Shares in state miner Coal India
On Wednesday, shares in Coal India, the country's fourth-largest company by market value, fell as much as 3.9 percent in early trade. It closed down 2.8 percent in a flat Mumbai market.
After the market close, UK fund The Children's Investment Fund Management (TCI) added to pressures on the company's management by saying it had filed a writ in the Delhi High Court to quash directions by India's coal ministry to the miner to reverse a price hike.
Coal India late on Tuesday had agreed to supply at least 80 percent of the coal needed to fuel new Indian power projects, a condition set by the government, but stipulated it could use a mix of 15 percent imported coal versus 65 percent domestic.
"The additional obligation of being an importer of coal is not positive for the company, and the real challenge is likely to arise when global coal prices spike up," JPMorgan said in a report.
Analysts warned that agreeing to imports to meet supply agreements may extend reliance on these shipments.
"This is a change in management stance. It significantly raises risks of Coal India potentially having to subsidise imported coal a few quarters/years later," Credit Suisse analyst Neelkanth Mishra said in a note on Wednesday.
Another key issue worrying investors has been the amount of the penalties Coal India would have to pay should it fail to meet its supply agreements. Its board has deferred a decision on the matter for later this month.
Coal India is seeking to pay only 0.01 percent of the shortfall in supply, whereas electricity utilities are seeking a far higher 10 to 20 percent.
Coal India officials dismissed these market concerns, saying neither issue would have a significant impact on its earnings.
"Coal India will only be a facilitator. The cost for imported coal will be borne by the respective utilities," said a senior Coal India official, declining to be identified because he was not authorised to speak to the media.
"The market has no reason to worry about this aspect,"
Coal India produces nearly 80 percent of the country's domestic coal supply of about 550 million tonnes but has struggled to increase local supplies for years because of failure to get swift environmental and regulatory approval and inadequate railway infrastructure.
UK INVESTOR FILES SUIT
The company also has been under pressure from investor TCI, which holds about 1 percent, after it bowed to the government in January and reversed an increase in coal prices.
TCI said it had filed a suit against the miner and the coal ministry, which have both been issued notice by the Delhi High Court.
TCI said in its petition that coal prices in India are completely de-regulated and the government does not have legal authority to interfere with the discretion of Coal India.
Earlier this year Coal India moved to a new mechanism that links prices to gross calorific value (GCV) of the coal, but it still prices domestic coal 45 to 70 percent cheaper than international prices, in part to keep costs low for power companies, the biggest coal consumers in the country.
TCI has estimated the miner loses $19 billion in pretax profits annually because of the low prices.
Earlier this year, the government, which owns 90 percent of the company, ordered it to sign contracts guaranteeing 80 percent of coal supplies to new projects, which would pave the way for power generators to obtain funding for their planned projects.
TCI said it had also challenged that directive in its petition. It warned it would separately take legal action against Coal India's directors if they did not fulfil their fiduciary and legal obligations.
"We have not done anything other than what was given in the statement (red herring prospectus) when we did the IPO," a top official at the coal ministry said.
"We don't see any strength in this complaint. Anyway, since it (the petition) is the procedure and law, we will face it."
