The board of directors Coal India Limited today agreed to sign fuel-supply agreements (FSAs) with nearly 50 thermal power units commissioned between April 2009 and December 2011. The decision came at the cost of major tweaking of the penalty provisions, reportedly under pressure from the independent directors.
According to chairperson, Ms Zohra Chatterji, CIL will not pay any penalty for the first three years, for supplies less than the minimum guaranteed 80 per cent of the requirement of the power plants. From the fourth year onwards, the company will pay a mere 0.01 per cent penalty on the basic value of the quantity in shortfall. The FSAs will be finalised and circulated to the power producers by April 20.
In contrast, the company's existing FSAs, with the trigger set at 90 per cent, attract 10 per cent penalty on 85-90 per cent supplies. Similarly, 80-85 per cent supplies attract 20 per cent penalty and supplies of less than 80 per cent attract a 40 per cent fine.
Zero impact on profit
To put things in perspective, theoretically, CIL is required to step up production (or supplies) by a minimum of 69 million tonnes to be able to fulfil the forthcoming FSAs. In reality, even if CIL fails to produce (or supply) even an extra kilogram of coal to these power stations, there is no negative impact on profitability.
Assuming an average basic value of Rs 1,000 a tonne, a back-of-the-envelope calculation shows that from fourth year onwards CIL may pay a maximum of Rs 70 lakh for not catering to any of the power stations. The coal major was currently supplying approximately 50 per cent of the requirement against the letter of allotments issued previously.
Expectation surpassed
Sources in CIL say that the board development surpassed the company's expectations. According to sources the company was of the view that penalties would have to be paid from first year.