How India allowed RP-Sanjiv Goenka firms to beat coal auctions
The Narendra Modi-led government enabled private firms to continue to bypass competitive processes to corner large coal reserves.
New Delhi, India – At 11am on January 31, 2015, India’s Ministry of Coal started the online bidding for the Sarisatolli coal mine in the eastern state of West Bengal. But it did not generate heat in the energy-hungry nation, and the first bid came one hour and 37 minutes later from a conglomerate’s firm. Of the five companies that were eligible to compete, only one kept sparring with the firm. Another made a fleeting appearance once and the rest did not bid.
Three of those five bidders, including the winner, belonged to the same conglomerate, the RP-Sanjiv Goenka (RPSG) group, previously undisclosed internal documents of India’s top auditor, the Comptroller and Auditor General (CAG), reveal. The group is a $4bn-revenue conglomerate with interests in power, IT, education, retail and media.
Of the three RPSG subsidiaries, the documents showed, one did not bid at all. Another subsidiary, a shell company the group acquired two days before the auction, tendered a bid from the same private internet protocol (IP) address used by its parent company and the bid-winner, the Calcutta Electricity Supply Corporation (CESC).
The documents indicated a lack of bid secrecy, essential for getting optimum value during an auction. Related entities participating and communicating with each other during the bidding process is widely considered to be “bid-rigging,” per CAG’s protocols.
CESC had the licence for the Sarisatolli mine until 2014 when India’s Supreme Court cancelled it, along with licenses for 203 other mines. Earlier governments, the court found, had handed out licences illegally and at a pittance, part of an alleged $22bn coal scam. The Narendra Modi-led BJP government that rode into power on an anti-corruption wave that year set out to “transparently” re-auction the mines through an electronic bidding process.
The first part of our investigation reveals that the new administration enabled private corporations to continue to bypass the competitive process to corner large coal reserves, ignoring several warnings from its auditors of loss to the government exchequer, as it had under previous governments.
The Sarisatolli mine was part of the first lot of auctions the Modi government conducted to hand over the coal reserves to private companies. The CAG officials red-flagged its auction and that of 10 other mines to the government in its final report on electronic auctions of coal mines submitted to Parliament in August 2016. It said the “potential level of competition” was not achieved during the auctions — a bureaucratic euphemism for failed auctions.
An auction is considered successful when different businesses compete to get an asset by bidding what they think is the fair value for it without being aware of the offers their competitors have made. In a true competition, the highest bidder gets the asset and the seller receives a fair market price. In this case, it seems this did not happen because some companies may have colluded through their subsidiaries to artificially lower the bids being offered for the coal block.
CAG’s final report listed the auctions for these 11 mines in which some bidders participated along with their sister firms. Apart from the RPSG Group, the other bidders that employed similar practices were Aditya Birla Group’s Hindalco Industries Limited, Vedanta’s BALCO and OP Jindal Group’s Jindal Power Limited (JPL).
Although CAG had evidence of RPSG companies bidding from the same IP address for the Sarisatolli mine, it only detailed their modus operandi in a “case study” to demonstrate the potential collusion without their identifiable details. It did not disclose the name of the mine or the identities of the bidders in the case study.
The Ministry of Coal rubbished CAG report findings at the time, and the secrecy around the names of the bidders and the mine served only to bury the Sarisatolli case.
The Reporters’ Collective (TRC), a non-profit media organisation based in India, accessed internal records of the CAG audit that named RPSG’s subsidiaries and detailed how it won the mine. The group’s financial records also showed that it acquired three shell firms immediately before the coal auctions, which influenced the auctions of at least two other mines.
A few months after these auctions, the Modi government internally admitted the auction process was “prone to be misused” and rules that governed the auctions could allow bidders to “stifle competition”. But it modified the rules only after most “ready-to-use” coal mines had been auctioned. Most of the winners, including the RPSG firm, CESC, have continued to operate the mines today.
The collective and Al Jazeera sent detailed questions to the RPSG firms, the coal ministry and the CAG. None responded.
Queries were also sent to Hindalco, BALCO and JPL. Only JPL responded, stating that the CAG’s finding that the potential level of competition may not have been reached, “is unfounded”. It said, “on the contrary, India’s auction policy has attracted good competition and fetched maximum premium which has no parallel in the world” and that its participation in the auctions “has all along been in compliance with the tender terms and conditions”.
To ensure auctions are competitive and fetch the best rate for national assets, the coal ministry’s auction rules said there should be at least three qualified bidders in the final round after an initial screening of applicants.
Two days before the due date to apply for the auction of the Sarisatolli coal block in January 2015, CESC, along with two of its subsidiaries Haldia Energy Limited and Dhariwal Infrastructure, acquired the three shell companies – Sheesham Commercial Private Limited, Wigeon Commotrade Private Limited and Water Hyacinth Commosale Private Limited.
CESC, along with Sheesham Commercial and one of its older subsidiaries Haldia Energy, participated in the auction of the Sarisatolli block. Two more bidders — Adani Power Limited and GMR Chhattisgarh Energy Limited — were in the fray in the final round to make it a total of five contestants. Adani did not bid at all and GMR went back and forth with CESC but was outbid.
In late 2015, as the top auditors of the country examined the electronic logs of bidding records, they found that Haldia Energy did not bid despite submitting an initial price offer with a non-refundable fee at the screening stage, and Sheesham Commercial bid once, from the same IP address used by CESC.
The auction rules also required bidders to specify the power plants they owned and which would use the coal from the mines they had bid for. The auditors found that Sheesham Commercial, which did not own any power plants, showed a unit of a CESC power plant as its own end-use plant. Immediately after winning the auction, CESC requested the coal ministry to allow it to “divert” coal from its mine to the power plant unit quoted by Sheesham Commercial. The ministry agreed.
“This was a tailor-made case of cartelisation,” said Sudiep Shrivastava, a lawyer and one of the key litigants in the case that led to the cancellation of coal blocks in 2014. “Three companies from the same group bid together; two deliberately lose the bid and one gets the coal at the cheap rate. The winning bidder then diverts the coal to the power plant of the company that lost the auction. In effect, the subsidiary, which lost the auction, also got the coal at the same price as that quoted by the winning company.”
Web of zero-revenue firms
CESC’s shell firms Sheesham Commercial, Wigeon Commotrade and Water Hyacinth Commosale were incorporated in Kolkata in May 2012, two months after a draft CAG report blowing the lid off the past arbitrary allocations of coal mines was leaked to the press. According to their incorporation documents, their main “objective” was to carry out mining to supply coal to their shareholders’ thermal power plants.
On paper, however, the original shareholders of these companies were entities that had no public record of owning any thermal power plant or links with coal businesses. The three companies shared the same email address and two of them were registered at a common postal address.
All three firms turned in the same exact figures in their balance sheets for the financial year 2013-14, a year before the auctions. In fact, multiple financial documents of Water Hyacinth were attached as records for Sheesham Commercial.
In August 2014, several other companies became shareholders in Sheesham Commercial and Water Hyacinth. TRC reviewed their financial statements and found relations existed between some of these and RPSG.
On January 29, 2015, with 48 hours remaining for the auctions, RPSG’s flagship company CESC took direct and full control of all three shell companies.
The three companies did not conduct any business operations for another financial year after the coal auctions. The sole business activity on their books until 2016 was participating in the coal auctions by taking a loan from their parent group companies. In June 2016, RPSG changed Sheesham Commercial’s name to Kota Electricity Distribution Limited and got its first real business operation to supply electricity. Similarly, Wigeon Commotrade’s identity was changed to Bharatpur Electricity Services and Water Hyacinth’s name was changed to Bikaner Electricity Supply Limited, both of which started real operations, supplying electricity.
The flawed rule
In its October 2015 audit query, CAG asked the coal ministry whether it “took cognizance of the fact that CESC Ltd became the holding company of Sheesham Commercial Pvt Ltd” two days before the due date for bidding applications for Sarisatolli mine. It further asked if it knew that both firms submitted their bids from the same IP address and that Sheesham Commercial listed CESC’s power plant unit as its own in the application. “If yes, did the MoC [Ministry of Coal] call for any clarification from the successful bidder in this regard?” the CAG asked.
In an internal email on November 9, 2015, coal ministry officials recorded that the participation of joint venture companies and their parent companies with “common” end-use plants was allowed “in accordance with the tender document”.
The standard tender document (STD), which laid out the rules for conducting auctions, said all applicants would be first ranked based on their “initial price offers”, which is the cost of coal they were willing to pay to the government. Either the top 50 percent of all applicants or the top five bidders, whichever number was higher, would then be selected for the final round of bidding.
But the STD also had a clause that allowed joint venture companies and their parent companies, including those with common end-use power plants, to participate in the auction as bidders. This ensured that while there was a cap on the maximum number of firms that could participate in the final bidding, related companies that might communicate and agree with each other about bid pricing and profit-sharing from the auctions were allowed to participate.
Within the first week of auctions in February 2015, when only 11 mines were auctioned, one of the bidders challenged the clause in the Delhi High Court, arguing that it could lead to “cartelisation” among bidders and “lowering of final bid price”. But on February 18, 2015, the court dismissed the petition, ruling that, in the auctions conducted until then, the “processes had worked well” and that it could not find any “indication or evidence” of cartelisation.
The Sarisatolli mine’s internal bidding records were never placed before the Delhi High Court as evidence, but the coal ministry repeatedly used the court judgement to claim before the CAG and in Parliament that there was nothing wrong with the auction process.
The ministry, however, later agreed internally that the rule allowing joint ventures and parent companies to participate as competing bidders was flawed and removed it.
“It has been felt that this provision is prone to be misused” the ministry had said while recommending the change before the third round of auctions in June 2015, the CAG noted.
In later auctions, the ministry considered all joint ventures and subsidiaries of one company as a single bidder and allowed more independent bidders to participate to maintain competition.
It, however, did not act on CAG’s findings about suspected collusion by CESC and its subsidiaries using this clause in the Sarisatolli auction. It never responded to the auditors’ specific query seeking clarification on CESC and Sheesham Commercial submitting bids from the same IP address.
Government vs CAG
Though CAG did not disclose specific details of the Sarisatolli auction in its final report submitted to Parliament in August 2016, it said because the government allowed joint ventures and subsidiaries to participate as independent bidders, effective competition in at least 11 of 29 auctions until then was reduced to between two to three bidders even though more might have technically qualified.
“Further, in 7 coal mine auctions (27%) the winning bidder was a coalition company,” it said. CAG summarised, “Audit could not draw an assurance that the potential level of competition was achieved during Stage II bidding of these coal mines.”
To ascertain the government’s response to the CAG’s report, TRC accessed through Right to Information queries the coal ministry’s Action Taken Note, a formal response submitted to Parliament in response to CAG’s findings.
In the note, the ministry said the provision to allow subsidiaries and parent companies as independent bidders “was a result of a well thought out process based on a logical analysis of bidding behaviour”.
It further elaborated that “even assuming that bidders for a particular mine belong to the same company, some of them would still have to bid aggressively in order to qualify in the top 50%”.
The CAG, in its response, pointed out the ministry was defending the same clause it had found to be “prone to be misused” by bidders and changed later. It said the ministry had no “specific reply” regarding the 11 cases, including Sarisatolli, in which the CAG could not determine if the potential level of competition was achieved.
The ministry’s Action Taken Note, along with the CAG’s remarks submitted to Parliament, has so far not been taken up for discussion or acted upon. The CAG, too, did not follow through with the investigation in the 11 cases that it suspected of rigging.
Anil Swarup, the former coal secretary who oversaw the auction, cast doubt on the findings of CAG. In his memoir, Not Just a Civil Servant, he boasted that the government ensured many of CAG’s initial findings did not make it to the final report tabled before Parliament.
Shashi Kant Sharma, the former CAG who oversaw the 2015 audit of the coal auctions, did not respond to requests from the collective for an interview.
Fast forward to the future
Once the government changed the rule, and with most “ready to use” mines taken in the first two rounds, few bidders showed interest in the following auctions and the government could auction only two more mines to private players until 2020.
That year, New Delhi removed the restriction on the bidders to use the coal in their own plants. After the change, they could mine the coal to sell on the open market. With this relaxation, 43 coal mines have been successfully auctioned for the commercial sale of coal. Another 141 new mines — the highest so far — have been put up for auction in the latest tranche in November.
Misuse of the bidding process was not the only way through which corporations bypassed competition in coal mining. Part two of this series will reveal how the Modi government helped another big corporation do so through another route.
Kumar Sambhav and Shreegireesh Jalihal are members of The Reporters’ Collective.