Shareholder activism on CIL: read the fine print

When Children's Investment Fund (CIF) bought 1.01% of Coal India Ltd (CIL), it perhaps focussed more on its profitability than risks. Gautam Chikermane writes.

Investors: answer two questions. One, would you buy a company that sells its product at prices lower than the market? And two, would you buy if the company told you that the majority shareholder's interests could conflict with yours? It's difficult to take investment decisions based on just these two questions, but if I were an investor, I would steer clear of this company - or if I did invest, I would factor in these risks.

It seems, the UK-based Children's Investment Fund (CIF) didn't. When it bought 1.01% of Coal India Ltd (CIL), it perhaps focussed more on its profitability than risks. As a result, when the majority investor, the government, told India's fourth-most valued Indian company to sell coal to power companies at subsidised prices, the fund went ballistic and threatened legal action against CIL and its directors. Taking cue from CIF, a few individual investor too plan legal action against CIL.

But the fact is, there are two risk factors were disclosed in the offer document CIL released before listing on the Bombay Stock Exchange on November 10, 2010. "We sell our coal at prices lower than the prices otherwise in the Indian and international coal markets," states risk factor 17. "The interests of the GoI as our controlling shareholder may conflict with your interests as a shareholder," says risk factor 55.

Further, "the President of India may issue directives with respect to the conduct of our business or our affairs for as long as we remain a government-owned company," it said. "As a result, the government may take actions with respect to our business and the businesses of our peers and competitors that may not be in our or our other shareholders' best interests." Finally, "The government could require us to take actions designed to serve the public interest and not necessarily to maximise our profits."

In terms of transparency, what could be clearer than these disclosures? For a responsible fund, whose investment in CIL is valued at Rs 2,158 crore today, CIF probably did not go through the 510-page prospectus diligently. Legal experts say that despite CIL having disclosed the risk upfront, CIF still has a case, a development that will play out this week.

Apart from this error, I believe CIF has also displayed a rather naïve reading of the political economy of India. Doesn't it know that oil companies like Indian Oil sell petroleum products at lower than market prices? Or that NMDC sells iron ore at below-market prices? And that CIL would do so too?

Minority shareholder activism is a much-needed idea in India, still budding. But applying it on CIL will be silly.