Should Coal India help the power sector at the expense of minority shareholders?

The Children Investment Fund Management (TCI), the UK-based organisation engaged in lifting the health and educational levels of children in underdeveloped countries, is also the single largest overseas shareholder in Coal India. The fund relies on returns from its investments to fund its activities in regions including India.

The fund has threatened to sue Coal India if it does not mend its ways, and price its produce according to market dynamics. Registered as a foreign institutional investor (FII) with Sebi, it has written to the Coal India management asking to clarify its stand by June 30, failing which it will petition courts and seek compensation for the losses it has suffered.

The Kolkata-based public sector unit, which produced 436 million tonnes in fiscal year 2011/12, accounts for 81 per cent of the country's coal output. According to its website, the Maharatna company "supplies coal at prices discounted to international prices".

The company may have stated its social obligations in its red herring prospectus (RHP) at the time of listing in November 2010. Individuals and institutions responded and invested in its IPO wanting to make some gains. The outside investors had no intention of participating in the government's mission to ensure affordable electricity to consumers by selling coal below the prevailing market rates.

Through Coal India, the government may be justified in under-pricing its coal to keep the end price of electricity under control. But to achieve that it should not bank on the support of outside investors. It should calculate the under-recoveries from power companies and either reimburse the Coal India or bear it out of its share of profits. It must not dip into the share of retail and institutional investors. Simply put, it must follow the same approach it does in respect of diesel/LPG under-recoveries. The government issues bonds to oil marketing companies for the losses they suffer on account of diesel/LPG subsidies.

The message: Coal India can do charity at government's expense, not at the cost of shareholders.