Disciplining PSUs

TCI-like minority shareholder activism is overdue

In the two decades that disinvestment has been on the government’s agenda, its purpose has been distorted. When the idea that the central government’s stake in public sector undertakings (PSUs) be diluted was first suggested and implemented, the main motivation was to improve their efficiency. Disinvestment would lead to greater operational discipline, it was argued. Listing a PSU meant that it would be subject to the rules of the market, with the government turning from the command centre of the economy to just another shareholder, albeit one with control. This has not happened; and now disinvestment seems to be seen as just another way to raise resources for a cash-strapped exchequer. In the process, the companies themselves have suffered. They still follow government directives on their day-to-day operations that are supposedly in the economy’s interest, not in their own. Yet little has been done to change that — till now. Over the past two weeks, a UK-based hedge fund called The Children’s Investment Fund (TCI) has launched a campaign against how Coal India Limited (CIL) is being managed and, in particular, its government-directed policy of selling coal well below the international market price. TCI argues, as the second-largest investor in CIL (it owns 1.01 per cent of the company), its rights as a minority shareholder are being ignored by the majority shareholder — the Centre, which is not seeking to maximise value as it should.

TCI’s campaign is unusual in nature and is being carried out on multiple fronts. It has set up a website, www.coal4india.com, which lists its grievances and solicits public support. It has written to the government demanding the board of CIL, which it calls the “board of shame”, be changed. It has threatened to sue CIL’s directors for neglecting their fiduciary responsibility to shareholders. This followed CIL’s rollback of a price increase that had accompanied the shift to a gross calorific value-based pricing system. Nor is TCI daunted by the slow pace of India’s legal process. It has announced that it will, under the bilateral investment treaty that India has signed with the United Kingdom, take legal action against the Indian government in that jurisdiction.

The hedge fund’s mission may appear quixotic and doomed to failure. CIL’s initial public offer was oversubscribed, and the government may well just imagine that TCI will sell its stake. But TCI’s history should give it pause. The hedge fund, which gives a large proportion of its profits to a child-focused charity of the same name, has made a name for itself through such campaigns. It caused the split-up of ABN AMRO; it forced the resignation of Deutsche Borse’s CEO following his abortive attempt to take over the London Stock Exchange; and it helped push through the Mittal takeover of Arcelor in the teeth of political opposition. Shareholder activism is how the fund adds value to the companies in which it invests, so it will not be going away soon. This is to be welcomed. India’s shareholders have accepted government mismanagement of listed PSUs too passively. The problem extends beyond Coal India. State-controlled companies in the petroleum sector, in particular, have suffered greatly from the government’s unwillingness to depoliticise pricing decisions. They, too, are ripe for shareholder activism, which holds the government to account for ignoring the legitimate rights of investors. In the absence of government commitment to reforming PSU operations, market discipline must be imposed by market participants.