Why only CIL? Here are 9 other PSU boards investors can sue

At last, investors are waking up to the damage done by the lack of corporate governance in public sector companies.

Unfortunately, it is not an Indian investor who seems to be getting all steamed up about government squashing minority shareholders’ rights. A UK-based hedge fund called The Children’s Investment Fund (TCI), which happens to hold about 1 percent in Coal India Ltd (CIL), has threatened legal mayhem against the coal company’s directors for failing in their duty to protect minority shareholders’ interests.

According to a report in Business Standard, TCI has written to directors and top CIL officials that it can “no longer tolerate abuse of minority shareholders and poor corporate governance.”

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Attaboy. Way to go.

TCI is miffed that Coal India, which decided a few months ago to implement a new pricing structure based on gross calorific value (GCV), was forced to roll back the plan under pressure from the Prime Minister’s Office (PMO), which was worried about power plants not getting coal at the right prices.

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TCI has backed its complaint by obtaining an official letter under the Right to Information Act. The letter involved is the one Alok Perti, Coal Secretary, wrote to the Coal India Chairman ordering him to reduce coal prices “latest by 31st January 2012.”

In fact, this was the last act of NC Jha before he retired as Coal India Chairman. And his last act is likely to be the first act in shareholder activism involving politically mismanaged public sector companies.

But, one may ask, does the government not have the right to set prices as majority owner of Coal India?

The answer is absolutely yes, and absolutely not. Yes, it can set prices, but not at the cost of minority shareholders. Every time it sets prices below commercial rates, there is a loss in Coal India’s profits and share prices - and this loss is borne by minority shareholders too.

The point is majority ownership is not the same as 100 percent ownership.

If the government wants to set coal prices low, it has to compensate Coal India for any subsidies involved because any loss of profitability is not borne only by the government alone as shareholder, but also by minority shareholders.

In fact, it is surprising how uneducated government ministers are when it comes to managing the public sector units under their charge. A few months back, Coal Minister Sriprakash Jaiswal was happily offering Coal India’s cash to fund food security (read the story here).

Jaiswal told The Economic Times then: “Cash-rich companies like Coal India Ltd can lend to the government whenever the government is in need of funds. For example, enactment of the Food Security Bill would require huge funds. Coal India belongs to the people of this country and an amount of Rs 25,000 crore can easily be given to the government for implementing social schemes.”

This is the appalling state of corporate governance in India’s public sector companies.

Firstpost believes that the Indian government, and especially the UPA government, has been very lackadaisical about corporate governance where listed companies are being asked to hand over their profits to others without compensation. We, therefore, strongly support TCI’s move to speak on behalf of minority shareholders and test the matter in court.

Apart from Coal India, here are 9 other public sector undertakings whose shareholders should sue their boards and the government of India as promoter for lack of corporate governance.

First, there is ONGC: Profits from ONGC are used to illegally subsidise the oil marketing companies (OMCs). ONGC is not compensated for this loss. In fact, the government has arbitrarily even raised the level of subsidies payable by ONGC.

Second, there is GAIL: Its profits too are used to subsidise the OMCs like ONGC.

Third, there is Oil India; Same as above. It is in the same boat as ONGC and GAIL.

Fourth, there is Indian Oil: Despite being forced to sell everything from petrol, diesel, kerosene and cooking gas below cost, the government has not been compensating them.

Fifth, BPCL: Same case as Indian Oil. Petrol is supposed to be deregulated, but government has forced the OMCs to hold back on price increase due to the UP elections.

Sixth, HPCL: Ditto as above. HPCL, BPCL and Indian Oil shareholders can also sue their boards and the government for deciding that airlines can import fuel directly - at their cost. Aviation fuel is not subsidised, but even this profitable product will now be imported directly, reducing the business opportunities for OMCs.

Seventh, NTPC: India’s largest power company is being forced to keep supplying power to bankrupt state electricity boards and distribution companies at a huge cost to itself in terms of unpaid receivables.

Eighth, MTNL: MTNL, along with its unlisted sister BSNL, was forced to take up costly spectrum during the 3G auction and not allowed to expand in other territories beyond Mumbai and Delhi. The company is now more or less a basket case. Another case of the board not barking when the government was standing in the way of profitable growth.

Ninth, LIC: Here, policyholders should sue the board, which is neither independent nor alert. In the recent ONGC share auction, the insurer was forced both to buy ONGC shares before the auction and during the auction to bail out the government’s disinvestment programme.

The LIC’s job is to protect policyholders’ interest, not bail out the disinvestment programme. It certainly should not be investing in companies like ONGC where corporate governance is going from bad to worse under government pressure.