The government plans to force Coal India to commit fuel supply to private power producers for 20 years, and has signalled its intention by sternly rebuffing UK-based hedge fund TCI which criticised the move as an "abuse" of minority shareholders, government officials said.
The government will first try to persuade independent directors who have opposed the directive from the prime minister's office (PMO) asking the state-run firm to agree to pay penalties if it cannot meet 80% of the committed fuel supply. The board did not approve the proposal despite three meetings in the past week because independent directors raised concerns that the company may not be able to meet its obligations and would have to pay heavy penalties that would drain its income.
Officials said the government has the power to issue a presidential directive to force the issue, but this would be the last resort. A director in the company said Coal India would have to obey such a directive. "The government may now exercise its presidential powers to enforce and implement its decisions. Being a government-owned company we will have to go by it," he said.
Somasekhar Sundaresan, partner in law firm J Sagar Associates, said the government would have to justify how the decision is in "larger interest".
The coal ministry asserted its position on Friday with a stern letter to TCI - which holds 1% equity in the company. It said that when Coal India's shares were sold, the offer documents clearly mentioned "risk factors" such as conflict of interest between the government and minority shareholders and that the company sold fuel to prices below international rates.
It said TCI must have read these disclosures before investing. "Hence your contention of any abuse of minority shareholders and the government of India has sold shares to shareholders/investors at the IPO, based on misrepresentation, is not based on facts and thus merits no consideration," coal ministry wrote in a letter to the fund. Oscar Veldhuijzen, partner in TCI, said he would respond on Monday.
The hedge fund has initiated arbitration against the Indian government saying its treatment of the state-run miner was in violation of treaties of Cyprus and the UK.
CIL is unlikely to meet March 31 deadline set by Prime Minister's Office (PMO) for signing of fuel supply agreements (FSAs) to raise power generation. Delay in implementation of the dictate would impact investments by companies toward setting up 28,000-MW power plants.
With 90% ownership in CIL, government may invoke a clause in an agreement signed with shareholders authorising it to take decisions in public interest despite opposition by other investors. Independent directors supporting investors will be persuaded, a coal ministry official said.
"Clause 37 of Memorandum of Association signed between shareholders and CIL gives the owners' a right to supersede other shareholders to take a decision in national interest," he said on condition of anonymity. Memorandum of Association is a document that governs a company's dealings with outsiders including shareholders.
Coal minister Sriprakash Jaiswal said he would not comment before receiving an official communication about the company's board meeting. CIL acting chairperson Zohra Chatterji, a bureaucrat in coal ministry, said the company would seek time from government to persuade independent directors.
CIL minority shareholders and independent directors have raised concerns on CIL's capability to commit large supplies to power plants for 20 years, as non-compliance will attract penalties.
The company targets production of 464 MT coal in fiscal 2013 and 615 MT in another four years. They have also questioned the company's practice of selling the fuel at up to 70% discount to international market price.
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