| Challenging times
New Delhi, April 3: The government today sent a presidential directive to Coal India Ltd to sign long-term fuel supply agreements with private power firms, under which the PSU will guarantee to supply 80 per cent of the coal committed at pre-agreed prices.
Top coal ministry officials said Coal India was free to decide on prices and other terms, including penalty clauses, in case of lower-than-committed supplies. The directive was issued as independent directors of the coal giant had blocked a resolution allowing fuel supply agreements. The government, through the President of India, holds 90 per cent in Coal India, giving it the right to issue such directives.
However, the presidential directive may be the beginning of problems for the state-run, listed firm.
Global hedge fund The Children’s Investment Fund (TCI), which holds 1 per cent stock in the monopoly coal miner, had threatened legal action against Coal India for selling coal at a 70 per cent discount to market prices “in breach of the fiduciary duties to maximise value for shareholders”.
TCI, which has written letters and issued a statement threatening action, is believed to have appointed a legal firm to initiate action against Coal India and has invoked investment treaties India has signed with Britain and Cyprus to protect its interests. It has also raised the issue of CIL signing supply pacts, committing to sell coal at below market price and pay a penalty in case it was unable to meet committed volumes.
TCI has a formidable reputation in global markets as an investor that protects its interests very seriously. Some seven years ago, the hedge fund, which held an 8 per cent stake in London Stock Exchange, stalled Deutsche Börse’s bid to take over the premier stock exchange.
The investor has claimed that CIL is selling coal at $20 a tonne against a landed price of $70 a tonne, leading to a loss of about $20 billion a year. Coal India’s pricing is supposed to be free, but in effect it is decided by the administrative ministry.
Coal India executives, too, have reservations about such directives. Officials had earlier indicated they would like to sign a fuel supply agreement at 60 per cent commitment, with penalties kicking in at supplies below that level.
They also point out that several power producers have yet to sign power purchase agreements with clients and yet are seeking fuel supply pacts merely because lenders have been demanding these as preconditions for releasing funds.
Ashok Khurana, director-general at the Association of Power Producers, said coal prices were fixed in consultation between the government and CIL after reviewing production estimates and import.
“The objection by minority shareholder TCI is frivolous and CIL had made the price fixing norm clear, when it went to the market with the IPO,” he said.
Meanwhile, CIL achieved a production of only 435.84 million tonnes in 2011-12, missing the revised target of 447mt, which could add to the supply constraints of power producers further.
“CIL ended the fiscal 2011-12 with a production of 435.84mt, more than 4.52mt compared with the previous fiscal, registering a growth of 1 per cent. Now it is fully geared up to put up a spirited performance in attaining the optimistic target for 2012 which has been fixed for 470mt,” Coal India’s CMD Zohra Chatterji said.