London-based hedge fund The Children’s Investment Fund (TCI) has initiated legal action against the Union government under the provisions two bilateral investment treaties over its investment in Coal India (CIL). TCI, which holds over 1% in Coal India, through two vehicles domiciled in the UK and Cyprus, sent a notification to this effect to the finance minister on Tuesday. The notification invokes two bilateral agreements between India and the United Kingdom in 1994 and India and Cyprus in 2002
"The Republic of India's recent conduct with respect to CIL has seriously impaired business activities and operations of CIL and has contravened each of the treaties," the fund said in the notice. If a settlement is not reached within six months, the fund said, under the terms of the treaties international arbitration would begin.
TCI's grievances include pricing of coal up to 70% below international market prices, allocating coal blocks to the private sector below market proces which then remain undeveloped and continuing to operate loss making underground mines and generally controlling and issuing directions to the company in a manner which is abusive to minority shareholders.
TCI also cited interference of ministry of Environment and forests in delaying environmental and forestry clearance approvals to allow CIL to develop new coal mines. "Further should the mines and Minerals (Development and Regulation) Bill 2011 be passed into law by the Indian Parliament, the undue and disproportionate adverse effects of this bill on the operation of CIL will also constitute a contravention of each of the treaties," the notification said.
The conduct breaches the government's obligation to accord fair and equitable treatment under the said treaties, TCI claimed.
The move comes after two weeks of public posturing by the $8 billion fund, which has made a name for itself taking on companies around the world on governance and minority investor issues.
In his letter addressed to the top management and board members of CIL on March 12, Oscar Veldhuijzen, Partner, TCI had alleged breach of fiduciary duties by the directors and threatened legal action “if no clear commitments are made public in the immediate future to provide parity of coal prices to import prices and rectifying the other breaches of fiduciary duties which we have outlined.” In this letter TCI alleged that Coal India reversed a decision to hike coal prices on instruction from the government. TCI had obtained a letter written by the coal secretary to NC Jha, the then chairman of CIL through the Right to Information (RTI) Act.
In a separate letter addressed to the government a few days after writing to the board, TCI said Coal India has lacked the necessary leadership to develop operationally after the retirement of CMD Partha Bhattacharya. “It is time for the Board to hold the management accountable, or for the Board and management to be swiftly changed."