Tilting at windmills: Rebuttal of FP post on Coal India

By Pavan Ahluwalia

In his response to my 9 April op-ed in The Indian Express, in which I criticised the media for its lack of attention to detail in covering the TCI-Coal India litigation, R Jagannathan, the Editor of Firstpost, offers me a curious and surely unintended vindication by being, well, not particularly attentive to detail. He not only mischaracterises my overall position, which I thought was made quite clear in my article, but also makes specific criticisms that leave me wondering whether he actually read through the piece, or whether he was simply responding to the headline.

To his credit, he has had the courtesy to both link to my piece, to allow his readers to view my arguments for themselves, and give me the opportunity to respond on his website, which I am glad to avail myself of.

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Let me start by addressing his characterisation of my article as “condemning” foreign investors for speaking out against practices that are unfriendly to minority shareholders. This strikes me as bizarre because I go out of my way to praise TCI for its activism. I point out, clearly (more detail on this below), that this activism is welcome, that TCI is playing a role that domestic institutions do not play, and end the article by explicitly thanking them for speaking up. We are all better off with vocal minority shareholders.

I do, however, disagree with the position that TCI is taking, which is self-serving, but which has been effectively marketed to the media as being in India’s interest. Disagreeing with what someone has to say is completely different than condemning their participation in a public debate and it is surprising that a journalist of Jagannathan’s experience should confuse the two.

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In response to his specific criticisms:

(Jagannathan’s comments are in bold font, quotes from my own piece are italicised)

"First, selling coal at low prices is bad policy when fossil fuels are depleting and carbon emissions are a big concern. Surely, Ahluwalia has also heard of worse things going on in oil -where profits are being transferred from ONGC to the oil marketing companies when all of them are listed entities. If he can justify Coal India’s bad practices, he can do this too."

I completely agree that selling coal at low prices is bad policy. However, selling it at high prices and allowing a (part private and arbitrarily declared) monopoly to pocket the gains is just as bad, if not worse. My piece calls not for the sale of coal at low prices, but for some sort of a competitive bid for coal mines. “The correct demand to make of the government would be comprehensive reform in the coal sector, resulting in the auctioning of coal mines.”

Like Jagannathan, I disapprove of Coal India’s “bad practices.” However, the answer, in my view, is not to turn Coal India into a giant monopoly whose rents are shared by the Indian government and foreign hedge funds, but to introduce competition in resource allocation. Allowing Coal India the freedom to price monopolistically would be a sub-optimal solution since it would provide no incentive for Coal India to improve its efficiency and because it would basically confer rents that belong to the country on private parties.

If Jagannathan is so keen on giving Coal India the freedom to price where it wants, I don’t understand why he doesn’t want to force it to compete for its mining leases. If he doesn’t want it to compete for mining leases, then it is contrary to all economic logic to give it pricing freedom.

As a matter of fact, if Coal India were to start pricing in line with international benchmarks, any coal consuming company would be completely justified in filing a public interest litigation (PIL) demanding that coal mines be auctioned, if their operators are to be allowed to charge market pricing. And such a PIL would have very compelling legal logic behind it.

(Of course there are worse things going on in oil, and elsewhere in the economy. That is no justification for bad things happening in coal. I would hardly use India’s oil sector as a policy example for anything, and I think Jagannathan and I and just about every other thinking person in India would agree on this.)

“Second_,_there is no case for a government to both be a commercial player and a policy maker on coal prices. The fact that this was mentioned in the Coal India prospectus does not make this acceptable. This conflict of interest is wrong. If the government wants to do both - make policy and own Coal India - it should buy out minority shareholders completely. It cannot first invite minority players to own shares and then sell their interests down the river. A shareholder is a part-owner invited in by the government, not an unwanted interloper.”

I completely agree that the government should not be a commercial player and a policy maker, and that this is bad policy. I say as much in my article. “One can certainly criticise this policy on its merits, and support market-based resource allocation over central planning.” In fact, I go so far as to characterise the present arrangement as being “strange.”

Unlike Jagannathan, however, I believe its being disclosed to investors is of critical importance in determining whether the system is transparent and fair (even if it is not efficient). Very few organisations are so monistic in their choice of objectives as to pursue one goal - be it shareholder value, or size, or social impact - at all costs. Most corporations pursue a plurality of goals. While TCI has every right to question the judgment of the board of directors in choosing to prioritise the public policy objective of cheap coal over the obligation to create value for shareholders, it cannot call this either “fraudulent” or an “abandonment of fiduciary duty.” It is a judgment call that TCI disagrees with, just as shareholders routinely disagree with managements on decisions pertaining to business strategy and capital allocation. It is a cause for nasty questions at an AGM, and possibly a proxy fight, not a lawsuit.

Let me take an example to illustrate this. Suppose you invested in a consumer goods company that had a declared strategy of acquiring FMCG labels if the acquisition price made sense. Let us further assume that the company also had a declared policy of being socially responsible. Now, suppose the company had the opportunity to buy a very strong cigarette brand at a throwaway valuation, and that this opportunity was vastly superior, from a business standpoint, to anything else it was likely to encounter. If the company declined to make the acquisition, citing its policy of social responsibility (which, let us say, happened to be mentioned in its prospectus with the specific example of avoiding tobacco products), would you have any moral or logical basis to object? I would argue not.

Shareholders are indeed part owners, but when they buy into listed companies as minority owners they buy into going concerns, with declared goals, visions, and policies. If they don’t like these, they should either try to change them by majority vote or sell their shares. They should not be filing lawsuits or crying on journalists’ shoulders, and expect to be taken seriously.

“Third, rather than blame media for getting too excited by TCI’s legal challenge, he should be asking why domestic minority shareholders and institutional investors - whether in Coal India or Satyam - do not seem to care about promoter repression.”

I do ask (and answer) the question of why domestic institutions are sleeping on the job.“It (TCI) is certainly better positioned for this than domestic institutions, which often have strong business relationships with these (Indian) promoters.” In fact, I go on to welcome this activism. “And the correct response to TCI would be to thank them for their activism….” Where I disagree with Jagannathan is on the merits of TCI’s specific demand.

Jagannathan is imbued with an admirable sense of history, on whose “wrong side” he accuses me of being. Since we are on the subject, I am willing to bet that going forward, it will be much harder for the government to hand national resources to private parties without a competitive process, no matter how slickly these parties market themselves to the media. And I will take the further risk of predicting that TCI will lose its lawsuit in the Indian courts, if it chooses to persist with one, and also that it will not get much relief by way of arbitration. And that this will be the correct outcome. If we can achieve this while encouraging the growth of further shareholder activism, it will be an even better outcome for India.

Let me add, here, that dragging my father’s name into this, and using it as a tag on the post was a cheap shot. I wrote my piece as an Indian fund manager, not as my father’s son (although it would almost certainly have received a lot more attention if I had advertised it as the latter!) I realise that our media has a “dynasty obsession.” However, it ought to be able to distinguish between people advertising themselves as members of a family, or as people carrying on a particular legacy, and those who, for whatever reason, wish to live their professional lives independently of their parents.

For a news organisation that employs the relatives of a number of eminent people, this is particularly surprising. I don’t seeNetwork 18referring to Rajdeep Sardesai as Dilip Sardesai’s son when he writes about cricket. Nor do I see them referring to Suhashini Haidar as Subramaniam Swamy’s daughter when she writes about politics. Surely they can extend the same courtesy to columnists writing for other organisations regardless of whether they agree with their views.

Turn to the next page for Firstpost’s response ..

Firstpost adds: Here are Jagannathan’s observations on Pavan Ahluwalia’s rebuttal.

Overall, I find more points of convergence than divergence with Ahluwalia’s rebuttal of my viewpoint, which incidentally, wasn’t primarily about The Children’s Investment Fund (TCI) lawsuit or Coal India, but the silence of domestic financial institutions in defence of minority shareholder interests. I am happy to acknowledge this point of agreement - which I failed to note earlier since my article was prompted by the Satyam developments rather than Coal India.

I would also like to emphasise that my intention was not to analyse the full op-ed written by Ahluwalia in The Indian Express. Hence my failure to note all his viewpoints. This was unintentional.

However, I do find that Ahluwalia is rebutting points I never made or intended. Thus while he agrees with me that keeping coal prices low is not a great idea, he presumes that I support high prices for coal. He also assumes that I support monopoly profits for Coal India, or that I do not support auction of coal blocks, etc.

It is easy to rebut a point I did not make. But for the record here are my views on the subject. I believe that Coal India’s monopoly should be ended, there should be free competition, coal blocks should be auctioned to private parties by amending the laws, and in the interim, when Coal India is still a monopoly, there should be a coal price regulator to ensure that there is no unintended profits - whether to Coal India or minority shareholders like TCI.

In short, Ahluwalia agrees with the one point I did make and disagrees with views I did not express in this article.

On the second quote, once again Ahluwalia agrees with the core point, but disagrees with points I did not make. I have only called for the separation of the government’s policy-making role from its ownership of commercial enterprises. But he goes on to tell us that corporations pursue a multiplicity of objectives - which I agree with - and that government as owner of Coal India can do so.

However, I disagree with Ahluwallia when he says: “Unlike Jagannathan, however, I believe its being disclosed to investors is of critical importance in determining whether the system is transparent and fair (even if it is not efficient).”

I presume the reference is to the risk factors disclosed in the Coal India prospectus where it says government influences pricing.

Assuming this is what Ahluwalia meant, I have the following observation: the disclosure that government influences Coal India’s pricing is fine - but if Ahluwalia agrees that policy and commercial decisions are two different things, this disclosure means little. Putting this in the prospectus does not give the government a licence to pursue bad corporate governance policies. In fact, any company should put policy risk into its prospectus, but should it get away with bad governance even if that is indicated in the prospectus? I am not sure the disclosure of risk factors constitute adequate protection to Coal India against governance issues raised by TCI.

At the very least, I would expect the courts to ask the government to separate policy from board autonomy - and this would be great. The problem is by confusing the two, the government takes away a commercial undertaking’s power of agency, its power to protect itself from commercial decisions taken by the dominant shareholder.

On the third point, the merits of TCI’s demand, I am happy that Ahluwalia welcomes TCI’s activism. I would not be so sure that TCI will lose its case altogether, though one does not know if it will get its way on pricing. However, the issue is important, for what happened was a complete travesty of corporate governance. Coal India’s board, where presumably the government is represented very well, first decided on changing the basis of coal pricing to gross calorific value, and then reversed it after private power producers lobbied for it and got the government to intercede on its behalf.

This is kowtowing to pressure and reversal of a board verdict is certainly a cause for concern - and one is glad for TCI’s intervention which put Coal India’s independent directors on notice. The same goes for the direction to sign fuel price contracts through a presidential directive. Once again, TCI’s interventions helped.

Another point I would like explain is this. It is normal practice in news journalism to tell readers about a person’s connections to a better known person. So the fact that Pavan is Montek’s son is given more by way of information, not with any innuendo or nexus in mind. The PM’s daughter may be a historian, but the relationship is not mentioned to malign either party or to link a viewpoint of the historian with that of the politician PM. However, I apologise if this is objectionable to Pavan Ahluwalia.

One more explanation is in order: the trigger for the article was the Satyam lawsuit by Aberdeen, and the purpose was to point out that domestic FIs are silent in such lawsuits. The only reason I made a reference to Ahluwalia’s article was that it appeared on the same day, and that, too, because the headline and some observations seemed to suggest that TCI’s lawsuit was “tilting at windmills”, and also that the media was somehow accepting TCI’s viewpoint uncritically. Actually, some in the media have taken the exact view that Ahluwalia has (Read here). Even brokerages have made the same point - as reflected in an Espirito Santo report (read here and here). Espirito Santo also agrees with the Ahluwalia view that TCI’s activism is welcome, but doubts its ability to win the lawsuit.

So, the short point is there was no general failure on the part of “media, market gurus and corporate lawyers” to appreciate the other side of the argument in the TCI case.