Decoder: How SC deallocating 214 coal blocks could punch a hole in India's economy

The Supreme Court’s ruling cancelling all coal blocks allocated since 1993 to steel, cement and power companies for their own consumption, except to four state-run companies, has the potential to create a big hole in the country’s economy that would run into trillions of rupees.

The apex court has also imposed a penalty of Rs 295 per tonne on all cancelled block holders.
Such a jolt could seriously upset Jaitley’s budget calculations as the Modi government will have to fight the capital implications on multiple fronts.

The implications range from the likely pressure on bank loans in the backdrop of cost-impact on these companies, the fate of the investments already gone into about 35 projects that have production, the tremors in the stock markets and the expected additional cost burden on the exchequer.

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The capital burden will be immense.

First, banks will take the first jolt. That’s because banks’ exposure to iron and steel companies stands at Rs 2.65 lakh crore, until June 2014.

That apart, banks’ exposure to power companies, which too will get partly affected, stands at Rs 5 lakh crore.

But not all of this money will get impacted since the exposure comprises money lent to distribution companies and firms that are not allotted coal blocks, as well.

Lender’s woes don’t end there. Besides the direct loan exposure to coal-related companies, there is also the chunk of restructured assets from iron, steel and power sectors.

Till end-June, Rs 80,000 crores of loans are being recast under the corporate debt restructuring mechanism from iron, steel and power segments.

This chunk is critical since restructured loans are already under stress and any further pressure on the sector can diminish the chances of recovery. Banks need to set aside money to cover bad loans, which impacts their profitability, and, in turn, capital needs.

According to a Credit Suisse report, State Bank of India and Power Finance Corp Ltd have an exposure of some $10-$12 billion to the coal, power and steel sectors.

This isn’t the first time SC whip on alleged wrongdoings of the UPA government raising concerns among the banks.

In early 2012, banks faced similar plight when SC quashed 122 2G spectrum licences granted UPA-government on the ground that they were issued a “totally arbitrary and unconstitutional” manner. Banks’ exposure to 2G loans was much less, at about Rs 10,000 crore.

Second, the fate of money invested by companies in coal production is uncertain. About Rs 3 lakh crore has already gone as investments to develop the coal blocks. According to the estimate of coal controllers’ office, Rs 2.87 lakh crore has been in the 178 blocks alone. But the final figure will be much higher above Rs 3 lakh crore, since total number of blocks is over 200.

Third, about $3 billion (approximately Rs 18,000 crore) is the expected jump in the import bills of the country in the event of complete de-allocation of the coal blocks, according to a report by Macquarie research.

The two most impacted companies are Jindal Steel and Power and Hindalco, the report said.

Fourth, the bloodbath in the stocks of affected companies is likely to continue. In fact, the stocks of companies, which are affected by the order, are already plummeting. There has been significant erosion in the market cap of the major steel and power companies post the Court ruling.

Investors are estimated to have lost about Rs 52,000 crore that have put in 23 large steel and power companies since the 25 August verdict in which the apex court declared all coal block allocations illegal.

After the apex court’s verdict, shares of Jindal Steel & Power have fallen 9.13 percent to Rs 191.50, Prakash Industries fell by 7.67 percent to Rs 61.40, Hindalco fell by 5.25 percent to Rs 148.80, Adani Power down by 1.68% percent to Rs 46.90 and Bhushan Steel down by 4.96 percent to Rs 107.30 on the BSE, when the benchmark index, Sensex was trading nearly flat.

The extend of impact on these sectors will also depend on what corrective action the government will adopt going ahead and how the Modi government chooses to deal with the coal sector.

(Kishor Kadam contributed to this story)