Coal India will continue to be a victim of conflicting ideologies  

April 9, 2012

The government has listed Coal India to raise money but has pushed CIL into a conflict between its role as a company that is fully accountable to its shareholders and its role as a PSU with all the associated national and social obligations

EAS Sarma

When Mohan Kumaramangalam nationalised 937 private coal mines in the country in 1972 and 1973, his intention was to put an end to unscientific ‘slaughter ‘mining practices, ensure the safety and the welfare of the miners, channel public investment on a large-scale into coal mining and facilitate integrated planning of coal development. In 1975, CIL was created as a 100% public sector undertaking (PSU), as a holding company, to fulfil this vision. CIL has indeed measured up to this expectation by guiding its subsidiaries in developing both coking and non-coking coal mines in a scientific manner.

Its systematic exploration effort has made it possible for the company to establish around 22 billion tonnes of extractable coal reserves. It has a well-trained, dedicated work force of a little less than 0.4 million, producing 430 million tonnes of coal annually to fuel most of the country’s electricity generation and other vital industries. As one of the largest coal companies in the world with invaluable assets, CIL now attracts huge investments, both domestic and foreign. In view of these achievements, the central government has conferred on it the status of a ‘Maharatna’ company with increased freedom to take autonomous decisions on expanding its operations, both domestic and global. The Maharatna status also mandated CIL to open up its shareholding to the public and get listed in the stock market.

CIL went in for an Initial Public Offering (IPO) in October 2010, which became oversubscribed by more than 15 times. Both, domestic and the foreign investors, have an eye on India’s vast mineral resources, particularly coal, apart from deriving value from the organisational strengths of CIL. The company’s problems started soon after its successful IPO.

The IPO has changed CIL’s character as a PSU. With a 10% public shareholding in it, CIL is no longer a 100% government-owned company. Being listed in the stock market, the company is now subject to the rigorous norms of corporate governance. Its private shareholders are entitled to a share in the company’s profits in proportion to their shares. They can question the company’s decisions to the extent they affect their interests. On the other hand, CIL has several national obligations that are imposed on it by the majority shareholder, i.e. the government.

For example, CIL is obligated to sell its coal at the government-fixed subsidised prices to the electricity utilities, so as to enable the utilities in turn to subsidise the electricity sold to the farmers and the other consumers, as per the diktats of their respective owners, i.e. the states.

Thus, if the Maharatna status has apparently liberated CIL from some governmental control, its primary role as the main supplier of coal to the electricity industry continues to constrict that freedom and neutralise it to a very large extent.

During the last five to six years, the laissez faire policy of the present government has allowed the power ministry and the states to go berserk in allowing a large number of new merchant power projects. The environment ministry has bowed down to their wishes and rubber stamped, or is in the process of rubber stamping, 702,000 MW of thermal capacity, mostly based on coal. This is a mind boggling figure as it is six times the existing thermal capacity in the country and three times the capacity projected by the Planning Commission as the requirement up to 2031. CIL is expected to meet at least 70% of the coal needed by these new power projects. It can neither raise the huge financial resources needed for expanding its capacity so quickly nor upscale its physical capacity to such an extent, to cope with this challenge within such a limited time. If it seeks budgetary support from the government, it will have to forego its Maharatna status and along with it, whatever little commercial autonomy it has gained! If it does not, it will forego its role as the main coal supplier in the country, forcing India to become a net importer of coal.

Incidentally, the coal rush described above has also led to a coal scam in which the coal ministry allotted more than a hundred coal blocks to private companies for captive mining, without following transparent competitive bidding procedures. A few influential private developers have cornered the lion’s share in this, on highly concessional terms, causing substantial loss to the public exchequer. As usual, it is the media that exposed this scam. It is Comptroller and Auditor General (CAG) who evaluated the loss. Under intense public pressure, the coal ministry has at last notified the introduction of a competitive bidding format for the future allotment of captive coal blocks. It is like shutting the stable door after the horse has bolted.

When it came to pleasing a select group of private companies, the three central ministries, namely, environment, coal and power acted together in an orchestrated way to allot the coal blocks and clear the merchant power projects with unprecedented alacrity. One wonders whether the public financial institutions in the country have also unwittingly or otherwise have joined this bandwagon of a mega scam by extending loans to both the power companies and the coal investors! One should not be surprised if some of these institutions soon get sucked into this scam, ending up with unmanageable NPAs non-performing assets), as it happened more than a decade ago with the infamous Enron in Maharashtra.

I have mentioned this as an aside to illustrate how misplaced laissez faire policies in different sectors could together hurt the economy in a far reaching way.    

Coming back to the case of CIL, there is clearly a case of conflict between its role as a company that is fully accountable to its shareholders and its role as a PSU with all the associated national and social obligations. The government should make up its own mind in choosing between these two distinctly different roles of CIL. There cannot be a middle path in this. Unfortunately, what the government is trying to do in the case of CIL and for that matter, in the case of most PSUs, is to run with the hare and hunt with the hounds! It was determined to convert CIL into a listed company and, at the same time, do everything that went counter to it.

Caught between the influential group of private power producers on the one hand and a not too enthusiastic CIL management on the other, the government invoked its extraordinary power under CIL’s Memorandum of Association to issue a Presidential directive to the company to sign 20-year fuel supply agreements (FSAs) with new power projects, guaranteeing to supply at least 80% of the contracted quantity, that too at the prices approved by the government. This implies that CIL should bear the burden of the penalties for short supplies. CIL may even have to turn into an unwilling importer of coal to fulfil its obligation. CIL’s coal will not fetch its full market value.

Why has the government thought of resorting to such an extraordinary step? I will cover this in the second part of my analysis.

(EAS Sarma is an ex-Union power secretary)