Coal India rose in morning trade after the company revised its fuel supply pact with power units commissioned after December 2009 to include new clauses that include higher penalty for short supply.
The stock is currently trading 1.69 percent higher at Rs 351.30 on BSE, with the stock gaining for the second straight day. Meanwhile, the BSE Sensex was up 48.54 points, or 0.28%, to 17,649.10.
The company made the announcement after trading hours on Tuesday. The stock has risen 1.87% in two consecutive sessions .
Coal India agreed on Tuesday to pay penalties for failing to provide sufficient supplies to new Indian power projects that range from 1.5 to 40 percent of a shortfall, depending on the level of default. Consequently, CIL will be required to pay 1.5% of the shortfall value if coal delivered is between 65-80% of the Annual contracted quantity (ACQ), while in the worst case scenario, the penalty would be as high as 40% if CIL supplies below 50% of the promised amount.
Under the existing fuel supply agreement with power companies , there is no penalty for Coal India for short supply in the first three years, after which it pegged at 0.01 percent.
CIL is expected to supply 470 million tonnes in the current fiscal year, compared with actual supplies of 432.94 million tonnes in 2011/12. It had aimed to supply 452 million tonnes in the last fiscal year.
Coal India board also agreed to pool imported and domestic coal supplies provided all existing consumers and stakeholders agree to the proposal. Price pooling denotes fixing a price for coal supplied as an average of the prices of both imported and domestically produced coal. In order to come to a price pooling arrangement, the Central Electricity Authority (CEA) has proposed that up to 20% of the imported coal be made available.
Once pool pricing is implemented and Coal India gets the right remuneration, it can start imports to meet 80 percent coal supply to power plants.
Coal India Chairman S Narsingh Rao told CNBC- TV18 that "We have no objection to pooling of prices if it is acceptable to all stakeholders." He also pointed out that CIL is not under any obligation to supply beyond 65 percent even if a consensus on coal import is not reached.
"If there is no consensus among the power producers to bear the additional price on account of import and pooling now, there may not be any obligation for us to supply beyond 65%. Our commitment is 65% of the FSA quantity from the indigenous source and the penalty regime will remain the same. The level of 65-80% is essentially based on the premise that there will be import of coal to meet that extra 15% and if that doesn't happen due to some reason, the commitment of Coal India still remains at 65%, " Rao said.
This means that with pool pricing, power plants will have to pay a higher price for coal by Coal India. . As per CEA estimates, coal price will go up by at least Rs 105/tonne. Pool pricing of coal will effectively push up power tariffs by 2-5 per cent (or 6-7 paisa per unit).
Around 40 FSAs are yet to be signed and Coal India insists that imported coal will not be sold at a concession. Companies that have already signed the FSA include Reliance group company Rosa Power, Bajaj Energy Ltd, Jhajjhar Power, Rajasthan Rajya Vidyut Nigam, CESC, Lanco and Mundra Power.
The country's largest power producer NTPC and Damodar Valley Corp are among the power producers that are yet to sign the agreement.
The CIL stock had underperformed the market over the past one month until 8 August 2012, falling 1.69% compared with the Sensex's 0.45% rise. The scrip had also underperformed the market in past one quarter, rising 3.15% as against 6.37% rise in the Sensex.