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Wednesday, April 4, 2012

Govt issues presidential decree to force Coal India for long-term fuel supply to private power firms

The government issued a presidential decree to force Coal India to guarantee long-term fuel supply to private power firms, as it used its discretionary authority to trump independent directors who resisted pressure from the Prime Minister's Office and said such pacts would harm the company.

The rare government directive, issued after hectic lobbying by top industrialists such as Ratan Tata and Anil Ambani to ensure predictable supplies of coal, mandates that CIL will have to pay penalties if it fails to supply 80% of its commitment. But it also gives breathing space to the PSU by leaving it to the board of directors to decide what the penalty will be.

"This is best possible we could do to break the stalemate. We have to think about Coal India's investors and the company as well. CIL will adhere to the PMO's order," a coal ministry official said.

The decree will help power firms run idling plants, sell electricity and secure finance. It will help idling thermal plants with a total capacity of 28,000 mw that have been built by last December, and another 22,000 mw that will be constructed in the next three years.

While the move has cheered power producers, it will disappoint independent directors and minority shareholders such as The Children's Investment (TCI) Fund that have vociferously opposed it and initiated legal action.

The coal ministry had earlier rejected TCI's demands. Coal Minister Sriprakash Jaiswal said agreements would be signed in days. "We have invoked the presidential directive following which CIL is expected to start signing fuel supply agreements (FSAs) with power firms within the next two days," he said. But CIL officials said the process may take a month.

The ministry intervened after Coal India's board could not reach consensus on the PMO directive asking the company to sign FSAs, even if it required imports. A senior coal ministry official said letting the company decide the penalty would not amount to contravention of the PMO's order and this had been conveyed to the "highest level".

Jaiswal told reporters that the company would not be required to import coal if it increased its efficiency to mine coal.


The company targets production of 464 million tonnes coal in fiscal 2013 and 615 million tonnes in another four years.

A senior Coal India official said the company would like to reduce the penalty from the current level of about 10%.

"The penalty, which will be part of the agreement, will now have to be decided and a 10% penalty in case of failure to supply the committed amount is on the higher side. We will look at the option of reducing the quantum of penalty," the official said.

The ministry has called a meeting of the chiefs and functional directors of Coal India and all its subsidiaries to discuss various options to raise output and possible imports, a company source said.


It is a binding instruction issued to a public sector company by the administrative ministry.

A directive was issued in 2004 to GAIL to cancel a pipeline tender that restricted competition.

It can be issued if required in public interest on financial, managerial and administrative issues of a PSU.

Coal India had a bad experience when it tried to import coal on behalf of companies in 2010. It received a good response from global suppliers but they wanted to charge a premium for 10-15 years' supply commitment. NTPC, which was initially interested, found the price too high and backed out.

The company wants to make sure this doesn't happen. For power producers, it should not be a problem because increase in cost of supplies from Coal India can be passed on to the buyer.

"As coal prices in the international market are nearly double the domestic coal price, imported coal will be sold at cost plus basis on the landed price of coal.

Nevertheless, the power producers will also have to indicate in the FSAs whether they intend to buy imported coal from CIL or would they prefer to import on their own. In case they want to buy imported coal from CIL, they will have to stick to their commitment of buying from us.

However, if they opt for importing on their own, their total supply volume will be reduced on basis of the volume they intend to import," the senior CIL official said.

Power producers cheered the presidential directive. Association of Power Producers director-general Ashok Khurana said, "We welcome this step. It ends uncertainty. Now, we would like Coal India to operationalise the decision quickly so that plants can operate to their optimal capacity and meet power requirement," he said.

Stocks of power companies like Adani Power, Tata Power and Lanco Infratech rose about 2% on BSE. Shares of CIL, which announced a 1% rise in coal production in 2011-12, ended with 0.65% gain.

The coal ministry's directive will disappoint CIL's independent directors and minority shareholders opposing the signing of FSAs. UK-based TCI, which owns 1% in CIL, has initiated legal action against the state-run miner for breach of key provisions of Indian corporate law by following government directives that are detrimental to the company's growth.

The hedge fund has also initiated arbitration against the government for forcing CIL to sell coal to power companies at discounted price.

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