Business Standard

Web analysis | Coal India: A victory sans the spoils

While the company has been able to extract a near-zero penalty in the new fuel supply pact, the power sector firms aren't willing to sign

Related News

Coal India’s victory of reducing its penalty to near zero seem to be short-lived. As had been expected by the market, power producers, including public sector giant have refused to sign the new with Coal India. This news is expected to affect power sector companies more than it will affect Coal India.

The reason power companies are refusing to sign the agreement is because they feel it is biased and absolves from all obligations. NTPC chairman and managing director Arup Roy Choudhury has been quoted by The Economic Times saying “We will not sign the new fuel supply agreement in the present form because it does not provide much in terms of coal supply commitment.”

After refusing to agree to sit on the negotiation table, Coal India was issued a Presidential directive to issue Fuel Supply Agreements with power companies. Coal India managed to bargain a low penalty clause, thanks largely to the stand taken by independent directors and shareholder activism led by The Children Investment Fund.

According to the new pact, Coal India will be liable to pay a penalty of 0.01%, that too after three years if it fails to supply the fuel. The contract also gives discretion to the supplier to terminate an agreement unilaterally. This clause itself is enough to scare away the power producers as it creates uncertainty over the tenure of the agreement.

Earlier Coal India had said that, if they had to import coal to feed the power producers it will be passing on the differential between the price at which they sell in the domestic markets and international market to the power producers.

According to a report in the Financial Express, Association of Power Producers has said that the increase in price of coal due to imports would need to spread over the entire quantity of domestic production to keep power cost manageable. In other words, power companies are not willing to buy coal at imported price, but need it subsidised by passing on the higher price to all domestic consumers.

It is this subsidised price which seems to be stalling the entire process, as agreement for coal at international prices could have been signed by the association of power producers themselves. Commenting on NTPC’s refusal to sign the fuel supply agreement DNA quotes the newly appointed chairman of Coal India as saying that “The main issue is they are not agreeing to accept the gross calorific value (GCV) formula and want to go back to old useful heat value (UHV)”

Price thus seems to be the main issue, penalty clauses are just a negotiation tool being by the power producers.

Read more on:   
|
|
|

Web analysis | Coal India: A victory sans the spoils

While the company has been able to extract a near-zero penalty in the new fuel supply pact, the power sector firms aren't willing to sign

Coal India’s victory of reducing its penalty to near zero seem to be short-lived. As had been expected by the market, power producers, including public sector giant NTPC have refused to sign the new fuel supply agreement with Coal India. This news is expected to affect power sector companies more than it will affect Coal India.

Coal India’s victory of reducing its penalty to near zero seem to be short-lived. As had been expected by the market, power producers, including public sector giant have refused to sign the new with Coal India. This news is expected to affect power sector companies more than it will affect Coal India.

The reason power companies are refusing to sign the agreement is because they feel it is biased and absolves from all obligations. NTPC chairman and managing director Arup Roy Choudhury has been quoted by The Economic Times saying “We will not sign the new fuel supply agreement in the present form because it does not provide much in terms of coal supply commitment.”

After refusing to agree to sit on the negotiation table, Coal India was issued a Presidential directive to issue Fuel Supply Agreements with power companies. Coal India managed to bargain a low penalty clause, thanks largely to the stand taken by independent directors and shareholder activism led by The Children Investment Fund.

According to the new pact, Coal India will be liable to pay a penalty of 0.01%, that too after three years if it fails to supply the fuel. The contract also gives discretion to the supplier to terminate an agreement unilaterally. This clause itself is enough to scare away the power producers as it creates uncertainty over the tenure of the agreement.

Earlier Coal India had said that, if they had to import coal to feed the power producers it will be passing on the differential between the price at which they sell in the domestic markets and international market to the power producers.

According to a report in the Financial Express, Association of Power Producers has said that the increase in price of coal due to imports would need to spread over the entire quantity of domestic production to keep power cost manageable. In other words, power companies are not willing to buy coal at imported price, but need it subsidised by passing on the higher price to all domestic consumers.

It is this subsidised price which seems to be stalling the entire process, as agreement for coal at international prices could have been signed by the association of power producers themselves. Commenting on NTPC’s refusal to sign the fuel supply agreement DNA quotes the newly appointed chairman of Coal India as saying that “The main issue is they are not agreeing to accept the gross calorific value (GCV) formula and want to go back to old useful heat value (UHV)”

Price thus seems to be the main issue, penalty clauses are just a negotiation tool being by the power producers.

image

Read More

Axis Bank: Concerns reflect in valuations

Axis Bank posted good set of numbers for the quarter ended 31st March 2012, beating the consensus estimates. Higher than expected growth in interest ...

Recommended for you

Advertisements

Quick Links

Market News

33 stocks outperform markets ahead of MSCI inclusion

Though short-term investors can buy these stocks in a hope to make quick returns, long-term investors should look at company fundamentals before ...

Global slowdown, jump in crude oil prices are key risks: Anand Shah

Interview with Chief Investment Officer, BNP Paribas Mutual Fund

Subdued outlook for GAIL

Weak petchem margins, high feed-stock prices, lower utilisation of gas pipeline infrastructure are likely to keep stock under pressure

ICAI to submit decision on NSEL auditor soon

Probe over, it tells Delhi HC, decision in 4 weeks; matter pending with it for about 20 months

Nifty could zoom 200-300 pts if rate cut expectations are met

Consensus is strongly in favour of a rate cut, of 50 basis points, rather than a minimum 25 bps

 

Back to Top