Indian Supreme Court Cancels Mining Concessions

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On 24 September 2014, the Indian Supreme Court cancelled 214 out of the 218 existing coal-mining licenses. The only mining licences which were not cancelled were four coal blocks made to Government controlled undertakings linked to major state power projects, and which did not involve a joint venture with a private company.

The decision follows a report from federal auditors in 2012, which found that India had lost roughly US $33bn due to coalfield rights being sold off cheaply. The audit report was supported by an earlier judgment of the Indian Supreme Court on 25 August 2014 where the Court declared that all 218 coal mining licenses both to private and state companies were assigned illegally by the central government in a process that lacked transparency and was arbitrary and illegal.

The order of the Supreme Court of India takes effect immediately for 172 mines that were not in production, while the cancellation for the remaining 42 blocks that have already begun production or should come into production during 2014 - 2015 will take effect in six months, i.e. by 31 March 2015. After this period, the Government will be free to hold new auctions for the cancelled coal fields, although Coal India Ltd., a public sector undertaking, will continue the extraction of coal from 31 March 2015 until such time as the auctions will have been completed in order to ensure security of supply to India’s coal dependent energy sector. 

In addition, the Court has ordered the licence holders of the coal blocks that were in production must pay as a levy a 295 Rupees (approximately US $5) per metric ton of coal they have already extracted or will extract prior to the termination date of 31 March 2015. The levy is designed as a means of recouping the losses reported by the federal auditors, but has been criticised for being an arbitrary sum.

The Court issued both the 25 August judgment and the 24 September order without hearing any of the companies adversely affected by its resolution. In fact, the Supreme Court refused to grant a hearing to any individual licence holder or to appoint a committee to examine each individual allotment and consider the specific circumstances of each licence award. Instead, the order assumes that each and every award was tainted by corruption and that the economic losses suffered by India as a result of this corruption applied equally across each licence. Furthermore, there is nothing in either decision of the Supreme Court that suggests that the companies involved will be provided with compensation for their development costs, despite many having invested many millions and, in some cases, billions of dollars into India. As a result, the share prices of companies involved in coal mining in India have tumbled.

This case underlines the difficulties that can be faced by companies investing in foreign countries and the potentially significant losses that can arise from state actions and investigations that lead to the cancellation of licences. Apart from domestic legal proceedings in India, foreign investors affected by the Supreme Court decisions may also wish to consider availability of legal strategies under bilateral investment treaties (“BITs”), especially when adequate compensation is not offered to them.

India has signed over 80 BITs, with countries such as the UK, China, Russia, Germany, France and Australia. BITs typically provide that a country should treat investors from the other country fairly and equitably, affording them legal protection, and should not expropriate their assets (which will normally include mining licences), except for public purpose and in a non-discriminatory manner, within due process of law and upon compensation of the market value of the investment. Eligible investors, who contend their treaty rights were violated by a state, may typically assert these rights against the state in international arbitration, seeking damages and/or other remedies on the basis of international law. Many of pending or past investment treaty disputes arose from cancellation of permits, licenses and concessions in the extractive industry.

India has been party to at least 10, pending or concluded international arbitration cases instituted under BITs by foreign investors, including at least one case in which it was ordered to pay damages for acts of its judiciary.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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