Business Ethics Assignment

Coalgate Scam:Ethical
issues in allocating
coal blocks

Submitted by,
Anjanayan A. R.,
Reg No: 0051/51,
Section A

Coalgate Scam:Ethical issues in allocating coal blocks

February 8, 2015

Governments as an organization
As per the Oxford dictionary definition, an organization is a group of people with a
particular purpose such as a business or government department. The definition itself
includes governments and government bodies. Some of the characteristics of an
organization can be observed as below1,
i)
ii)
iii)
iv)
v)

Division of work
Coordination
Plurality of Persons
Common Objectives
Machine of Management

So if we analyze any Government departments, we can see the above characteristics

present which make them perfect as an organization. Unlike the profit maximization
objective of business organizations, Government organizations will have a common
objective of,
i)
ii)
iii)

iv)
v)

Maintaining a stable Macro economic framework

Improving quality and cost effectiveness of public services
Increasing the productivity of the economy and expanding economic and
employment opportunities for all, through productive investment,
competition, innovation, enterprise, better regulation and increased
employability
Promoting fair and efficient tax systems
Facilitating the foreign business organization and make sure a perfect
competition in the market

and many more

To achieve above said objectives, the government departments will have a proper
reporting structure, talent recruitment policies, compensation schemes, capital raising
opportunities, and mission and vision statements.

Reporting structure of Government of India

The Indian scenario is not different from the above said organizational characteristics.
We have divided the work (work here would be administrative and progressive in

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nature) into State and central level. State/Center will have elected representatives to sit
on the top of each department as ministers. These ministers will report to their
Chief/Prime minister who will in turn report to the Governor/President. In a way it can
be considered as the reporting structure of the Government as an organization. The
works as stated above has been taken care of by individual ministerial portfolios and
different such departments needs to communicate and coordinate among each other to
perform their activities ,just like Water departments communicate to Electricity
department regarding building damns and from which generating electricity.

Importance of ethical practices in Organization

Ethics are the principles and values an individual uses to govern his activities and
decisions. In an organization, a code of ethics is a set of principles that guide the
organization in its programs, policies and decisions for the business. The ethical
philosophy an organization uses to conduct business can affect the reputation,
productivity and bottom line of the business9.
As said above each organization works for a common goal. In order to achieve that, they
will have a set of plans or activities among which some may be independent of external
world and some may be dependent on external world. For example taxing the people by
Finance minister in order to raise money for infrastructure development like building a
damn has got a direct impact on the people. While performing these activities,
organizations consume natural or artificial resources like the spectrum consumed or
allocated by Department of Information and broadcasting.
The ethical practices can be categorized into,
o Employee Ethics
o Leadership ethics
o Ethical Organizational culture
So while executing their activities or consuming the resources (including human
resource: when an organization hires a human resource and asks him to work for that
organization, he is utilizing his time (which is irrecoverable) for that organization. So in
that sense an organization is consuming its human resource) there are some ethical
practices the organization should follow. As said in previous chapter, the existence of an
organization depends on many external environments as well. So its activities may have

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a direct or indirect impact on the external environment. A very good and which is very
common today is pollution. When an organization set ups a factory to produce the
products it plans to sell, the factory ejects number of solid/liquid/gas waste to the
outside world. This waste sometimes make the land/water/air of external environment
non usable or in other words pollutes the external environment. Ejecting the waste to
the outside world may be inevitable as far the organizations concerned, but it should
also try to avoid the amount of waste its producing, the toxicity of waste, and also try
to decompose the waste internally. This may incur some monetary costs to the
organization and eat some of their profits. But the organization shouldnt reluctant to
take necessary measures to control the waste its ejecting world outside. This can be
considered as very important ethical practice every organization should follow.
How the ethical practices will benefit the organization?
A positive and healthy corporate culture improves the morale among workers in the
organization, which may increase productivity and employee retention; this, in turn, has
financial benefits for the organization. Higher levels of productivity improve the
efficiency in the company, while increasing employee retention reduces the cost of
replacing employees9.
A business, also known as an enterprise or a firm, is an organization involved in the
trade of goods, services, or both to consumers. Businesses provide goods and services
to customers in exchange for other goods, services, or money. Primary focus of such
organizations will be to make monetary benefit so that people who are working in those
organizations can make a living. But when we consider political organizations, welfare of
people whom they serve should be primary focus. Politicians are not supposed to make
monetary profits out of their service.

Energy sources and requirements in India (past and future)

Making available energy in different forms is the primary thing the world is after. As we
know about the energy conservation law, it cant neither be destroyed nor be created, it
can only be converted from one form to other. In fact we observe a bit closely, different
business are doing that, for example an automobile is converting energy stored in
chemical bonds of hydrocarbon chain (basic building blocks of petroleum compounds )
to rotational energy and pushing the wheels to move forward. But automobile engine
can only make use of petroleum compounds which can easily release the energy even at
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the spark of a flame. But as the energy conservation law says we cant create that
energy, again those petroleum products are converted to its usable form from crude oils
which are again got deposited from fossils of animals lived in this planet 10,000 years
back. So it gives us a small picture of how important or difficult is to get the products
which are easily convertible and hence useful for the human.
A general classification of energy resources can be done as below3
1. Primary energy resources : resources in their raw form that need to be processed
for utilization
Minded coal
Crude oil
Uranium Ore
2. Secondary energy resources : these are transformed primary energy resources in
a form of final fuels or energy supply. Many technological processes are involved
in these transformations; thus, the energy content of primary energy sources is
partly spent on the way to energy consumers.
sized coal
refined crude oil products - gasoline, petrol
enriched uranium in fuel rods
electricity
3. Alternative energy sources - those ones that their application is not typical in
contemporary technologies. They are not necessarily renewable; however, their
application in a new way can bring some benefits. Some examples follow:
wood - from very traditional energy source to an option to fossil sources
natural gas involved in transportation systems instead of crude oil
products
geothermal resources substituting fossil energies
4. Renewable energy resources - such energy resources that cannot be depleted in a
very long time horizon; from the mankind history point of view, they seem to renew
their capacity to infinite levels.
the dominant source of such energy is solar energy
anyway, geothermal energy represents another example

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5. Waste energy resources - the same as materials can by recycled, there is a

potential to reuse some energies originally considered to by a "waste" energy by
primary and secondary energy resources utilization
energy from cooling systems of electricity production (have you ever seen
a nuclear power plant cooling towers?)
utilization of these sources leads to higher energy intensity, practically it is
accomplished by combined heat and power (CHP)
From above classification we can see how important coal as an energy resources. In the
case of India4 we may approximately calculate the energy production and various
components as shown in below table,

Total Installed Electricity Capacity (2012)

Coal
Hydro-electric
Renewable Sources
Natural Gas
Nuclear
Oil
Total Primary Energy Supply (2011)
Coal/Peat
Hydro
Natural Gas
Renewable (Geothermal, Solar and Wind)
Nuclear
Oil

211,766 MW
57.4%
18.6%
12.2%
8.9%
2.3%
0.6%
675,830 MW
42.3%
1.4%
7.2%
0.3%
0.7%
23.6%

From the table above we can refer that India is depended on Coal to meet its energy
requirements.

Coal blocks in India

Coal is the key contributor to the Indian energy scenario. From the table its clear that
Coal meets more than 50% of the current commercial energy demands of the country.
Out of the four major fuels resources, viz Oil, Natural gas, Coal and Uranium coal has the
largest domestic reserves. A far large percentage of coal demand in the country is met

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by the domestic production as compared the other major fuels like Oil and Natural gas.
This scenario is expected to remain the same in the foreseeable future unless alternate
energy sources occupy the center stage5.
The nationalization of coal blocks were done in India in two phases, on phase 1 (1972)
coking coal mines, and in phase 2 (1973) non coking coals. On November 1975 Coal
India Limited (CIL), a holding company under the Ministry of Coal (MoC) was set up. In
1976, The Coal Mines Amendment Act was enacted which terminated all the mining
leases with the private parties. But act allowed the mining for captive use to produce
steel and iron. To implement the captive mining of Coal blocks, a screening committee
was set up on 1992 by MoC under the chainman ship of Secretary (Coal) through an
administrative order to consider the applications made by various companies. A list of
143 coal blocks were prepared and placed under the website of MoC for information of
public at large. In 1993 the act was amended to allow Indian companies engaged in
Power production to carry out coal mining in captive use. In 1997, Cabinet approved a
proposal to amend the Coal Mines Act to allow non-captive mining by an India
Company. In 2000, another amendment bill was introduced in Rajya Sabha which allows
commercial mining of Coal blocks but met stiff opposition from trade unions who
expressed concern over the possibility of possibility of unscientific mining and labor
exploitation2. On 2005, a seven expert committee headed by Mr. T. L. Sankar, chairman
of Energy Group Administrative Staff College of India , constituted by Government of
India prepared and submitted a report to then Prime Minister Dr. Manmonhan Sing,
about a comprehensive road map for the modernization of coal sector.
The major recommendations made by the committee was as follows,
Continue to regulate the price of coal to ensure least cost of supply of coal for
power generation while allowing a competitive and transparent to supply the
needs of the consumers
Emphasis on the role of captive mining to contribute significantly to the
production of the coal in the short to medium term
The procedure and processes of allocation of coal blocks needed to be improved
to expedite the allotment of captive coal blocks in a transparent and effective
manner
Releasing coal blocks with inferred and indicated category of reserves for captive
mining may not result in the increasing number of players in coal mining

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Production from captive mines during mine development or periodic surpluses

during mine operations must be sold to CIL/SCCL at negotiated price
Encashment of bank guarantees of non-serious players
Launching a program for detailed exploration and drilling for increasing Proved
Reserves
De-reservation of CIL that cannot be put into production before 2026-27
Setting up a permanent task force for monitoring progress of clearances and
project implementation to enhance the domestic coal capacity

On 2006 Government permitted 100 percent FDI under the Automatic Route for captive
coal mining by companies in the power, iron, steel and cement sectors and other eligible
activities permitted under the coal mines act. In October 2008, The Mines and Minerals
Development Regulation (MMDR) bill was introduced in the Parliament. It was to bring a
competitive bidding system to get the lease agreement, applicable to all mineral
covered under that Act. In 2010 the MMDR amendment act was enacted. In 2012, MoC
notified the auction by competitive bidding of Coal mines rules. This concludes a brief
history of different acts and amendments just before the CAG audit report on Coal
mining allocation done by the Government of India in 2012.

Coalgate Scam
The coal allocation scam, or Coalgate as it is popularly referred to in the media, is a
political scandal that engulfed the UPA government in 2012. The scam came to light
after the Comptroller and Auditor General of India (CAG) accused the government of
India for allocating 194 coal blocks to public and private enterprises for captive use in a
flawed, ad hoc manner between 2004 and 2009. If weve observe the history of
different acts and amendments passed related to the Coal mining allocation, we could
see government was favoring different corporates by including more sectors to apply for
coal block mining. Government claimed they were looking for more revenue options,
but for that they couldve introduced the competitive bidding scheme which will create
more competition in the industry at the same time exchequer can collect more revenue.
CAG alleged the governments policies were non transparent and favoring the public
and private entities. It also found that many politicians lobbied for allotment to certain
private players raising questions about crony capitalism. CAG also said some private

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companies were able to get hold of coal blocks more than they might require for their
operations and sold it in open market for higher price and made huge profits. CAG
initially estimated a Rs. 10.6 lakh crore loss to the exchequer but the final report
avoided the public sector entities and reduced the amount to Rs.1.86 lakh crore.
As per the CAG draft report, the objective of the report was
i)

ii)
iii)

To assure and cross verify the procedure followed for allocation of coal blocks
for captive mining ensured objectivity, transparency, and reasonable gain
share to the gain to the allocatees
The coal blocks allocated for captive mining augmented production of coal as
envisaged
CIL augmented its production capacities as planned

These objectives in a way are the objectives of government per se. At the end of audit,
then CAG Mr. Vinod Rao found out that government didnt meet any of its objectives
while doing business in coal block mining allocation.
CAG figured out the amount of allocation made to private and public companies as
below8,
Year
of
Allo
cati
on

Up
to
2005
2006
2007
2008
2009
2010
Total

Total
Power projects
Government Companies

Private Companies

No.
of
bloc
ks

Geologic
al
Reserve
(in MT)

% of
Total
Geologi
cal
Reserve

No. of
blocks

29

6,294.72

65.35%

41

3,336.88

34.65%

32
34
3
1
0
99

12,363.15
8,779.08
509.99
337
0
28,283.94

69.49%
74.01%
14.37%
4.89%
0.00%
55.98%

15
17
20
12
0
105

3,793.14
2,111.14
2,939.53
5,216.53
0
17,397.22

21.32%
17.80%
82.81%
75.68%
0.00%
34.43%

Geologic
al
Reserve
(in MT)

No.
of
block
s

70

9,631.60

6
1
1
3
1
12

1,635.24
972
100
1,339.02
800
4,846.26

53
52
24
16
1
216

17,791.53
11,862.22
3,549.52
6,892.55
800
50,527.42

Geological % of Total
No. of
Reserve
Geological
blocks
(in MT)
Reserve

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Geological
Reserve (in
MT)

Coalgate Scam:Ethical issues in allocating coal blocks

February 8, 2015

The response to the allocation process between 2004 and 2009 was spectacular, with
some 44 billion metric tons of coal being allocated to public and private firms. By way of
comparison, the entire world only produces 7.8 billion tons annually, with India being
responsible for 585 million tons of this amount. Under the program, then, captive firms
were allocated vast amounts of coal, equating to hundreds of years of supply, for a
nominal fee8. The allocatees had a windfall gain as tabulated below because of that8
Windfall Gains to Allocatees (in
Calendar
Year

Government Companies

90%
of GR
in MT

Windfall
gain
historic
rates

2004
1,709
2005
1,388
2006
8,660
2007
7,000
2008
288
2009
303
Total
19,349

45,807
34,056
185,119
64,066
6,704
2,438
337,471

crore)

Private Companies

Government
Companies
+Private Companies

Windfall
Windfall
Windfall
Windfall Windfall
gain
90%
gain
90%
gain
gain
gain Mar
Mar
of GR
Mar
of GR
historic
historic
2011
2011
in MT
2011
in MT
rates
rates
rates
rates
rates
56,949
0
0
0
1,709
45,807
56,949
45,561
1,776
39,146
85,523
3,163
73,203
131,084
259,547
3,011
62,085 111,764 11,671 247,204
371,311
207,098
1,747
38,284
51,502
8,746 102,350
258,599
7,364
2,682
54,445
80,137
2,970
61,149
87,501
11,285
4,605
99,735 150,574
4,908 102,174
161,859
587,803 13,820 293,695 479,500 33,169 631,166 1,067,303

The table employs the following calculations for windfall gain:

windfall gain/ton = market price/ton production cost/ton
windfall gain = windfall gain/ton x number of tons allocated x 90% (to reflect 90%
confidence in the geology of the reserve)
After the report and allegations made by CAG, major political parties started
questioning the government and asked CBI to initiate a probe into the matters. The CBI
has so far lodged 14 cases against individuals and firms including high profile
industrialists like Naveen Jindal and his company JSPL, Kumaramangalam Birla, Congress
MP Vijay Darda and his brother Rajendra Darda, JLD Yavatmal Energy Limited, AMR Iron
& Steel Private Limited, Vini Iron & Steel Udyog among others 6. An Inter-Ministerial
Group also formed to decide on the de-allocation of coal blocks that were not
developed on time. The IMG recommended de-allocation of 13 blocks and forfeiture of
bank guarantees of 14 allottees including the likes of Tata Sponge, GVK, Arcelor Mittal,
Monnet Ispat & Energy, Adhunik Metaliks etc.6

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The then prime minister Dr. Manmohan Sing was handling the Coal portfolio during that
time. Former Coal Secretary P C Parakh who has now been charged by the CBI along
with Birla hit out at the PM last year for overruling his call for auctions and continuing
arbitrary allotments of coal blocks. 142 blocks were allotted during the PMs tenure as
Coal Minister6.
The facts which prove hidden interest of politicians and corporates involved in the coal
block allocation was the missing files which CBI was asking for. As many as 157 files,
crucial evidence for the CBI probing the scam, have gone missing including those
containing minutes of screening committee meetings, allocation records etc. While the
coal ministry says it has deposited a bulk of the files with the CBI, reports suggest 18-20
crucial files still remain untraceable. Because of lack of evidences CBI may not be able to
conduct the investigation properly and as we know, Indian legal system gives every
benefit of doubts to the person whom crime has been accused.
On August 25, 2014, the Supreme Court passed the judgment, terming all coal
allocations between 1993 and 2010 illegal. It observed that as per the recommendations
made by the Screening Committee from July 14, 1993, in 36 meetings the allocation
through the government dispensation route suffers from the vice of arbitrariness and
legal flaws. The apex court pointed out that the scam resulted in the heavy suffering of
common good and public interest.
The important paragraph from the SC verdict is as follows10,
The allocation of coal blocks through Government dispensation route, however laudable
the object may be, also is illegal since it is impermissible as per the scheme of the CMN
Act. No State Government or public sector undertakings of the State Governments are
eligible for mining coal for commercial use. Since allocation of coal is permissible only to
those categories under Section 3(3) and (4), the joint venture arrangement with
ineligible firms is also impermissible. Equally, there is also no question of any
consortium/leader/association in allocation. Only an undertaking satisfying the eligibility
criteria referred to in Section 3(3) of the CMN Act, viz., which has a unit engaged in the
production of iron and steel and generation of power, washing of coal obtained from
mine or production of cement, is entitled to the allocation in addition to Central
Government, a Central Government company or a Central Government corporation.

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Analysis on ethical grounds

While judging on any issue we should heat both side arguments. Government of India
argued that the delay in introducing the auction process was a result of coalition
politics. It also alleged that opposition ruled states opposed the auction methodology.
So if thats the case then what was the motive behind inclusion of other sectors in coal
mining, why they allowed non captive use of coal blocks?
From the energy production table which was given above, we can refer that our country
is very much dependent on Coal. So in such a situation allocation of coal for non-captive
purposes is a matter of concern. Also lack of transparency in the processes followed is
again highly unethical and severely penalized.
The only flawless argument from a people oriented government point of view might be
the point made by Government saying maximization of revenue shouldnt necessarily be
the governments prime motive, as an auction can lead to higher prices hurting
consumers. But if we see the timing when theyve liberalized the policies, most of them
were done nearer to the election timings at different locations across the country. It is
skeptical in a way that some politicians were favoring the corporates to benefit their
political party funding to meet the election expenses. Again if it was for the benefit of
public then the extra money the government getting by introducing the competitive
bidding can be used for the infrastructure development or creation of employment
opportunities. Since the market is perfectly competitive, the increase in price of coal will
not increase the price of the final products from the companies. It was the opinion of
macroeconomic experts. So the government had no valid reasons for not following the
bidding process in allocation of coal blocks.
As per the comments made by CAG government got a lot of opportunities to introduce
the competitive bidding scheme. But they failed to do as the corporate have already
lobbied the politicians to act according to their interest.
We take a look at some of the scathing observations that the apex court made on the
CBI affidavit in the Coalgate case10:
CBI has become a caged parrot speaking in master's voice. It's a
sordid saga that there are many masters and one parrot

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The heart of the report was changed on the suggestions of

government officials
CBI must know how to stand up against all pulls and pressures by
government and its officials
No substantial progress has been made in the coal scam probe after
registration of the case
Probe report is not a progress report to be shared with government
and its officials
Job of CBI is not to interact with government officials but to
interrogate to find the truth
We want thorough & qualitative investigation in the case

No interaction with any person without the permission of the court

Conclusion
Who should be blamed for the unethical practices followed during Coal block allocation?
Should the government take complete responsibility in this matter and resigned from its
position?
If we take a look into the history we can get many people who has taken responsibility
of the failure of their acts and resigned from their positions. Vishwanath Pratap Singh
was one such a politician. He was appointed by Indira Gandhi as the Chief Minister of
Uttar Pradesh in 1980, when Gandhi was re-elected after the Janata interlude. As Chief
Minister (198082), he cracked down hard on dacoitry, a problem that was particularly
severe in the rural districts of the south-west Uttar Pradesh. He received much favorable
national publicity when he offered to resign following a self-professed failure to stamp
out the problem, and again when he personally oversaw the surrender of some of the
most feared dacoits of t he area in 19837.
So should Dr. Manmohan Sing also have followed a similar step that shown by V.P. Sing
? The primary or most important expectation people will have from a person who bears
a position is taking up responsibilities of their own actions. Person who is in a position as

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that of a prime minister shouldnt fail in their actions, because it has got direct impact
on millions of people. These are applicable only in case of incautious actions. But if
things are done deliberately, then they are criminal offense and should be severely
punished especially they are holding a very high position and cheated the millions of
people who have put their faith in them.

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References
1. http://www.yourarticlelibrary.com/organization/5-important-characteristics-oforganisation/946/
2. Annexure 1-5 of Performance audit report on allocation of Coal blocks and
augmentation of coal production, Government of India 2013
3. http://web2.mendelu.cz/af_291_projekty2/vseo/stranka.php?kod=308
4. en.openei.org/wiki/India
5. Draft report of CAG about Coal allocation auditing
6. http://www.business-standard.com/article/companies/7-things-you-wanted-toknow-about-coalgate-113101500366_1.html
7. http://en.wikipedia.org/wiki/V._P._Singh
8. http://en.wikipedia.org/wiki/Indian_coal_allocation_scam#1992.E2.80.932010._
Background_to_Coalgate:_history_of_coal_allocation_in_India
9. http://smallbusiness.chron.com/importance-ethics-organizations-20925.html
10. Supreme Court judgment dates 25th August 2014 regarding Coalgate scam

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