The Supreme Court on Monday said the terms of allocation of coal blocks since 1993 as illegal, as per media reports. The apex court said no objective criteria and guidelines were followed in allocation process. The Supreme Court has not de-allocated coal blocks saying further hearing is required on issue of de-allocation. The apex court will discuss consequences of illegality of coal blocks. Further the Supreme Court has disallowed exploitation of captive mines for UMPPs and commercial sale.
Commenting on coal blocks allocation, Dhananjay Sinha, head, institutional research, Emkay Global Financial Services, said, ''We believe supreme court's verdict is a landmark judgment for the mining sector, as it will act as a benchmark for other pending and future cases relating to illegal mining. Our discussion with lawyers engaged in this case suggests that a committee will be set up to decide on the course of action on the 186 coal blocks that have been declared illegal. While the committee will undertake a case-by-case approach in disposing the illegal mine cases, it is likely that majority of the cases will be dealt through by imposing penalty. Even in this case, it remains to be seen who bears the burden of the penalty. We see low chance of blanket de-allocation, which can have disastrous consequences for the users in our view. We believe that pending clarity on future action by the government and the Apex court itself, the overhang might continue. However, there are few stocks that have reacted adversely even without have any consequence from SC verdict. Tata Steel & GPIL are few of them.
While, Chirag Shah, Barclays Capital, said, ''Whether these allocations would remain in effect is still undecided, and will be addressed in further hearings beginning on September 1. However, blocks allocated under the UMPP route were not challenged by the Supreme Court ruling. Stocks that have high exposure to captive coal blocks (Hindalco, JSPL) are likely to be impacted the most. However, an early resolution of the issue could provide much needed clarity for the sector to move forward and could pave the way for auction of mineral resources in India. While it is difficult to quantify stock implications before the next course of action from the SC is known, we believe that the SC ruling would be an overhang on the sector in the near term.
For JSPL, the SC ruling not only creates uncertainty on profitability from existing operational coal blocks but also on the profitability of the USD 2.6 billion investment in the Angul Steel & Power project as the associated Utkal B1 block is unlikely to be allocated now. For Hindalco, profitability of Mahan and Aditya smelters is to a large extent dependent on allocation of associated coal blocks (Mahan and Talabira-II). Tata Steel's Ganeshpur (thermal coal block) and Kotre Basantpur (coking coal block) allocation could also be impacted. Though JSW Steel's Rohne coal block was allotted in 2008, there was not much progress on this mine and hence we expect limited stock impact to JSW Steel.''
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