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I believe the story lies in the detail.

Has Coal India Developed a Spine?

Right in the middle of the mess that the Indian coal industry today finds itself sits Coal India or CIL, a behemoth of contradictions. It is the world’s largest coal miner, producing about 450 million tons every year. Its financials will impress the best of investors – net profit of over Rs 11,000 crore on an annual turnover of Rs 1 lakh crore and a cash pile of Rs 55,000 crore.

But if anything, CIL has been a miserable big company.

Almost 10,000 coal mafia group squeeze the company all over the country. Eastern Coalfields, one of CIL’s eight subsidiaries, alone loses Rs 1 crore a day because of the mafia menace. Union Coal Minister Sriprakash Jaiswal last year said that corruption and inefficiency eat away 25 per cent of CIL’s production. And despite having control over 65 billion tons of reserves, it has been missing production targets for the last two years. Power companies in the country say they have been forced to either buy or import expensive coal from Indonesia and Australia, largely because of CIL’s inefficiencies.

The biggest hurdle for the company though is its largest shareholder – Government of India. Though the pricing of coal was de-regulated in 2000, the establishment has managed to force CIL to revise prices according to its design. Though a serious corporate governance issue, especially since the public sector unit is listed on the stock exchanges, the government has had its way. Until now.

Probably in a first for a public sector company in the country, the board of CIL on Thursday refused to sign along the dotted line. The government (read the PMO) wants CIL to sign 20-year fuel supply agreements with ‘end users,’ mostly power generation companies. If CIL fails to supply 80 per cent of the agreed amount it would be liable to severe penalties. While the board, led by its independent directors, is fine with the supply agreement, it has not budged on the penalty clause, especially when CIL has been missing production targets for the last two years. Now the only way for the government, like a Times of India report says, might be to send a “directive” to CIL to sign the supply agreement.

Ironically, it is the second largest shareholder of CIL that has helped the company stand up against its biggest stake holder.  Sure, The Children’s Investment Fund, or TCI’s 1.01 per cent stake in CIL might look minuscule against the government’s 90 per cent holding, but the hedge fund’s very-public activism for the last two weeks has put the government on a sticky wicket. “The company is being forced to sell 80 per cent of its product at almost 70 per cent discount of the market price. According to our calculations, this will rob CIL up to $20 billion in profits,” says Oscar Veldhuijzen, senior partner at TCI. Oscar has been fronting an unprecedented attack that has raked up corporate governance issues in CIL that are typical of any other public sector company in India.

One of the most glaring examples of the lack of corporate governance, says Oscar, was the letter that Union Coal Secretary Alok Perti wrote to former CIL Chairman and Managing Director NC Jha. The letter, which Oscar had got hold of through a RTI application, had asked the CIL management to roll back a hike in coal prices it had announced earlier. This violated the government’s promise during CIL’s 2010 initial public offering of giving the company’s management a free hand in deciding prices. “Coal pricing was supposed to be de-regulated since 2000,” Oscar says. TCI had bought the stake in CIL in the 2010 IPO.

Is India becoming a Russia, Oscar asks, pointing a finger at the powerful Prime Minister’s Office that is said to be pushing CIL to sign fuel supply agreements against all economic sense. Powerful power sector and banking lobbies are said to be working up their influence in the PMO. The Russian economy and her industrial houses are infamous for being controlled by the Kremlin.

Though claiming to be media-shy, both TCI and Oscar have used public platforms to drive in their points. Its past achievements include forcing the resignation of CEO of German stock exchange Deutsche Borse, splitting of bank major ABN AMRO and even supporting Lakshmi Mittal’s takeover of Arcelor (though when the steel king tried to acquire Arcelor’s Brazilian unit “without an appropriate premium” TCI’s activism saw Mittal Steel raising the offer price). One of TCI’s few failures has been a futile attempt at getting Japanese company J-Power to increase its dividend pay.

Oscar says he and TCI are ready and prepared for a lengthy battle over CIL. “But please do not think we are saying that we know better how to run the company. We just want to make sure that CIL’s interests are protected,” says Oscar.

In the past, even the best have found it a hard task. Partha Bhattacharyya, the now legendary former Chairman and Managing Director of CIL, couldn’t help but despair at the “slow pace” of decision making that has hampered the company. In two different meetings with Forbes India in 2010 and 2011, Partha emphasized the need for speedy decisions if CIL was to use its immense cash reserves to buy coal assets abroad. It is now part of PSU folklore about how by the time the government gave permission to the company (despite CIL’s Maharatna status giving it the “freedom” to take independent decision) to bid for a mine overseas, a private competitor had already taken away the prize!

CIL has been almost leaderless since Bhattacharyya, who had turned around loss making subsidiary BCCL, retired from the company in early 2011. Jha, who was a Director, doubled up as CMD before retiring.  At present additional secretary in the ministry Zohra Chatterjee is filling the seat till a ‘permanent’ candidate is found. While the new CMD might be only a “few weeks” away, it might not cheer investors like TCI that senior bureaucrats and not industry veterans are favourites to take over. “Surely, the PMO will have better control over the company if its own person is the CMD,” says an industry insider. It might not matter for the government that only a coal industry executive or a CIL insider, with insights into how the sector works, can have any realistic chance of making things better in the company.

Is privatization of CIL a solution? Will someone like Anil Agarwal, who, despite the controversies around him, has successfully turned around state-owned companies, be better suited to run CIL? For instance, the first thing that an entrepreneur like the Vedanta Resources owner would do is streamline the almost three-lakh manpower of the company and reduce its flab. A populist government dare not do the same.

Interestingly, all the 155 blocks of coal mine allotted by the government from 2004-2009, which are now in the middle of “Coalgate Scam,” were those that CIL was unable to develop. The fact that the private companies were unable to start production in more than 20 per cent of these blocks is perhaps an indication that privatization might not be the solution. The solution might have to come in the form of a government that has the spine to take rational decisions, which in present circumstances might be similar to hoping for India to top the London Olympics medals tally.

 

 

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The speed of execution of the transaction demonstrates bengaltools responsiveness to market opportunities...............
Vilas R.Naganur
By signing MOUs' with every party on the planet and hardly honoring it doesn't make a good corporate governance case either. What i suggest CIL is a two pronged strategy. Firstly, Let it fulfil the commitments to end consumers mainly the IPP's so as to ensure them to run the plants at 80-85% PLF and thereby provide uninterrupted power supply to the national grid..By this, i am sure their profitability will enhance. Then, CIL increase the prices gradually YOY in order to maintain its targets say ROCE/ROE/OPM/NPM blah blah..Its a win-win for everybody, isn't it?
Mallikarjun Bhat
While this is a good example of investor activism in India specially fronted by Hedge Funds, the emerging markets have different dynamcs. I would have liked the article to balance view points, by providing more detail around why CIL is being asked to sign binding agreements than a simple liner on end customers constraints. It seemed to bring out the cry of TCI more than the actual issue at hand.
 
 
Prince Thomas
Despite the seemingly royal linkages of my first name, I like to see life from the back bench. While studying it helped when lectures were unending but later I realized it also worked as a corporate reporter. It gives a clear view of both the performer and the viewer; of the 360 degree perspective and the minute detail. Now while tracking the world of business for the pages of Forbes India as Senior Assistant Editor, I will use this space to share what I observe from that rear seat.
 
 
 
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November 28, 2013 17:39 pm by rohit kumar
The speed of execution of the transaction demonstrates bengaltools responsiveness to market opportunities...............
April 05, 2012 16:15 pm by Vilas R.Naganur
By signing MOUs' with every party on the planet and hardly honoring it doesn't make a good corporate governance case either. What i suggest CIL is a two pronged strategy. Firstly, Let it fulfil the commitments to end consumers mainly the IPP's so as to ensure them to run the plants at 80-85% PLF a...
March 30, 2012 21:08 pm by Mallikarjun Bhat
While this is a good example of investor activism in India specially fronted by Hedge Funds, the emerging markets have different dynamcs. I would have liked the article to balance view points, by providing more detail around why CIL is being asked to sign binding agreements than a simple liner on en...