COALGATE
Interim Report

Ethics & Values in Management

Submitted to: Prof.

N.R. Govinda Sharma

Submitted by: Group

B3 - Ethereal

FEBRUARY 10, 2014 SDMIMD Mysore

Table of Contents
1 .Major Ethical issues ............................................................................................................................ 2 2. Ethical dilemma ................................................................................................................................. 3 3. Ethical Theories .................................................................................................................................. 5 3.1. Consequentialism ......................................................................................................................... 5 3.2. Utilitarianism ............................................................................................................................... 5 3.3. Ethical Realism (as espoused by Reinhold Niebuhr) (the lesser of two evils) ............................ 5 4. Approaches that can be followed to resolve these dilemmas and Issues ............................................ 6 References .............................................................................................................................................. 7 Bibliography .......................................................................................................................................... 7

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INDIAN COAL ALLOCATION SCAM
1 .Major Ethical issues
Between 1993 and 2011, the government of India gave away 206 coal blocks for free to government and private companies. After coal nationalisation in 1973, public sector Coal India Limited (CIL) was accorded sole rights to extract coal. But CIL has been failing to supply coal in the required quantities to end-users (particularly in the power, steel, aluminium and cement sectors). This has emerged as a major constraint on India’s growth. CAG accuses Government of India of allocating coal block in an inefficient manner during the period 2004-2009. Government had authority to allocated coal block by competitive bidding process, but choose not do so. As a result both public sector enterprises and private firm paid less for the coal blocks. The loss estimated by CAG was Rs.18559 crore. (US $30 billion). The initial CAG report suggested that coal block could have been allocated more efficiently, but they have never said anything about the corruption and nepotism involved in the scam. CAG was also going through political pressure, this was proved later because only after logging the complaint by BJP, CVC directed the CBI to investigate the matter. CBI has booked various private and public firms for giving false information about their structure, net worth, tie-up with others players and details of existing coal blocks while applying for new blocks. Some of these firms like Nalwa steel and power limited, Gagan sponge iron limited, Opelina finance and investment limited and Minerals management services even falsify their address and their telephone numbers while applying for the coal allocation process. Some of the promoters of these companies had also sold their stake of the companies soon after allocations. Even the government official indicated that there were discrepancies in the past, as many of these companies did not seek any regulatory clearance after getting the mines. However, all blame cannot be put only on central government and coal ministry because state government was also involved, as they have recommended some companies for coal block allocation without any prior investigation. The most important question is how can govt. official miss out the possibility of such huge windfall gains? Obviously they are motivated because of their personal gains.

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2. Ethical dilemma
First CAG charge: the Government had the legal authority to auction coal blocks According to the Final Report, the CAG continued its contention that the Government had the legal authority under the existing statute to auction coal by making an administrative decision, rather than needing to amend the statute itself. From this record, the CAG draws the following conclusions: The Government decided to bring transparency and objectivity in the allocation process of coal blocks, with 28 June 2004 taken as the cut-off date. The DLA advice of July 2006 was sufficient grounds upon which to introduce competitive bidding, by means of an administrative decision. Despite this DLA advice, there was prolonged legal examination as to whether an administrative decision or amendment of the statute was necessary for competitive bidding to be introduced. This stalled the decision making process through 2009. In the period between July 2006 and the end of 2009, 38 coal blocks were allocated under the existing process of allocation, "which lacked transparency, objectivity, and competition." Second CAG charge: "windfall gains to the allocates were INR185591 crore (US$30 billion) If the most important charge made by the CAG was that of the Government's legal authority to auction the coal blocks, the one that drew the most attention was certainly the size of the "windfall gain" accruing to the allocates. The CAG estimates these to be INR 1855.91 billion (US$30 billion). Manmohan Singh's Rebuttal in Parliament: The CAG, Singh argued, had simply ignored the practical realities of policy implementation in their accusation that the Government did not move fast enough in transitioning to competitive bidding.
First CAG charge: the Government had the legal authority to auction coal blocks

Singh addresses the question of legal authority in paragraphs 14–18 of his Parliamentary statement: The CAG says that competitive bidding could have been introduced in 2006 by amending the existing administrative instructions. This premise of the CAG is flawed. Initially, the Government had initiated a proposal to introduce competitive bidding by formulating appropriate rules. This matter was referred to the Department of Legal Affairs, which initially opined that amendment to the Coal Mines (Nationalisation) Act would be necessary for this purpose.
Second CAG charge: "windfall gain to the allocates were INR185591 crore (US$30 billion)

The CAG has computed financial gains to private parties as being the difference between the average sale price and the production cost of CIL of the estimated extractable reserves of the allocated coal blocks.
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Firstly, computation of extractable reserves based on averages would not be correct. Secondly, the cost of production of coal varies significantly from mine to mine even for CIL due to varying geo-mining conditions, method of extraction, surface features, number of settlements, availability of infrastructure etc. Thirdly, CIL has been generally mining coal in areas with better infrastructure and more favourable mining conditions, whereas the coal blocks offered for captive mining are generally located in areas with more difficult geological conditions. Fourthly, a part of the gains would in any case get appropriated by the government through taxation and under the MMDR Bill, presently being considered by the parliament, 26% of the profits earned on coal mining operations would have to be made available for local area development. Therefore, aggregating the purported financial gains to private parties merely on the basis of the average production costs and sale price of CIL could be highly misleading. Moreover, as the coal blocks were allocated to private companies only for captive purposes for specified end-uses, it would not be appropriate to link the allocated blocks to the price of coal set by CIL. Many people argues that, since coal is a natural resource so why government is auctioning it, why it can’t give free? But the other group of people says since coal is non-renewable resource like petroleum and it is not unlimited in nature like air hence it needs to be utilized sustainably and therefore must be auctioned like any other resources. Government give excuses that they had given mines below their prices as they were in the group of those idle mines which needs to be explored. But the question is if those were idle mines which were taken over by private and public firms, then the question is why the government officials kept such huge assets idle? Was it so that they are motivated to sell it to private? Such huge national assets are being allotted, Why not auctioned? Even if there is a screening company where is the transparency of 10.7 lac crores is huge it can buy government officials?

Various events of Dilemma: Jindal steel and power limited is a law abiding corporate citizen, follow rules, regulations properly and maintains highest standards of moral and ethical conduct even though media blamed them for to unethical practices:  Media blamed them for violation of guidelines of coal allocation given by GOI i.e. they must have minimum net worth of INR 4000 crores for getting a coal block whereas they had only INR 3772 crores. But in this context JSPL replied that they had applied for coal block under consortium with three other companies having a total aggregate net worth of INR 5390 crores which is according to the norms.  Media had also blamed JSPL that they had given fake addresses and telephone numbers of their groups/associate companies and JSPL denied this by giving reasons.

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The above two events put’s everyone in dilemma including government, common public, CAG, CVC, CBI, etc., that who is right and who is wrong and raises the question of viability of corporate ethics in the market.

3. Ethical Theories
3.1. Consequentialism maintains that the majority of an action depends on the immoral consequences that the action brings about. Morality of an action consists of the ratio of good to evil that the action produces. We should perform right and only right action in terms of good and evil, as each individual defines good and evil, and right and wrong. There is no objective right and wrong or good and evil. The person defines them. Finance minister P Chidambaram’s ‘zero loss theory’ explanation of the coal block allotments is the best example of Consequentialism in Coalgate. According to him: If coal is not mined, if coal remains buried in mother earth, where is the loss. The loss can arise only if one tonne of coal is taken out of mother earth and sold at some unacceptable price or value. This is similar to the situation of a person who bump into a car at the mall. He could leave a note, but since there were no witnesses and the owner is not around, he decides not to because he recognizes that the damage is low (probably only a couple of hundred bucks). The car owner probably has insurance, and it would be such a hassle for the owner to contact him and his insurance company. And also he may end up paying higher premium, the owner may think I’ll of that person - all of which are immoral reasons that may be unpleasant for him.

3.2. Utilitarianism states that the moral standard should be promotion of the best long-term interests of everyone concerned. Many utilitarianisms say that which is intrinsically good is pleasure and happiness (known as the hedonistic calculus). Others say there are other things which are intrinsically good such as beauty, power, knowledge, etc. In Coalgate case this theory is valid, when government said that they had given the coal blocks to various companies for the larger production of coal in India so that Indian industries should not have to import from outside at high rate which will lead to loss of foreign reserves and thus helping in the growth of Indian society and our country. It’s similar to the situations of those few doctors who decides to conduct a number of experiments on a few people, even if most of them died, would be worth it if they could find a cure for a disease that would relieve the suffering of millions of people. Utilitarianism would give the approval for such because it produces the greatest good for the greatest number of people.

3.3. Ethical Realism (as espoused by Reinhold Niebuhr) (the lesser of two evils) states that when absolute norms come into conflict (as they will eventually do) one must decide which to follow. Each solution offers limited alternatives, so the solution which produces the less of two evils is the one to be chosen. While allocating coal blocks, government had also done the same thing, chooses the less evil option of allocating coal blocks without auction between the two options available i.e. either
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don’t do anything for coal exploration as CIL was unable to explore and utilise our high potential Indian coal reserves and stand still while watching the slowdown of our economic growth or choose a risky step of allocating coal blocks to various public and private parties without any bidding because at that time there were clear rules mentioned for the auction of natural resources and even various companies are also not ready to participate in the auction process. Niebuhr talked of the world. War. The Soviet Union was an evil and brutish dictatorship over millions of people, forcing them into horrific, hellish conditions. Yet to oppose them in an outright war would bring massive destruction through nuclear weapons. Instead of direct opposition, we chose indirect opposition (the cold war) through economics and alternative means.

4. Approaches to be followed to resolve these dilemmas and Issues
Firstly, the money involved is so large that it could plausibly control the politics of any country. Yet, we have allowed these resources to be distributed at the politicians' discretion. We continue to watch their tennis-match politics. Congress or BJP, we think our favourite party can fix the problem. However, the problem is not party specific; it is with the rules of resource allocation. Hence, one hopes the discussion on the coal scam quickly moves to the real issue - how do we ensure the nation's natural resources, which belong to the people, are allocated in the fairest and most productive manner? Auctions are one natural route. However, unlike spectrum, sometimes valuing a mine is not easy given the uncertainty of the reserves, end use and extraction rates. In such a case, a royalty share model may work better. Whatever it is, the best practices of the world must be followed. Commodity-rich democracies such as Australia have figured out how to develop the mining sector while not compromising on public interest. Surely we can do the same. The political parties are managers of the nation's assets, not owners. We, the citizens and the media, have to stop focussing on the 'he did it, not me' drama of the two political parties (both did it) and focus on the right solution for the future. Second, it needs to present a new natural resource allocation policy to ensure this never happens again. Third, a simple one, it needs to be less defensive and arrogant. Being in power and being right are two separate things, each with their own importance. Humility, reason and, if possible, some ethics are what need to be on display. India can also consider the Alaska example. Alaska changed its constitution so that oil money goes into a special fund. Investment from the fund is given to all Alaskan every year. In this way, the people truly own the country's resources, whether it is oil, coal or diamond. This is not a dream.

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References
Anonymous. (2012, August). Indian coal allocation scam. Wikipedia. Anonymous. (2012, August 27). Media coined 'zero loss' theory on coal blocks allocations: P Chidambaram. CNN-IBN, p. 01. Anonymous. (n.d.). Nine theories of ethics that rule the world. Arizona: Northern Arizona University. Bhagat, Chetan. (2012, September 08). It's time we realised India's mineral wealth belongs to its people, not to the politicians. The Times Of India, pp. 01-03. JSPL. (2012, September 28). Indian coal mining scam - JSPL issues clarification. Steelguru, p. 01. Prabir Purkayastha. (2012, September 13). The Other Half of the Coal Loot – Looting through the Power Market. Newsclick, pp. 01-03. Saikia, Siddhartha P. (2012, November 21). Coal scam: Ministry issues notices to firms named by CBI. The Hindu: Business Line, p. 01.

Bibliography
Anonymous. (2012, August). Indian coal allocation scam. Wikipedia. Anonymous. (2012, August 27). Media coined 'zero loss' theory on coal blocks allocations: P Chidambaram. CNN-IBN, p. 01. Anonymous. (n.d.). Nine theories of ethics that rule the world. Arizona: Northern Arizona University. Bhagat, Chetan. (2012, September 08). It's time we realised India's mineral wealth belongs to its people, not to the politicians. The Times Of India, pp. 01-03. JSPL. (2012, September 28). Indian coal mining scam - JSPL issues clarification. Steelguru, p. 01. Prabir Purkayastha. (2012, September 13). The Other Half of the Coal Loot – Looting through the Power Market. Newsclick, pp. 01-03. Saikia, Siddhartha P. (2012, November 21). Coal scam: Ministry issues notices to firms named by CBI. The Hindu: Business Line, p. 01.

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