Does TCI have ammo against CIL? Yes, it has two bullets

New Delhi: Even as newspapers on Thursday carried reports that Coal India Ltd (CIL) may, after all, be revising coal prices as demanded by activist minority shareholder The Children’s Investment Fund (TCI), the latter has reconfirmed that it will be moving court against the company’s board members - ostensibly for failing to assert their independence from government meddling.

The moot point though is whether TCI has a strong case, when many experts have pointed out that Coal India’s IPO prospectus specifically mentioned the government’s ability to interfere with coal pricing decisions.

Among other things, the IPO prospectus mentions the following risk factors that investors must note before investing in the company: that “the interests of the government of India (GoI) as our controlling shareholder may conflict with your interests as a shareholder”; that “the president of India may issue directives with respect to the conduct of our business or our affairs for as long as we remain a government-owned company… as a result (of which) the government may take actions with respect to our business and the businesses of our peers and competitors that may not be in our or our other shareholders’ best interests.”

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[caption id=“attachment_273436” align=“alignleft” width=“380” caption=“TCI has alleged that the government has been routinely flouting this order and interfering in fixing coal prices.Reuters”]  [/caption]

This has led market experts to conclude that TCI’s case will likely be thrown out of the window by any court.

However, TCI’s partner, Oscar Veldhuijzen, has a different story to tell. He told Firstpost in an emailed reply that when CIL announced its IPO, the government and the management had assured the fund that the CIL board had complete freedom to determine coal prices. “This was certainly the case when Mr (Partha S) Bhattacharya was the CMD of CIL. However, since he left CIL, the company has been mismanaged and there was no opposition from the board to (the government’s decision to) reverse the price hikes announced early January 2012.”

Coal India has been headless since Bhattacharya retired in February last year. After he left, CIL’s Technical Director NC Jha was given additional charge of the CMD’s post. He too retired in January this year without ever becoming full CMD. Zohra Chatterjee, Additional Secretary in the coal ministry, is currently the acting chairperson, and she will be replaced by a regular CMD - S Narsing Rao - from 23 April. Coal Minister Sriprakash Jaiswal has said that Rao will look into the pricing issue carefully.

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Veldhuijzen told Firstpost that that there was no opposition from the board to reversing the price hikes announced in early January 2012, when CIL decided to shift to pricing based on gross calorific value - the international norm. “We obtained a letter from Mr Alok Perti (Secretary, Ministry of Coal) under RTI which instructs CIL to reverse their price hikes, which they did. This is a clear breach of fiduciary duties of the board.”

In subsequent board meetings, CIL’s independent directors opposed the signing of Fuel Supply Agreements (FSAs) with power producers for committing to a minimum of 80 percent supply, failing which CIL would pay penalties. They opposed the FSAs saying this could lead to a supply shortfall and losses; they also wanted coal prices raised. The government overruled their objections to FSAs by getting a presidential order mandating CIL to sign FSAs.

However, TCI is basing its case not only on the oral assurances given to it at the time of the IPO, but also the Colliery Control Order, 2000, which deregulated coal prices and allowed the government to regulate coal supplies, not coal prices.

According to Veldhuijzen, the Supreme Court has taken strong exception to the government’s interference in coal pricing. TCI quotes the case of Ashoka Smokeless Coal India (P) Ltd vs. Union of India (reported at (2007) 2 SCC 640), where the Supreme Court noted:

“The coal companies evolve price fixation but, admittedly, they have been doing so at the instance of the Central Government. The Central Government seeks to exercise its statutory power. Such a power, however, is confined to the four corners of the 2000 order. When there is no control over the price, the Central Government is forbidden to issue any direction that will have an impact thereover.”

TCI has alleged that the government has been routinely flouting this order and interfering in fixing coal prices. In an earlier claim, TCI said that coal prices in India were about 70 percent lower compared to international prices because the government forces CIL to keep them low.

To seek support from other Indian shareholders in its lawsuit, TCI runs a website www.coal4india.com.

According to the hedge fund, if coal prices were market linked, CIL’s profits “would increase by $19 billion which could be distributed to the government through divided payments”. It had also pointed out that coal price discounts through FSAs would primarily benefit private power producers since “some power companies keep FSA benefits to themselves as they sell power under merchant power tariffs”.

CIL’s CMD designate, Narsing Rao, has estimated that incremental coal production of at least 64 million tonnes is needed this fiscal to fulfill FSA commitments.