Nationalization) Amendment Bill 2000: In the year 2000, the Coal MinesNationalization Amendment Bill was introduced in the Rajya Sabha. As per the

Statement of Objects and Reasons accompanying the Bill, an estimated demand

supply gap of 235 MT was expected by 2007, which could not be bridged by the

nationalized coal companies. The Bill therefore seeks to introduce Section 3A in the

principal Act of 1973 which would permit domestic private companies to mine and

produce coal either for own consumption, sale of for any other purpose in

accordance with the prospecting licence or mining lease or sub-lease. However,

power is sought to be vested in the Central Government to determine the location,

57

Issued under the Mines and Minerals (Regulation and Development ) Act, 1957.58Section 6 of the Coal Mines (Nationalization) Act 1973.

59Appointed under Section 17 of the Coal Mines (Nationalization) Act 1973.


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size, and other conditions, in relation to the operation of a coal mines by a private

company.

3.5.2.5 The Bill was referred to the Standing Committee on Energy which submitted its

Report on 31.08.2001, endorsing the passage of the Bill. However, due to opposition

by trade unions, and frequent change of government at Union level requiring

repeated Cabinet endorsement for the Bill, further delayed its approval.60

3.5.2.6 Observations: It is instantly recognizable from the above review that the Act has a

direct bearing on competition in the coal sector by limiting the number of producers

in the market and giving government companies exclusive rights over coal

production.

3.5.3 (c)The Coal-Bearing Areas (Acquisition and Development) Act, 1957

3.5.3.1 Preamble: The preamble of the Act states that it intends to establish greater public

control over coal mining industry and its development by providing for the acquisition

by the Government of unworked land containing or likely to contain coal deposits or

rights over such lands by modifying or extinguishing current agreements, leases ,

licenses etc..

3.5.3.2 Main Provisions: This Act aims at facilitating coal prospecting and acquisition of land

for mining by the Central Government. When the Central Government is of the

opinion that coal is likely to be obtained in any locality, the Central Government canthrough notification in the official gazette, give notice of intent to prospect for coal61.

Such a notification under Section 4 (1) of the Act shall have the effect of setting aside

any license for prospecting coal or any other mineral on the land so notified 62. The

said notification also has the effect of setting aside any mining lease in so far as it

authorises the lessee or any person claiming through him to undertake any

operation in the notified land63.

3.5.3.3 If the Central Government were to be satisfied that the coal is obtainable in the land

notified for prospecting, it can within two years of notification for prospecting or

further one year thereafter publish in the gazette its intention to acquire the wholeor any part of the land notified for prospecting64. Subsequent to the declaration of

acquisition under Section 9 of the Act, the land and the rights therein vest with the

Central Government65 .

3.5.3.4 The Central Government can thereafter direct and vest the rights in the land on a

60Supra n.7, p. 144.

61Section 4 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957.

62Section 5 (a) of the Coal-Bearing Areas (Acquisition and Development) Act, 1957.

63

Section 5 (b) of the Coal-Bearing Areas (Acquisition and Development) Act, 1957.64Section 7 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957.

65Section 10 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957.


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the provision of village sites, or the extension, planned development or

improvement of existing village sites;

provision of land for town or rural planning;

provision of land for the planned development of such land from public funds

pursuant to any scheme or policy of the government and subsequent disposal

thereof in whole or in part by lease, assignment or outright sale with the object of

securing further development as planned;

the provision of land for a corporation owned or controlled by the state;

the provision of land for any other scheme of development sponsored by the

government, or, with the prior approval of the appropriate government, by a local

authority; and

the provision of any premises or building for locating a public office, but does not

include acquisition of land for companies.

the provision of land for a corporation owned or controlled by the state.

3.5.5.3 In addition, certain states have amended the central statute and framed their ownrules for compulsory land acquisition. A company has to abide by the State

legislations in those states in which it conducts its business, in addition to the

Central legislation.

3.5.5.4 Observations: As discussed earlier in this Report, the procedures under the Land

Acquisition Act and the Coal Bearing Areas Act differ in favour of the government

coal companies. The effect of this difference is examined further later in this report.

3.5.6 (k) Environment related legislation81

3.5.6.1 Clearances by the Ministry of Environment and Forests (MoEF) is required under

the Environment (Protection) Act, 1986, as amended, the Forest Conservation Act

1980, if any forest land is involved, the Air (Prevention and Control of Pollution)

Act, 1981, the Water (Prevention and Control of Pollution) Act, 1974, as amended,

and the Water (Prevention and Control of Pollution) Cess Act, 1977, are required

before commencing the operations of the mines. Applications are made through

the respective State Governments who then recommend the application to the

Government of India.

3.5.6.2 Environment Protection Act: The Act has been formulated by the Central

Government for the protection and improvement of the environment in India and

for matters connected there with. The Act also prohibits any person carrying on any

industry, operation or process from discharging or emitting or permitting to be

discharged or emitted any environmental pollutants in excess of such standards as

may be prescribed.82 The Central Government has been provided with broad rule

81This overview relies on information provided in pages 120-122 of the Coal India Final Prospectus dated

October 26, 2010, save for the parts relating to the go/no go policy adopted by the Ministry ofEnvironment in 2009 and the Comprehensive Environment Pollution Index Notification of January 2010.

82Section 7 of the Environment Protection Act 1986.


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making powers, such as, (a) the standards of quality of air, water or soil for various

areas and purposes; (b) the prohibition and restriction on the location of industries

and the carrying on process and operations in different areas; and (c) the

procedures and safeguards for the prevention of accidents which may cause

environmental pollution and for providing for remedial measures for such

accidents.

3.5.6.3 In 2006, the Government of India issued another Notification No. S.O. 1533(E)

dated September 14, 2006, (2006 EIA Notification), according to which all new

projects, expansion of existing projects, product-mix activities and projects require

prior environment clearance if they are listed in the schedule to the said

notification. The projects and activities listed under category A of the schedule

require clearance from the regulatory authority constituted by the Central

Government, whereas, the projects and activities listed under Category B are

required to obtain clearance from State Environment Impact Assessment Authority,

(SEIAA). The SEIAA will base its decision of granting prior environment clearanceon the basis of the recommendations of the State Expert Appraisal Committee

(SEAC) while the Central Government will grant prior environmental clearance for

category A projects on the basis of the recommendations of the Expert Appraisal

Committee (EAC) to be constituted as per this notification. If the SEIAA or the

SEAC is not constituted in any state then the Category B project will be deemed to

be Category A project. The notification provides for four stages for prior

environment clearance. However not all stages apply to all projects. The four stages

are:

(i) Screening: During this process the appraisal authority shall determine whether

there is a requirement of Environment Impact Assessment Report to besubmitted as per the guidelines given by the Central Government in this context.

(ii) Scoping: During this process the appraisal committee will determine the Terms

of Reference for each of the category (i.e. category A and B 1 projects). TOR will

be conveyed to the applicant within 60 days of receipt of the application in

prescribed format.

(iii) Public Consultancy and Public Hearing: This process involves obtaining and

receiving objections and other concerns of local affected persons and others

who have a stake in the project and its impact. Public Hearing should be

conducted by the State Pollution Control Board or the Union Territory Pollution

Control Committee within 45 days from the date of receiving the applicationfrom the project proponent to this effect.

(iv) Appraisal: SEAC or EAC accordingly shall consider the final Environment Impact

Assessment report and the outcome of public consultation and other documents

and make recommendations to the regulatory authority. They may recommend

granting prior environmental clearance on stipulated terms and conditions or

rejecting the applications recording the reasons for the same.

3.5.6.4 Mining of minerals with a mining lease area of over 50 hectares is listed as a

Category A project mining lease area of between 5 and 50 hectares is listed as a

Category B project. Prospecting (not involving drilling) is exempted. Coal washerieswith an annual output of over one million tonnes are listed as Category A projects,


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however, if located within mining area the proposal is to be appraised together

with the mining proposal.

3.5.6.5 Forest Conservation Act 1980: In case forest lands are involved, the mining lease

can be executed only after obtaining the forest clearances. The Act provides that no

State Government or any other authority shall authorize, without the prior

approval of the Central Government, that any forest land or any portion thereof

may be used for any non-forest purpose where non-forest purpose refers to the

breaking up or clearing of any forest land or portion thereof for:

the cultivation of tea, coffee, spices, rubber, palms, oil-bearing plants,

horticultural crops or medicinal plants; or

any purpose other than afforestation but does not include any work relating or

ancillary to conservation , development and management of forests and wildlife.

3.5.6.6 Air & Water Acts: Under the Air and Water Acts, a company responsible for

emitting smoke or gases by way of use as fuel or chemical reactions or fordischarging industrial or domestic wastewater, respectively, is required to make an

application to the state pollution control boards. The consent to operate is granted

for a specific period after which the conditions stipulated at the time of granting

consent are reviewed by the state pollution control board. In the event of non-

compliance, the state pollution control board may take necessary measures to

ensure compliances, and even mandate closure the mine or.

3.5.6.7 Water Cess Act: Mining is a specified industry under the Water Cess Act and a

lessee is required to pay the surcharge as stipulated on the basis of water

consumed. The assessing authority at the state level levies and collects thesurcharge based on the amount of water consumed by such industries. The rate is

also determined on the basis of the purpose for which the water is used. Based on

the surcharge returns to be furnished by the industry every month, the amount of

cess is assessed by the relevant authorities. A rebate of up to 25% on the surcharge

payable is available to those industries which install any plant for the treatment of

sewage or trade effluent, provided that they consume water within the quantity

prescribed for that category of industries and also comply with the effluents

standards prescribed under the Water Act or the Environment Act.

3.5.6.8 Go-No Go Policy: In June 2009, the Ministry of Environment & Forests and theMinistry of Coal initiated an exercise to identify prima facie go and no-go areas

for coal mining. Go areas were those where, prima facie, the statutory Forest

Advisory Committee in the MoEF considered proposals for diversion of forests land

for coal mining purposes. No-go areas were those areas with rich forest cover and

biodiversity where applications were not entertained for forest land diversion. The

concept behind the policy was to avoid the uncertainty. Prior experience showed

that companies would apply for forest clearance for coal blocks and have to wait a

number of years only to have them eventually rejected as they were in dense forest

areas. By identifying such areas in advance, the companies could apply only in the


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recommend LOAs in respect of power utilities, IPP, CPP, cement and steel

manufacturers;

CIL to meet the full requirement of coal under the FSAs even by resorting toimports if necessary;

After the execution of FSAs, parties to try to execute a tripartite agreement(FSTA) with the transport provider (Railways) as well;

Introduction of an e-auction scheme by CIL, which will include provide for (i)access to any buyer, (ii) no floor price but rather an undisclosed reserve price not

lower than the notified price, (iii) announcing the programme of e-auction well in

advance and with sufficient publicity, (iv) an announcement by CIL at the

beginning of each financial year declaring the quantity and quality of coal to be

available through e-auction, and the location from which it would be available, (v)

initially around 10% of CIL production to be earmarked for e-acution.

3.5.8.2 Currently approximately 10.0% of CILs aggregate raw coal production is offered

under the e-auction scheme. This quantity is reviewed from time to time by the

Ministry.

3.5.8.3 With the amendment to the Mines and Minerals (Development and Regulation) Act

in 2010, a system of allocation of coal blocks for specified end uses through auction

by competitive bidding has been introduced. The Coal Ministry is seeking to

formulate appropriate new guidelines for allocation of coal blocks89 in accordance

with the amendment.

3.5.8.4 Observations: The Distribution Policy has a direct bearing on competition in the

sector and its effects are discussed in the next chapter.

3.5.9 Pricing

3.5.9.1 Since 1945, the price at which the various types and grades of coal were sold was

controlled by the Central Government, under the provisions Colliery Control Order

of 1945. Beginning in March 1996, the Government gradually deregulated the price

of various types and grades of coal. The pricing of coal in India was completely

deregulated pursuant to the Colliery Control Order, 2000 with effect from January

1, 2000. As no other companies are allowed in the field, coal pricing is now entirelydependent on the price notified by Coal India Ltd.

3.5.9.2 Unlike a normal monopolist, however, the price CIL is able to fix is influenced by the

requirements of the overall development in the country, and primarily that of the

power sector. Thus, the price fixed by CIL under the FSAs with the erstwhile core

consumers is reasonable compared to what a private sector monopolist would have

been in a position to fix. This is evident from the prices fixed for the 10% coal

allocated for sale through the E-Auction scheme and for the sale of higher grade

the Standing Linkage Committee (Shot Term), which used to meet on quarterly basis for allocation of coalto the power and cement sectors, was discontinued.

89Answer by the Minister of Coal to unstarred question No. 3553 in the Lok Sabha dated 24.08.2011.


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open cast mines the coal is mined only to the depth of 150 meters. At the current

production levels the known extractable reserves may be depleted in the next 45

years, moreover a large proportion of coal reserves may not be extractable102. There

has been a deterioration of the quality of domestic thermal coal due to increased

reliance on cost effective open cast mining operations 103. However, the lignite

resources in the country have been estimated to be adequate to meet the projected

demand104.

3.6.4 Based on the foregoing statutory and regulatory review the following issues affecting

the competitiveness of the sector have been identified, the categorisation has been

made from an impact on competition view point105. The issues have been identified

on the basis of the criteria mentioned in the Competition Checklist (Annex 3 of the

TOR). The issues and the relevant entries in the Competition Checklist have been

discussed in the table below. The analysis in Chapter IV of this report details the

relevant statutory provision, regulation, rule, industry practice etc and suggests

remedial pro-competitive measures:

August 2006, P.117,http://planningcommission.nic.in/reports/genrep/rep_intengy.pdf, Last Accessed on

20.12.2011102

Ibid, P.117.103

Ibid, P.116.104

Report of the Expert Committee on Road Map for Coal Sector Reforms , Part II, Ministry of Coal ,

Government of India, Oct 2007, Paras 1.31, 1.32, 1.34, 1.35, p. iv, http://coal.nic.in/expertreport2.pdf,

Last Accessed on 20.12.2011105

Issues in the Captive Mining segment and Coal India have been dealt with separately as captive mining issupposed to supplement the production in CIL & SCCL. It is in this context that it becomes necessary to

understand the dynamics between the two.
http://planningcommission.nic.in/reports/genrep/rep_intengy.pdfhttp://planningcommission.nic.in/reports/genrep/rep_intengy.pdfhttp://planningcommission.nic.in/reports/genrep/rep_intengy.pdfhttp://coal.nic.in/expertreport2.pdfhttp://coal.nic.in/expertreport2.pdfhttp://coal.nic.in/expertreport2.pdfhttp://coal.nic.in/expertreport2.pdfhttp://planningcommission.nic.in/reports/genrep/rep_intengy.pdf


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4. Changing environmental

policies, and

considerations delaying

grant of prospecting

permits and mining leases.

D1

The sector subject to policies or regulations that

are onerous, costly time-consuming, and

frequently change, thereby creating policy

uncertainty. The issue of delays due to time

consuming environmental clearances and

uncertainty over the outcome has been

documented in earlier reports of expert

committees. The frequent changing policies and

rules adopted in the failed experiment of the

recent Go-No Go and CEPI policies have added

to the uncertainty and have been blamed for the

fall in production levels. While this is primarily an

issue concerning the removal of bottlenecks it

acts as a disincentive for other potential suppliers

to enter and compete in the sector.

5. The various advantages

granted to CIL due to

nationalization in 1973

and the incumbency

benefits enjoyed by CIL

over the last 35 odd years.

B3

State-owned enterprise(s) receiving benefits and

preferential treatment not available to other

firms which appear to have the effect of limiting

competition in the relevant market. High sunk

costs.

6. Non Working of Coal

Blocks and Mining

Licenses by CIL does not

invite cancellation.

B3

State-owned enterprise(s) receiving any benefit(s)

or preferential treatment not available to other

firms which appear to have the effect of limiting

competition in the relevant market.

7. Price Distortions B1, B5

Limits sellers ability to set the prices for goods or

services.

The under-development of transport and other

infrastructure appears reinforces the monopoly

status of the incumbent firms and reduces any

potential competition.


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exclusive protection.

4.6.1 CIL has also received budgetary support from the Government over the years,

including for building rail infrastructure for transport of the coal produced by it.

Further, in 1995 1996 the company again benefited from a financial restructuring

package by the Government, whereby Rs. 8,917 million of interest liability was

waived, Rs. 9,041.8 million of plan loan repayment arrears was converted to

preference equity and Rs. 4,326.4 million of non plan payment arrears were allowed

a moratorium for repayment and interest accrual for a period of three years, to be

repaid in three equal instalments.115

4.6.2 Even assuming the sector was opened to private participants, and given the high

sunk costs inherent in the coal producing sector, these are factors that have

historically conferred a significant competitive advantage to CIL and continue to

affect its competitive position in the sector. Removing the statutory barrier to

private sector participants would result in several pro competitive advantages suchas increases in production, new and innovative technology being introduced, new

distribution and sales techniques, etc.

4.6.3 Since coal mining involves high sunk costs and long term investments CIL with

established operations enjoy incumbency benefits. These incumbency benefits

could be summarised as follows116:

All the available geological data are in possession with CIL; Monopolizing infrastructure (CIL has constructed railway lines through budgetary

support etc.);

Domain knowledge in terms of vast experience; Established market and clientele; Business Goodwill; CIL enjoys close proximity with the Ministry of Coal that guides CILs pricing and

distribution decision. This is at once an advantage and a disadvantage due to the

fact that it would reduces CILs competitiveness as and when the market is

opened to private participants.

4.6.4 Post privatization, the extensive government regulation of CIL would reduce its

competitiveness. The New Coal Distribution Policy of 2007 directly controls the

amount of coal that CIL is able to sell and the persons to which the coal is to be sold,and the broad terms of agreements which govern the parties contractual

relationship. CIL cannot therefore respond to realistic market conditions, given that

the entire distribution is controlled by the interested Ministries. However, at the

same time, while reducing the competitive position of CIL, the policy ensures a

rational and coordinated distribution of coal for overall development of the Indian

infrastructure and economy. In the present market context of one enterprise

controlling over 80% of the market, it is undesirable that the distribution or pricing

be left to market forces, where the monopolist is free to reduce output and set the

115Seewww.coalindia.in

116Supra n.7, p.145.
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Freight rates of railways for transport of coal need to be rationalised119. Alternative modes of movement of coal be promoted for ex. coastal shipping,

river/canal movement, movement of coal slurry through pipeline etc.120

.

4.7.2 Though the price of coal should be ideally determined in a competitive market, the

same may not be possible given the number of suppliers, hence a process of

competitive price discovery needs to be adopted121. Till such time the demand and

supply for coal comes to equilibrium there exists a need for an agency to regulate

the price for major bulk consumers of coal, especially those consumers whose

output prices are strictly controlled as in the power sector 122. The report of the

Shankar Committee observes that the decisions regarding pricing are still influenced

by the Ministry of Coal and other interested ministries, nevertheless it also states

that the benefits of price deregulation of prices will be evident only with the

presence of more players in the coal market123.

4.8 IV. Impediments on Captive Mining

4.8.1 Under the Coal Mines (Nationalisation) Act 1973 captive consumption by companies

involved in generation of power, production of iron and steel, production of cement,

washing of coal, and syn gas production has been allowed. It was thought that

captive mining would help enhance productivity in the short and medium term.

4.8.2 However the captive mining policy has faced significant hurdles and as not been able

to achieve the goal of enhanced productivity124. The procedures for obtaining the

numerous approvals and permissions from diverse departments at the State andCentral level for launching a coal mine are proving to be the major factors which

inhibit the companies using coal but not familiar with coal mining shying away from

captive mining125.

4.8.3 One of the major issues prior to the amendment of Section 11A of the Mines and

Minerals (Development and Regulation) Act, 1957 was non transparent allocation of

captive coal blocks. Further CIL was the custodian of all coal blocks and would

recommend the coal blocks which could be allotted126.

4.8.4 The Mines and Minerals (Development and Regulation) Act, 1957 was amended in2010 to make a special provision for granting reconnaissance permit, prospecting

license or mining lease for companies engaged in captive mining of coal or lignite ,

though

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Coal Sector