Is Coal India Selling Coal at a 70 per cent discount?

The Children’s Investment Fund sounds like the cuddliest toy in the nursery. As executives at Japan Tobacco and railroad company CSX will testify, however, it is a tireless activist investor. Always alert to any danger to its interests as a minority investor, TCI is now focusing on Coal India . It has threatened the company’s board members with legal action for alleged breach of fiduciary duties. TCI chief Chris Hohn could be in for a long fight.
That is hardly likely to faze TCI; the question is whether it has a case. Mr Hohn claims that the world’s biggest coal miner by output sells two-thirds of its coal to customers such as power groups at a 70 per cent discount to the market.  TCI also accuses Coal India of bowing to government pressure and of failing to meet production targets.

There appears to be a degree of governmental sway over the prices that Coal India charges. A price increase that the company put into effect on January 1 drew a sharp request from the coal ministry to revise it, according to a letter from the ministry made available by TCI. Coal India, producer of 80 per cent of the country’s output, ought to have a bit more operational freedom than that, especially as imports are on the rise. Citigroup estimates that Indian thermal coal demand will rise at a compound annual rate of 13 per cent up to 2015 while supply will grow at only 5 per cent. This means that imports would need to rise by roughly half. That is the kind of opportunity that Coal India should be minting.

TCI’s success rate in its battles with recalcitrant management teams is mixed, though shares of Japan Tobacco have risen by a half since last June when the investor called for the company to raise its dividend and buy back shares. The board of Coal India is one thing; the Indian government, which owns 90 per cent of the company, is quite another.

 FT