In
what would be a first for India, a minority foreign
investor, and that too a hedge fund looking for capital
gains, has challenged the right of the government
to pursue policies it presumes is in the national
interest. The company involved here is Coal India,
considered one of the world's largest coal producers
in a country that has among the largest coal reserves.
Not too long back, in October last year, a government
in search of receipts from privatisation decided to
sell 10 per cent of the equity in India's publicly
owned coal-producing giant. The sale, through an initial
pubic offering, attracted bids at the top end of the
Rs. 225 to Rs. 245 price range, valuing the company
at $35 billion.
What is more the issue was oversubscribed to the extent
of 12 times the offer on the third day of the IPO.
This should not have come as a surprise. The company
had recorded profits of close to Rs. 100 billion in
the year prior to the issue. It had rights to mine
large coal reserves access to which was being eased
by relaxing environmental norms whenever required.
And it was sitting on a cash reserve of close to Rs.
400 billion, a part of which it claimed was to be
invested in acquiring assets globally.
Further, this trophy buy was being put on sale when
huge quantities of cheap liquidity had been pumped
into the world economy in response to the crisis.
Financial institutions with access to near-zero cost
funds were rushing into emerging markets that had
not done too badly during the crisis years and were
open to foreign investment flows. India was one such
country and Coal India one such beneficiary.
Among the investors who successfully picked up a stake
in Coal India, to emerge the largest foreign investor
in the company, was a hedge fund with an unusual name:
The Children's Investment Fund (TCI). But it is not
TCI's name that has brought it to the attention of
the Indian state. Rather it is the fact that the fund,
despite being a relatively small minority shareholder
with an estimated 2 per cent stake, has decided to
challenge Coal India's policies and practices. In
a letter sent on March 12, reportedly addressed to
the members of Coal India's board (Financial
Times, March 13, 2012) the fund has accused
the company of acting against the interests of its
shareholders by ''not acting independently of India's
government'' and through ''acquiescence to interference
by the Prime Minister's Office'' on coal prices, among
other things. As evidence it has produced a letter
obtained under the Right to Information Act written
by the Secretary, Coal, Government of India, instructing
the company to reverse a decision that would have
hugely enhanced the profits of the coal producing
public monopoly.
The main issue here is Coal India's reversal of its
early-2012 decision to adopt a pricing mechanism under
which coal was to be priced based on its gross calorific
value (GCV) rather than its useful heat value (UHV),
which was the principle adhered to till then. While
justified by Coal India on the grounds that this would
ensure parity with international prices, the change
in pricing principle was opposed by user industries
with the NTPC arguing, for example, that it would
raise the price of certain grades of coal by as much
as 179 per cent and hike power generation costs by
as much as 40 per cent. This was tantamount to Coal
India exploiting its monopoly at the expense of the
rest of the economy.
Faced with the opposition, and pressure from its parent
Ministry, the company decided to go back on that decision
at the end of January, resulting in an average 12.5
per cent fall in prices that would be implemented
with retrospective effect from January 1, 2012. TCI
finds this and other policies unacceptable, on the
ground that it works against the interests of minority
shareholders and smacks of being ''reckless and lacking
integrity''.
Campaigns such as this are typical of TCI's strategy.
The Children's Investment fund was established by
a successful hedge fund manager, Christopher Hohn.
Son of a Jamaican car mechanic, with degrees from
Southampton University and the Harvard Business School,
and an enviable track record in the hedge fund business,
Hohn was unusual. He established an activist hedge
fund with an aggressive strategy. Supported by pension
funds, insurance companies and investors like the
Yale University endowment, he invested in companies
assessed as being capable of increasing shareholder
value if they are restructured through mergers or
asset sales. He often, therefore, used TCI's presence
as a shareholder to force even dramatic changes in
company policy, taking on big players if necessary.
Thus Hohn is famous for two major activist forays,
among others. The first was his campaign in 2005 to
stall the bid by Deutsche Börse to merge with
the London Stock Exchange, resulting in the exit of
Werner Seifert who was then the Chief Executive of
the former. The other was his role in 2007 in pushing
ABN Amro to sell out to the Royal Bank of Scotland.
What was shocking was the ability of Hohn to influence
these deals with his own profits in mind, though he
was by no means a dominant shareholder. With activism
of this kind and an ability to deliver returns of
40 per cent during the good times, Christopher Hohn
gained in notoriety.
However, he tempered this aggressiveness through his
philanthropic side. He set up along with his wife
the Children's Investment Fund Foundation (CIFF),
a charity working with children in Africa, Asia and
elsewhere to which he diverts a share of the profits
derived from TCI. CIFF is now one of Britain's largest
charities. As The Economist noted as far back as 2007,
''Charity may be good for business. Not that there
is any doubt of Mr Hohn's sincerity-close friends
say he is passionate about his charity in private-but
his philanthropy may prove useful protection. The
commercial success of active investors, in the form
of both hedge funds and private equity, has made them
politically vulnerable. Attacks on the locusts have
spread from Germany to Britain, America and Japan
over the past year; trade unionists, politicians and
journalists have called for their activities to be
restricted. In this atmosphere the decision to funnel
TCI's profits to the poor looks less like an act of
insane generosity than a remarkable piece of far-sightedness.''
It is an aggressive player like Mr. Hohn who has now
decided to take on the public sector in the form of
Coal India. What is important is that he has declared
that once the government divests equity in a company
to mobilise resources for its budget, then the company
can no more act under instructions from the state.
In what amounted to a threat, Oscar Veldhuijzen, a
partner at TCI reportedly told the Financial Times:
''Coal India have to understand that if they mess around
and treat their company like a 100 per cent government-owned
entity, it will have major implications for the future
of Indian capital markets.''
The government is unlikely to be immediately cowed
down by that threat since it holds too large a stake
and has given foreign investors like TCI the right
to exit if they are not happy with the functioning
of the company. But this is a government that is extremely
concerned about the sentiments of foreign investors.
Moreover, TCI's protest may be the first shout in
what could become a campaign. Foreign investors, even
minority ones, who have come in droves into the country
and bought into the public sector, may declare any
policy that limits profiteering in the interests of
development as amounting to oppression of minority
shareholders. And that may cow the government down.
Liberalisation by definition reduces the policy space
open to government. It sets new terms for the relationship
between the state and private capital, giving the
latter an edge. What this experience suggests is that
this can happen when even the capital brought in post-liberalization
is a small sum and that capital derives profits from
assets created largely with public money.
*This article was originally
published in the Hindu on 14 March, 2012, and is available
at
http://www.thehindu.com/opinion/columns/
Chandrasekhar/article2994991.ece
