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Cos sitting on coal blocks could lose bank guarantees

Delays in putting their captive coal blocks to use could cost companies dear.

Delays in putting their captive coal blocks to use could cost companies dear. In the wake of the CAG report criticising coal block allocations, the government has finalised a set of guidelines for performance-linked encashment of bank guarantees furnished by these companies. These penalties would be in addition to possible de-allocation of blocks in case of continued negligence.

The government will take the final call on de-allocating captive blocks only after the inter-ministerial group (IMG) reports to the coal ministry. The IMG, which met here on Monday, is slated to meet for three consecutive days from Thursday to give companies an opportunity to present the reasons for delays. The IMG, sources said, will give its report to the ministry by September 15.

According to sources, as per guidelines approved by the IMG, delay in developing blocks ? which means start of initial work and securing necessary clearances ? will attract a deduction of 50% of bank guarantee (BG).

Another 50% will be deducted if targeted peak production is not achieved on time. There could be additional deductions to the extent of 10% of total BG every year for delays in meeting production schedules. Companies would be asked to re-validate and replenish the BG to the extent of its deduction till the blocks reach rated production levels.

The IMG has also proposed that BG procedures should be made uniformly applicable to all allocated coal blocks and not merely those awarded after 2005 when this system was introduced and after 2007 when the system of linking BG deduction linked to production was introduced. The changes will bring almost 46 blocks allocated prior to 2005 under the BG framework and another 118 blocks allocated prior to July 2007 where BG was furnished but its deduction was not linked to achievement of milestones.

The new guidelines have been framed after the CAG rapped the coal ministry that delay in finalising the methodology for accounting BG and absence of a guidelines for it resulted in several companies escaping penalties. In fact, CAG also pointed out that as of November, 2011, BGs amounting to Rs 311.81 crore in respect of 15 blocks had lapsed and were not renewed.

?Guidelines will now be notified by the coal ministry to put in place a system of financial penalty for non achievement of stated milestones for development of captive coal blocks. We will also see how we can invoke BG for blocks that were awarded prior to the introduction of this system,? said a government official privy to the development.

In order to validate the new system, the government will also ask companies where delays over milestones are noticed but where substantial progress and investment has also been made to accept the new guidelines or face de-allocation and deduction of BG.

The new guidelines also gives companies with captive allocation the option to surrender their coal blocks if the projects are inordinately delayed due to regulatory and statutory clearances.

On Monday, the IMG headed by additional secretary in the coal ministry reviewed the progress of 58 captive coal block which were earlier issued show cause notices. According to a ministry statement, ?latest progress as reported by the Coal Controller will also be taken into account before recommending on the action against coal block allocatees. The IMG has also firmed up the guidelines for proportionate deduction of BG for failure to achieve mile stones for development of the block.?

The ministry had issued show-cause notices to a host of companies including the Tatas, Essar, ArcelorMittal, GVK Power, Hindalco, Grasim Industries, JSW and Bhushan Steel. Indications are that deallocation is likely only in cases of serious lapses in taking steps to start production.

Sources said in the initial meetings, the IMG found evidence of delays on part of the company in more than a dozen cases. These could be fit cases for deallocation. The coal ministry has deallocated 24 captive coal blocks so far bringing down the total captive blocks to 194 at present.

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First published on: 03-09-2012 at 22:18 IST
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