Companies & Sectors
Economy & Nation Exclusive
Coal India will continue to be a victim of conflicting ideologies - Part I

The government has listed Coal India to raise money but has pushed CIL into a conflict between its role as a company that is fully accountable to its shareholders and its role as a PSU with all the associated national and social obligations

When Mohan Kumaramangalam nationalised 937 private coal mines in the country in 1972 and 1973, his intention was to put an end to unscientific ‘slaughter ‘mining practices, ensure the safety and the welfare of the miners, channel public investment on a large-scale into coal mining and facilitate integrated planning of coal development. In 1975, CIL was created as a 100% public sector undertaking (PSU), as a holding company, to fulfil this vision. CIL has indeed measured up to this expectation by guiding its subsidiaries in developing both coking and non-coking coal mines in a scientific manner. 

Its systematic exploration effort has made it possible for the company to establish around 22 billion tonnes of extractable coal reserves. It has a well-trained, dedicated work force of a little less than 0.4 million, producing 430 million tonnes of coal annually to fuel most of the country’s electricity generation and other vital industries. As one of the largest coal companies in the world with invaluable assets, CIL now attracts huge investments, both domestic and foreign. In view of these achievements, the central government has conferred on it the status of a ‘Maharatna’ company with increased freedom to take autonomous decisions on expanding its operations, both domestic and global. The Maharatna status also mandated CIL to open up its shareholding to the public and get listed in the stock market. 

CIL went in for an Initial Public Offering (IPO) in October 2010, which became oversubscribed by more than 15 times. Both, domestic and the foreign investors, have an eye on India’s vast mineral resources, particularly coal, apart from deriving value from the organisational strengths of CIL. The company’s problems started soon after its successful IPO.

The IPO has changed CIL’s character as a PSU. With a 10% public shareholding in it, CIL is no longer a 100% government-owned company. Being listed in the stock market, the company is now subject to the rigorous norms of corporate governance. Its private shareholders are entitled to a share in the company’s profits in proportion to their shares. They can question the company’s decisions to the extent they affect their interests. On the other hand, CIL has several national obligations that are imposed on it by the majority shareholder, i.e. the government.

For example, CIL is obligated to sell its coal at the government-fixed subsidised prices to the electricity utilities, so as to enable the utilities in turn to subsidise the electricity sold to the farmers and the other consumers, as per the diktats of their respective owners, i.e. the states. 

Thus, if the Maharatna status has apparently liberated CIL from some governmental control, its primary role as the main supplier of coal to the electricity industry continues to constrict that freedom and neutralise it to a very large extent. 

During the last five to six years, the laissez faire policy of the present government has allowed the power ministry and the states to go berserk in allowing a large number of new merchant power projects. The environment ministry has bowed down to their wishes and rubber stamped, or is in the process of rubber stamping, 702,000 MW of thermal capacity, mostly based on coal. This is a mind boggling figure as it is six times the existing thermal capacity in the country and three times the capacity projected by the Planning Commission as the requirement up to 2031. CIL is expected to meet at least 70% of the coal needed by these new power projects. It can neither raise the huge financial resources needed for expanding its capacity so quickly nor upscale its physical capacity to such an extent, to cope with this challenge within such a limited time. If it seeks budgetary support from the government, it will have to forego its Maharatna status and along with it, whatever little commercial autonomy it has gained! If it does not, it will forego its role as the main coal supplier in the country, forcing India to become a net importer of coal. 

Incidentally, the coal rush described above has also led to a coal scam in which the coal ministry allotted more than a hundred coal blocks to private companies for captive mining, without following transparent competitive bidding procedures. A few influential private developers have cornered the lion’s share in this, on highly concessional terms, causing substantial loss to the public exchequer. As usual, it is the media that exposed this scam. It is Comptroller and Auditor General (CAG) who evaluated the loss. Under intense public pressure, the coal ministry has at last notified the introduction of a competitive bidding format for the future allotment of captive coal blocks. It is like shutting the stable door after the horse has bolted. 

When it came to pleasing a select group of private companies, the three central ministries, namely, environment, coal and power acted together in an orchestrated way to allot the coal blocks and clear the merchant power projects with unprecedented alacrity. One wonders whether the public financial institutions in the country have also unwittingly or otherwise have joined this bandwagon of a mega scam by extending loans to both the power companies and the coal investors! One should not be surprised if some of these institutions soon get sucked into this scam, ending up with unmanageable NPAs non-performing assets), as it happened more than a decade ago with the infamous Enron in Maharashtra.

I have mentioned this as an aside to illustrate how misplaced laissez faire policies in different sectors could together hurt the economy in a far reaching way.    

Coming back to the case of CIL, there is clearly a case of conflict between its role as a company that is fully accountable to its shareholders and its role as a PSU with all the associated national and social obligations. The government should make up its own mind in choosing between these two distinctly different roles of CIL. There cannot be a middle path in this. Unfortunately, what the government is trying to do in the case of CIL and for that matter, in the case of most PSUs, is to run with the hare and hunt with the hounds! It was determined to convert CIL into a listed company and, at the same time, do everything that went counter to it.

Caught between the influential group of private power producers on the one hand and a not too enthusiastic CIL management on the other, the government invoked its extraordinary power under CIL’s Memorandum of Association to issue a Presidential directive to the company to sign 20-year fuel supply agreements (FSAs) with new power projects, guaranteeing to supply at least 80% of the contracted quantity, that too at the prices approved by the government. This implies that CIL should bear the burden of the penalties for short supplies. CIL may even have to turn into an unwilling importer of coal to fulfil its obligation. CIL’s coal will not fetch its full market value. 

Why has the government thought of resorting to such an extraordinary step? I will cover this in the second part of my analysis.

Dr EAS Sarma, IAS, is a post-graduate in Nuclear Physics (Andhra University) and in Public Administration (Harvard University) and a Ph.D from IIT, Delhi. As a Union Secretary he has held the portfolios of Power, Economic Affairs and Expenditure. He quit the government in 2000 over differences regarding policy issues with the National Democratic Alliance government. He is the convener of Forum for Better Visakha (FBV), a civil society group set up in 2004.
 

 

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COMMENTS

Shibaji Dash

5 years ago

Coal was nationalised ostensibly for careful utilisation of the mineral and solve rehabilitation issues. Then coal mafias took over. Where was the money from the mafias going? The mafias were raided in 1989 for reasons more political at that time. But the mafias survive and prosper. Only they are no more dominated by a particular caste. They have been that way democratised. The monstrous grip over coal continues- only persona have changed.

dayananda kamath k

5 years ago

actually govt as owner has the responsibility to run the organisation efficiently. but all publ;ic sector undertakings are run as fiefdom of politicians. otherwise many of the public sector undertaking would not have been under loss. now govt is using lic premiume money to bail out banks. being owner of the lic. if the same thing were tobe done by a private owner he would have been behind bars. people are being looted of their assets and creating an impression of welfare state by taking a cut back in these projects.since last 9 years i have written to every authority who matters about how public money is being looted and every govt authority has failed.and country has lost crores of rupees. but no one is bothered.and i am amused when they raise the issue why any issue is being raised so late. it is because it will not be taken up in right earnest in initial stages. only it becaomes too hot to handle it will be taken up. and the delay will allow the influential to cover up their role. it is bigger conspiracy against the people of this country.

Nagesh Kini FCA

5 years ago

Immediately after independence, Nehru with his flair for Soviet type Planning went in for the Commanding Heights and went about setting up large PSUs when the Private sectors dare not venture.With high capital requirements and longer gestation periods.It set up
units in remote areas like Koraput and generated a lot of employment. Ministers like TTK and Kumaramangalam went about by nationalizing Insurance and Mining.Morarji sacked JRD from Air India Chairmanship.
That the Navratna PSU scrips appear in the BSE and NSE Tops is evidence enough of the public confidence.
With all around Policy Paralysis and the Government uncertain about its moorings, it is better they grant the PSUs functional autonomy with adequate self regulatory mechanism in place.
No more IAS babus on Boards.
CAG is doing an excellent job even overseeing the statutory auditors!

REPLY

N Dey

In Reply to Nagesh Kini FCA 5 years ago

Sorry to say that Mr. Kini is not particularly right in overstimating the Commercial Audit wing of the CAG. The slipshod manner in which audits of PSUs are conducted, with right royal treatment given to (and demanded by) the audit teams (as the Income tax department does with the Revenue Audit teams year after year), is simply unthinkably ludicrous. A former director (fin) of Steel Ministry had told me in the late eighties as to how SAIL plants' audit was done and the ridiculous findings given by the auditors. If one is really interested, CVC can take up a study of the manner in which audit of PSUs is awarded by the babus of the CAG.
To be frank and candid, all drawing salaries from the govt. (that is India's people) are taking the country for a ride.

nagesh kini

In Reply to N Dey 5 years ago

I beg to disagree with Mr. Dey. I've not 'overestimated' the Commercial Audit.
As a CA on the CAG Panel, I've had occasions to conduct Statutory Audits of SAIL. I was not accorded any 'right royal treatment' neither did we compromise in reporting our findings.
That this profession has also degenerated like all others is a fact of life. There are some dedicated left too. Not all are bad apples.

Sandeep Jagre

5 years ago

Coal India Limited is govt. or semigovt. or autonomus ?

Economy & Nation Exclusive
Coal India case shows the reality of political control over the PSUs - Part II

Can the majority shareholder (the government), trample upon the primary rights of the minority shareholders? This question affects all PSUs. This is the second part of the three-part series on Coal India

According to the news reports, it all started with the Prime Minister’s Office (PMO) which, in its usual exuberance, intervened at the instance of the persuasive private power producers and asked the coal ministry to direct Coal India (CIL) to commit legally binding guarantees in supplying coal to the power companies. Goaded by the PMO, the coal ministry tried to direct CIL informally to do what the PMO wanted. Apparently, a few really ‘independent’ directors of CIL resisted the ministry’s direction as it would have exposed the company to undue risks and litigation from its private shareholders.

In order to get over this avoidable ‘irritant’ of dissent in the board, CIL’s managers had apparently hinted the easy way out of the situation, that the government could issue a Presidential directive to the company to silence the dissenting directors. In such situations, the position of the chief executive officer (CEO) of a company would be unenviable. However, in the instant case, the problem got readily resolved as the ministry’s representative on CIL’s board also occupied the position of the CEO, a situation that typically symbolises the lackadaisical way in which PSUs are managed!

Today, the minority shareholders are questioning the majority shareholder’s unilateral interventions in the day-to-day affairs of CIL. Is the Presidential directive issued in the case of CIL tenable at all, since it does not strictly confine itself to a policy matter? Can the majority shareholder, by the fiat of a Presidential directive, trample upon the primary rights of the minority shareholders? Would not such a directive defeat the very spirit of disinvestment and run counter to the norms of good corporate governance? If the government is so adamant on ‘directing’ CIL to continue to play its pre-disinvestment role, should it have, in the first instance, forced CIL to get listed in the stock exchange?

These are not dilemmas faced by CIL alone. These are the generic set of questions that arise in the case of all similar PSUs which either face disinvestment for the first time or have already been subject to disinvestment. In order to appreciate this problem in all its dimensions, it is necessary to understand the genesis and the evolution of the PSUs in the country.

Soon after Independence, largely during the sixties and the seventies, the then political executive led by Jawaharlal Nehru considered it necessary for the state to have a predominant presence in important infrastructure sectors such as oil, coal, electricity, ports, highways, and so on to facilitate all-round economic growth. In line with this, many private companies in the infrastructure sector were nationalised. In some cases, in the name of safeguarding the interests of the workforce, even loss-making private companies were taken over. Further, new PSUs were set up in crucial sectors to provide an impetus to the development of the economy. During the subsequent years, the country witnessed the expansion of the public sector like never before and along with it, a corresponding mushrooming of the supporting bureaucracy to ‘oversee’ the PSUs.

Article 12 of the Constitution of India considers all agencies under the ‘control’ of the state as a part of the state itself. This provision conferred a special status on the PSUs. At the same time, it also gave the political executive and the bureaucracy a handle to exercise excessive control over the affairs of the PSUs.

In the case of both the statutory and the non-statutory PSUs, the government reserves for itself the overarching authority to issue ‘policy’ directives. As in the case of CIL, the authority to issue the Presidential directive is embedded into the Memorandum of Association of each PSU. In the case of the PSUs created under the statute, it is factored into the statute itself. Such directives are meant to be issued in the national interest, more as an exception than a rule. Moreover, a Presidential directive so issued can at best lay down the policy guidelines for the PSU, not spell out the way the PSU should conduct its day-to-day affairs. In practice, however, the policy directives, though issued sparingly, sometimes provided a cover for the ministry overruling the decisions of the PSUs’ boards even in day-to-day commercial matters. In the case of CIL, the Presidential directive given on the FSAs is one such order that impinges on the PSU’s commercial obligations as a listed company.

In addition to the authority of issuing policy directives, the bureaucracy lost no time in also developing a maze of controls over the PSUs, which were so complex that they transformed the PSUs into mere appendages of the government. As a result, the PSUs generally imbibed the same rigidity and risk aversion that characterise the government agencies. The politicians perceived PSUs as convenient vehicles to dole out political patronage and, at times, even earn personal gratification by exercising their clout to manipulate contracts and purchases. This in turn encouraged the civil servants to strengthen their own stranglehold further over the PSUs. The latter provided them remunerative assignments, both in service and post-retirement, apart from day-to-day perquisites.

The PSUs are usually treated like subordinate agencies by their parent ministries. PSUs cannot borrow funds for their expansion or incur expenditure beyond a limit without the ministry’s express approval. The Planning Commission reviews the budgets of many PSUs. The Public Enterprises Selection Board (PESB) selects their top personnel. Government officials sit on their boards, though their presence could pose serious problems of conflict of interest. In the name of “public welfare”, it is the parent ministry that usually decides the PSUs’ pricing policies. In the name of uniform wage policies, it is once again the ministry that should approve the wage agreements of PSUs with their employees’ unions. Often, it is the finance ministry that decides even their dividend policies, as the dividends are used as a source of revenue to bridge the fiscal gap in the government’s budget.

Dr EAS Sarma, IAS, is a post-graduate in Nuclear Physics (Andhra University) and in Public Administration (Harvard University) and a Ph.D from IIT, Delhi. As a Union Secretary he has held the portfolios of Power, Economic Affairs and Expenditure. He quit the government in 2000 over differences regarding policy issues with the National Democratic Alliance government. He is the convener of Forum for Better Visakha (FBV), a civil society group set up in 2004.
 

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COMMENTS

Rohit

5 years ago

Does not the presidential order / GOI directive disobey the SC directive on naturaly resources when CIL is being made to sell coal below market price. Should not auction be mandatory in light of SC directive?

Shibaji Dash

5 years ago

All official announcements about the policy philosophy of PSU disinvestment is all hogwash, as records demonstrate.In fixing the issue price the Govt has conducted itself like any greedy merchant banker.The realisation from the sale proceeds has become an antidote to financial profligacy. Corporate Governance ? My foot!

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