As Coal India Ltd prepares to sign Fuel Supply Agreements with power generation companies following presidential directive, the question that is uppermost in the minds of the investors is how the Government of India’s handling of the episode would impact the investor sentiments, particularly FIIs towards PSUs.

This is all the more important because the Centre proposes to raise about Rs 33,000 crore during the current fiscal through disinvestment and any investor apprehension about back-seat driving of the PSUs by GoI would make the investors nervous over investing in them.

Since many of the prominent PSUs are in the socially important sectors like oil and gas, energy, finance, natural resources, etc, it may not be possible for them to enjoy full functional autonomy as the Government would be wary of backlash from the public if inflation goes out of hand.

But the Government would also have to make a tight rope walking as any impression that the investors' interest, particularly FIIs, is sacrificed for reasons other than finance.

The Children’s Investment Fund, which has sizeable stake in CIL, has raised a furore claiming that the Government was forcing CIL to sell coal at a significant discount to the market rates and thus causing huge loss of revenue to the company.

But the Government of India faces the dilemma of ensuring that the new power plants, which would go on stream over time having a generation capacity of up to 50,000 MW, are not starved of coal.

In an interview to Business Line , Mr Dinesh Thakkar, Chairman and Managing Director (CMD), Angel Broking, Mumbai, shares his views on the controversy and its impact on the markets. Excerpts:

What is your view on the course adopted by the GoI in the Coal India issue?

Given that Coal India had signed Letter of Assurances (LoAs) with the power companies, the Government is now mandating the PSU to sign Fuel Supply Agreements (FSAs) as power companies have made huge investments based on those LoAs.

However, Coal India is currently struggling to raise production and hence, there is likely to be a shortfall in meeting the FSA requirements via domestic production. The likely path for Coal India to meet the new FSA requirements could be a combination of (a) reducing e-auctions (b) speeding up clearance processes and (c) import the shortfall in coal.

Considering the current gap between imported coal prices and corresponding linkage prices for similar grade coal, there could be a large financial burden on Coal India.

To offset this, the company could raise the blended average linkage prices for all FSA agreements to partially offset the impact of high-priced imported coal, though there is a risk that some portion of losses due to high-priced imported coal could end up being absorbed by Coal India itself.

There is uncertainty around this and the overhang is likely to remain on Coal India and hence, we are currently neutral on the stock.

Do you think the virtual back-seat driving by GoI would do any good for CIL in the long run?

Well, Coal India being a Government owned company, the Government’s decisions would continue to be influenced by socio-political concerns as much as purely economic considerations.

Investors need to take cognizance that CIL will likely have to ensure fuel supply to power producers at reasonable prices so that the power tariffs for end-consumer (general public) do not rise significantly and thus keep inflation in check.

In the scenario of rising coal (as also oil) prices, there is always a risk that the Government will try to mute the impact of this rise by subsidising coal/oil prices to ensure price stability.

In my view, the Government should try to balance the interest of all stakeholders in a way to ensure Coal India makes reasonable profits to ensure that it has enough resources to meet its future capex needs; while balancing its other goals such as price stability, etc.

But, yes there is need for the Government to at least minimise the uncertainty and ensure clear and transparent policies, especially in the case of listed companies — keeping in mind the fiduciary duty to take care of minority shareholders as well — so that investors can properly assess the risk-rewards while evaluating investments in these companies.

The Government plans to go for resource mobilisation of about Rs 33,000 crore through PSU divestment this year. What impact do you think the CIL episode would have on the divestment plans?

I do not think that the CIL episode will have any meaningful impact on the upcoming PSU public offerings. Largely, it is the coal and oil and gas companies that have been subject to higher degree of intervention by the Government and this is a well-known fact.

For example, take a case of upcoming offering of Rashtriya Ispat Nigam which makes steel and as such will have a free hand on pricing. Most of the PSUs — particularly in the oil and gas and metal space — would have to follow the Government line because of their ability to influence inflation.

Do you think real corporate independence would elude them forever?

As I said earlier, the Government has to take into account political and social considerations. Hence, sensitive commodities such as oil, coal and gas producing PSUs may be continued to be influenced by the Government. However, having concrete and transparent policies would aid investors to assess the prospects of the companies in a better manner.

The Children's Investment Fund has spoken of seeking judicial intervention. Do you think increasingly foreign investors would take to legal recourse in the case of other PSUs as well?. Do you buy the argument that shareholders’ interests override that of a country in so far as essential sectors like natural resources are concerned?

Well, I can’t comment on how other foreign investors would react. However, an investor must consider all the risk factors before investing in PSU companies, especially energy-related companies.

The Government on its part too should try and ensure that it balances the interests of all its stakeholders. Like I mentioned earlier, it should try to minimise the volatility/uncertainty/arbitrariness by having concrete policies so that investors can properly assess the risk-rewards while evaluating investments in these companies. This would be in the interests of all stakeholders.

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