KAAND: The Natural Resource Kaand TACTIC: Get a mine, a spectrum block, a gas field allocated below market — the original wealth is always a gift from the state
THE TACTIC IN ONE PARAGRAPH The simplest way to create generational wealth in India is to secure a natural resource—coal, iron ore, spectrum, gas—at a fraction of its market value. The mechanism is straightforward: the state owns these assets, and their allocation is discretionary. A company or consortium lobbies for a license, lease, or block at a fixed price, often set decades ago or determined through opaque processes. Once allocated, the asset can be monetized at full market value—sold, leased, or used as collateral for loans. The difference between the allocated price and the real value is pure profit, funded by the public exchequer. The state bears the cost of undervaluation; the beneficiary bears none of the risk. This is not corruption in the traditional sense—it is structural arbitrage, where the rules are written to allow it.
HOW IT WORKS IN INDIA SPECIFICALLY India’s natural resource allocation system is uniquely vulnerable to this tactic due to three institutional features. First, the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and its amendments grant the state absolute discretion in granting mining leases, often without competitive bidding. Second, the Telecom Regulatory Authority of India (TRAI) Act, 1997 and the Indian Telegraph Act, 1885 historically allowed spectrum to be allocated administratively, not auctioned, until the Supreme Court intervened in 2012. Third, the Petroleum and Natural Gas Rules, 1959 permit the government to award exploration blocks through a "nomination" process, bypassing auctions entirely.
The regulatory gaps are deliberate. The Comptroller and Auditor General (CAG) has no power to audit discretionary allocations unless specifically directed by Parliament. The Directorate General of Hydrocarbons (DGH) and the Ministry of Mines operate with minimal transparency, and their decisions are rarely scrutinized by the Central Vigilance Commission (CVC). Even when allocations are challenged, the judiciary moves slowly—cases drag on for decades, during which the beneficiary extracts value. Banks, meanwhile, accept these assets as collateral at inflated valuations, knowing the state will not revoke them easily. The result is a system where the original sin of undervaluation is never corrected, only compounded.
THE HISTORICAL RECORD The 2G spectrum allocation of 2008 is the most documented instance of this tactic. The Department of Telecommunications (DoT) allocated 122 licenses at 2001 prices, ignoring TRAI’s recommendation for auctions. The CAG later estimated the presumptive loss to the exchequer at ₹1.76 lakh crore. The beneficiaries—telecom companies—sold stakes at market valuations within months, pocketing the difference. The Supreme Court canceled the licenses in 2012, but by then, the original allocation had already been monetized. The perpetrators faced no financial penalty; the state absorbed the loss.
In coal, the Coalgate scandal revealed a similar pattern. Between 1993 and 2010, the government allocated 218 coal blocks to private and public sector companies through a screening committee, not auctions. The CAG estimated the windfall gain to allottees at ₹1.86 lakh crore. The beneficiaries included power plants, steel mills, and captive users, who either sold the coal at market rates or used it to secure loans against the asset’s inflated value. The Supreme Court canceled 214 allocations in 2014, but the damage was done—the original allocation had already created balance-sheet wealth.
In oil and gas, the Reliance KG-D6 case illustrates the tactic’s longevity. The Ministry of Petroleum awarded the KG-D6 block to Reliance in 2000 under the New Exploration Licensing Policy (NELP), which allowed cost recovery before profit-sharing. The company allegedly inflated capital expenditure, reducing the government’s share of profits. The Directorate General of Hydrocarbons (DGH) disputed the claims, but the dispute remains unresolved. Meanwhile, Reliance monetized the gas at market rates, securing loans against the asset’s value. The state’s share of profits, as per the CAG, was a fraction of what it should have been.
THE INSTITUTIONS THAT ENABLED IT No tactic works in isolation. The 2G scam was enabled by the Department of Telecommunications, which ignored TRAI’s auction recommendation, and the Finance Ministry, which did not object to the revenue loss. The CAG flagged the issue only after the fact, and the Enforcement Directorate (ED) took years to file charges. Banks like State Bank of India and ICICI Bank lent against spectrum licenses at full market value, treating them as secure assets.
In coal, the Ministry of Coal and the Screening Committee allocated blocks without competitive bidding. The CAG’s audit was delayed, and the Central Bureau of Investigation (CBI) filed cases only after public outrage. Rating agencies like CRISIL and ICRA gave investment-grade ratings to companies holding these blocks, despite the legal uncertainty.
In oil and gas, the DGH and the Ministry of Petroleum allowed cost inflation, while ONGC and GAIL signed long-term purchase agreements at market rates, effectively subsidizing private players. The CAG’s reports were ignored for years, and the Serious Fraud Investigation Office (SFIO) took no action.
THE CURRENT STATE The tactic is harder to execute today but not impossible. The Supreme Court’s 2012 and 2014 rulings forced auctions for spectrum and coal, but loopholes remain. The MMDR Act still allows captive mining without auctions, and the National Mineral Exploration Trust (NMET) funds exploration for private players, effectively socializing risk. In oil and gas, the Hydrocarbon Exploration and Licensing Policy (HELP) introduced auctions, but legacy blocks remain under dispute. The Insolvency and Bankruptcy Code (IBC) has made it easier for banks to seize assets, but the original undervaluation persists in balance sheets.
WHAT TO WATCH FOR 1. Discretionary allocations: If a company secures a mine, spectrum, or gas block without a transparent auction, assume the price is below market. Check the allocation order—was it through a committee, nomination, or "first-come-first-served" basis? 2. Asset-backed loans: If a company pledges natural resource assets as collateral, verify the valuation. Banks often lend at 70-80% of market value, even if the asset was acquired at a fraction of that. 3. Regulatory disputes: If a company is in a long-running dispute with the government over royalty payments or profit-sharing, it likely monetized the asset before the dispute began. The state is always the last to recover its dues.