(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Jeff Glekin
MUMBAI, March 28 (Reuters Breakingviews) - TCI, Chris Hohn's
investment fund, is raising the stakes in its tussle with New
Delhi over the pricing of coal. The Children's Investment Fund
is planning to sue the Indian government and says Coal India
is presided over by a "board of shame". That's
fighting talk. The challenge, however, is to win the policy
arguments as well as the legal ones.
The hedge fund says Coal India isn't being run for the
benefit of all shareholders. The company, it says, is selling
its output at around 70 percent less than it could be. Hohn says
it could make an additional $20 billion a year if it sold in
line with open market prices.
That estimate looks optimistic. Yes, Coal India currently
makes $8.30 of EBITDA per tonne of coal, compared to $26.90 at
Indonesia's Bumi or $45.70 at China's Shenhua, according to
Nomura. But the $20 billion number implies that Coal India would
generate $55 of EBITDA per tonne of coal. While Coal India's
cost of production per tonne is lower than its competitors the
quality of coal is inferior; and $55 would give it perhaps the
highest margin in the world.
But, say, Coal India could double EBITDA per tonne. That
might add $20 billion to the value of the company and take Coal
India above Reliance Industries in the Sensex size rankings.
New Delhi is not convinced. The upside may be clear to TCI,
but the government, which owns 90 percent of the company, is
worried about the impact of higher coal prices on India's power
sector. But it is in this sensitive policy arena that TCI needs
to make a better case. One of Indian firms' most common
complaint is not on pricing, but on shortage of supply. They are
willing to pay higher prices - look at the recent spate of
Indian businesses which have bought coal mines overseas.
Greater emphasis on this sort of logic would help TCI's case
in New Delhi no end. It might also generate shareholder value
more quickly than rattling sabres. Since reform could make Coal
India the biggest company quoted in Mumbai, the outcome could be
- The Children's Investment Fund (TCI) has written to the
Indian ministry of finance giving formal notice that it intends
to launch dispute proceedings over the pricing policies followed
by Coal India. Coal India, which is quoted on the Bombay Stock
Exchange and is included in the Sensex equity index, is
90 percent controlled by the Indian state. TCI owns just over 1
percent and is the second largest shareholder.
- TCI will pursue the dispute using two bilateral trade
agreements between India and the UK, and between India and
Cyprus (where TCI's funds are domiciled), the Financial Times
reported on March 28. In its letter, TCI says that the
government has "seriously impaired the business activities and
operations" of Coal India.
- Alok Perti, India's coal secretary, said he had not
received a letter from TCI, according to local reports on March
- On March 26 Chris Hohn, the head of The Children's
Investment Fund, told India's CNBC television station that Coal
India is losing $20 billion annually on under-priced sales of
coal. He said Coal India sells at a 70 percent discount to the
fair market value. He called it a "theft of a national asset
that belongs to the Indian people" and said Coal India was
presided over by a "board of shame".
- FT story: link.reuters.com/max37s
- Reuters: UK fund threatens action against Coal India
- For previous columns by the author, Reuters customers can
(Editing by Robert Cole and David Evans)