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Hedge fund threatens to sue Coal India's board

Second largest shareholder wants public commitment to have market-linked coal prices

Sundaresha Subramanian & Jyoti Mukul  |  Mumbai/ New Delhi 

In a first of its kind investor backlash, The Children’s Investment Fund (TCI), the second largest shareholder in Limited (CIL), has threatened to take legal action against individual directors for failing in their fiduciary duties to protect the interest of minority investors.

In a letter to the directors and top officials of on Monday, the London-based activist said it “can no longer tolerate abuse of minority shareholders and poor corporate governance” and said it would seek legal action “if no clear commitments are made public in the immediate future to provide parity of coal prices to import prices and rectifying the other breaches of fiduciary duties which we have outlined”.

When contacted, M Viswanathan, company secretary, CIL, said, “We are not aware of any such complaint. We have not received the letter.”

The move followed the company’s recent decision to reverse the hike in coal prices. According to TCI officials, did this on instructions from the government.


Recent triumphs of investor activism:
* Crompton Greaves forced to sell a private jet
* Akzo Nobel forced to review royalty agreements
* Maruti investors reach out to unions directly
* In 2008, Sterlite forced to withdraw group restructuring  
* LIC questioned on its investment in tobacco companies 

In a decision made late last year, Coal India said it would adopt a new pricing mechanism based on the 'gross calorific value' (GCV) of coal with effect from January 1, 2012. Earlier, it had based prices on the 'useful heat value' (UHV) of coal, which deducted ash and moisture content from the standard formula.

On January 25, Alok Perti, secretary, ministry of coal, wrote to N C Jha, then chairman of Coal India, referring to complaints received from ministers, members of Parliament, secretaries of user ministries and various coal consumer associations, “pertaining to unreasonable price increase by CIL w.e.f 01.01.2012, consequent to the migration from UHV based grading to GCV based coal grading bands.”

“As discussed in the meeting and also during sitting of the standing committee on Coal and Steel on 20.12.2012, you are requested to review/revise the above stated CIL’s price notification latest by 31st January, 2012,” Perti said in the letter.

TCI said it had obtained the above letter through the Right To Information (RTI) Act and cited it as proof of the government’s interference in pricing.

“Despite the fact that they had complete freedom to take their decisions, the board members have simply responded to the instructions of the coal ministry and reversed their earlier decision. We have documents received under the RTI to prove that the board responded to instructions from the government. This is a clear breach of fiduciary duties,” Oscar Veldhuijzen, partner, TCI, told Business Standard over the phone.

The UK-based TCI has been active in pursuing governance issues in investee In 2008, media reports said it was contemplating legal action against Vedanta over its recast plan on the ground it was skewed against minority shareholders, but benefiting the promoters. Vedanta eventually dropped the plan. Veldhuijzen also said his fund had a “strong history of taking legal actions” against which put the interests of minority investors in jeopardy. “We have moved against ABN AMRO, Japan Tobacco... in all parts of the world,” he added.

On January 31, CIL announced the rollback. The reduction in prices was with retrospective effect from January 1, 2012, with a declaration it would be reviewed after March 31.

TCI has also listed several other instances where the board failed to protect the interests of minority investors. The board did not oppose the draft mining Bill, which was detrimental to coal mining companies as it proposed to increase coal mining taxes by 39 per cent. The investor also said the board acted in a similar manner on several other key issues such as the theft of coal, inefficiency in underground mining and under-delivery of production targets despite having abundant reserves.

The Union government holds 90 per cent in Coal India. TCI owns 1.1 per cent.

“The Indian government is one amongst several shareholders and has no legal right to directly instruct the Board in this manner. There was no push back at all from CIL’s board to the instructions from ministry of coal. In fact they simply implemented government’s instructions without any debate, question or challenge,” the letter said.

It further added that “contrary to the reputation India seeks to gain in the global market place as a fair ground for foreign investors, we find actions of CIL and its individual board members to be reckless and lacking integrity; we will hold each member personally liable. We will not be complacent in aligning our respective interests.” The letter was addressed to 15 top officials of the company, including the chairman and the chief financial officer.

First Published: Tue, March 13 2012. 00:30 IST