In the second of this series to mark 10 years of coaljunction, we will highlight how the transparent market price discovery system freed the coal supply chain from the shackles of cartelisation, intermediaries and the infamous mafia.
Coal is a crucial national resource, with 60% of the country's power generation still being coal-fired. With the country's industrialisation drive, coal thus becomes a very crucial resource.
Once coaljunction’s objective of cleaning up the coal supply chain became clear, it concentrated on building a system which will make coal accessible to the smallest buyer for which he will pay the fairest possible price which is determined by the market.
Coal India was unhappy with the way in which coal was being sold. The system was a pawn in the hands of different cartels and Mr P.S. Bhattacharyya, the then chairman of BCCL, felt there was lack of fair play in the system. mjunction then studied the existing system and made virtual lots of different sizes for each grade and source combination. All these different lots would be taken up for e-auction simultaneously. The drawbacks of this system were that buyers protested against the lot sizes and demanded more flexibility in size, grade and source; competition was scattered, cartelisation was rampant and there was low price realisation.
mjunction then set about finding a solution which would address all these problems. It studied the book building process used in Initial Public Offers where bidders bid for quantity and price within a band. They also studied the Yankee rule used in USA for the sale of securities wherein the first preference goes to price and in case of price tie; preference goes to the bid for a higher quantity. If there is a price and quantity tie, then preference is given to the bid received earlier. The innovative idea was to incorporate these two processes online.
In the new auction process designed by mjunction, the fixed lot sizes were done away with. The total quantity available for a grade/colliery was offered as one single lot. The buyer was required to quote only for the required quantity. The system would then be designed to allocate the quantity from this single lot as per the Yankee rule.
Anybody could bid for a single lot by specifying quantity and price. With this mechanism, mjunction broke the hold of the cartels. There was opposition by groups with vested interests. Buyer meets were held to educate the people about the new process. Even within Coal India people had to be convinced about the new process.
The pilot auction was conducted on February 19, 2005. The government agency and coaljunction conducted an auction on the same day but adopted different techniques. The price increase realized by the government agency was 5% while mjunction’s auction delivered a price increase of 54%. CIL was convinced and this new method was made mandatory for all. mjunction was then appointed on a trial basis by the Chairman, till the Board ratified the appointment later. The new methodology brought in greater transparency in the auction process. On the day of the auction, the staff of mjunction was threatened but the auction proved to be a success. With the possibility of smaller consumers getting smaller lot sizes through a simple and friendly user screen, the cartels would get broken up.
mjunction’s methodology was then adopted as the standard methodology for the sale of coal. Coal India then instructed the government agency also to follow the procedure that mjunction had established.
Till then, the coal industry was plagued by a multitude of problems like lack of transparency, process inefficiencies, inequitable distribution, dependence on intermediaries and cartelisation. With the introduction of e-selling, over Rs 900 crore in terms of revenue had been unlocked in a short span of time to benefit the coal companies.
With the new methodology, middlemen disappeared and black marketing stopped. mjunction thus contributed to industry and society by cleaning up the supply chains and reducing the hold of the mafia and the cartels.