The founder of the USD 6 billion The Children‘s Investment Fund is best known in India for taking on the government against what he calls 'unfair pricing of coal'.
Christopher Cooper-Hohn is counted among UK's most successful hedge fund managers. However, the founder of the USD 6 billion The Children’s Investment Fund is best known in India for taking on the government against what he calls “unfair pricing of coal”.
TCI, which has a minority stake in Coal India, has been accusing the PSU of not protecting minority shareholders' interest and harming the company. It has also initiated legal action against the PSU by filing a petition before the Kolkata High Court.
"The government has not raised prices on coal in nearly two-years. As a result with inflation, coal pricing is falling in real terms,” Hohn said in an interview to CNBC-TV18. "It remains a gigantic economic loss for the Indian people, approximately USD 20 billion a year of lost profits, which should be going to the Indian people as the 90 percent shareholder of Coal India," Hohn said.
He says politically connected companies to the Indian government are receiving fuel supply agreements (FSAs) at half market price or a third of market price for coal. It is a system that encourages corruption because not everybody can get coal at half price. So obviously there is a massive incentive for companies to pay bribes in order to get FSA contracts.
As a result, he says, the companies that get coal do not charge low prices but just extract monopoly and profit margins from the benefit of the cheap coal. So, there is a lie that has been told to the Indian people that cheap coal benefits them. But Hohn says it does not benefit investors of Coal India at all.
“If you price the coal to market, the USD 20 billion of extra profits of Coal India could be distributed to the poor Indian people. 40 percent of the population has no access to electricity. The beneficiaries of cheap coal are not the poor people of India but actually rich industrialists who are willing to pay bribes in order to get the FSA coal at cheap prices,” he said.
Below is the verbatim transcript of Hohn's interview on CNBC-TV18.
Q: You run a very successful hedge fund but in India everybody knows you as the man who is running a crusade against the government on Coal India on what you think is a very unfair pricing of coal, where do things stand on that front right now?
A: The government has not raised prices on coal in nearly two years. The cost of the company has been escalating very strongly. As a result with inflation, coal pricing is falling in real terms. So, there has been no progress at all on the coal pricing issue. It remains a gigantic economic loss for the Indian people, approximately USD 20 billion a year of lost profits, which should be going to the Indian people as the 90 percent shareholder of Coal India.
It is solely because politically connected companies to the Indian government are receiving fuel supply agreements (FSAs) at half market price or a third of market price for coal. It is a system that encourages corruption because not everybody can get coal at half price so there is a massive incentive for companies to pay bribes in order to get FSA contracts.
As a result, the companies that get them, do not charge low prices, they just extract monopoly and profit margins from the benefit of the cheap coal. So, there is a lie that has been told to the Indian people that cheap coal benefits them. It does not benefit them at all.
If you price to market, the coal, the USD 20 billion of extra profits of Coal India could be distributed to the poor Indian people. 40 percent of the population has no access to electricity. The beneficiaries of cheap coal are not the poor people of India but actually rich industrialists who are willing to pay bribes in order to get the FSA coal at cheap prices.
Q: Are you completely opposed to the signing of the FSAs with these private companies?
A: We are happy for them to sign FSA contracts as long as the volumes make sense and so do not mind the contracts that have been signed. But they cannot force the company to sell at discounts to market prices, which they do not.
So the actual contracts that have been signed, I am not opposed to it. The issue is not to guarantee some volume to customers that is okay, the simple issue is that if the market price of coal is USD 70, you cannot sell it for USD 25 in return for companies paying a bribe. That is not right for India.
What is bizarre about the whole situation is that we as foreigners entering India, are the only people who are shouting about this. You have the Comptroller and Auditor General (CAG) of India write a few more reports saying that the whole coal block allocation process was fraud and corrupted - very valuable coal blocks being given away for free to connected people to the Indian government. The same point is true about FSA contracts. We have asked the CAG of India to launch a review into why this is also not being auctioned.
Supreme Court (SC) of India has ruled the natural resources, which belonged ultimately to the people of India are best allocated through a transparent auction process. The whole pricing of FSA coal at giant discounts persists because the scale and money involved is so giant, USD 20 billion a year, big enough to finance the large political parties in their campaigns.
Q: Is that the reason why there is so much political interference because money is changing hands?
A: Yes, absolutely. Everybody in India understands that the whole coal industry is corrupted, every level of the chain. The coal mafia get cheap coal given free that whole large scale theft of coal from Coal India is not clamped down on, they receive the highest quality coal and lowest quality coal then goes to companies like National Thermal Power Corporation (NTPC) and it goes all the way down the chain.
Why else should rich industrial companies receive - Jindal Steel and all of these companies for example - free coal blocks and coal at 70 percent discounts to market prices. It has no benefit at all to the poor people of India.
Q: Do you have some sympathy for NTPC, the fact that they are unwilling to sign the FSA because of the quality of coal issues?
A: Yes, I do have sympathy for them. We have been pressing a campaign on coal for India that coal should be washed in India. 40 percent of the coal that is sold in India by Coal India is full of ash and dirt and rocks as pointed out by NTPC. The company has been unbelievably slow and useless in implementing a coal washing program. Coal is washed in the US, it is washed in China in order to remove this giant proportion of ash and rocks. It is very good for the environment, for the air quality of India and it is a win-win.
There was a regulation placed so that the next two-three years majority of coal should be washed but it is never enforced. The government of India doesn’t enforce it and even though NTPC is in favour of coal washing as is all the other private sector power companies like Tata Power and the environment ministry is in favour of coal washing but it never happens because you have a board of Coal India and the CEO view themselves as totally unaccountable to the wider base.
They don't talk to shareholders and do not consider themselves in any way accountable to them. This has to stop because it is such an important company in India, it is the linchpin of the economy because power and coal are the linchpins that the mismanagement on every part of the operations, not just pricing the coal but the fact that they fail to implement coal washing program that they said they would in order to meet the regulatory requirements, is just another economic crime being put on the Indian people.
Q: You have been stonewalled for many months now. Are you hopeful or at some point you get frustrated and say I give up, I am a shareholder, I am going to sell my shares of Coal India?
A: Whatever shareholding we hold, we will go to the distance on the litigation. The board of Coal India has grossly failed both shareholders and people of India and the litigation that we have against the board of Coal India begins in June or July this year. They have personal liability for the damage that has been caused, the economic loss to shareholders and the people of India. If we win we will bankrupt them personally and if they leave the board the liability legally doesn’t go away.
There is some understanding now of the board members that they are in deep trouble. So for that law suit there is no board in any developed world, company can sell their product cheaply at half market prices to friends of the controlling shareholder. It is called a related part transaction and it is illegal.
There are two best ways we can win here, one is through litigation, the best opportunity as against the board and we won't give up on that. Second is for the Indian people to wake up and realise that the damage of Coal India is not just economic but also environmental.
By not pricing according to market there is an over consumption of coal in India.
Coal is the only fuel that you rely on, why in other countries is there a greater diversity of fuel sources – renewables and hydro and for example in natural gas whereas in India it is 75 percent coal? This is because they have priced coal at way below prices and that causes climate change in India, it causes long-term drought, drying out of soil, water shortages, air pollution. So, the biggest issue is not the USD 250 billion of value lost to the Indian people but the environmental impact of this policy. The only way this will change just like corruption which ultimately is the source of the problem, is for the India people to protest and to say enough.
The only way you can avoid bribery coming into a system which prices product below market allocated by the government is to price it through an auction. Supreme Court has ruled that. It is common sense that a system giving away a product for half price on a non transparent, non auction system is going to be prone to corruption and the Indian people let it persist, the government lets it persist. The reason is, every political party has benefitted from this. Whoever gets into power benefits from the money from the coal industry.
Given the poverty of India, the scale of money involved in this is so large that is why the government fights it. So, we do need a time to keep making the argument and I believe persistence will be persistent and irrespective of whatever shareholding we have, we will continue this because it is a morally wrong system.
Q: You had disappointments in the past as well. You owned a clutch of public sector banking stocks that you sold down over a period of time, what led to that disappointment?
A: In any fund you have some things that win and some others that lose. Our fund has compounded at 18 percent a year for the 10 years that it has been in operation. Last year the fund was up around 30 percent and this year, year to date (YTD) we are up 20 percent.
The issue in holdings of these public sector banks is the same problem, the government started to interfere and do directed lending.
If you are a shareholder in a bank and the government instructs the bank to go and lend to bankrupt companies like Kingfisher Airlines (KFA) you can’t fight that. It can quickly destroy you as a shareholder and again the opaqueness of government interference in the public sector undertakings (PSU) banks for allocating social lending like to agriculture – we ultimately concluded there were better opportunities elsewhere.
Q: You had some run-ins in the past with the Vedanta Group as well. You own shares in that, how did that get resolved finally?
A: Vedanta Group was an issue of poor governance. They were the controlling shareholder and tried to do a related party transaction. Ultimately, we protested and they scraped the transaction. This was essentially for the company to buy at a vast over valuation an African copper asset that they had paid.
As a result of these things investors stay away, poor corporate governance has a price. Who wants to go and buy shares of a company with bad governance that may never give you back the cash. Government of India needs cash. There is a huge Budget deficit.
The PSU companies are a source of that cash. Coal India is one such company, but how if the government sells shares in Coal India they are going to take a vast discount to intrinsic value. They are going to be selling at 10 or 20 percent the fair value. So, the people of India will lose again by this governance.
The normal pattern that we see all around the world is when a company is privatised which is why we invested in Coal India governance improves. However here – it was starting to but this case is different and what we had under estimated in Coal India was the impact of corruption. So, it is a very unusual case where the normal things that happen in a privatisation are not happening.
Our fund has been extremely successful around the world and the most disappointing investments that we have made are actually in India. The common theme across all of them is that bad governance causes a poor return for shareholders.
India as a stock market needs to clean its act up. Regulators need to get much more aggressive on related party transactions and put a stop to them.
We don’t understand why the stock market regulator doesn’t jump in and see the scale of this blindingly obvious related party transaction that is going on.
Q: Are you a bit disappointed that more companies are not being privatised in India because the government is selling 5 percent, 10 percent stakes in the large companies, but are not becoming private companies as such. When companies move, make their transition from public to private, do they turn out to be huge wealth creators?
A: In countries other than India that’s correct. Japan Tobacco is big investment for us, we doubled our money in the last two years, as the government sold down below control and the company was forced to run itself for shareholders for the first time. QR National in Australia, another big investment for us, stock is up 60 percent in two years, again the same normal pattern, government sells down, and company makes a lot more money as a result of not having the government interfere.
In India it is different, the government has a mindset that they will not privatise in reality, they would pretend to privatise, but selling very small stakes everything continues as before. The mindset doesn’t change and it is a state controlled company and so the stock market has woken up and said that we will never invest in those things, at a great discount and so it is a failure of government policy not to fully privatise these things. They got to decide if they don’t want these companies to make money they should renationalise them.
There is absolutely no point with them being on the stock market it is a distraction, but again the Indian people will miss out and because there is these huge deficit, budget deficits in India, the government have to be funded from somewhere and one of the biggest assets is public sector undertakings (PSU) companies. Otherwise, Indians will have to pay more in taxes to fund the deposits it is quite obvious and so it is a big problem that the government hasn’t properly privatised these assets.
There is a very clear reason as to why that doesn’t occur, it is the same reason again, corruption. It is a form of a control over corrupt processes whether it is loans to politically connected people in the banking sector, cheap gas, cheap electricity, cheap coal, it is a common theme and it is one of the reasons India is never going to achieve its full economic potential.
The poverty of India will persist and there is a increasing anger in India against corruption, but people need to understand that the PSU companies across the board remain a giant source of this corruption and unless it changes real economy will be held back and these will be unattractive investments for people.
Q: Would it be fair to say that your experience in India has not been good and save this one remaining or residual investment in Coal India you would be reluctant to put more money here?
A: Correct, that is absolutely true.
Q: Is India off your radar for future?
A: Pretty much. Why should we invest in India when companies in the Europe, US, Australia, they are run for shareholders and you can find fantastic franchises there that we don’t have to worry whether government will steal the profits not and whether it will be run for shareholders, just don’t need the headache. So, it will be a big deterrent for investors coming to India.
India as a country needs a trillion dollars of investment in infrastructure, I don’t know from where they are going to get it from because if the government wants to keep interfering and control pricing across the board who is going to invest in power if they want to cap the power price, so you can’t make a profit. It doesn’t make sense and similarly in roads and all other infrastructure that is needed by India.
The Finance Minister came to London a few months ago to try to raise money here and the government must understand that international investors want good governance.
There is a reason why you are seeing more and more Indian companies investing overseas. They find the same conclusion that is more attractive to invest internationally because you don’t have the bureaucracy and the corruption to deal with. So, it is absolutely true, India has become an unattractive place to invest because the government doesn’t liberalise the economy.
Q: How are you feeling about markets this year? Already your portfolio is up 20 percent this year. Do you think it will be a good year for equities per se or do you expect turbulence in the second half?
A: Yes, equities will be well supported this year because of zero interest rates in developed countries. It will persist for a long period. The reason for that is the debt levels in aggregate have not come down and deleveraging in the developed world has not started at all. So, you have an era of financial repression where governments will hold interest rates negative in real terms for a long time – that’s extremely bullish for equities, which are inflation-protected assets.
Equities are far more attractive than government bonds and that on both absolute and relative basis. The fears over 2008 still persists in people’s mind, it is like a trauma. When you have a psychological trauma it takes many years to feel that the world is safe again and that scar of 2008 still persists and takes time for mental healing for investors and that’s why equities still remain cheap in our view because of that fear.