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Coal India faces government pressure
by Staff Writers
New Delhi (UPI) Apr 4, 2012

The Indian government issued a rare presidential directive ordering Coal India Ltd. to sign fuel supply agreements with power plants.

The presidential order follows an order issued to Coal India in February through the prime minister's office, also to sign supply agreements with power producers, but the company missed a March 31 deadline as its board of directors rejected clauses requiring the company to assure supplies or face penalties.

Coal India, which is 90 percent owned by the government and provides 80 percent of the country's coal needs, has been struggling to meet rising demand from power producers.

Amid the increased demand for coal, the company has also faced environmental hurdles, land acquisition disputes and other regulatory issues, causing it to fall short of production targets, forcing power companies to rely more on imported coal.

For fiscal 2011-12 (April-March) the company missed its production target of 440 million tons, producing instead 435.84 million tons, Platts news service reports. For fiscal 2012-13, it has set a target of 464 million tons.

"In the name of the president of India, we have issued directives to Coal India" to sign the contracts, Coal Minister Sriprakash Jaiswal told reporters Tuesday.

The presidential order can overrule the decision of Coal India's board and force the company to follow the government's directives. But it allows Coal India to determine the amount of penalty it would be required to pay if it fails to meet the minimum 80 percent supply requirement.

Coal India now pays a penalty of 10 percent of the cost of overall shortfalls.

"Giving a free hand to Coal India to decide on the penalty takes the monkey off its back," Bhavesh Chauhan, a senior analyst at Angel Broking Ltd. was quoted as saying by The Wall Street Journal. "It is positive for Coal India and its minority shareholders."

In an interview with the Economic Times, Partha S Bhattacharya, who served as Coal India's chairman and managing director until February 2011, called the presidential order a "win-win situation for everybody."

But he sees the penalty clause as the main issue: "If the supply does not fructify, is Coal India required to pay (a) penalty? If so at what rate?" he asked.

"That is what is the most crucial part where the investor interest would be," Bhattacharya said. "Investors would like to know how Coal India is going to make the extra coal available but I am sure that (the) government will not take a one-sided view."

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