Thursday, April 12, 2012

TCI takes on Coal India

TCI's battle with Coal India Limited (CIL) is giving India a bad press abroad. TCI is known to be an activist shareholder. Just before the financial crisis, it was amongst those who pressure ABN Amro to split up and sell the pieces to various parties, including RBS. The deal eventually sunk RBS- so much for TCI's activism.

TCI's demands on CIL are downright unreasonable- they certainly cannot dictate pricing policy or, for that matter, personnel policy or any other policy. Shareholders must focus overwhelmingly on outcomes- are they getting their target returns or not? Judged by this test, TCI has no business to get worked up over CIL. CIL's return on equity in the past couple of years were 37% and 33%. It seems to me that it is customers who are getting ripped (or maybe suppliers, including the supplier of land, the government), not shareholders.

The bottomline is this: the PSU business model is very different from the private sector model. If you don't like this model, stay out of PSUs. It can't be that you invest in a PSU and expect it to behave like a private company. I am sorry to note that the independent directors on the board of Coal India do not seem to have applied their mind to the problem; they seem to think that independence is best displayed by not toeing the government line.

More in my ET column, CIL: TCI's Misplaced Zeal


Anonymous said...

1) how are you getting those RoEs? CI IPO'd at 290 and is at 330 now. dividend yield is 1%. RoE seems to be much lower than what you claim. Why should there be an upper bound on RoE anyway!

2) "The deal eventually sunk RBS- so much for TCI's activism." What does TCI's activism on ABN Amro have to do with what decision RBS made?!

T T Ram Mohan said...

1. I am talking of the accounting return, derived from the balance sheet, not the return on the stock.A company's return is expected to meet its cost of capital.

2. I meant that the combined RBS (RBS plus ABN Amro) was sunk. I agree, TCI had nothing to do with RBS's decision.


Anonymous said...

Thanks for the clarification. I don't know corporate finance and it would be interesting to analyze RoE components to see whether the RoE is high for healthy reasons.

Its shocking for you to say that the shareholder should have no say in running the company. By that argument, the government shouldn't interfere either? While I agree that a smaller shareholder can't dictate policy (and that will anyway be the case), I also don't think that you can argue that "TCI has no business to get worked up over CIL".

"It can't be that you invest in a PSU and expect it to behave like a private company."

The day CI raised capital in private markets, it ceased to remain a pure PSU. I can turn your argument around to say - It can't be that you seek capital from private markets and expect to behave like a 100% PSU.

chandramouli said...

I agree that TCI cannot dictate pricing policies to CIL especially when there is an involvement of scare and important national resource like coal. Nationalization of coal industry in India in the early seventies was a fall out of oil price shock, which led the country to take up a close scrutiny of its energy options. A Fuel Policy Committee set up for this purpose identified coal as the primary source of commercial energy. The objectives of Nationalization as conceived by late Mohan Kumaramangalam were conservation of the scarce coal resource, particularly coking coal, of the country by halting wasteful, selective and slaughter mining and planned development of available coal resources. In India we use the term “Divestment” and not “privatization” meaning the government has no intention of giving up the management of the company or review its policy but reflecting govt.’s intention of raising resources to reduce the budgetary deficit. This was the case with CIL IPO when the pricing structure and government's control over it was clearly mentioned as "risk factors" in the Coal India’s prospectus for the IPO. The govt still holds 90% of the shares of Coal India and CIL is showing good profits even at the existing pricing. The pricing of coal still has to be controlled by govt. as this will have a direct bearing on the electricity pricing affecting the common man and industries like steel, cement, and infrastructure. This basic premise cannot be challenged by TCI as 90% shareholding is still with the govt. and coal is a scarce and important resource of the country. However, the corruption that might have crept into Coal India can definitely be brought to the public domain. FSA may not be justifiable for non-power companies, as these sell their products at non-regulated prices and do not pass on benefits to the consumers. Because huge free profits are available for the firms obtaining FSAs, it is also highly likely that FSAs are awarded to companies willing to pay bribes. This area can be challenged by TCI if they have evidence.

Anonymous said...

I would just endorse what 1st Anonymous Guy (above) has specified - "It can't be that you seek capital from private markets and expect to behave like a 100% PSU".

Shareholders' activisim, be it in Private Companies or Public Companies, is something that should be promoted as we aspire towards better Corporate Governance.

The Board or Management of CI should either convince TCI as to why their demands are not viable or they should implement them, considering the voting structure of CI.

And I would go further to say that private shareholders of other similar PSUs, that have gone public, should take a cue from TCI and follow the footsteps.

After all, it is this activisim that brought Satyam to surface. And it is this activisim that will improve the transparency of India Inc (including private or PSU).

Raj said...

You can't delist, invite public to invest in equity, and then tell them that they have no say in company's pricing policy. Then remain a nationalised entity for ever and behave accordingly.

And to say that shareholders must be content with targeted returns is unreasonable.Every shareholder has a right to expect ' maximum' returns, legally possible under a fair system.

The reason that CIL has been profitable is because its input costs have been kept low. As the owner of the resource, GOI can enhance the royalty on the coal. No shareholder can object to that.

chandramouli said...

We should not forget the predominant role of the market. See the ONGC issue. It had to be bailed out by LIC and SBI though the pricing was attractive. Public will not invest if the negative factors outweigh the positive factors in their perception. The govt will not be able to meet its divestment targets. Let the minority shareholders activism continue as it is a process towards better corporate governance. No body is stopping them. CIL and its management will address the queries of the minority shareholders in accordance with law.

chandramouli said...

Mr. Raj has said “The reason that CIL has been profitable is because its input costs have been kept low. As the owner of the resource, GOI can enhance the royalty on the coal.” This statement is absolutely correct and it gives the right answer. Govt can plunge CIL into a loss making entity by manipulating the royalty of coal.(where will TCI go then?). But govt is doing a balancing act by allowing CIL to make adequate profit and at the same time ensuring that the price of scare resource as coal does not adversely affect the industries that has coal as an essential raw material. Dear Professor, I would request you to kindly put forth such Indian case studies(which are in plenty) to your students and, after having gone through the problem, let them come out with innovative ideas. The govt has to unlock the investment locked in the public enterprises but is also faced with the problem as in case of CIL. Let the young students discuss the problem and advise the govt. on better models to solve this problem.

Anonymous said...

Chandramouli says: "Govt can plunge CIL into a loss making entity by manipulating the royalty of coal.(where will TCI go then?)."

I will ask a counter question - after screwing CIL and private investors like TCI, where will the govt go then to raise money for other projects?

Anonymous said...

Chandramouli, as far as better models to govt control and price fixing, I suggest you look into "capitalism" and "private markets". Govt control and price fixing is suboptimal and has failed everywhere, whether it be in the West or the East. I don't know when people like you in India will come to realize that govt should not be engaged in running companies but only in drafting policies.

chandramouli said...

To ananymous 9.10 I have addressed this in my note on the predominant role of the market and the ONGC issue.
As to anonymous 9.16, I agree govt should not be engaged in running companies but only drafting policies. That is our view today after 60 years. But, having accepted the Nehruvian policies, when it appeared correct at that time, let us find out solutions to a thing that has already happened. By your statement, we are trying to escape from finding a solution to the existing problem. It is easy to say govt should not have done it after 60 years without understanding the situation and sentiments that were prevailing immediately after independence. But now it is for us to find a solution to the problem in hand and that is where the young MBAs of this country can contribute.It is easy to say today, after 60 years, that the policy was wrong.60 years back we could find solution to the rapid development of our economy. Today, we can only say that the policy was wrong and we have no fertility of brain to find a solution.

Anonymous said...

I'm not talking about decisions taken 60 years ago. Why continue those failed policies when there are obvious solutions? Who says there are no fertile minds in India? These are political issues, not intellectual issues. Intellectually, the solutions are obvious and trivial. Try convincing the politicians and babus though... yeah, that is what the MBAs should be taught in IIM - selling obvious economic solutions to babus and politicians.