Should the Indian Government Use State-Owned Enterprises as Instruments for Public Policy?

The Indian government’s policy of using state-owned enterprises as vehicles for public policy once again comes into question as the Children’s Investment Fund (TCI) files a new lawsuit against Coal India Limited (CIL).
Coal India Limited | Ltd | News | Share Price | Of | Stock | TCI Fund Management
Coal India Limited | Ltd | News | Share Price | Of | Stock | TCI Fund Management
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Oct. 31, 2012 - PRLog -- An old nemesis has come back to haunt Coal India Limited (CIL).

Earlier this month, the Children’s Investment (TCI) Fund Management filed a law suit in the High Court of Kolkata charging CIL of not working for the interest of all shareholders.

TCI is a London based discretionary investment manager. It owns just over a 1% of CIL and is the largest minority shareholder in CIL. The government owns 90% of CIL.

CIL is the country’s largest coal producer and supplies more than 80% of domestic coal demand. The company went public in 2010 after the government decided to divest 10% of its shares. CIL had the largest initial public offering (IPO) in the history of the Indian capital market, mopping up US$3.5B for the 10% stake in an offering that was over-subscribed 15 times.

Since then the relationship between CIL and its minority shareholders has been turbulent. In a statement issued shortly after the High Court had accepted the case, TCI said it had filed the law suit “against the directors of Coal India Limited (CIL) for breach of their fiduciary duties and for failing to perform their functions with adequate care and skill”.

This is the second lawsuit TCI has filed. In August, it filed a writ petition in the Delhi High Court “seeking to quash the letter dated 25 January 2012 written by the then Coal Secretary, Mr. Alok Perti to Coal India Limited (CIL) instructing it to revise the price hike CIL made in December 2011”. A hearing on the Delhi High Court case has been scheduled for December 7.

Mr Perti’s letter remains at the centre of TCI’s case. The recent law-suit in the Kolkata High Court claims that the company will have lost $1.75B in pre-tax profits by the end of this fiscal year as a result of the price reversal. “By failing to raise FSA [fuel supply agreements] coal prices to market levels, the directors have cost CIL a staggering INR 2,152B [US$43B] in pre-tax profit since the IPO,” TCI has claimed. TCI’s lawsuit is effectively being treated as a class action lawsuit representing the interests of all minority shareholders. The first hearing has been scheduled for December 12.

The courts are likely to weigh in on the case purely on the basis of the protection afforded to minority shareholders under Indian laws. The Companies Act, a key legal framework, is antiquated and a revision to the Act has been languishing in Parliament.

From the narrow perspective of the protection extended to minority shareholders, the lawsuit will do little to get resolution on the key issue that the case raises: government use of state-owned-enterprises to achieve policy goals.

Over the last decade, government has disinvested portions of its holding from several state owned enterprises. It continues to push for further disinvestment. But in many of these companies, Government remains the largest shareholder and, as is the case with CIL, government is effectively the manager as well.

With such ownership patterns, the lines between corporate objectives of the company and policy objectives of the government often blur. The TCI case is really about this blur – the use of CIL as a policy instrument for meeting the country’s energy goals.

The CIL coal monopoly offers government a powerful instrument for exercising its policy. As a result, CIL decisions are as much political as they are corporate. “You can’t take a company to IPO, ignore your new responsibilities and then expect shareholders to quietly suffer,” TCI partner Mark Derbyshire said in the company’s statement.

The government sees things differently.

“As a government-owned company, CIL cannot be motivated only by profits. It has a broader set of objectives,” a senior official at the Ministry of Coal confided after the first TCI case was filed.

With the TCI lawsuit, the courts will weigh in on whether shareholders should be entitled to the $43B that is claimed or if CIL trampled on their rights. But the more important issue of whether Government should be allowed to use state-owned enterprises as instruments for policy will likely go unanswered.

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