The pitfalls of buying into Coal India

The true import of the risk factor No. 55 in Coal India Ltd's IPO prospectus — “the interests of the Government of India (GoI) as our controlling shareholder may conflict with your interests as a shareholder” — perhaps did not dawn on investors who made a scramble for the Maharatna company's shares offloaded by the government to the public in 2010.

Even post-IPO, the GoI, with a 90 per cent stake, retains its stranglehold on the company.

It is not the high percentage — which, incidentally, makes a mockery of its widely-held character implicit in listing — that by itself is frightening.

Investors like the Children's Investment Fund of the UK have joined issues with the government for several acts of self-abnegation, consisting chiefly of selling coal cheap vis-à-vis international prices by an astounding 70 per cent; however, they ought to have paid greater heed to risk factor 55.

Fuel supply agreement

It pointedly invites a wannabe investor's attention to a clause in the Memorandum of Understanding (MOU) that CIL has entered into with the GoI, which, for good measure, is also reiterated by the company's own articles — “the President of India may issue directives with respect to the conduct of our business or our affairs for as long as we remain a government-owned company”. That is precisely what has happened. The government has, through a Presidential directive, asked CIL to sign 20-year fuel supply agreements (FSA) with power producers commissioning plants between April 2009 and March 2015.

In the event, the investors can only twiddle their thumbs nervously at the prospect of CIL having to meet 80 per cent of the coal requirements of these plants, as mentioned in the FSA, whether through mining in India or by importing from abroad. In short, by moving heaven and earth.

Penalty clause

But the directive seems to have left a vital issue — penalty for non-compliance with the FSA — delightfully vague, in fact, unquantified. The Coal Minister, Mr Sriprakash Jaiswal, has interpreted this to mean that the penalty would be decided by the Board of Directors of CIL. Touché. Since when did international and Indian jurisprudence allow a defaulter to write his own punishment? Markets with taut nerves in the wake of the Presidential directive might perhaps breathe easy at the laughably benign penalty clause.

The government's pummelling of CIL has had quite a few sidelights. First, the assertion of independent directors: They put their foot down and refused to sell cheap, besides refusing to commit themselves to an onerous FSA. But what can they do in the face of a Presidential directive? Their courage must, nevertheless, be lauded, given that independent directors are generally considered to be apathetic, if not spineless – recall l'affaire Satyam.

Many right-thinking people would wonder as to whether the Maharatna status means anything at all, if a company cannot be the arbiter of its own commercial fortunes, more so when it is listed on the Bombay Stock Exchange.

Be that as it may, investors perhaps may not take a dim view of Section 619 of the Companies Act, which wrenches away from the boards of government companies, and by extension from their shareholders, the right to appoint the auditor of their choice. These companies have to submit themselves to the CAG regimen, including the appointment of an auditor from the panel maintained by the CAG.

Investors may, in fact, be happy that CAG is one auditing institution that inspires confidence in people, despite its being pilloried in some quarters for rushing out with brash figures of opportunity losses by certain government companies, including CIL.

The following Section 620, however, is an implicit risk factor by itself for all government companies. For, it says that the Central Government, by a notification, may mandate peremptorily that the specified sections of the Act do not apply to government companies, or apply as modified by the notification.

Who knows, using this power, the next act of ham-handedness could be keeping out the accounting minutiae from public scrutiny, lest those like the Children's Investment Fund of the UK ask some inconvenient and troubling questions.

Impact on divestment

Anyway, the Presidential directive would have the effect of reducing interest in future sell-offs by the government. The disinvestment process would receive a setback. What was known already — incompatibility in the twin roles of the government, investor and regulator — has now come into prominent relief. Ironically, CIL shareholders' loss could spell partial gains for the shareholders of another government behemoth, NTPC, which could actually benefit from the FSA. Right now, only fuel suppliers are on the mat. What investors like Children's Investment Fund are asking with injured innocence could well be asked in the context of state-owned oil marketing companies as well.

(The author is a New Delhi-based chartered accountant.)

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