In a judgment delivered on 24 September 2014, the Supreme Court of India cancelled 214 coal block allocations that had been in place since 1993. Out of the 214 cancelled allotments, 42 coal blocks with end-use plants that were already functional or were about to become functional, have been allowed a six-month window to wind down their operations. Cancellation with respect to those coal blocks would come into force from 31 March 2015. In addition, the Supreme Court of India has established a fine of Indian Rupees 295 per metric ton of coal mined from the date of commissioning of these blocks.
While the domestic impact of this judgment in terms of potential legal redress by the affected companies is a different gamut altogether, this Alert outlines some of the issues that international investors may encounter.
Risk & Recourse Identification
Many of the cancelled coal blocks were running as joint ventures between a domestic company and international joint venture partners. It is essential to get an early steer on the remedies available to the international joint venture partner where the main asset of the joint venture has come under significant uncertainty. It also may be worthwhile to investigate whether the host country of the international joint venture partner had any sort of bilateral investment protection agreement with India (such as Singapore, the UK or Netherlands).
Given that the Supreme Court has also ordered criminal investigations by the Central Bureau of Investigation into any wrongdoing, including bribery and other illegal gratification, it is possible for international joint venture partners to be involved in protracted proceedings regarding this. Undertaking a sanity check on the paper and audit trail that exists, documenting the circumstances leading to formation of the joint venture relationship, may be worthwhile.
International banks, alone or as part of a syndicate, have extended credit facilities heavily in this sector, and given the likely cash crunch that these companies may face in the very near term, it is essential to look at the package of security documentation and, in particular, if any recourse is available against the promoters or parent companies.
Private equity players with direct exposure to these companies, or in an ancillary capacity to steel, cement and others with captive thermal power plants, may need to revise their estimates for return on investments, as well as see what recourse they might have in their documentation for a fundamental change of circumstance such as this.
International companies doing business in India, in particular in the manufacturing sector with heavy dependence on power, may want to gear up for short-term cost and supply fluctuations for accessing power.
This judgment could act as a binding precedent in relation to the manner of allocation of public resources to private enterprise, including land, spectrum, natural resources, infrastructure concessions and others. International investors who have a connection in some capacity with the commercial use of a resource obtained from the Government of India should consider conferring with their legal counsel to revisit the foundations of how that resource was obtained and test it against the principles laid down in this judgment (i.e., illegal and arbitrary allotment of public resources for private gain).
A natural corollary of this judgment is that the Government of India will be required to invite bids for re-allocation of the cancelled coal blocks. While this appears to present an opportunity for an international investor interested in this sector, it may be worthwhile to explore the possibility of having a bespoke foreign investment protection agreement with the Government of India to potentially insulate against future shocks of this nature.
This judgment will likely result in significant supply disruptions, as mining from these blocks will be hampered, further exacerbating the coal shortages in India. This is likely to necessitate coal imports from other countries and, accordingly, open up supply-side business opportunities.