Apr 17, 2012, 11.57 AM | Source: CNBC-TV18

To sue Coal India despite lower penalty in pact: TCI Fund

Chris Hohn, chief investment officer, The Children's Investment Fund told CNBC-TV18 that the CIL board’s decision to sign the FSAs on zero penalty a “victory for the shareholders and the independent directors”

Chris Hohn, CIO, TCI Fund
Supporting Coal India's decision to sign the fuel supply agreements (FSAs) with a lower penalty , Chris Hohn, chief investment officer, The Children's Investment Fund (TCI) called it a 'victory for the shareholders and the independent directors'.

However, TCI will pursue legal action against the Coal India board and the government of India for violation of the terms under the bilateral treaty, Hohn said in an interview to CNBC-TV.

He pointed out that despite the dilution of the penalty clause, the pricing of coal and selling coal at 70% discount still constituted one of the biggest scams on the people of India.

Below is an edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: You heard the Coal India chairman. The board met and took a decision. Cola India  will sign the FSAs, but the penalty clause will be operational only after a period of three years at 0.1%, What is your first reaction?

A: It's a victory for shareholders that the penalty is essentially zero and a victory for the independent directors who opposed the government’s attempt to impose punitive penalties and because the independent directors agreed with our view.

We believe that trying to impose any penalties for FSAs is essentially an abuse of the minority shareholders and cannot be justified.

Q: So you are happy with what’s happened as far as the penalty clause is concerned. Does this change your legal strategy going forward?

A: No, we haven’t changed our legal strategy. Our intention is still to file a legal suit against Coal India’s board in the next two weeks in additional to the law suit against the government of India under the UK-Indian bilateral treaty.

The basis for this lawsuit is that FSA pricing should be moved to market prices rather than at 70% discount of market prices. So, our lawsuit will rather revolve around the pricing of the coal which we feel is high abusive to investors in the company and represents a huge theft of a national asset from the Indian people.

Q: That has been your argument. But the government’s argument or response to your argument is that you were well aware of the fact that the government would direct pricing if that would actually benefit the power sector which is a key sector for India which isin dire need of reforms. That was mentioned in the draft red hearing prospectus. So you knew about that as a possible risk?

A: It’s irrelevant legally. The only relevant thing will be the public interest. There is a concept of the rule of law, which is that nobody, including the government, is above the law.

So, if the government advertised that they wanted to give away 2G licences to telecoms for free, that’s not legal. Even if they put it in the prospectus, even if they tell everybody, it’s not legal. Our legal case will revolve around public interest.

Q: You are saying that you will file against the Coal India board. You’re going file a lawsuit in about two weeks. But where do things currently stand as far as the arbitration against the government under the bilateral treaty?

A: There will be a six-month period before arbitration begins as it’s normal in that process and that will be filed shortly as well. So, there will be two parallel legal cases filed.

Q: Have you heard from the Coal India board and the management?

A: The Coal India board is broken in terms of governance. They don’t return calls. They don’t communicate with their shareholders. Even the former chairman of ONGC tried to speak to them and said that something was seriously wrong with the governance within Coal India as they don’t think they have a obligation to communicate with their shareholders.

Q: So there will be no change in your legal strategy even after you’ve heard that the FSAs will be signed and that the independent directors have prevailed on the penalty front?

A: The signing of the FSA doesn't change the pricing of coal. Pricing of coal is still taking place at a 70% discount and it’s the biggest scam going on in India today. The money lost is enough to price coal to the market and give free electricity to all the citizens of India .

Sooner or later the people of India will realise that the system is ripping them off and benefiting only a handful of wealthy industrialists. We think that FSA coal pricing system is encouraging massive corruption within India.

Coal India stock price

On November 27, 2015, Coal India closed at Rs 336.25, up Rs 0.35, or 0.10 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 17.63. 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 12.69.

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