Opinion Don’t tilt at windmills

In activist India — with activist bureaucrats,activist judges,activist film stars,even an activist army chief — it is perhaps unsurprising that the leading activist hedge fund in the world has found a warm welcome here. Like non-financial activists,TCI promises to solve a pervasive problem — the Indian promoter’s notorious disregard for minority investors. It is certainly better positioned for this than domestic institutions,which often have strong business relationships with these promoters. And as with the media’s coverage of non-financial “activism”,excitement over enhanced engagement has prevented an intelligent discussion of specific demands. Because the activism is so welcome,the demands are assumed to be justified. This is a questionable assumption.

TCI’s principal demand is that CIL raise the price at which it sells coal to reflect international coal prices. They claim that CIL’s refusal to do so is a “fraud on minority shareholders” and the “theft of a national asset.” They further claim that this will damage India’s reputation with foreign investors. Both claims make for catchy headlines. Neither is a compelling argument.

It is true that the government effectively tells CIL how to price its coal,despite the company being publicly listed. However,it is crucial to recognise that CIL neither owns its mines nor acquired its mining rights via a competitive process. It was allotted most of India’s coal reserves by the government (their owner) with the clear intention that it would mine and sell to government-designated buyers at government-set prices. In that sense,CIL is a relic of old-school central planning.

This strange arrangement cannot,however,be called a “fraud” since it was fully disclosed to minority shareholders in CIL’s prospectus at the time of its IPO. Page xxvii of the prospectus (available on the SEBI website but shockingly ignored by most media coverage) states clearly that “the price of raw coal sold under our FSAs (fuel supply agreements) does not fully reflect market prices of coal in India or in international coal markets.For policy or other reasons,we may not price our coal at levels that would adversely impact the power sector or the Indian economy”.

TCI should,therefore,have known not only that CIL had goals broader than shareholder value creation,but also that it would not prioritise shareholder value over these other goals.

One can certainly criticise this policy on its merits,and support market-based resource allocation over central planning. But from this perspective,the correct solution would surely be to auction off India’s coal mines,with the government either extracting large upfront payments,or getting the benefit of the lowest tariff bid. Allowing a part-private company to corner scarce national resources without fair competition,and sell them at market prices,is inefficient and offensive — whether that resource is spectrum,land,or coal. That,rather than CIL’s present pricing policy,would be the true theft of a national resource

Will this scare foreign investors? Unlikely. Investors fear uncertainty,not predictable irrationality. Knowing how India works,few investors would be surprised by a PSU subordinating shareholder value to policy considerations,especially when it had committed to do so in advance. Perhaps the best proof of this is how stable CIL’s stock price has been in recent months,suggesting that this is what most investors other than TCI expected in any case.

While the media is understandably excited at the prospect of the government being sued by a financial institution (catch UTI,or even HDFC doing that!),TCI’s legal options do not look promising. Given the disclosures in CIL’s prospectus,it would have had a weak case in court. It is now pursuing relief under investment protection treaties that India has with the UK and with Cyprus (where its funds are domiciled). But these treaties only require that India extend “fair and equitable treatment” and “freedom from expropriation” to persons from these countries,and it would be a stretch to argue that CIL has violated either condition.

TCI’s best bet is to make enough noise so that the Indian government will let CIL take a small price hike,which will help its stock price and allow TCI to exit at a profit. It helps that the finance minister has projected Rs 30,000 crore as revenue from disinvestment in his budget,which means that the government will be receptive to arguments that emphasise its reputation with capital markets. The fund realises this and has,therefore,been particularly vocal in the Indian and international media.

TCI has a right to pursue maximum returns for its investors. What is disturbing is the uncritical acceptance of its argument by so many professing only a concern with the public interest. The correct demand to make of the government would be comprehensive reform in the coal sector,resulting in the auctioning of coal mines. And the correct response to TCI would be to thank them for their activism while rejecting their specific request in the name of the great Indian majority that does not own the 10 per cent of CIL that was privatised.

The writer is managing director of Laburnum Capital,a Delhi-based investment firm