Web analysis: Dark days ahead for Coal India

The UPA government has finally used its ‘Brahmastra’ on Coal India. On Tuesday the government issued a Presidential directive forcing the company to supply at least 80 per cent of the quantity committed to power companies.

The directive was needed as Coal India’s board of directors rejected the proposal originally suggested by the PMO (Prime Minister Office).

The company’s largest non-promoter shareholder, The Children’s Investment Fund (TCI), is taking Coal India to court as it believes that the company is being run in a manner which is ‘both prejudicial to public interest and oppressive to shareholders.’ The Presidential directive further strengthens the fund’s case. TCI said that it believes that a number of government directives are not in the public benefit and should not be followed by Coal India, because they destroy the profitability and value of stake in Coal India. 

The only dilution which was allowed to the company in the directive is that it will have the flexibility to relax the penalty that would be payable in case of a shortfall. Currently, the company pays as penalty 10 per cent of the average cost of the overall quantum of the shortfall on 80 per cent of the committed Annual Contracted Quantity (ACQ).

Reports say that post intervention of the PMO, railway rakes are being made available to Coal India and the company now is receiving highest ever number of rakes. These will not be sufficient, going forward, as there is a shortfall for nearly 40,000 MW of power, which will require over 200 million tonnes of incremental coal.

The other issue however is the pricing of coal. Private players having not been able to meet their coal requirements at required prices have now pressurized the government to ask Coal India to supply them at subsidised rates. Though the company generates higher profitability from e-auctions, the directive will force the company to redirect the production to these power producers.

Coal India had earlier said that if it imports coal in order to meet the PMO directive, it will not absorb international rates, which are substantially higher than at those it supplies to NTPC. But if that would have been the case power producers would not have gone to the government for preferential treatment.

Presidential directive will make Coal India absorb volatility of international coal prices as it will be forced to import given its slow production growth. The trade-off will then be on which is lower, penalty for not meeting the required supplies or subsidies for meeting the supplies.