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BW Businessworld

Unforeseen Harassment

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When Dr Manmohan Singh, in his earlier incarnation as finance minister, allowed foreigners to make portfolio investments in Indian shares, he exercised all the caution that he is well known for. He placed a limit of 20 per cent on foreigners' investment, so that they could not get any representation on the board or exercise influence on the management. Within that percentage, the limit of investment from any single shareholder was tiny; he thus also minimised the influence of single foreigners. Thereby he aimed to brace up Indian companies' shares without weakening Indian promoters' and shareholders' influence. In particular, he thought that the stranglehold of the government on public sector enterprises, in whose equity the government held an overwhelming share, would be unaffected by pygmy foreign shareholders. It looked  like a shrewd, nationalist move to bring in some investment and shore up the foreign exchange reserves that were uncomfortably low at that time.

He was right for two decades, but now his wisdom is being challenged by the course of events. First there is Coal India Limited, in which the government owns an overwhelming majority. Since the government decontrolled prices in 1996, Coal India has developed a pricing model which enables it to find a market for its enormous output without upsetting its heavyweight customers. The armed forces, power companies and fertiliser companies, which have political muscle, get more or less standardised coal at relatively low prices that are infrequently raised. A similar pricing model applies to steel makers and big users of coking coal. Small and uninfluential consumers get their coal through auctions conducted on the Internet. Since the government gave it a near-monopoly of domestic production, Coal India made stable and rising profits, and was a darling of the stock market.

On New Year's Day, Coal India gave its consumers a gift: it changed the basis of coal pricing from useful heat value to gross calorific value. Gross calorific value is pretty clear: it is the heat in a gram of coal, which can be measured by burning it under controlled conditions. It forms the basis of pricing all over the world. Useful heat value was an Indian measure whose origins are lost in history; it made provision for the fact that coal out of a mine contains a lot of dirt which not only does not give any heat on combustion but absorbs heat when the coal is burnt. So UHV pricing in effect gave customers a discount on low-quality coal. Coal India promised not to raise the average price. But its customers did not believe it. The inevitable NGO went to the Calcutta High Court with a public interest petition, influential customers went to the coal minister, and the price rise was indefinitely postponed.

Meanwhile, Coal India has reached the capacity of its mines. It could open new mines, but that would disfigure pristine landscapes and require digging up tribal habitats, so it has been prevented from doing so by the ministry of environment. Coal India cannot acquire mining acreage abroad because the prices it charges in India for coal are only about half those ruling internationally, so it cannot compete with other bidders for acreage. In the meanwhile, Coal India's hungry customers are crying for more supplies, and it has not been able to satisfy their demands. A time had come for its coal to be rationed; but its customers were not convinced that it was doing so rationally and honestly.

So Sriprakash Jaiswal, minister of coal, has issued a command to Coal India in the name of the President that it must supply at least 80 per cent of the requirements of every influential consumer. Representing as he does the majority owners of Coal India, however, the minister has not been very stern; he left it to the company to decide what compensation it would give its customers – what punishment it would inflict upon itself – if it failed to supply the 80 per cent. Left to itself, it will hardly bother to punish itself.

Now The Children's Investment Fund, a British institution that finances assistance to needy children, has threatened to sue Coal India for not defending the interest of its shareholders against the government. Its stake in Coal India is tiny – just about 1 per cent – but that does not diminish its rights as a shareholder as defined by company law, or the obligation of Coal India's board of directors to defend shareholders' rights. Just last month, Jaiswal's senior colleague, Pranab Mukherjee, invited international ire by arbitrarily taxing a deal that was done abroad. Both can trace their troubles to their prime minister's decision 20 years ago to let in tricky foreign investors. Life was so much easier in the old days of autarchy.

(This story was published in Businessworld Issue Dated 23-04-2012)