Breaking up Coal India will only break its back

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26 Aug, 2025 12:21

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Shishir AsthanaMoneycontrol Research

How do you break a company’s monopoly – by splitting the company itself. This seems to be the logic behind government’s thinktank NITI Aayog’s proposal to tackle Coal India’s monopoly in the coal sector.

Reports quoting the Draft National Energy Policy prepared by NITI Aayog says that one of the major suggestions made is to corporatise the seven existing subsidiaries of the national miner to foster more competition and improve coal supply efficiencies. The report also hopes that progressively fresh production from new mines ought to come from the private sector.

By splitting Coal India and allowing its subsidiaries to be independent entities NITI Aayog's intent is to replace the current system of administrative allocation of coal by a vibrant coal market with prices performing the function of allocation. The policy document says that increased competition and market determined pricing would bring about substantial reduction in coal price and India’s coal industry will emerge as an exporter of coal.

There is nothing wrong in the logic of NITI Aayog though the thought of splitting Coal India has been considered earlier, also. However, it seems that it is a little too late in the day for such a move.

Let’s consider the ground realities. Demand for coal by power sector players, especially the public sector ones has been falling. Power accounts for the major chunk of coal consumption in the country. Government itself is not considering setting up new thermal based power plants. Its focus is to promote renewable power. It hopes to meet the incremental demand for power from environmental-friendly sources.

Coal India is in any case not in the best of health. Its margin is shrinking on account of a large and increasing fixed-cost base. Further, the company continues to derive most of its revenue from low grade coal. Its cash balance, accumulated over the years, is depleting as the government is demanding higher dividend as well as making the company buy back the promoter’s (government’s) stake. Further, low international prices of coal are preventing the company to increase prices.

Splitting subsidiaries under such a condition will only add pressure on their margins. Though the price of coal may come down and benefit the consumer, the move will be detrimental to the financial health of individual companies.

To add to the trouble is the possibility of an increase in supply from private sector players. The government has been successful in auctioning the coal mines which were given away for free by the Manmohan Singh-led government which had resulted in the Coal Scam. These mines were given to private players for captive usage. Reports say that commercial mining is yet to see the light of the day largely on account of subdued demand and availability of low cost coal.

NITI Aayog feels that fresh coal production should come from private sector mines and is pitching for more reforms in allocating coal blocks to independent companies specialised in coal mining. This will add to the supply pressure in the coal sector.

As for exports of coal, the commodity has seen a growth in production after Donald Trump was elected President of the USA. Production in US has increased by 19 percent as Trump walked out of climate change policy. Increased supplies of coal will keep prices depressed.

Finally, the shareholders of Coal India, who are now in the unenviable position of holding a company that is trading close to its life-time low, are unlikely to see much relief through the move. Splitting the subsidiaries and listing them separately would unlock some value but in the end the problem with savvy investors buying Coal India shares was that the company does not have pricing power. The same is likely to continue even when the companies are split. Even if the companies are given pricing power, increased supplies would result in the siblings fighting with each other for market share.

As mentioned earlier along with pricing power, the problem for Coal India is lack of demand. Unless these are addressed, splitting them or keeping them together does not matter.