Sukumar Mukhopadhyay: A FactualAppraisal of CAG’s Report on Coal Block Allotment

 

Coalgate is an expression created by the Media and I do not propose to use it.  It assumes that there is a massive scam in coal block allotment in the last few years.  The issue has been so politically charged that extreme views are being expressed.  In this treatise, I propose to discuss the factual position depending on the actual report of the CAG, the available comments of he Prime Minister in the web-site and some of the non-political comments of different analysts and important personalities.   I shall try to be completely apolitical.

            The report of the CAG is called “Performance Audit on Allocation of Coal Blocks and Augmentation of Coal Production for the year ended March 2012”.   It has discussed the wider issue of widening gap between demand and domestic supply and import of coal.  The Coal Mines Nationalization Act 1973 was amended in 1976 allowing allotment of coal mines to private companies for their captive end use (they cannot sell to others) in the production of iron and steel, cement and power.   However, allotments by the Screening Committee were made merely on the basis of recommendation from State Governments and other administrative Ministries without ensuring transparency.

 In some cases there was nothing on record in the minutes or in other documents the reason for such allotments.  In July 2004, the Secretary (Coal) submitted a “comprehensive note  for competitive bidding for allocation of coal blocks” to the Minister of State for Coal and Mines highlighting that “since there is a substantial difference between the price of coal supplied by Coal India and coal purchased through private mining, there is a windfall gain to the person who is allotted the captive blocks”.  This note further said that “the bidding system will only tap part of the windfall profit for the public purposes”.   The Minister of State (Coal and Mines) referred the matter to the Cabinet.  On the draft Cabinet Note the PMO raised objection pointing out certain disadvantages in competitive bidding.  Secretary (Coal) replied that these objections are no merits.  There were so many discussions and it is clear that while Secretary (Coal) always wanted the competitive bidding system, the PMO opined that it would be appropriate to amend the Mines and Minerals (Development and Regulation) (MMDR) Act 1957 so that the system of competitive bidding could be made applicable to all minerals.  Amending an Act covering all mines and minerals was by nature highly controversial because it would withdraw the existing power of the States.    In the meantime the Ministry of Law in June 2004 had opined that in 28th July 2006 that “it was open to the Government to introduce the auctioning of coal mining blocks for captive use through competitive bidding as the section process for allocation was possible by amending the existing administrative instruction and such a process could be governed by the provisions of the Indian Contract Act 1872”.  This view was reiterated by the Law Secretary in August 2006 also.   Rather than following this simple method, the Government chose the longest and the most controversial method of amending the law involving the rights of the States.  This naturally took time and it is only  on 9.9.2010 the amendment of the Act was passed and notified and on 2.2.2012 (after eighteen months) the rules for auction were framed.    The CAG’s case is that while there was a clear cut opinion of the Law Ministry in favour of auctioning by merely issuing an executive order, the whole process was delayed for several years by choosing the complicated route of amending the law comprehensively.  If the government really wanted to do what the Secretary (Coal) resolutely pursued since July 2004 and which was supported by Law Ministry in August 2006, the long delay would not have taken place.  The Government could have continued with the auctioning by administrative action while at the same time amending the law.  The CAG’s argument is fundamentally that “delay in introduction of competitive bidding has rendered the existing process (of allotment) beneficial to a large number of private companies to the extent of 1.86 lakh crore.  The CAG’s conclusion is exactly the following  “A part of this financial gain could have accrued to the national exchequer  by operationalising the decision taken years earlier to introduce competitive bidding for allocation of coal blocks”. 

Estimation:

            CAG estimated financial gains to the tune of 1.86 lakh crore likely to accrue to private coal blocks allottees based on the following method for (i) opencast mines (ii) Mixed mines where mining plan are available and (iii) mixed mines where mining plans are not available. He has left out public sector companies and underground mines. Average sales price for similar grade of CIL mines is more than the average cost of these grades even including the financing cost.  This difference has been taken to multiply the extractable reserves for these three types of mines.  The total comes to exactly 185,591.34 crore.  There is hardly any postulate or assumption involved in this calculation excepting the very general one that similar goods are sold at the same price and their cost of manufacturing and the financial cost are the same.

            The calculation in the final draft has been criticized by some because it is much less than in the draft. But that is its strength , not weakness. After the Ministry points to some aspects, they are accommodated which is always the practice. The calculation has also been criticized as purely hypothetical by some analysts.  The fact is that there has to be some assumption when by nature it is a financial gain,  “likely to accrue” and “could have accrued”.   By its very nature it is like calculating under valuation for imported goods which is done by comparing with same and similar goods as provided in the valuation Sections of the Customs Act.   Similarly here also the same types of similar goods have been accepted for comparison of value and cost.  Customs Law regarding under valuation provides for best judgement assessment which is based on assumptions.  All theories of Economics are based on assumptions.  Even the Keynesian theory is based on assumption about propensity to consume and save.  So a theory is as good as its assumptions.  Here the assumption by the CAG is minimum and is also unassailable. There is no assumption about policy matters, as some critics have argued.

Power of CAG

            The power of the CAG to delve into policy has been questioned.  However, the law is clearly on his side.  Section 16 of CAG`s (Duties, Powers and Conditions of Service) Act 1971  says that  : “It shall be the duty of the CAG to audit all receipts which are payable into the Consolidated Fund of India …. and to satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on  the assessment, collection and proper allocation of revenue and are being duly observed ...”.So he has the power to delve into the design of the rules and procedures. Thus performance audit is his jurisdiction and he has been doing it for more than four decades.

            It may be of interest to know that the theory of unjust enrichment was first discussed with the CAG and later canvassed by the PAC.  Section 11B of the Central Excise Act was amended and also the relevant Section of the Customs Act.  It is now applicable to service tax also.  Similarly Section 125(2) of the Customs Act was amended at the instance of the CAG and the PAC. This amendment has a background.  Section 125(2) says the following: “Where any fine in lieu of confiscation of goods is imposed under sub-section (1) the owner of such goods or the person refer to in sub-section(1) shall, in addition, be liable to any duty payable in respect of such goods”.   The amendment was also accompanied by an amendment of sub-section(1) to introduce the concept that the duty will be liable to be paid by the person from whose possession the goods are seized even where the owner of the goods was not known.  This was quite a departure from the existing understanding of the Customs Act under which the taxable event was the act of importation and if the importer was not known, the tax could not be levied on the owner who had not committed the act of importation.  There were several Supreme Court judgements to support this view.  These Court judgements  categorically state that the taxable event in the case of imported goods is not ownership but the act of importation and the person who does the act of importation is the sole person who is liable to pay the duty.  This amendment incorporated in Section 125(2) makes a change in the fundamental position enunciated by the Supreme Court not only in one judgement in 1963  but subsequently in a series of judgements.  Even after this amendment in 1985, there are other Supreme Court judgements given  in 1989 and 1990 which reiterated the same position that the ownership is not the taxable event but the act of manufacture (or act of importation for Customs).   This amendment, therefore, was quite a wrong policy and, I would say, quite unconstitutional also.  But the government introduced both these policies mentioned above without even a murmur against the CAG that he has no jurisdiction to deal with policy.   I am not holding the view that the CAG can delve into fundamental policies such as fiscal policy of the Ministry of Finance or monetary policy of the Reserve Bank  or the general policy of whether nationalization is better than laissez faire.  He can only deal with policy if it relates to the design of rules and procedures relating to the assessment, collection and allocation of Revenue for the Consolidated Fund of India.  This has been done by the CAG for several decades.  Performance Audit is going on for long.  Earlier the government did not protest because the issue did not touch any involvement by extremely senior political functionaries.  Now that it has touched them, they are raising huge noise about the power of the CAG. 

Delay due to the involvement of States

            The delay in the amendment of the law could have been due to the involvement of the States but if the government wanted to introduce competitive bidding straight away by following the Law Ministry’s opinion of August 2006, there would have been no delay. Coal is a central subject and the views of States were not relevant for allocation.

Delay due to obfuscation by Law Ministry

            This is a very cruel way of passing on the buck to another Ministry.  If the Law Ministry have given clear cut opinion that executive decision was enough, it was enough for the Government to act on it.  If the Government makes too many references clouding the issue, bringing the question of amendment of  a bigger law, naturally the issue is  obfuscated.  But the Law Ministry is not responsible for that.

No loss since the blocks have not started operating

            The operation of the block is inconsequential since the “financial gain likely to accrue” is when the blocks became operative.  The fact is that the private factories have got grossly undervalued coal blocks which will accrue profit to them when the blocks start operating.  And the government has lost ownership of them and so the opportunity of using them.

Auctioning would increase the cost of production of coal, steel, cement

            This argument is not valid because the government itself has decided to auction on principle since 2006.  Only it has done it too late.

Conclusion

            To auction or not to auction is not the question.  The question is, why decide to auction so late.  This late decision has led to undue enrichment of a private sector under less than transparent circumstances. But all this will be better understood if there is a thorough discussion in the Parliament.  The discussion in the Parliament should not be stalled.  May be after the discussion the Parliament may take a decision to cancel the allotment of those coal blocks  which have breached the conditions of allotment.  This is not a case where the principle of promissory estoppel can be invoked.   There is no promise here since the sale has already taken place.  Allotment can only be revoked if there is a violation of the condition of allotment or if allotment was obtained by misrepresentation of facts.  The legal position is just similar about the law relating to cancellation of license in the case of customs.