Coal India faces a surprising case of shareholder activism in India
The Children’s Investment Fund (TCI), a London-based fund famous for its activism, is threatening to sue the board of Coal India, as well as initiating legal action against the Indian government for allegedly breaching international treaties. This shareholder activism is unprecedented, and almost unheard of, in the country.
The government currently owns a 90% stake in Coal India, a previously state-owned company that listed on the stock market in 2010. TCI is its largest foreign shareholder, with a holding of almost 2%. The fund has accused Coal India of willfully manipulating the price of coal, on the orders of the government, pricing it at a 70% discount to international market prices. This action coincides with yet another corruption scandal in the country, with the coalition being accused of selling coal blocks too cheaply to some of the country’s prominent industrialists and losing the country up to $210 billion in potential revenues.
TCI alleges that it has evidence of the company rolling back its coal price on orders from the Coal Minister this year. Additionally, it claims it has been trying to settle its concerns with the company and government for a year, but has been repeatedly ignored. On the other hand, India’s Coal Secretary has not only denied having received a formal notice from TCI informing of it a dispute, but also said the fund was free to sell its holding in Coal India if it was dissatisfied.
While TCI has gone as far as to create a website (coal4india.com) to air its grievances against the company, the case has not received the attention it deserves. In fact, shares of Coal India actually rose on TCI’s announcement. Most investors agree that it is highly unlikely that TCI will win this battle, as Coal India is known to have strong ties to the government, with the majority of its board members being ex-bureaucrats. Additionally, it is key for the government to continue to provide cheap fuel to the country’s stressed power sector.
However, while the country’s state-backed companies are notorious for being uncooperative, the case could not have come at a worse time for the state. The Indian government is actively trying to encourage state divestment and foreign inflows to allow it to tackle an increasingly widening budget deficit, having dismally failed to meet its targets in 2011. Additionally, the coalition is already in a precarious position, weakened by its recent thumping in the state elections and the string of corruption scandals it has been internationally accused of.
Yet, while this case will no doubt make it harder for the country to attract foreign investment, it is positive for investors in the longer-term if it helps other groups demand more accountability from management.