Coal India (CI), a public sector undertaking in India, is in the news for wrong reasons. The government of India owns 90 per cent of CI. The Children’s Investment Fund (TCI) a London-based hedge fund is the second largest shareholder in CI with 1.01 per cent stake.
By a presidential directive, the Central Government asked CI to sign 20-year fuel supply agreements (FSAs) with power producers. After signing FSAs, CI would be compelled to supply the full quantity of coal.
If it supplies less than 80 per cent of the total requirement of power producers, it would be liabile to pay a penalty which could range between 10-40 per cent of the price of the shortfall.
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The government has only acceded to CI’s request to incorporate a flexible penalty clause in the FSAs. No doubt the flexibility to decide on the size of the penalty if it fails to meet FSA commitments would make the directive far less harmful. TCI has now demanded that those penalties are close to zero and that they raise FSA prices to market levels.
This is not the first time that the government has forced CI to comply with its requirements. In 1998, it directed CI to accept the commercial terms of the Hinduja group(HG).
HG has sought steep damages related to its coal supply pact with CI for a proposed plant in Andhra Pradesh. However the deal did not go through as the project itself was abandoned.
Even in the context of the mess that has been created by the government in the coal sector, certain brokerages (read Edelweiss Securities) have given a “buy” call on CI.
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According to Edelweiss, CI would be able to meet its contractual obligations in the coming months through increased output and de-stocking of its inventory.
Further, the brokerage’s optimism is also based on accelerated clearances of CIL projects in the coming months. Further even in the long term, FSAs may not help power producers as CI would be compelled to import coal if it is unable to fulfill the FSAs.
The “interference” of the government raises the following questions:
(1)The company’s freedom to exercise commercial judgement has been jeopardised.
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(2)The minority shareholders of CI were not consulted which tantamount s to exploitation of minority shareholders. The Companies Act has provisions (read Sections 397/398) to punish company managements that shortchange minority shareholders.
(3)The company was forced to make a mockery of corporate governance.
(4)The government has merely transferred the risk of power producers to CI in forcing CI to sign FSAs.
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K.V. RAO
Email: kvrao42004-at-gmail.com