CAG Clarification On Coal Blocks May Help Stabilize The Scenario

The CAG draft report on the illegal allocation of coal blocks in India has raised too many uncomfortable questions for the Indian government. Nonetheless, if the CAG draft report is true, the primary concern is about knowing which are those companies involved in the mind-boggling scam of Rs 10.5 lakh crore. It would indeed go down in history as the biggest scam of its kind if the report about the biased allocation of 150 odd coal mines to private and public sector companies between 2004-2009 turns out to be true.

However, as per media reports, the CAG has submitted a letter stating that the report is just a draft and hence could be misleading. The news, however, pushed the stocks of the mining, metal and steel companies to the edge and they continue to remain under pressure. The draft has not been published and no names have yet been announced. Coal is the most important raw material used as a source of fuel by the metal and power companies and therefore the scrips of such companies got impacted as soon as the media got wind of the development.  

The power and metal index yesterday closed down by 3.62 per cent and 3.29 per cent respectively. However, the clarification issued by the government about the report being at a preliminary stage may help the counters bounce back and with the fundamentals remaining intact we believe there won’t be much impact on the counters until there is any concrete and reliable data dished out by the CAG.

The mining sector on the whole has been in the news for various scams such as illegal allocation of coal blocks, illegal iron ore mining in the region of Karnataka and other states, etc and all this has impacted the economy. Moreover, the lower mining output has impacted the GDP growth too. One of the reports submitted by an empowered committee investigating the illegal mining of iron ore has dented the production of steel and the performance of some of the steel companies. As such, the industry has requested for relief by allowing them to continue with mining operations, the decision currently pending with a bench of the Supreme Court.

Meanwhile, a decision on the resumption of mining activities in Karnataka has been postponed by the Supreme Court to March 31, 2012.  The steel industry in Karnataka, in particular, is facing a severe shortage of iron ore, thereby impacting steel production. JSW Steel, which has major operations in this region, has therefore asked the Supreme Court to at least allow operations of those mines that have been given a clean chit under the ‘A’ category. Given all such developments, investors should keep a lookout for the Supreme Court’s decision that will have a bearing on the sustainability of steel production.