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Coalgate and Judicial Review of Distribution of Natural Resources

In the previous two posts, Manish has exhaustively analysed the Supreme Court’s verdict in M.L. Sharma vs Principal Secretary [“Coalgate”]. In the broader scheme of things, the judgment makes an important contribution to the Supreme Court’s evolving jurisprudence with respect to the judicial review of distribution of natural resources. Recall that in the First Spectrum Case, the Supreme Court had taken a highly interventionist stance with respect to the 2G Spectrum Scam, not only quashing the allocation of spectrum, but also – in effect – imposing a public auction as the only legitimate method for governmental distribution of natural resources. Recall also that in the Second Spectrum Case (a Presidential reference), the Supreme Court backtracked, limiting the holding of the First Spectrum Case (public auction required) to its specific facts (distribution of spectrum, not all natural resources), and also observing that while an auction was, presumably, the only legitimate method if the objective of distribution was to raise maximal revenue, it was also open to the government to set goals other than revenue maximisation, consistent with the common good. In such cases, clearly, an auction might not be the best method of distribution.

In Coalgate, the Supreme Court affirms the view of the Constitution Bench in the Second Spectrum Case. It accepts the government’s contentions that the requirements of the industry at the time of liberalisation provided strong reasons (in 1993) not to distribute coal blocks via auction. Nonetheless, it holds the allocation itself to be illegal. It does so by examining the minutes of all 36 Screening Committee Meetings (where the allocation decisions were taken), and finds that there were no relevant guidelines to determine inter-se merit and priority between applicant companies, and that whatever guidelines were there, were constantly changed. It also finds that there was no discussion about inter-se merit before allocations were awarded. On these grounds, it finds an Article 14 (arbitrariness) violation in the State action.

I’ve written in detail about the place of Coalgate within the broader framework of the Supreme Court’s natural resources jurisprudence elsewhere (see here and here). In this post, I want to focus on something specific: the standard of review that the Court does not directly expound, but which implicitly emerges out of its analysis.

The primary reason why the Court holds the allocations illegal – as mentioned just above – is because of the absence of guidelines that would help the Screening Committee decide which applicants would succeed. In the first set of meetings, it notes, there are no guidelines at all. When some kind of guidelines are framed, they make no mention of determining inter-se merit. Notice that there are three things that the Supreme Court does not do (or rather, it is spared doing, because of the absence of guidelines): examining the sufficiency of the guidelines for actually determining inter-se merit, examining the government’s factual assessment of inter-se merit within the framework of the guidelines, and examining the outcomes of the allocations.

All this sounds very familiar. Indeed, it is analogous to the Court’s jurisprudence under Article 356 (in the emergency powers chapter) of the Constitution. Article 356 allows for President’s Rule if “on receipt of report from the Governor of the State or otherwise, [the President] satisfied that a situation has arisen in which the government of the State cannot be carried on in accordance with he provisions of [the] Constitution.” In S.R. Bommai vs Union of India, the Supreme Court held:

“The President’s satisfaction [under Article 356] has to be based on objective material. That material may be available in the report sent to him by the Governor or otherwise or both from the report and other sources. Further, the objective material so available must indicate that the government of the State cannot be carried on in accordance with the provisions of the Constitution. Thus the existence of the objective material showing that the government of the State cannot be carried on in accordance with the provisions of the Constitution is a condition precedent before the President issues the proclamation. Once such material is shown to exist, the satisfaction of the President based on the material is not open to question. However, if there is no such objective material before the President, or the material before him cannot reasonably suggest that the government of the State cannot be carried on in accordance with the provisions of the Constitution, the proclamation issued is open to challenge.”

As the Law Commission points outS.R. Bommai limits judicial review of an Article 356 proclamation to verifying whether there existed material that was relevant to a consideration that the government of a state cannot be carried on in accordance with the Constitution. What the Court cannot do is substitute its own opinion for whether a state government could or could not be carried on in accordance with the Constitution, and nor can it impugn the process by which the President (i.e., in effect, the Council of Ministers) came to that conclusion.

We can now see the similarities. The Court held the first batch of allocations (pursuant to the first twenty-one meetings) illegal because of the absence of any guidelines for determining how to select applicants on the basis of merit. It held the next batch illegal because even the guidelines that were framed were of no aid in determining the merit. Thus, the first batch related to the existence of objective 356 material, and the second batch related to its relevance – which, together, constitute the limits of judicial review under 356, and beyond which the Court, in Coalgate, did not go.

What will be particularly interesting in the future will be to see how far the Court takes its 356-analogous line of thought. Coalgate was a particularly easy case because of the absence of guidelines, or their prima facie irrelevance. What will happen if, for instance, the government does frame guidelines, which are at least prima facie relevant to determining merit – but its allocations are then challenged on the grounds that it has incorrectly – or unreasonably – applied its guidelines to the actual question of allocation, or misconstrued the objective requirements of the guidelines? Will the Court then adopt the Article 356 framework fully, and defer to the government? Or will it – keeping in mind Article 39(b) – adopt a more interventionist framework when it comes to questions of distributing natural resources to private entities? This is a fascinating question, and M.L. Sharma leaves it open – perhaps to be settled by another Court, adjudicating another scam.

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Guest Post: The Supreme Court’s “Coalgate” Judgment – II

(In this second, and concluding part, Manish examines the constitutional issues that arose in the Supreme Court’s “Coalgate” judgment)

The main argument advanced on behalf of the petitioners, challenging the allocation, was that the allocations made on the recommendations of the Screening Committee were illegal and ultra vires both the provisions of the 1957 and 1973 Acts, as well as Article 14 of the Constitution. It was argued that the Screening Committee failed to adhere to any consistent criteria while processing the applications, as a result of which coal blocks were allocated even to companies that were not engaged in any of the end-uses notified under section 3 of the 1973 Act. It was alleged, relying on the CAG report,  that some of these companies further sold the coal to government entities that were engaged in the notified end-uses, thus reaping “windfall profits” at the expense of the exchequer.

The Supreme Court accepts this argument after a long and detailed review of the Screening Committee’s work. It is unclear why the court chose to get into the substantive aspect of this argument – having declared that the issuance of allocation letters by the Central Government was in excess of its powers under the 1957 Act as well as the 1973 Act, the entire proceedings could have been quashed on that ground alone. Perhaps, the court was conscious of the fact that there was a major natural resource at stake here and that its order could have large economic impacts (the judgment opens with the lines “Coal is king and paramount Lord of industry”), therefore justifying greater substantive reasoning. As we will see, this consciousness permeates through to the final order as well. The Court merely begins the next part of its reasoning in para 69 with “Assuming that the Central Government has competence to make allocation of coal blocks…”, and then holds that the issuance of the allocation letter amounts to a grant of largesse by the State – thereby subjecting it to judicial review in light of the test of non-arbitrariness, as explained in Ramana Dayaram Shetty v. International Airports Authority and other cases. In para 82, it formulates three questions to be addressed in this regard:

(i) Whether the allocation of coal blocks ought to have been done only by public auction?

(ii) Whether the allocation of coal blocks made on the basis of recommendations of the Screening Committee suffer from any constitutional vice and legal infirmity?

(iii) Whether the allocation of coal blocks made by way of Government dispensation route (Ministry of Coal) is consistent with the constitutional principles and the fundamentals of the equality clause enshrined in the Constitution?

The first question is easily answered in the negative by the Court, relying on its opinion in the 2012 Presidential Reference Re: Natural Resources Allocation as well as earlier cases on the allocation of natural resources by the State. The Court recognises that in order to fulfill the mandate of Article 39(b) of the Constitution (distribution of material resources to serve the common good), auction may not necessarily be the best available method, and this would ordinarily be a matter of executive privilege. In para 105, the Bench observes that despite the fact that competitive bidding would have ensured “transparency, objectivity and very importantly given a level playing field to all applicants…”, it was not the prerogative of the Court to examine or evaluate the various methods available. The court in this respect defers to the Government’s stance that there was a grave shortage of power in the country at that time and hence auctioning, which would have driven prices higher, could not have been the best method to be adopted in the circumstances, holding that “in our view, the administrative decision of the Government not to pursue competitive bidding cannot be said to be so arbitrary or unreasonable warranting judicial interference.”

In respect of the second and third questions, though, the Court is less circumspect:

However, if the allocation of subject coal blocks is inconsistent with Article 14 of the Constitution and the procedure that has been followed in such allocation is found to be unfair, unreasonable, discriminatory, non-transparent, capricious or suffers from favoritism or nepotism and violative of the mandate of Article 14 of the Constitution, the consequences of such unconstitutional or illegal allocation must follow.

The Screening Committee constituted by the Central Government held 36 meetings between 1993 and 2010. The Supreme Court goes into a detailed review of each of these meetings (paras 108-149) and points out several infirmities in the procedure adopted by the Committee (para 150). First, there was no objective criteria for the selection of applicants laid down by either the Central Government or by the Committee itself. The court observes that the Committee only laid down vague guidelines at its first meeting which it kept varying subsequently, and blindly relied on the information provided by the applicants without verifying them. Further, the Committee functioned in a wholly non-transparent manner, with no advertisements released inviting applications, and allocations being recommended in favour of parties without considering their requirements, location or capacity, in breach of the Committee’s own guidelines. The norms for inter se priority allocation to two or more equally qualified applicants for the same block were not laid down until 2003, and even then the Court found serious problems with the application of these norms to selected parties. Thus, the entire proceedings of the Screening Committee were found to be tainted with manifest arbitrariness. It should be noted that besides a few passing references, the Court does not really engage with the question of arbitrariness vis-a-vis fairness in respect of grant of largesse or allocation of natural resources by the State. it seems to presume a settled position in this regard and largely focuses on establishing whether the facts at hand supported the petitioners’ position.

A peripheral point was also raised about the allocation of blocks by the Central Government to public sector undertakings (PSUs) run by the States, in furtherance a 2001 circular that permitted state PSUs to engage in coal mining. The Court quashed the circular as being ultra vires the legislative scheme of the 1973 Act which only permitted commercial mining by the Central Government or its companies, or companies engaged in notified end-uses. It held that the allocation of coal blocks to the state PSUs for engaging in commercial mining were also illegal, observing (para 153) that these blocks had, in many cases, been further handed over to private companies through joint ventures, thereby defeating the entire legislative object and scheme of the 1973 Act.

In its conclusion, the Court is scathing in its indictment of the Screening Committee:

To sum up, the entire allocation of coal block as per recommendations made by the Screening Committee from 14.07.1993 in 36 meetings and the allocation through the Government dispensation route suffers from the vice of arbitrariness and legal flaws. The Screening Committee has never been consistent, it has not been transparent, there is no proper application of mind, it has acted on no material in many cases, relevant factors have seldom been its guiding factors, there was no transparency and guidelines have seldom guided it. On many occasions, guidelines have been honoured more in their breach. There was no objective criteria, nay, no criteria for evaluation of comparative merits. The approach had been ad-hoc and casual. There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth. Common good and public interest have, thus, suffered heavily. Hence, the allocation of coal blocks based on the recommendations made in all the 36 meetings of the Screening Committee is illegal. (emphasis supplied) [para 154]

The allocation having been declared illegal, the next question that arises is to the fate of the coal blocks that have already been allocated. The logical conclusion might be to assume that all these allocations would stand cancelled, or be expressly quashed by the Court as it did in the 2G Spectrum judgment. However, the Court, seemingly conscious of the criticism of its decision in that case, as well as the wide-ranging consequences of cancelling all coal block allocations since 1993 – many of which were made to currently functioning power plants and other infrastructure projects – chooses to tread cautiously, merely stating that “to this limited extent, the matter requires further hearing.” While this manner of splitting the verdict and the consequences seems to be drawn from criminal procedure (where separate hearings are held to determine guilt and sentence), it is seemingly unprecedented in a writ petition. The “further hearing” is scheduled for September 1, and all eyes will be on the Court to see how it deals with the matter.

 

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Guest Post: The Supreme Court’s “Coalgate” Judgment – I

(In this two-part series, Manish examines the recent judgment of the Supreme Court in the coal blocks allocation scam, popularly known as “Coalgate”. In the first post, Manish examines the factual background and history of the case, and in the second post, the core constitutional arguments)

On August 25, in M.L. Sharma v. Principal Secretary, the Supreme Court disposed of a group of public interest litigations challenging the allocation of coal blocks by the Government since 1993. The petitioners alleged that the allocation was a scam of epic proportions – popularly known in the media as ‘coalgate’ since news of it broke in 2012 – that had been carried out in violation of statutory norms and involved large-scale corruption, and sought two-fold relief from the court in cancelling the impugned allocations and initiating a criminal investigation against those involved. In Tuesday’s judgment, the Court dealt with the first prayer, declaring all the allocations illegal but stopping short of cancelling them en masse.

The statutory framework surrounding ownership and exploitation of coal resources is complex, and a brief historical perspective is necessary to understand it in full (dealt with in detail in paras 12-41 of the judgment). Coal mining in India has been carried out for over two centuries by private as well as public enterprises. Coal, being a natural resource (like other minerals), is licensed by the government for exploitation under section 4 read with section 10 of the Mines and Minerals (Development and Regulation) Act, 1957 (“1957 Act”) and Rule 22 of the Mineral Concession Rules, 1960 (“1960 Rules”). All private coal mines in the country were nationalised by the Central Government between 1971 and 1973 through a series of legislative and executive measures that culminated in the Coal Mines (Nationalisation) Act, 1973 (“1973 Act”), creating a government monopoly in respect of coal mining. Section 3 of the 1973 Act originally restricted coal mining to the Central Government, companies owned or managed by it, or companies engaged in iron and steel production. This was being carried out by Coal India Limited (CIL), a Government company that was set up in 1975, and its subsidiaries.

After the liberalisation of the Indian economy in 1991, the Planning Commission suggested that private participation in coal mining be permitted for power projects to overcome the electricity crisis in the country. Accordingly, section 3 of the 1973 Act was amended in 1993 to include companies engaged in other notified end-uses of coal, including power generation, cement production and production of gas. Once private players had been allowed into the field again, the question that arose was how to identify and allocate coal blocks (which were till then under the control of CIL) to these private parties. The procedure that was followed involved the Central Government preparing a list (“booklet”) of available coal blocks and inviting applications for mining leases from private parties. These applications were then processed by a Screening Committee that was constituted (and later reconstituted) by an executive order, and the Central Government then issued letters of allocation based on the recommendations of the Screening Committee. This process continued from 1993 till 2010 when the 1957 Act was amended to insert section 11A, providing for allocation of coal blocks by competitive bidding.

Both the power of the Central Government to allocate coal blocks, as well as the procedure therefor, came to be questioned by the petitioners in the instant case. The preliminary argument advanced on behalf of the petitioners was that the Central Government had no power to allocate coal blocks either under the 1957 Act read with the 1960 Rules, or under the 1973 Act. The Court accepts this submission, observing that neither of the Acts provided any procedure for grant or allocation of coal blocks:

First, although the Central Government has pre-eminent role under the 1957 Act (…) but that pre-eminent role does not clothe the Central Government with the power to act in a manner in derogation to or inconsistent with the provisions contained in the 1957 Act. Second, the CMN Act, as amended from time to time, does not have any provision, direct or indirect, for allocation of coal blocks. Third, there are no rules framed by the Central Government nor is there any notification issued by it under the CMN Act providing for allocation of coal blocks by it first and then consideration of an application of such allottee for grant of prospecting licence or mining lease by the State Government. Fourth, except providing for the persons who could carry out coal mining operations and total embargo on all other persons undertaking such activity, no procedure or mode or manner for winning or mining of coal mines is provided in the CMN Act or the 1960 Rules or by way of any notification. (…) [paras 58-59]

The Court observes that the issuance of an allocation letter to an entity by the Union Government is not merely an exercise in identification, but rather amounts to a selection of a beneficiary and the grant of a right to the allottee. This is significant and based on section 11(1) of the 1957 Act, which reads as follows:

Where a reconnaissance permit or prospecting licence has been granted in respect of any land, the permit holder or the licensee shall have a preferential right for obtaining a prospecting licence or mining lease, as the case may be, in respect of that land over any other person

The Court effectively equates the issuance of the allocation letter with that of the issue of a permit, mining lease or license under section 11. There is one crucial factor, however, that plays an important part in the Court’s subsequent determinations. The issue of a mining lease under section 11 of the 1957 Act is carried out by the State Government. The Court observes that since the allocation letter itself were to amount to the grant of a right, then the State Government’s role under section 11 would be reduced to a mere formality. (A number of attempts were made to suggest that this was in violation of the State Government’s executive power, but this was rejected by the court and in any case is not germane to the analysis being attempted here.) The court eventually concludes that:

…the exercise undertaken by the Central Government in allocating the coal blocks or, in other words, the selection of beneficiaries, is not traceable either to the 1957 Act or the CMN Act. No such legislative policy (allocation of coal blocks by the Central Government) is discernible from these two enactments.     [para 65]

(Part II will examine the constitutional issues)

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