Directors at Coal India Ltd (CIL) face a tough choice once the expanded board meets for the first time, probably around mid-October, on whether to agree to a proposal to buy back shares from the Government and, if so, at what rate.
The Government is insisting that Coal India should part with a portion of its Rs 62,000-crore cash reserve (as on June 2013) to keep the fiscal deficit within manageable levels.
Investors’ backing
The Government is considering a share buyback due to stiff opposition from trade unions to disinvestment move. Initially, the Centre favoured a follow-on public offering (FPO) to divest up to 10 per cent stake in the company. Currently, the Government holds 90 per cent in the company while 515 foreign institutional investors hold 5.35 per cent.
Foreign investors are not for an FPO because in the prevailing market conditions, Coal India’s share price could take a beating.
With Coal India’s cash pile doing nothing much beyond earning bank interest investors feel the company could acquireits own shares, particularly when the stock price is ruling at around Rs 300.
Since the shares purchased through the buyback have to be extinguished, it will improve the public shareholding and also the earnings per share.
Some concerns
However, it is also not certain that the buyback will achieve its aim. The biggest concern is the Government’s expectations on the amount it can raise through this device. At the current market price, a buyback of 5 per cent shares will fetch Rs 8,000 crore. But the market buzz is that theCentre is eyeing upwards of Rs 10,000 crore.
For that, the Government should either sell shares at a higher price than the prevailing rate or ask Coal India to buy back more than 5 per cent of its shares from the promoter.
Both the options may be against the interests of the company and minority shareholders.
Coal India currently earns nearly a third of its profits from cash invested in fixed deposits.
With production falling behind projections, there is only a limited scope to sell coal through e-auction that fetches higher margins.
“Since most of our incremental production is committed to power companies (sold at the cheapest rate), our profit margin will be under pressure,” CIL Chairman S. Narsing Rao told the media in August after announcing a 16 per cent drop in net profit in the April-June 2013 quarter.
The October board meeting will reveal whether independent directors can maintain the balance and take a call in favour of the company as well as its minority shareholders.