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Coal scam: Anxious moment till judgement day

Metal stocks reacted sharply on the day Supreme Court declared all captive coal blocks allotted since 1993 as illegal. But after the dust settled, metal stocks recovered part of the lost ground the very next day.

So what changed overnight? Nothing except that market participants had more time in their hand minus the noise in the market to carefully go through the Supreme Court order. Experts commenting on the issue too helped in controlling the panic.

Panic was created when reports of Rs 2 lakh crore of investments will be hit because of the Supreme Court order were flashed. Investors hit the sell button on all those companies who were allocated coal mines not bothering to check the text of the Supreme Court judgement. No one even bothered to check before selling Tata Steel that the company has been allocated coal blocks before 1993.

Nowhere did the honorable Supreme Court say that they would be de-allocating the mines, at least not yet. Though the court said that allocations have been illegal and arbitrary but they have not been cancelled. Future course of action will be decided after further hearings.

Emkay Global Financial Services in their comment on the event have said that as per their discussion with lawyers engaged in the case a committee is likely to be set up to decide the future course of action on the coal blocks that have been declared illegal.

Harish Salve, Senior Advocate, Supreme Court has been quoted in CNBC saying “Unless something is brazenly unconstitutional, every illegality or every irregularity, every arbitrary action does not necessarily need the court to invalidate where invalidation of an individual action will be more productive  of public mischief, or cause public injury, greater than public good. That’s a well established principle.”

Salve also said that the court is perfectly conscious of balancing the need of industrialization and added that in his interaction with the Judges he feels that there will be a committee to three retired judges that will be set up to inform the Supreme Court of the action plan ahead.

Vinayak Chatterjee, chairman, Feedback Infrastructure also in an interview to CNBC said that the SC is unlikely to disrupt operations. It is unlikely to do anything drastic that will affect production of the mines or its production to other sectors of the economy.

With some clarity that supplies will not be disturbed or alternate sources would be available for the companies the doomsday scenario has been substantially downplayed. Worst case scenario would be that profitability of the companies would be affected rather than the earlier premise of units having to shut down their operations.

As for the argument that Rs two lakh crore of investment would be jeopardized an article in Scroll.in points out that the actual figure that would be affected is only Rs 4,000 crore. The article points out that only 39 of the 218 blocks allocated since 1993 have started production till December 2013. Government’s own numbers point out that Rs 8,777 crore of investment has gone in to 30 blocks which are in production and 17 which are nearing production.

Though some of the companies which were allotted mines have recovered banks and finance companies continue to be battered. Analysts expect that anxiety will continue till September 1, 2014 when the Court would hear the consequences of the illegality of the coal blocks. Chatterjee feels that there will be a transition from an old system of allocating coal to a new system that is more transparent etc and in the meanwhile steps will be taken to see that business does not suffer.

Broking firms are speculating on the options that the Supreme Court has in front of it. Blocks could be auctioned while others say that existing users would be allowed to continue to operate after paying a fine.

Emkay Global sums it up well by saying that till there is clarity on the part of the government and Supreme Court on future course of action, overhang might continue.

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