The Children's Investment Fund, the largest FII investing into Coal India wrote to the management regarding issues on corporate governance and CIL failing to protect the interests of minority shareholders.
But Chris Hohn, CIO, The Children's Investment Fund says Coal India’s email statement to their letter has been poor. In an interview to CNBC-TV18, he says his fund is looking at direct litigation options against the Indian government and is looking at all parameters to initiate legal action within a week.
Hohn alleges that Coal India is losing USD 20 billion annually on subsidised sales. “CIL has broken all corporate governance standards which is creating a very negative sentiment for investors like us.”
Below is an edited transcript. s for more.
Q: Have you heard back from the Coal India management on the very serious reservations you had expressed a few weeks back?
A: Yes, they sent an email statement saying they are aware of no wrong doing at all. It’s really no genuine engagement or attempt to review or investigate the issue. We view it as frankly a board of shame that is directly taking instructions from the Indian government which in our view is a legal breach of their fiduciary duty.
Q: Did you provide any concrete evidence to them of the allegations that you are making and have they continued to ignore those factual data that you presented to them?
A: Absolutely. We believe there is really no difference at all between giving away coal blocks for substantially below their fair market value and selling coal by Coal India for 70% discount to the fair market value which is exactly the same point we believe in both cases. It’s in our opinion the theft of a national asset that belongs to the Indian people on a massive scale.
Q: How exactly did you go about finding these observations about the scam that you allege in Coal India and what was your subsequent course of action?
A: We asked the company to provide us with answers as to why they rolled back their price increase and whether the government had instructed them to do so. They refused to answer the question. So we went to the Calcutta court under RTI and obtained the letter directly that was sent from the secretary of the Ministry of Coal instructing the board of Coal India to roll back price increases. We caught them red-handed. One of the board members of Coal India stated to us last week that that had nothing to do with the decision to roll back the price increase, which is frankly laughable.
Q: What will your next course of action be having engaged with Coal India's management? Is this going to go the litigation way?
A: We have concluded that the initial best course of action is to take direct litigation against the Government of India under the bilateral investment treaty with the UK. This will be a quicker process, then going through the Indian courts where clearly the appealer process can take years to resolve. Ultimately, we believe the only real solution to this scandal is going to come from people of India realising that they are the losers.
Q: By when do you expect to proceed with the kind of legal action that you were talking about?
A: We expect in a next week to send a letter that starts the legal process to the Indian government under the bilateral investment treaty between UK and India, citing a breach of this treaty. The process typically has a six month period for responses, before it enters the court system. We are using this route because it is a far quicker route than the Indian court system and more likely to have a fair hearing. But ultimately the solution to this scandal has to come from the Indian people realising that the government is not above the law, and that they are the losers.
The USD 20 billion a year and an enormous amount of money that could be helping the poor of India and the infrastructure of India is being lost every year to the benefit of a few wealthy industrialists in India who are politically connected to lobby the Indian government, to keep prices at massive discount for coal to market prices. Coal India mines coal at USD 19-20 a tonne of cost and it is selling at USD 20 a tonne. So they are making virtually nothing from the sale of coal under FSAs.
The board of Coal India met last week, for five hours analysing whether they should sign FSAs. With the power industry under pressure from the Indian government, now the former CMD at the time of privatisation, Mr Partha explained to us that there is no value in Coal India signing FSAs because they have massive excess demand.
So where is the economic value for Coal India to sign FSAs to continue perpetuating this massive non-economic subsidy to the power industry? We don't see it and we see this as another example of the breach of fiduciary duty of the board, we view it as a board of shame.
Q: Does this have broader ramifications in terms of FII sentiment or willingness to invest into India as a market and concerns about the corporate governance levels generally here?
A: I think it's more than simply FII investment. I think its general investment of domestic and foreign investors in India is massively damaged by scandals such as the one going on in Coal India. We are certainly after this experience really disinterested in investing in India. It's about the worst governance we have seen outside of Russia of any company. It is an embarrassment to the government that they allow this level of corporate governance to occur in one the very largest companies in the Indian stock exchange. It should be a model of corporates governance; instead it is a board of shame in our view.
I think that it's going to absolutely lead in our view to a reduction in confidence of international investors in the Indian capital markets. We have significant investment fund, we manage over USD 8 billion of assets, we are highly respected for our views and we are standing up and today and saying one of the largest companies in India has a broken corporate governance system. A board that is acting shamefully with respect to its shareholders, refused to get on the phone and address their concerns. They don't pick up the phone, they think they are not accountable to their shareholders.
Coal India stock price
On November 30, 2015, at 13:28 hrs Coal India was quoting at Rs 332.00, down Rs 4.25, or 1.26 percent. The 52-week high of the share was Rs 447.25 and the 52-week low was Rs 300.75.
The company's trailing 12-month (TTM) EPS was at Rs 19.07 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 17.41. The latest book value of the company is Rs 26.49 per share. At current value, the price-to-book value of the company is 12.53.
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