We are like that only: Why The Children Investment Fund's exit from Coal India matters

The Children's Investment Fund finally has bowed out. The activist institutional investor has sold its entire stake in Coal India, reports The Financial Times.

The fund sold its holding in the world's biggest coal miner in the recent months, said the report citing people familiar with the development.

Two days back The Economic Times reported that the fund is likely to exit the coal producer as its stake had fallen to a negligible level. With the FT's report, it is almost certainthat the fund has exited the Indian company. (TCI has not confirmed the development.)

The development holds much significance in the Indian context.

The fund, which was once the second biggest shareholder in Coal India with about 2 percent stake, hit the news headlines in India in 2012 after it took on the government for controlling coal prices, which it pointed out was negatively impacting the state-run company's profitability and shareholder value.

In March 2012, TCI had served a notice to the Indian government for alleged violations of international treaties related to its investments in the state-owned firm.

"The Republic of India's recent conduct with respect to CIL has seriously impaired the business activities and operations of CIL and has contravened each of the treaties," the hedge fund had said in a notice to the finance ministry.

What infuriated TCI was Coal India's decision to ink fuel supply pacts with power companies for a minimum assured supply under a Presidential directive.

It accused the state-run company of not protecting minority shareholders' interest and harming the company by not opposing such fuel supply pacts. It had even take legal recourse against Coal India'sbreach of fiduciary duties.

TCI's move was the kind ofshareholder activism that India never witnessed earlier. The Calcutta High Court had even allowed the fund to make its case against Coal India representative of all shareholders, which in effect meant it would be treated like a class action suit.

"If it succeeds, it could open the floodgates for mass investor action against a whole host of public sector companies where the government uses its shareholding majority to oppress minority shareholders. The oil marketing companies and ONGC are a prime example of this. Both are looted by the exchequer in the name of keeping oil prices down," Firstpost editor R Jagannathan had argued in an article then.

But nothing seems to have come out of the fund's activism. The issues it raised continue to be the same. Coal India is still a state monopoly with limited independence from its political bosses. What else explains the government's directive to Coal India to reduce the quantum of e-auctions?

Ideally, as this report in The Economic Times says, the Supreme Court's order in coal block allocation scam should have boosted Coal India's profits as power companies flock to the e-auction forthe fuel. This augurs well for the company because its realisations at the auction are higher and to an extent make up for the marginloss it suffers from selling coal at below market rates.

According to the ET report, the company sells the fuel atRs 1,600 a tonneundernotified regime, while at e-auction the price wasRs 2,200 a tonne on an average in 2013-14. If the economy indeed revives this year as expected, the coaldemand will alsorise, boostingthe company's earnings.

But that is not going to be the case, because the government has asked Coal Indiato reduce the quantum of coal offered at the e-auction to 26 million tonnes from 58 million tonnes last year, the report says.In short, the political intervention continues. TCI's activism was aimed at highlighting this rot in the Indian system.

As Anil Singhvi of Institutional Investor Advisory Services, a shareholder advisory group, tells the FT, the fund is likely to have got disillusioned because of the government's nonchalance and apathy towards the minority shareholders.

"It is very hard to change something here if you are a small minority," he has been quoted as saying in the FT.

With inputs from PTI

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Updated Date: Oct 15, 2014 16:07:28 IST