State owned Indian companies have trodden over minority shareholder rights for a long time now. Ever since these companies were listed, minority shareholders have been getting the short end of the stick as these firms are run more by Government diktat and priorities, rather than being run with a profit motive. The big oil and gas companies like ONGC, GAIL, IOCL , HPCL and BPCL pay massive subsidies to the oil and gas sector in India. Some of them like IOCL are always running massive losses and perennially trade at a fraction of their P/S and P/B values. State owned public banks also trade at a fraction of the valuations given to private sector banks.
Not only are these companies run by Government appointed bureaucrats and are mismanaged, but they also have to serve the Government priorities which causes massive losses. Coal India is another firm, where majority is owned by the Government of India, has now passed a resolution to the detriment of the shareholders. Coal India will pay massive penalties to its customers if it fails to meet the supply quantities signed in FSAs. Note these FSAs are themselves harmful to Coal India’s interests, as they sell coal at a massive discount to the market price of coal. We had earlier flagged Government interference as a major risk to investing in Coal India’s IPO in 2010.
1) Low Quality of Coal Reserves – Indian Coal is of typically low content with high amounts of impurities making it unusable in industries like the steel industry where higher quality is a must. Also low calorific content of coal makes CIL’s Coal of lower value leading to lower realizations.
2) Inefficient Mining Practices – CIL is not exactly a well run modern mining company on the lines of BHP Billton or Rio Tinto. The Company with a long history tracing to British days is organized haphazardly with a number of subsidiaries. Its mining operations are hardly efficient and its expertise in underground mining of coal as opposed to open casting mining is quite suspect.
3) Dangers of Being Government Owned – Government owned Fossil Fuel Companies like IOC, ONGC, BPCL have a long history of subsidies and losses. The profits and losses of these companies despite being listed on the public markets are subject to the whims and fancies of the Government. The Company prices its products significantly below international market costs, which has little justification. Though the Company manages to get 15% Net Margins, it could change drastically depending on the fickle nature of the Party in Power. The Government is planning a new legislation which will lead to giving of 20% of profits of mining companies to local communities. CIL being Government owned will definitely come under the ambit of this proposed law leading to a potential decrease in profits.
4) Growth Rate is not Fantastic by Any Means – CIL has managed a decent growth of around 10% which it will find difficult to accelerate despite huge demand due to its not so competent management and organization. The Company’s structure won’t change radically with public listing overnight. So while CIL should be a good safe investment, it might not be a multi-bagger in the near future.
5) Global Carbon Tax and Climate Change Legislation – Coal is the Dirtiest form of Energy and its cheapness is due to the fact that implicit costs on the society are not added to Coal. It is already well known that Coal has huge pollution and health costs. Mercury poisoning, Degradation of Land and Ecology are some of the other negative environmental effects of Coal Mining and Usage. Its no wonder that Coal India’s Advertisements show Afforestation Measures to try and bolster its Green Credentials. But make no mistake CIL is the biggest polluter in India. A Global Carbon Tax or something to that effect might radically change the structure of the Coal Industry quite negatively.
6) Pilferage and Corruption – Illegal Coal Mining, Stealing and Pilferage is an Institutionalized form of corruption in India. Whole Villages in India’s Coal Belt in West Bengal, Jharkhand subsist through stealing of Coal. The Coal Mafia in India is a powerful one with Government links. Coal India suffers big losses though it is not been adequately disclosed in the Red Herring Prospectus.
TCI, a UK based pension fund has taken up the cudgels on the behalf of minority shareholders. The company has filed a legal case against the Government and the company for harming the shareholders. This case will have important ramifications because if TCI wins, then other FIIs can bring similar cases against listed PSU’s in India. Note, it is a shame that none of the domestic financial institutions have ever filed a case despite the fact that almost all listed PSUs are violating shareholder rights. It has taken foreign institution to take up the fight on behalf of the Indian shareholder.
The Children Investment Fund Management (UK) Llp, or TCI, filed a writ petition in the Delhi high court against India’s coal ministry and Coal India Ltd, in which it is a minority shareholder, challenging their moves to keep prices artificially low. TCI has argued that coal prices are deregulated in India and the ministry does not have the legal authority to interfere with Coal India decisions, it said. TCI has less than a 2% stake in Coal India, but its complaints against the miner earlier this year highlighted the problems arising out of government interference in the working of public sector companies, and were seen as generating awareness about shareholder activism in India.