New Delhi/Mumbai: The battle between India and a UK activist hedge fund over political interference in Coal India is set to intensify after New Delhi issued a rare presidential decree demanding that the coal miner agree to increase supplies to the country's power groups.
The move is designed to boost India's electricity generation and reduce blackouts. But it is likely to trigger a reaction from The Children's Investment Fund, Coal India's largest minority shareholder, which recently launched a public campaign against political meddling in the world's largest coal miner by production volumes.
The demand, which follows intense lobbying by industrialists who have seen their plans to spend about $36bn on new power plants stalled by coal shortages, will penalise the state-run miner if it fails to meet at least 80 per cent of targeted production, and may force it to import more expensive coal from abroad. Previously there had been no such requirement.
If Coal India fails to boost production under the agreement, it would be forced to pay power companies between 20 and 40 per cent of the average additional cost caused by the state miner's inability to provide them the fuel, an official told the Financial Times.
It was unclear whether the board of Coal India would sign the agreement. In theory, it is legally bound to do so, but it has previously objected to a similar scheme put forward by Manmohan Singh, India's prime minister.
TCI announced plans this week to bring legal proceedings against the company's independent directors relating to breaches of fiduciary duty.
TCI's complaints focus on government policies that direct Coal India to sell coal at below market rates, which it claims results in up to $20bn of lost government revenue in addition to harming shareholder interests.
Chris Hohn, the founder of TCI, said: "We believe that giving away coal at a 70 per cent discount represents a theft of a national asset for the Indian people for the benefit of a few politically connected industrial companies.
"If the board of Coal India want to escape massive personal liability they will have no choice but to raise prices closer to market levels in the near future."
The presidential decree was, however, welcomed by the market. Shares in India's leading private sector power companies such as Tata Power, Adani Power and Reliance Power, rose more than 2 per cent on Wednesday after the mandate was made public.
"This is an important development to enhance India's energy security," said Dilip Kumar Jena, a coal analyst at PwC in Mumbai. "As the supply of coal increases so will the supply of power this will help meet India's rising demand for electricity."
About 55 per cent of India's power-generation capacity is based on thermal coal. However, it is facing a severe coal shortage that is crippling the nation's infrastructure development, which is desperately needed to keep Asia's third-largest economy growing at a fast pace.
Coal India, which with 436m tonnes accounts for about 80 per cent of production in India, has the fourth-largest reserves globally. However, it has persistently been revising downwards its annual production target, due to regulatory and environmental hurdles.
India's coal demand is set to rise to 981m tonnes by 2017, according to official data, but production during the same period is expected to rise only to 715m tonnes. India's imports of coal has surged over the past three years to about 80m tonnes annually, with KPMG estimating that yearly demand for overseas coal will exceed 150m tonnes by 2015.
Copyright The Financial Times Limited 2012
Posted on www.ft.com on April 4, 2012 12:50 pm