It all began as a small issue of a minority shareholder fighting to protect its interests in a company but suddenly it has attracted national interest, hogging headlines in the press. Coal India Ltd (CIL) and corporate governance have been on a head-on collision course. The issue of fuel supply agreement (FSA) and penalties on not fulfilling the supply agreement had independent directors, shareholders and investors worried. At the same time, the government was worried that not being able to ensure implementation of the FSA would mean power shortages in the country.

Independent directors on the board of CIL rose to the occasion and voiced their protest in favour of shareholders. Consequently, a ‘Presidential Directive’ was issued to CIL to sign the FSA. The directive diluted many of the concerns of the shareholder and in the end, the shareholder won. It was a victory for corporate governance, as well.

For one, CIL has been allowed to decide the terms and conditions of the agreement. Some of the terms now being talked about include a pact only if the power producer has an agreement for power supply of 20 years. Further, the agreement would apply to the quantity that has been contracted for 20 years. For imported coal, it would be on a cost-plus basis.

After meeting all these conditions, if a short supply ensued, it would result in a penalty, which would be decided by CIL. All in all, it’s been a great victory for shareholders, as a ticklish issue was resolved with intervention from the highest level — the President of the country. This issue becomes important, as with the divestment programme going haywire in 2011-12, it becomes imperative that in the coming year, issues of shareholder concern and interest need to be resolved if the government’s divestment programme has to be taken forwarded with the active participation of foreign institutional investors. The last word on the CIL saga has not been said. But certain concerns have been mitigated and it has been done keeping in mind the interest of shareholders. At the end of the day, the government of India is also a shareholder, owning 90 per cent of the company’s equity. Naturally, it should look to keep the company healthy and profitable.

In another development, independent directors on the board of oil marketing companies have begun to demand an increase in petrol and diesel prices at the earliest. Reports have suggested the government is considering reduction of excise duty on petrol to cut losses of these companies. It’s a good development and augurs well for shareholders and corporate governance in PSU companies.

Banks will continue to be under stress
The banking sector is under a lot of stress, what with the slowing of the economy, high interest rates and stressed assets. The results for the quarter and the year ending March 2012 would reflect to some extent these concerns. The stressed assets and NPAs of banks, whether from the PSU pack or private sector, would put a strain on their performance this quarter. Restructuring of assets and referral of some large accounts for debt restructuring would affect banks in the quarter under review. Some large companies which have been or are in the process of being referred for restructuring include Air India, Kingfisher Airlines, Bharti Shipyard, HCC and GTL.

There are many other large, medium and small enterprises which would have been restructured or are in the process of being restructured. Corporate results would be affected and the whole sector would react to the numbers as they are declared. PSU banks have received a fresh dose of capital infusion through preferential allotment of equity to Life Insurance Corporation. The insurance company has already suffered mark-to-market losses on the same. The capital infusion already done is simply not enough and much more would have to be done, considering provision of NPAs and subsequent capital adequacy norms in accordance with Basel-III.

Published in Business Standard of 6th April 2012