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Nobody seems to like Coal India. The government, its owner, cares only about the money the company generates; investors feel that the company is stagnating and does not have pricing power; employees are perennially unhappy and look out for the smallest of reason to go on strike or ask for a pay hike, while its customers are not happy with the way the company discriminates against them and the poor quality of products it supplies. In fact, some of them took their complaint to the Competition Commission of India (CCI).
On investigation, CCI found that their customers were right all along. Coal India does discriminate between customers, supplies poor quality coal at high prices, unilaterally terminates contracts and does not even entertain complaints.
In short, the PSU behaves like a monopolistic company, which reminds us of the same attitude that telecom companies, such as MTNL and BSNL, displayed before the sector was opened up. All monopolies have that attitude; even private sector companies during licence raj had an attitude problem.
CCI penalised Coal India and three of its subsidiaries by imposing a combined fine of Rs 1,773 crore. The amount is only 10% of the company's net profit for FY13 and was arrived at by imposing the fine at 3% of its average turnover in the last three years. Markets have brushed aside the small fine with the stock remaining largely unchanged on the news.
To be fair to Coal India, it operates in a controlled environment and has no control on the selling price of its product. It sells its coal largely to public sector utility companies at a subsidised rate, which gives it a nominal return over the cost at which it produces it. There is a small window through which the company can generate higher profits and that is by selling in e-auctions, where companies across sectors and ownership patterns bid for the coal.
Here, the company naturally sells its highest quality coal as it will fetch the best price possible for it. E-auction prices are on an average nearly 80% higher than the notified price it sells to utilities. Coal India sells around 10% of its sales (which has been reduced to 7% on government's diktat) through e-auction, but earns nearly one-fourth of its profit through it.
This does not mean that the company should not follow ethical practices towards its other customers. The two companies that have complained against Coal India are from the public sector. CCI too has for the first time imposed a fine on a public sector company. But there is more to the order than just a fine, which the company can easily afford.
CCI has ordered Coal India and its unit to "cease and desist" from such practices and improve its sampling and testing procedure; change its clauses pertaining to charging buyers transportation and other expenses for supply of ungraded coal, among others. The underlying message is to stop behaving like a monopoly.
There will far-reaching impact of this decision if Coal India seriously thinks of implementing it. Not only will it have to absorb the cost, but it will also have to sell more coal than rocks to its customers. This would mean that the company's revenue will take a beating while its cost will go up. That's no incentive to behave if one looks at Coal India's point of view.
While CCI has penalised the monopoly behaviour, it has fallen short of telling the government and the company to remove the monopoly of Coal India and break it into manageable smaller ones, which compete with each other in the market place. In creating a market place, all issues of service standards and quality will be addressed.
Coal India anyway is a holding company and at the operational level operates through a number of subsidiaries. Hence, creating smaller independently managed listed companies will not be too much of a task. In fact, shareholders will unlock more value if this happens.
There are, however, two main problems in such an approach: one is the trade unions, which will be resisting change and reduction in their power; and second is the government (Coal Ministry), which will object to more independence to the companies.
So, unless the sector is opened up the way telecom was, Coal India's buyers will have to put up with the company's behaviour, buying more rocks than coal and paying for buying it too. A small fine is unlikely to change the opportunity to make more money.
