Analyzing the CoalGate Judgment: Part 2

In the previous post, the background, relevant of provisions and the contentions of the Counsels were dealt with. In this part, the judgment of the Court is discussed in six sub- parts or issues.

V. Judgment

Va. Judgment on the issue of Central Government’s Legislative Power to allocate Coal Blocks

The Court held that the power in relation to the mines and minerals was accorded to both, Centre and States. The State Governments in terms of List I Entry 54 and List II Entry 23 enjoy the power to enact legislation on the topics of “mines and minerals development”, with the only fetter imposed on the State Legislatures under Entry 23 is by the latter part of the said entry which says, “subject to the provisions of List I with respect to

Regulation and development under the control of the Union”.[1]

Therefore, the legal regime relating to Regulation of mines and development of minerals is, thus, guided by the 1957 Act and the 1960 Rules under the power of the Union. The Court held that in pursuance of the two declarations, i.e., Section 2 of the 1957 Act and Section 1A of the CMN Act, the States have lost their jurisdiction to legislate to the extent to which the Union had taken over control, Regulation and development of coal mines.[2]

The Court held that the purpose of CMN Act is to place an embargo on granting the leases for winning or mining of coal to persons other than those mentioned in Section 3(3)(a). In other words, with regard to the matters falling under the 1957 Act, the legal regime in the 1957 Act is made subject to the prescription Under Section 3(3)(a) and (c) of the CMN Act. For grant of reconnaissance permit, prospecting licence or mining lease in respect of coal mines, the MMDR regime has to be mandatorily followed. 1957 Act and so also the 1960 Rules do not provide for allocation of coal blocks nor they provide any mechanism, mode or manner of such allocation.[3] The Court further held that the CMN Act, as amended from time to time, does not have any provision, direct or indirect, for allocation of coal blocks and there are no rules framed by the Central Government nor is there any notification issued by it under the CMN Act providing for allocation of coal blocks by it first and then consideration of an application of such allottee for grant of prospecting licence or mining lease by the State Government.[4]

The Court also held that in its view, the source of power of the Central Government in allocation of coal blocks is not dependant on the understanding of the State Governments but it is dependant upon whether such power exists in law or not.[5]

Vb. Judgment on the issue of Right Created by the Allocation Letter

The Court held that the allocation letter is not merely an identification exercise as is sought to be made by the AG, which in its own opinion creates and confers a very valuable right upon the allottee. According to it, the allocation letter by the Central Government leaves practically or apparently nothing for the State Government to decide save and except to carry out the formality of processing the application and for execution of the lease deed with the beneficiary selected by the Central Government.[6]
The Court opined that while it is true that allocation letter by itself does not authorize the allottee to win or mine the coal but nevertheless the allocation letter does confer a very important right upon the allottee to apply for grant of prospecting licence or mining lease.[7]
The allocation of coal block is not simply identification of the coal block or the allocatee but it is in fact selection of beneficiary.[8] The Court rejected the submission of Mr. Salve that the additional declaration Under Section 1A of the CMN Act seeks to do away with any vestige of power in the State in the matter of selection of beneficiaries of the mineral on the ground that had it been so, Rule 35 of the 1960 Rules would not have been amended to provide that where two or more persons have applied for reconnaissance permit or prospecting licence or a mining lease in respect of the same land, the State Government shall, consider the end-use of the mineral by the applicant.

The Court alone on the above two issues could declare that the allocations are bad in law. But treading cautiously, it also went on to check the Constitutionality of the Allocation process. It is here that the process of allocation gets murkier and horribly opaque.

Vc. Judgment on the issue as to whether ‘Public Auction’ is the only Constitutional process.

The Court while clarifying that the State is duty bound to adopt the method of auction, was confined to the specific case of spectrum and not for dispensation of all natural resources, held that there is no constitutional mandate in favour of auction under Article 14.[9] It further held that merely because methods other than auction are susceptible to abuse, such cannot be the basis for striking down the method as ultra vires the Constitution.[10]

Vd. Judgment on the issue as to the Scope of Court’s interference on the method of distribution adopted.

The Court held that this Court cannot conduct a comparative study of the various methods of distribution of natural resources and suggest the most efficacious mode, if there is one universal efficacious method in the first place and it respects the mandate and wisdom of the executive for such matters, since they are matters of economic policy.[11] It held that it cannot and will not compare which policy is fairer than the other. However, the Court would interfere when such a policy decision is not backed by a social or welfare purpose, and precious and scarce natural resources are alienated for commercial pursuits of profit maximising private entrepreneurs, adoption of means other than those that are competitive and maximise revenue may be arbitrary and face the wrath of Article 14 of the Constitution.

Ve. Judgment on the issue of Constitutionality of ‘Not using Open Bidding Process’

The explanation by the Central Government for not adopting the competitive bidding is that coal is a natural resource used as a raw material in several basic industries like power generation, iron and steel and cement. The end products of these basic industries are, in turn, used as inputs in almost all manufacturing and infrastructure development industries. Therefore, the price of coal occupies a fundamental place in the growth of the economy and any increase in the input price would have a cascading effect.

It is important to note that the Court did not strike the allocations made on the ground that

“competitive bidding would have brought in transparency, objectivity and very importantly given a level playing field to all applicants of coal and lowered the difference between the market price of coal and the cost of coal for the allottee by way of premium which would have accrued to the Government.”

The Court held that

“[it] cannot conduct a comparative study of various methods of distribution of natural resources and cannot mandate one method to be followed in all facts and circumstances, then if the grave situation of shortage of power prevailing at that time necessitated private participation and the Government felt that it would have been impractical and unrealistic to allocate coal blocks through auction and later on in 2004 or so there was serious opposition by many State Governments to bidding system, and the Government did not pursue competitive bidding/public auction route, then in our view, the administrative decision of the Government not to pursue competitive bidding cannot be said to be so arbitrary or unreasonable warranting judicial interference.”[12]

Vf. Judgment on the issue of Constitutionality of using Screening Method for Allocation

The Court categorically stated:

“if the allocation of subject coal blocks is inconsistent with Article 14 of the Constitution and the procedure that has been followed in such allocation is found to be unfair, unreasonable, discriminatory, nontransparent, capricious or suffers from favoritism or nepotism and violative of the mandate of Article 14 of the Constitution, the consequences of such unconstitutional or illegal allocation must follow.”[13]

Here, the Court found that:

(a) the entire process suffers from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected. There is no evaluation of merit and no inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective as the minutes of the Screening Committee meetings do not show that selection was made after proper assessment.

(b) By virtue of the bar contained in Section 3(3) of the CMN Act, between 1976 and 1993, no private company (other than the company engaged in the production of iron and steel) could have carried out coal mining operations in India.

Section 3(3) of the CMN Act, which was amended on 09.06.1993 permitted private sector entry in coal mining operations for captive use. The power for grant of captive coal block is governed by Section 3(3)(a) of the CMN Act, according to which, only two kind of entities, namely, (a) Central Government or undertakings/corporations owned by the Central Government; or (b) companies having end-use plants in iron and steel, power, washing of coal or cement can carry out coal mining operations.

The prospective engagement by a private company in the production of steel, power or cement would not entitle such private company to carry out coal mining operation. Most of the companies, which have been allocated coal blocks, were not engaged in the production of steel, power or cement at the time of allocation nor in the applications made by them any disclosure was made whether or not the power, steel or cement plant was operational. They only stated that they proposed to set up such plants. Thus, the requirement of end-use project was not met at the time of allocation.

(c) Moreover, the recommendation by Screening Committee of allocating coal blocks to 29 State Government PSUs, while through the Government dispensation route, allocation has been recommended for 72 PSUs. The Government dispensation route is when allocations were made by the Ministry of Coal to the Government companies. The court held that in light of the provisions of the CMN Act, as amended in 1976, the State Government or State PSUs are not allowed to mine coal for commercial use.[14]

(d) Worsening the situation is when the State PSUs, besides having been allocated coal mines for commercial purpose, had also been allowed to form joint venture companies, i.e., 51% shareholding of State PSUs and 49% of private company. However, in the joint venture agreements between the State PSUs and the private companies, mining operations have been given to private company, which the Court holds has “virtually defeated the legislative policy in the CMN Act and winning and mining of coal mines has resultantly gone in the hands of private companies for commercial use.”[15]

(e) Many of the companies selected by the Screening Committee had no recommendation from the State Government or from the Ministry of Power and CEA and some of them had no recommendation either from the State Government or the Ministry of Power and CEA at all. For example, for Durgapur-II/Taraimar, the selected company Balco had no recommendation at all from the State Government, Ministry of Power and CEA.[16]

(f) The Screening Committee did not assess the capacities and coal requirement of the companies, for instance in 26^th meeting, where it decided that detailed formulation of groups or 'common pool' for allocation of coal/blocks in line with the dispensation being contemplated in MCL blocks will be worked out by the Ministry of Coal. The Court held that the expression 'a company' occurring in Section 3(3)(a)(iii) of the CMN Act does not cover "consortium of companies" or "formulation of groups" or "common pool". The decision of the Screening Committee to recommend allocation of coal blocks to consortium of companies or formulation of groups or common pool is in contravention of Section 3(3)(a)(iii) of the CMN Act.[17]

In conclusion, the Screening Committee has never been consistent, it has not been transparent, there is no proper application of mind, it has acted on no material in many cases, relevant factors have seldom been its guiding factors, there was no transparency and guidelines have seldom guided it.

The allocation of coal blocks through Government dispensation route, however laudable the object may be, also is illegal since it is impermissible as per the scheme of the CMN Act. No State Government or public sector undertakings of the State Governments are eligible for mining coal for commercial use. Equally, there is also no question of any consortium/leader/association in allocation.

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[1] Monnet Ispat and Energy Ltd. v. Union of India and Ors. (2012) 11 SCC 1,¶ 130

[2] CoalGate Judgment ¶¶ 50-56; Baijnath Kadio v. State of Bihar (1969) 3 SCC 838; Hingir-Rampur Coal Co. Ltd. v. State of Orissa AIR 1961 SC 459; State of Orissa v. M.A. Tulloch and Co. AIR 1964 SC 1284; Sandur Manganese and Iron Ores Ltd. v. State of Karnataka (2010) 13 SCC 1, State of Assam v. Om Prakash Mehta (1973) 1 SCC 584; Monnet Ispat and Energy Ltd. v. Union of India and Ors. (2012) 11 SCC 1,

[3] CoalGate Judgment ¶ 57.

[4] CoalGate Judgment ¶ 58

[5] CoalGate Judgment ¶ 59.

[6] CoalGate Judgment ¶ 61.

[7] CoalGate Judgment ¶ 70.

[8] CoalGate Judgment ¶ 64.

[9] CoalGate Judgment ¶ 94; Natural Resources Allocation, In Re Special Reference No. 1 of 2012 (2012) 10 SCC 1, ¶¶ 129- 131.

[10] CoalGate Judgment ¶ 95; Natural Resources Allocation, In Re Special Reference No. 1 of 2012 (2012) 10 SCC 1, ¶ 135.

[11] CoalGate Judgment ¶ 96; Natural Resources Allocation, In Re Special Reference No. 1 of 2012 (2012) 10 SCC 1, ¶ 146.

[12] CoalGate Judgment ¶ 105.

[13] CoalGate Judgment ¶ 105.

[14] CoalGate Judgment ¶ 153.

[15] CoalGate Judgment ¶ 153.

[16] CoalGate Judgment ¶ 148.

[17] CoalGate Judgment ¶ 138.

Analyzing the CoalGate Judgment: Part 1

On 24th September, the allocation to 214 Coal Blocks out of the illegal 218 blocks are cancelled by the Hon'ble Supreme Court here. By the judgment dt. 25th August 2014, it had struck down the allocation process on grounds of (i) illegality and (ii) unconstitutionality. While the illegality part is technical in nature, it is unconstitutionality part that poses serious questions of integrity, ethics, fairness and honesty of the actors involved in the whole process (rather swindle).

The judgment is wrought with a quagmire of dates of meetings of the screening committee, names of the applicant companies involved (whether allotted or not), provisions of the statute involved, but the post attempts to be as brief as possible, and at the same not to lose any major strand of arguments that culminated into the striking down of the whole allocation process.

Part I will discuss the background of the case, relevant provisions and the issues involved. One needs to only gloss over the relevant provisions first, then proceed with reading the Contentions, after that re- read the provisions carefully.

Manohar Lal Sharma v. The Principal Secretary, 2014 (9) SCALE 693

I. Facts of the Case

The present writ petitions were filed in the nature of Public Interest Litigation, challenging the legality and constitutionality of the allocation of coal blocks made by the Central Government for the period 1993 to 2010. The judgment is presently considering the matter w.r.t. quashing the allocation of coal blocks to private companies made by the Central Government between the said period.

II. Relevant Provisions

IIa. Mines and Minerals (Development and Regulation) Act, 1957

The Introduction of the Act states that in the Seventh Schedule of the Constitution in Union List entry 54 provides for Regulation of mines and minerals development to the extent to which such Regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest. On account of this provision it became imperative to have a separate legislation. In order to provide for the Regulation of mines and the development of minerals, the Mines and Minerals (Regulation and Development) Bill was introduced in the Parliament.

Section 2- Declaration as to the expediency of Union Control- It is hereby declared that it is expedient in the public interest that the Union should take under its control the Regulation of mines and the development of minerals to the extent hereinafter provided.

Section 4 mandates that prospecting or mining operations shall be under licence or lease. Sub-section (2) provides that no reconnaissance permit, prospecting licence or mining lease shall be granted otherwise than in accordance with the provisions of the Act and the rules made thereunder.

Section 5 mandates that in respect of any mineral specified in the First Schedule, no reconnaissance permit, prospecting licence or mining lease shall be granted except with the previous approval of the Central Government. Coal and Lignite are at item No. 1 in Part A under the title "Hydro Carbons/Energy Minerals" in the First Schedule appended to the 1957 Act.

Section 10- Application for prospecting licences or mining leases (1) An application for a reconnaissance permit, prospecting licence or mining lease in respect of any land in which the minerals vest in the Government shall be made to the State Government concerned in the prescribed form and shall be accompanied by the prescribed fee.

Section 11- Preferential right of certain persons:

(1) Where a reconnaissance permit or prospecting licence has been granted in respect of any land, the permit holder or the licensee shall have a preferential right for obtaining a prospecting licence or mining lease, as the case may be, in respect of that land over any other person;

Provided that the State Government is satisfied that the permit holder or the licensee, as the case may be…

(2) Subject to the provisions of sub-section (1), where the State Government has not notified in the Official Gazette the area for grant of reconnaissance permit or prospecting licence or mining lease, as the case may be, and two or more persons have applied for a reconnaissance permit, prospecting licence or a mining lease in respect of any land in such area, the applicant whose application was received earlier, shall have the preferential right to be considered for grant of reconnaissance permit, prospecting licence or mining lease, as the case may be, over the applicant whose application was received later:

Section 13 empowers the Central Government to make rules in respect of minerals. By virtue of the power conferred upon the Central Government Under Section 13(2), the 1960 Rules have been framed for regulating the grant of, inter alia, mining leases in respect of minerals and for purposes connected therewith.

Section 19 provides that any prospecting licences and mining leases granted, renewed or acquired in contravention of the 1957 Act or any rules or orders made thereunder shall be void and of no effect.

It is important to note that the legislature inserted by the Mines and Minerals (Development and Regulation) Amendment Act 2010, Section 11A- Procedure in respect of coal or lignite- The Central Government may, for the purpose of granting reconnaissance permit, prospecting licence or mining lease in respect of an area containing coal or lignite, select, through auction by competitive bidding on such terms and conditions as may be prescribed, a company engaged in… and the State Government shall grant such reconnaissance permit, prospecting licence or mining lease in respect of coal or lignite to such company as selected through auction by competitive bidding under this section.

By exercising power u/s 13, the 1960 Rules were framed by the Central Government.

Chapter IV of 1960 Rules deals with grant of mining leases in respect of land in which the minerals vest in the Government.

Sub-rule (1) of Rule 22 provides that an application for the grant of a mining lease in respect of land in which the minerals vest in the Government shall be made to the State Government in Form I through such officer or authority as the State Government may specify in this behalf.

Rule 35 provides that where two or more persons have applied for a reconnaissance permit or a prospecting licence or a mining lease in respect of the same land, the State Government shall, for the purpose of Sub-section (2) of Section 11, consider besides the matters mentioned in Clauses (a) to (d) of Sub-section (3) of Section 11, the end use of the mineral by the applicant.

IIb. Coal Mines (Nationalisation) Act 1973

This Act was enacted to provide for the acquisition and transfer of the right, title and interest of the owners in respect of coal mines specified in the Schedule with a view to reorganizing and reconstructing any such coal mines so as to ensure the rational, coordinated and scientific development and utilisation 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.

Under the Coal Mines (Nationalisation) Act, 1973, coal mining is exclusively reserved for the public sector, except in case of companies engaged in the production of iron and steel, and mining in isolated small pockets not amenable to economical development and not requiring rail transport.

Section 3(1) provides that on the appointed day (i.e., 01.05.1973) the right, title and interest of the owners in relation to the coal mines specified in the Schedule shall stand transferred to, and shall vest absolutely in the Central Government free from all encumbrances.

Section 1-A was introduced when this Act was amended by Coal Mines (Nationalisation) Amendment Act 1976 by which it was declared that it was expedient in the public interest that the Union should take under its control the Regulation and development of coal mines to the extent provided in Sub-sections (3) and (4) of Section 3 and Sub-section (2) of Section 30 of the CMN Act.

Section 1-A (2)- The declaration contained in Sub-section (1) was to be in addition to and not in derogation of the declaration contained in Section 2 of the 1957 Act.

Section 3 (3) (a)- no person other than:

(i)             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 such Government, company or corporation, or

(iii)          a company engaged in the production of iron and steel,

shall carry on coal mining operation, in India in any form.

Section 3 (3) (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)…

Later, the CMN Act was further amended in 1993, considering the need to augment power generation and to create additional capacity during the eighth plan, since the Government have taken decision to allow private sector participation in the power sector. Consequently, it had become necessary to provide for coal linkages to power generating units coming up in the private sector. Therefore, in order to allow private sector participation in coal mining for captive use for purpose of power generation as well as for other captive end uses to be notified from time to time and to allow the private sector to set up coal washeries.

Therefore, in Section 3 (3) (a) (iii)- a company engaged in- (1) the production of iron and steel,

(2) generation of power, (3) washing of coal obtained from a mine, or (4) such other end use as the Central Government may, by notification, specify.

By Notifications dt. 15.03.1996 and 12.07.2007, the Central Government specified production of cement and syn-gas obtained through coal gasification (underground and surface) and coal liquefaction to be an end-use for the purposes of the CMN Act.

III. Contentions defending the Allocations

(i) Ld. Attorney General submitted that in light of the power under Entry 54, List I, Schedule 7, sections 1A and 3(3) of the CMN Act and the declaration contained in Section 2 of the 1957 Act, the Central Government is empowered to allocate coal blocks.

(ii) Moreover, after allocation, the allocatee has to make an application for grant of mining lease or prospecting licence to the State Government in accordance with the 1957 Act and the 1960 Rules. It is for these reasons, he submits, that none of the States or any private person ever challenged the grant of allocation by the Central Government on the ground that the Central Government was not empowered to allocate the coal blocks.

(iii) According to the AG, the allocation letter does not by itself confer the right to work mines and the identification of the coal block does not impinge upon the rights of the State Government under the 1957 Act.

(iv) Ld. Counsel Harish Salve, submitted that section 1A(2) of the CMN Act makes the declaration in addition to the existing declaration in Section 2 of the 1957 Act, thus doing away with any vestige of power in the State in the matter of selection of beneficiaries of the mineral.

(v) Further, that the allocation letter issued by the Central Government is the procedure which regulates the exercise Under Rule 22 of the 1960 Rules (and Section 10(3) of the 1957 Act) by the State Government and that procedure is to ensure that a lease is granted to a company engaged in stipulated permissible activities by making it a two step process, viz., the issue of letter of allotment conditional upon the end-use plant, followed by grant of a lease once end usage is achieved.

IV. Contentions against the Allocations

(i) That CMN Act does not, in any way, give the power of calling applications, selection and allocation of coal blocks to the Central Government and Section 3 of the CMN Act only provides eligibility criteria for allocation of coal mines.

(ii) The minutes of the Screening Committee meetings do not show that selection was made after proper assessment. There is no evaluation of merit and no inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective.