Coal truths

EDITORIAL, THE HINDU BUSINESS LINE

The controversy over CIL's pricing points to a basic problem — that of the government being both an owner of firms and upholder of public interest.

This article was published on April 1, 2012
The initiation of legal action by a London-based hedge fund against the Centre for allegedly forcing Coal India Ltd (CIL) to enter into fuel supply agreements (FSA) on non-economic grounds, highlights the classic dilemma facing governments in their simultaneous roles as policymakers and promoters of enterprises. The Children's Investment Fund Management (TCI) – which holds slightly over one per cent in CIL – has claimed that the Centre's instruction to the coal major to ink FSAs with all power plants to be commissioned within the next three years goes against minority shareholders' interests. The FSAs, committing CIL to deliver 80 per cent of the entire contracted quantity of coal for a 20-year-period and arranging for imports in case of any shortfalls, would help in firing around 50,000 megawatts of capacity – not insignificant for a power-starved country. There is enough public interest to be served, therefore, from the directive, coming straight from the Prime Minister's Office (PMO). But according to TCI, CIL, as a listed company (despite the Centre owning 90 per cent), cannot be pressured into selling coal below international prices, or executing FSAs deviating from the goal of profit maximisation.

The above allegations are not fully borne out by facts. To start with, it is naïve for investors in stocks of public sector undertakings (PSU) to expect the Centre not to have any say in their pricing decisions (that too, in coal) or never require them to take actions in ‘public interest': These were, indeed, explicitly disclosed as risk factors in CIL's initial public offer prospectus in 2010. Also, not being allowed to run profitably is hardly a fair description for a company that, in 2010-11, delivered a 33 per cent return on net worth, had nearly $ 10 billion of cash and bank balances, and very little debt on its books. These numbers are no less a result of the virtual domestic monopoly that CIL enjoys – a position bestowed upon it by the Centre, which, far from being an impediment, has actually helped the company rake in massive profits and make it India's fourth largest by market capitalisation.

While all these considerably weaken TCI's legal position, they still raise valid concerns over the conflict of interest inherent in the government being both upholder of public interest and owner of firms. The ideal way to resolve this contradiction – more so, in listed PSUs that are accountable to minority shareholders – is for the government to exit business altogether. In CIL's case, even public interest is better safeguarded by throwing open commercial coal mining to private players and having an independent regulator for the sector to whom consumers can take their complaints. PMO diktats are, at best, poor substitutes for substantial reforms that attract new investments and promote market-based competition. Governments would do better in working towards this end than micromanaging the affairs of PSUs.