How India allowed RP-Sanjiv Goenka firms to beat coal auctions

Private companies were able to continue to eschew competitive procedures in order to secure significant coal reserves thanks to the Narendra Modi administration.

India's New Delhi - On January 31, 2015, at 11 a.m., India's Ministry of Coal began the online bidding process for the eastern state of West Bengal's Sarisatolli coal mine. However, it did not produce heat in the energy-starved country, and the first proposal was received one hour and 37 minutes later from a company owned by a conglomerate. Only one of the five businesses that were eligible to compete continued to spar with the firm. One other appeared briefly, but the others did not bid.

In previously unreleased internal records from India's top auditor, the Comptroller and Auditor General (CAG), it is revealed that three of those five bidders, including the winner, belonged to the same conglomerate, the RP-Sanjiv Goenka (RPSG) group. The $4 billion company has holdings in media, retail, education, power, and information technology.

The documents revealed that one of the three RPSG subsidiaries made no bids at all. The Calcutta Electricity Supply Corporation, the winning bidder, and another subsidiary both submitted bids from the same private internet protocol (IP) address, which the organisation had secured two days prior to the auction (CESC).

The documents showed a lack of bid confidentiality, which is necessary to obtain the best price during an auction. In accordance with CAG's standards, it is often seen as "bid-rigging" when related parties participate in and communicate with one another throughout the bidding process.

Before 2014, when the Indian Supreme Court revoked it along with the permits for 203 other mines, CESC had the licence for the Sarisatolli mine. According to the court, earlier governments allegedly engaged in a $22 billion coal fraud by illegally and cheaply issuing licences. The anti-corruption wave that propelled the Narendra Modi-led BJP government to power that year inspired them to "transparently" re-auction the mines through an online bidding process.\

The first phase of our investigation reveals that the new administration continued to allow private corporations to avoid the competitive process in order to secure large coal reserves, despite repeated warnings from its auditors about the potential loss to the public coffers, just as it had done under previous administrations.

The first round of auctions the Modi administration held to transfer the coal reserves to private businesses included the Sarisatolli mine. In their final report on computerised coal mine auctions, which was submitted to Parliament in August 2016, the CAG authorities raised red flags about its auction as well as those of ten other mines. It claimed that the "potential level of competitiveness," a bureaucratic euphemism for unsuccessful auctions, was not realised during the auctions.

When multiple businesses compete to purchase an item by offering what they believe to be its fair market worth without being informed of the proposals made by their rivals, the auction is deemed successful. In a true bidding war, the asset goes to the highest bidder and the seller is paid fairly. It appears that this did not occur in this instance because it is possible that several businesses conspired through their subsidiaries to artificially decrease the bids being made for the coal block.

The auctions for these 11 mines, in which some bidders and their sibling companies participated, were listed in CAG's final report. Apart from the RPSG Group, the other bidders who used similar methods were Hindalco Industries Ltd of the Aditya Birla Group, BALCO of Vedanta, and Jindal Power Limited of the OP Jindal Group (JPL).

Even though CAG had proof that RPSG firms submitted bids for the Sarisatolli mine using the same IP address, it only described the firms' methods in a "case study" to highlight any potential collusion without disclosing the individuals involved. The case study kept the name of the mine and the identity of the bidders secret.

A few months after these auctions, the Modi government acknowledged privately that the process of the auctions was "prone to abuse" and that the laws governing the auctions might allow bidders to "stifle competition." Yet, it didn't change the regulations until most "ready-to-use" coal mines had been sold at auction. The majority of the winners, notably the RPSG company CESC, still run the mines today.

The RPSG companies, the coal ministry, and the CAG received in-depth inquiries from the collective and Al Jazeera. Nobody spoke up.

Moreover, inquiries were submitted to Hindalco, BALCO, and JPL. The CAG's conclusion that the potential level of competitiveness may not have been attained "is unjustified," according to JPL, who was the only one to react. It stated that its participation in the auctions "has always been in compliance with the tender terms and circumstances" and that "on the contrary, India's auction policy has attracted good competition and fetched highest premium which has no counterpart in the world".

Reduced competition

The coal ministry's auction guidelines said that following a preliminary screening of applicants, there should be at least three qualified bidders in the final round to guarantee auctions are competitive and secure the best price for national assets.

The three shell companies Sheesham Commercial Private Limited, Wigeon Commotrade Private Limited, and Water Hyacinth Commosale Private Limited were purchased by CESC, along with two of its subsidiaries Haldia Energy Limited and Dhariwal Infrastructure, two days prior to the deadline for applications for the Sarisatolli coal block auction in January 2015.

CESC took part in the Sarisatolli block auction along with Sheesham Commercial and one of its older subsidiaries, Haldia Energy. There were a total of five bids competing in the final round, including Adani Power Limited and GMR Chhattisgarh Energy Ltd. Adani made no bids at all, and GMR and CESC exchanged bids before GMR lost to CESC.

Haldia Energy did not bid despite submitting an initial price offer with a non-refundable charge at the screening stage, and Sheesham Commercial only placed one bid from the same IP address as CESC in late 2015 when the top auditors of the nation checked the electronic logs of bidding data.

In accordance with the regulations of the auction, bidders had to identify the power plants they controlled and how they planned to use the coal from the mines they had purchased. The auditors discovered that Sheesham Commercial, which had no power plants of its own, had claimed ownership of a unit of a CESC power plant. CESC asked the coal ministry for permission to "divert" coal from its mine to the power plant unit mentioned by Sheesham Commercial as soon as it won the auction. The ministers concurred.

Sudiep Shrivastava, an attorney and one of the main claimants in the case that resulted in the revocation of coal blocks in 2014, said, "This was a tailor-made case of cartelization." "Three businesses from the same group jointly bid; two purposefully lost the auction, while one obtained the coal at a discount. The winning bidder then sends the coal to the firm that lost the auction's power plant. In reality, the subsidiary that placed last in the auction also purchased coal at the winning company's bid price.

Web of businesses with no revenue

In May 2012, two months after a draught CAG report exposing prior arbitrary coal mine allocations was leaked to the press, CESC's front companies Sheesham Commercial, Wigeon Commotrade, and Water Hyacinth Commosale were incorporated in Kolkata. Their primary "goal," as stated in their articles of formation, was to conduct mining in order to supply coal to the thermal power plants owned by their stockholders.

On paper, however, the founding shareholders of these corporations were organisations with no known connections to the coal industry or ownership of any thermal power plants. Two of the three businesses were registered at a single postal address, and all three used the same email address.

In their balance sheets for the fiscal year 2013–2014, which ended one year before the auctions, all three companies submitted the exact same numbers. In actuality, Sheesham Commercial received various financial records from Water Hyacinth that were attached.

Other businesses started owning shares of Sheesham Commercial and Water Hyacinth in August 2014. After reviewing their financial records, TRC discovered connections between some of these and RPSG.

With 48 hours until the auctions, on January 29, 2015, RPSG's flagship business CESC gained direct and total ownership of all three shell companies.

After the coal auctions, the three companies ceased all business operations for an additional fiscal year. Up until 2016, their only line of business consisted of taking out a loan from their parent group companies to participate in coal auctions. Sheesham Commercial was renamed Kota Electricity Distribution Ltd by RPSG in June 2016, and this was the company's first actual business operation to provide electricity. Similar to this, the names of Wigeon Commotrade and Water Hyacinth were changed to Bharatpur Electricity Services and Bikaner Electricity Supplies Limited, respectively, after which both companies began operating in the real world and supplying electricity.

the unsound rule

The CAG questioned the coal ministry in its audit request from October 2015 over whether it "took awareness of the fact that CESC Ltd became the holding company of Sheesham Commercial Pvt Ltd" two days before to the deadline for Sarisatolli mine bid applications. It further inquired if it was aware that Sheesham Commercial claimed ownership of CESC's power plant unit in the application although both companies filed their bids using the same IP address. The CAG questioned, "If affirmative, did the MoC [Ministry of Coal] inquire for any clarification from the winning bidder in this regard?"

Officials from the coal ministry stated in an internal email on November 9, 2015, that joint venture businesses and their parent companies with "common" end-use plants were permitted to participate "in compliance with the tender agreement."

All applicants would be ranked first based on their "first price bids," or the amount of coal they were willing to pay to the government, according to the standard tender document (STD), which set down the guidelines for conducting auctions. Then, during the last round of bidding, either the top 50% of all applicants or the top five bidders, whichever number was larger, would be chosen.

Yet the STD also included a provision that permitted joint venture firms and their parent firms, including those with common end-use power plants, to take part in the auction as bids. By doing this, it was made sure that, despite their being a cap on the number of businesses that may engage in the final bidding, connected businesses that might communicate and agree upon bid pricing and profit-sharing from the auctions were permitted to participate.

One of the bidders contested the condition before the Delhi High Court during the first week of the auctions in February 2015, when only 11 mines were up for auction. They claimed it may result in "cartelization" among bidders and "reduction of ultimate bid price." However, on February 18, 2015, the court dismissed the petition, finding that the "systems had worked properly" in the auctions held up until that point and that there was no "indication or evidence" of cartelization.

Internal bidding records for the Sarisatolli mine were never presented to the Delhi High Court as proof, but the coal ministry frequently cited the court's ruling to argue before the CAG and in Parliament that the auction process was flawless.

The provision permitting joint ventures and parent corporations to participate as rival bids, however, was later withdrawn after the ministry internalised that it was problematic.

The ministry had recommended the modification before to the third round of auctions in June 2015, noting that "it has been felt that this option is prone to be exploited."

To maintain competition, the ministry permitted more independent bidders to participate in later auctions and treated all joint ventures and subsidiaries of one corporation as a single bidder.

However, despite CAG's findings that CESC and its subsidiaries may have engaged in collusion by utilising this clause in the Sarisatolli auction, it did not take any action. When the auditors specifically questioned it about CESC and Sheesham Commercial submitting bids from the same IP address, it never replied.

CAG vs. the government

Though CAG did not provide specifics about the Sarisatolli auction in its final report to Parliament in August 2016, it did state that because the government allowed joint ventures and subsidiaries to participate as independent bidders, effective competition in at least 11 of the 29 auctions held up to that point was reduced to two to three bidders, despite the fact that more technically qualified.