From New York Times (April 20, 2012)
The Children’s Investment Fund Wages Battle With Coal India
BY VIKAS BAJAJ
.
MUMBAI, India — In 2010, when the Indian government sold 10 percent of
the shares of Coal India, one of the world’s largest coal mine
operators, the transaction was a way to raise money to help reduce its
budget deficit.
It did not anticipate that some of the shares would end up in the hands
of activist hedge fund managers who would demand that the behemoth
company, which employs more than 372,000 people, be managed differently.
But in the last couple of months, that is just what has happened. The
Children’s Investment Fund, a British hedge fund run by Christopher
Hohn, has waged a public battle with the Indian government and Coal
India’s board about how the company is run.
India Struggles to Deliver Enough Electricity for Growth
The fund, which gives a portion of its profits to a charity that
supports children in Africa and India, has threatened to sue the
company, its independent directors and the government of India unless
they agree to make decisions with the interests of minority
shareholders in mind.
Chief among its demands is that Coal India be allowed to sell fuel at
market prices, not government-set rates, which are about 70 percent to
80 percent lower than prices the company has been able to get in
limited auctions. The fund also wants the company, which has 549
billion rupees (about $10.5 billion) in cash, to substantially increase
its dividend.
The Children’s Investment Fund and Mr. Hohn have had much experience
over the years in battling corporate boards, aggressively pushing
management to take steps to increase a company’s stock value. Among
their biggest coups was in 2008, when the Children’s Investment Fund
prevailed in a bitter proxy battle with the railroad giant CSX
Corporation. But battling the Indian government presents a whole new
set of challenges.
In a telephone interview, Oscar Veldhuijzen, the fund partner leading
the fight, said the biggest beneficiary of its proposals would be the
people of India because the government would earn a lot more money.
“The government owns 90 percent of the company and is depriving the
people of India by $18 billion per annum,” he said.
He said the fund had threatened to sue after its efforts to privately
persuade the government and Coal India to change their policies were
rebuffed. In a letter to India’s Ministry of Finance, the fund has
argued that the government’s management of Coal India violates its
right to “fair and equitable treatment” under India’s bilateral
investment treaties with Britain and Cyprus, locations from which it
has invested into the company. The fund, which says it is the
second-largest shareholder in Coal India, has also taken its case
public by setting up a Web site, coal4india.com.
Indian policy makers see the situation differently. They have argued
that Coal India is a government enterprise and has to act in the public
interest, which officials say includes providing inexpensive coal to
power companies, steel mills and other businesses that they favor.
“Every shareholder in CIL must realize that India follows a socialistic
pattern of governance,” Sriprakash Jaiswal, India’s coal minister,
recently told the Indian Express newspaper, using the company’s
acronym. “We take decisions on the basis of the larger welfare of
people. Any foreign investor, before coming to India, must realize that
CIL is a government-owned company.”
For instance, in an effort to alleviate the country’s chronic shortage
of coal, policy makers have been pressuring the company to sign
agreements with power plant operators guaranteeing to provide them with
at least 80 percent of the fuel they need to run their plants. The
Children’s Investment Fund and other investors have opposed such
agreements because they would force Coal India to pay penalties if it
failed to meet the guarantees.
This week, Coal India said its board had agreed to sign such
agreements. But in a victory for outside investors, the company said
the penalties would begin after three years and would be relatively
minimal: 0.01 percent of the value of the coal it was unable to supply.
As in the United States, minority shareholders in India can seek to
prevent a majority shareholder from running a company poorly or in ways
that are not profitable. But few investors have sought to press such
rights, in large part because the legal system moves slowly in India.
Investors in India have long resigned themselves to the fact that
companies in which the government owns a majority stake will never be
run as profit-maximizing businesses. The government, for instance,
directs state-owned banks to give favorable treatment to farmers or
politically connected businesses. Oil companies are forced to bear the
cost of gasoline and diesel subsidies.
Analysts and investors have applauded the Children’s Investment Fund’s
challenge to that status quo, though some also see it as a quixotic
mission that is doomed to fail.
“I don’t think this one case will have an impact on accountability or
corporate governance” in state-owned firms, said Daryl Philip, a senior
research analyst at FinQuest Securities in Mumbai. “If there are a few
more such cases in the future, we might see a considerable impact.”
Mr. Veldhuijzen says he is committed to the fight even if it takes
years. He believes he will prevail because the government plans to
raise $5.9 billion this year by selling minority stakes in state-owned
firms. He said India would eventually have to rationalize its
complicated maze of energy subsidies and price controls.
“I have been working on this for the last one and a half years,” he
said. “I am hopeful that we will come to a resolution because the
government can simply not afford to let this get out of hand.”
Neha Thirani contributed reporting
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