Shares of certain steel and power companies crashed on Monday as the Supreme Court ruled that coal blocks allotted by previous UPA government between 1993 and 2010 were illegal.
Domestic share indices which hit fresh record highs early on Monday ended flat amid selling pressure in metal and power stocks. S&P BSE Metal index crashed 4.3% to 12291. Shares of Jindal Steel and Power tanked nearly 14%, while Hindalco fell nearly 10%, and Tata Steel, 5%.
Analysts said the ruling was most negative for JSPL followed by Hindalco and Sesa Sterlite. Tata Steel is however unlikely to be impacted as all its caol mines were allocated before 1993. Many called it a very negative judgment as the SC has gone beyond the coal blocks investigated by the CAG (2004 onwards). SC's decision was also compared with the decision in case of 2G telecom scam where the court had cancelled 122 licences. "If SC decides to deallocate operating coal mines, it will be extremely negative for investor sentiments. Lakhs of people are employed in these mines and the companies's future operations depend on these mines. I am hopeful that mines may not be de-allocated but could face retrospective penalties," Giriraj Daga, senior analyst at Nirmal Bang said.
"We are interpreting usage of term 'illegal' as need to stop operations, or cancellation of allotted coal blocks. However, it is too early to interpret anything. More clarity would emerge in the next hearing. However, any stoppage in coal mining would lead to higher imports," Prakash Duvvuri, head of research at OreTeam said.
"It is still possible for the above companies to get their respective coal mines but they might now have to pay a price for the same or take part in an auction depending on the SC's direction on September 1st, which reduces the economic benefit of these mines," CLSA said in a report.
Ashima Tyagi, senior consultant with Infraline Research, said, "The apex court has come down heavily against allocation of blocks to state PSUs, for this implies mining of coal for commercial purposes. Further, JVs between these State PSUs as well as other private companies have been cited as in contravention to the provisions of the Coal Mines Nationalisation Act."
"The message to the international investor community shall be in the negative, if there isn't much clarity on the applicability of laws and court-mandated directives are feared at every step," said Tyagi.
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