The Children's Investment Fund Management, a London-based hedge fund, has asked the Union government to reconsider the 26 per cent profit-sharing compulsion proposed to be imposed on domestic coal mining companies.
The fund, actually a limited liability partnership which makes long-term investments in companies globally, is commonly known as TCI. It had invested $1 billion (Rs 4,500 crore) in Coal India Ltd during the latter’s Initial Public Offer last October.
A group of minister chaired by Union finance minister Pranab Mukherjee had approved a change in existing law to compel all coal mining companies to share 26 per cent of their profits with local communities affected by their operations. A bill in this regard is to be tabled in Parliament.
In a letter to Mukherjee dated July 21, TCI has said the move would have a negative impact on the country's growth. It has indicated this would significantly reduce the government’s scope to raise further capital from privatisation of stakes held in companies.
Oscar Veldhuijzen, TCI partner, told Business Standard: “Assuming the draft mining bill is implemented, corporate taxes, additional taxes, royalty payments and CSR payments will result in 84 per cent of CIL’s pre-tax profits being distributed to federal and state governments. This compares extremely poorly with Australia, where the government effectively takes 43 per cent of pre-tax profits from private coal mining companies. The Indian government is already taking 69 per cent of pre-tax profits in taxes and other payments from CIL. It will become even more punitive compared with international standards.” Veldhuijzen said there was no rationale for the distinction between the treatment of coal mines and other mineral mines. “Currently, 85 per cent of CIL's coal is sold at a 60-70 per cent discount to market prices on an import-parity basis. It would be more prudent to charge a fixed royalty fee per tonne, rather than a percentage of sales price per tonne, given that the average selling prices will increase over time. There is a general consensus that increasing the royalty fee payments is a far more objective and efficient way of supporting the locals affected by coal mining than the proposed additional tax,” Veldhuijzen said.
He said profits were subjected to accounting variations and simply increasing the royalty fee per tonne of coal would leave less scope for manipulation.
More From This Section
SUPPORT FOR VIEW
R V Shahi, former Union power secretary, shares the concern raised by TCI. He said: “The coal industry after CIL's IPO is really getting into an overdue reform mode. CIL's IPO was a grand success. Obviously, such major policy changes, which would take away 26 per cent of the net profit, would affect the sentiments of not only domestic investors but also global ones. The finance ministry has a huge programme of disinvestment of a number of public sector units and policy changes like this will affect not only the coal sector but all future disinvestment programmes.”
Adding: “The power sector should be most concerned and also consumers, as this policy will have increase coal prices, which will lead to further deterioration of the financial health of state power utilities.” He suggested, too, that royalty be raised and shared, rather than this link with profit.
Motilal Oswal, in a recent report, said the current draft lacked an exact definition/calculation of “profit sharing” under the law and possible set-offs available.
There was no clarity on whether this was an appropriation of profit or a charge on profit. If there would be no tax on other income and a set off against social overhead expenses, the impact on CIL could be insignificant . Else, the impact on profit after taxes (PAT) could be 15 per cent, without assuming any offsetting price increase. A three-four per cent blended increase could help mitigate the earnings loss for CIL. However, if there would be tax on full profit and no set-off on social overhead expenses, the impact on PAT was expected at 20-21 per cent and CIL may need a five per cent price rise to counter this.