Who Wins; Who Loses?

The scam was caused due to the government’s failure to do prior study before awarding projects to the beneficiary private sector companies. The equity markets gave these beneficiaries high valuations based on their access to coal mines and land illegally awarded to them by the government. At the end, after the CBI probe and CAG reports, there is a sharp fall in valuations of the stocks of the “coalgate” beneficiaries.

The stock prices of GMR, Tata Power, Adani Power and Reliance Power have fallen drastically down from their previous highs and the share holders of these companies have lost heavily. This sharp fall marks the market’s mistake in valuing companies.

Tata Power and Adani Power have approached regulators for a revision in tariffs. These companies were hit by a change in Laws in Indonesia, where they acquired coal mines and found that coal prices in Indonesia have risen and the power projects are no longer viable at their bid prices. Tata bid 2.26 per unit for the Mundra UMPP (Ultra Mega Power Project) and is now having a loss of 0.75 per unit of power generated. Adani Power bid 2.5 for the Mundra project and now it is facing losses due to rise in the price of Indonesian coal.

Reliance Power bid 2.33 for the Krishnapatnam project and it finds that the project is no longer viable due to cost escalations. The company has now requested a price revision.

The real losers here are the shareholders of companies whose market values have dramatically fallen; the consumers who would lose on higher charges; the bankers who would lose on loan defaults; and the government that loses revenues and its image in the public.

The promoters who have cashed profits on high valuations given by the markets and the consultants; investment bankers; and other middlemen, who made money by working in these projects, are the winners of the “coalgate” game.