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CIL Made To Toe The Line

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Power companies have reasons to cheer as cracking a whip, the government on Tuesday issued a Presidential directive to Coal India to sign fuel supply agreements (FSAs) with the power producers assuring them of at least 80 per cent of the committed coal delivery. This comes in face of stiff opposition from independent directors who at a board meeting held on March 22 had resented the clause in the FSA for ensuring at least 80 per cent supply of the commitments to power plants. Last week British hedge fund, The Children's Investment Fund Management, served a notice to the Indian government for alleged violations of international treaties related to its investments in Coal India. The Presidential directive has been given to the PSU, as it did not meet the deadline of March 31, set by the Prime Minister's Office for Coal India Ltd (CIL) to enter into agreements with power producers which were facing fuel crunch. "Government has this power reserved so that whenever there is an emergency then that power can be used. As we saw an emergency.. there was a commitment by Coal India. Therefore, the government decided to sign the FSAs with 80 per cent commitment. That is why the directive was issued," Coal Minister Sriprakash Jaiswal told reporters. He said it would not take more than two-three days for the CIL to sign the FSAs with the power producers. However, the crucial clause of penalty on CIL in the case of its failure to meet 80 per cent fuel supply commitment, has been left to the PSU board, the minister said. "It is for Coal India to decide (penalty).They have full freedom (on it)," he said. Under clause 37 of the memorandum of association of Coal India, the Government of India has the right to invoke 'presidential directive' to overrule the board's decision if no consensus is reached on issues related to national interest. Coal India's independent directors were against the signing of fuel supply agreements at the trigger level of 80 per cent and the penalty clause involved. Last week, British hedge fund The Children's Investment Fund Management served a notice to the Indian government for alleged violations of international treaties related to its investments in Coal India. It is perhaps only the second time that the government has resorted to this option to force the Maharatna PSU agree to its directive. The government had issued Presidential directive to state-owned gas utility GAIL India Ltd in 2005 insisting on a particular technology for laying the Rs 1,800 crore Dahej-Uran pipeline. While the power producers welcomed the decision, analysts feel the Rs 50,000 crore CIL may stand to lose heavily in case it falters on its commitment to supply fuel to the energy firms. CIL share closed Rs 342.75, gaining 0.65 per cent. In February, after meeting with the power sector honchos, the Prime Minister's Office (PMO) had directed CIL to ink FSAs with 80 per cent supply commitment before March-end for power plants which have been commissioned on or before December 31, 2011. However, the PMO direction did not find favour with independent directors of the CIL, which is a listed and traded PSU. The minority shareholders also questioned the move. Earlier, independent directors in the board meeting held on March 22 had resented a clause in the FSA for ensuring at least 80 per cent supply of the commitments to power plants. The board had also met earlier twice over the past one week, but no consensus could be reached as there were disagreements over some of the clauses in the FSA. The independent directors, according to sources, had opposed to the clause for ensuring at least 80 per cent supply of the commitments to the power plants stating that the PSU as facing problems in enhancing coal production and was not in a position to meet the commitment. Amid power plants facing a supply crunch, the PMO had said that FSAs would be signed for full quantity of coal mentioned in the Letters of Assurance (LoAs) for a period of 20 years. It had elaborated that if the supply remains below 80 per cent, then CIL would be penalised and would be provided incentives if it was found above 90 per cent. In case, CIL is unable to meet the obligations, the company would have to arrange for fuel through imports or other arrangements, it had said. Coal India May Have To Pay 10% Penalty to Power Cos Under the FSA, Coal India may have to pay power companies between 10 and 40 per cent of the average cost of 20 per cent and more shortfall in supplies under new guaranteed fuel pacts the government is forcing it to sign, ministry sources said. However, the crucial clause of penalty on CIL has been left to the board The world's biggest coal miner, however, stands to gain equal levels of rewards even if it meets only 90 per cent of its commitments under these pacts with power plants that are due to be commissioned by 2015 and generate 50,000 megawatts of power. Coal India's production has stagnated due to regulatory and infrastructure hurdles. In 2011-12, it missed even a scaled down output target, producing about 436 million tonnes. It now aims to produce 470 million tonnes in 2012-13. The under-performance by the coal monopoly has worried Prime Minister Manmohan Singh, already struggling with a slowing economy, and he is now pushing the company to boost output which could help many power plants that are running below capacity. "What is being proposed is if the company fails to provide less than 80 per cent then it will be penalised in a graded manner," said a senior source in the coal ministry on condition of anonymity as the proposals are still being finalised. "Between 75 and 80 per cent supply (of the contracted amount), it will be fined 10 per cent of the average cost of the shortfall. For 70-75 per cent of supply the penalty will be 20 per cent and below 70 per cent supply will attract a 40 percent penalty." Average domestic coal prices are Rs 1,600-1,700 per tonne and are anywhere between 40-70 per cent below international spot prices as they are capped by the government which is keen to provide cheap electricity. Indonesia spot coal prices -- the biggest source for India's imports -- are currently around $65 per tonne. Singh's decision to force Coal India to sign guaranteed fuel supply pacts followed intensive lobbying by top executives from India's power companies, who had sought his help to boost supplies of coal. Singh's office has said Coal India will have to ensure supplies, including by imports if needed. CAG Estimates Illogical Coal Minister Sriprakash Jaiswal on Tuesday, meanwhile, described CAG draft report on allocation of coal blocks without auction as "illogical", asking by that yardstick even water used in the hydro projects should be charged. "This is no logic. If this is accepted , then there are so many hydro projects in the country. Tell me whether usage of water was charged," Jaiswal asked. He said the argument in the CAG draft report was "baseless", especially because when the blocks were given to the private and public sector companies for their captive usage, there was not much demand for coal. First, there was no policy of auctions in place from 1993 onward when the coal blocks were given for the first time to companies other than Coal India Ltd (CIL). Secondly, the auction system had not been in use for several other sectors. "...there are so many steel plants and so much iron ore is extracted, whether iron ore is auctioned," he said in an interview with PTI. Asked if he found no merit in the auctioning the natural resources like coal, then why is his ministry going in for inviting bids for the blocks, Jaiswal said dynamics have changed over the past few years as coal commands premium now. "Today coal demand has risen so much. That time (when the blocks were given (without auction) there was not much demand... naturally, there was not much value. "There were not many investors. Even if we had gone in for the bidding, we doubt whether any investor would have come. Everything has a time. With so value (now), bidders will come," he said. The draft report of the Comptroller and Auditor General(CAG) has created a furore by stating the companies, including top business houses and some public sector firms, had made gains worth Rs 10.67 lakh crore by bagging 155 blocks without any bidding between 2004 and 2009. UK's TCI Serves Notice To Govt On Coal India Last week British hedge fund The Children's Investment Fund Management served a notice to the Indian government Wednesday for alleged violations of international treaties related to its investments in Coal India. The latest salvo comes close on the heels of the UK hedge fund threatening to initiate legal action against the board members of state-run Coal India Ltd (CIL) for failing to protect the interest of minority shareholders. "The Republic of India's recent conduct with respect to CIL has seriously impaired the business activities and operations of CIL and has contravened each of the treaties," The Children's Investment Fund (TCI) said in a letter to the Finance Ministry on March 27. According to the letter, the Indian government's actions have breached the country's treaties with Cyprus as well as the UK and Northern Ireland, where the TCI's funds are domiciled. TCI's investments in Coal India are through TCI Cyprus Holding Ltd and Talos Capital Ltd, which is registered in Ireland. The hedge fund has said the letter was a "written notification of a dispute arising" out of breach of the two treaties. Among the alleged violations cited in the letter are the government's direction that CIL price and sell coal under Fuel Supply Agreements (FSAs) at a substantial discount to international market rates. (With Agencies)