Kolkata-based Maharatna major Coal India Ltd (CIL) has put the onus of signing of fuel supply agreements by November-end on power companies, in order to meet a directive by the Prime Minister’s Office. Early this month, the PMO had directed the state-run coal major to sign FSAs with power plants that have long and medium-term sale arrangements by November-end.
“We are well-equipped to meet this deadline, but the onus is on power companies. Even after issuing revised FSA draft, we were able to sign agreements with only 30 companies till now, while about 120 are in line,” said a top CIL official close to the development.
After a meeting at the PMO, the firm’s chairman and managing director S Narsing Rao had reportedly said that CIL will be able to sign at least 50 FSAs, with plants that were commissioned since March 2012.
While CIL revised penalty slabs in the current FSA structure, doing away with moratorium, the board has also approved cost price model for signing of FSAs, which will provide imported coal at actual cost. CIL had earlier agreed for a level of penalty ranging from 1.5% to 40% on failure to meet supply commitments. It came after protests from various corners over its decision to go for a minor penalty of 0.01%.
It is also reported that the CIL has added ownership change clause to fuel supply pacts and now the companies signing new fuel supply agreements (FSAs) with Coal India Ltd (CIL) could forfeit access to the energy resource in the event of an ownership change. Five senior CIL officials separately confirmed that it has inserted a condition for power companies signing the new FSAs to make disclosures on any change of ownership so that if a “windfall gain” is seen to be made, coal supplies could be cut.
“Those private companies who get their coal linkage and eventually sign FSAs will have to give a self-certification saying any change of ownership will be disclosed,” said one official. “This will be compulsory. If anything erratic is seen, naturally, coal won’t be given” said the official.
The condition has been introduced in the FSA by CIL directors who have done so on account of some coal block owners having sold stakes in their companies for high valuations on account of the coal reserves, effectively transferring ownership of the blocks themselves.
Like the coal blocks, FSAs are prized commodities as CIL is obliged to supply coal to the signatories at nearly half the market price of the fuel and can even be subject to payment of penalties if it fails to deliver.
The officials said they feared that power companies in the course of signing FSAs could see a spike in valuations and may be tempted to monetise them. “This will be for more transparency and to keep the non-serious players out of the FSAs,” another official said. “Coal India can give subsidised fuel for the public good, not for companies to make big gains.”
CIL chairman S. Narsing Rao declined to comment on self-certification. But he said the company had put together a “fair and well-balanced” FSA after months of deliberation. “I don’t think anybody will challenge the FSA now. In the given circumstances, it evenly balances the interests of both sides,” Rao said. “We have the responsibility (of supplying coal), we also take the risk (of penalties).”
In addition to self-certification, board members are also insisting on two other conditions firstly, FSAs will only be signed with power producers that have power purchase agreements with distributors at set tariffs. Secondly, there will be a sunset clause in the FSAs signed with companies that own coal blocks.
About 20 power companies are waiting to sign the newly drafted FSAs, including the country’s largest generator NTPC Ltd, meant for 10,005 MW (as an analyst estimates) scheduled to come on stream in 2013. Around 27 FSAs have been signed so far. A controversy broke out earlier this year over the terms and conditions of these pacts, particularly on penalties and import of coal.
CIL currently sells about 306 million tonnes (mt) of coal under FSAs, or linkages from a total production, of 435.84 mt and is under pressure from power companies for more supplies. An analyst said the self-certification condition may not be liked by the power producers unless there is clarity on how exactly it will be implemented. “The spirit of the clause is positive,” said Girish Shirodkar, partner and managing director, Strategic Decisions Group AsiaPac, a management consultant. “But how it will be implemented is the tricky part. It puts discretion in the hands of Coal India and the coal Ministry and any discretion is not good as it could lead to graft.”
The technicalities on how self-certification will work are being finalised, the officials said. “It will be seen judiciously. It will be referred to the government,” said another official. “We are trying to segregate the honest from the dishonest people.” The board-driven safeguards come in the wake of greater scrutiny of the company’s decision-making processes. One small shareholder has filed two lawsuits against it alleging mismanagement. They will come up for hearing in December. The Children’s Investment Fund Management (UK) Llp hedge fund has sued the government and CIL in the Delhi and Kolkata high courts.
“We are well-equipped to meet this deadline, but the onus is on power companies. Even after issuing revised FSA draft, we were able to sign agreements with only 30 companies till now, while about 120 are in line,” said a top CIL official close to the development.
After a meeting at the PMO, the firm’s chairman and managing director S Narsing Rao had reportedly said that CIL will be able to sign at least 50 FSAs, with plants that were commissioned since March 2012.
While CIL revised penalty slabs in the current FSA structure, doing away with moratorium, the board has also approved cost price model for signing of FSAs, which will provide imported coal at actual cost. CIL had earlier agreed for a level of penalty ranging from 1.5% to 40% on failure to meet supply commitments. It came after protests from various corners over its decision to go for a minor penalty of 0.01%.
It is also reported that the CIL has added ownership change clause to fuel supply pacts and now the companies signing new fuel supply agreements (FSAs) with Coal India Ltd (CIL) could forfeit access to the energy resource in the event of an ownership change. Five senior CIL officials separately confirmed that it has inserted a condition for power companies signing the new FSAs to make disclosures on any change of ownership so that if a “windfall gain” is seen to be made, coal supplies could be cut.
“Those private companies who get their coal linkage and eventually sign FSAs will have to give a self-certification saying any change of ownership will be disclosed,” said one official. “This will be compulsory. If anything erratic is seen, naturally, coal won’t be given” said the official.
The condition has been introduced in the FSA by CIL directors who have done so on account of some coal block owners having sold stakes in their companies for high valuations on account of the coal reserves, effectively transferring ownership of the blocks themselves.
Like the coal blocks, FSAs are prized commodities as CIL is obliged to supply coal to the signatories at nearly half the market price of the fuel and can even be subject to payment of penalties if it fails to deliver.
The officials said they feared that power companies in the course of signing FSAs could see a spike in valuations and may be tempted to monetise them. “This will be for more transparency and to keep the non-serious players out of the FSAs,” another official said. “Coal India can give subsidised fuel for the public good, not for companies to make big gains.”
CIL chairman S. Narsing Rao declined to comment on self-certification. But he said the company had put together a “fair and well-balanced” FSA after months of deliberation. “I don’t think anybody will challenge the FSA now. In the given circumstances, it evenly balances the interests of both sides,” Rao said. “We have the responsibility (of supplying coal), we also take the risk (of penalties).”
In addition to self-certification, board members are also insisting on two other conditions firstly, FSAs will only be signed with power producers that have power purchase agreements with distributors at set tariffs. Secondly, there will be a sunset clause in the FSAs signed with companies that own coal blocks.
About 20 power companies are waiting to sign the newly drafted FSAs, including the country’s largest generator NTPC Ltd, meant for 10,005 MW (as an analyst estimates) scheduled to come on stream in 2013. Around 27 FSAs have been signed so far. A controversy broke out earlier this year over the terms and conditions of these pacts, particularly on penalties and import of coal.
CIL currently sells about 306 million tonnes (mt) of coal under FSAs, or linkages from a total production, of 435.84 mt and is under pressure from power companies for more supplies. An analyst said the self-certification condition may not be liked by the power producers unless there is clarity on how exactly it will be implemented. “The spirit of the clause is positive,” said Girish Shirodkar, partner and managing director, Strategic Decisions Group AsiaPac, a management consultant. “But how it will be implemented is the tricky part. It puts discretion in the hands of Coal India and the coal Ministry and any discretion is not good as it could lead to graft.”
The technicalities on how self-certification will work are being finalised, the officials said. “It will be seen judiciously. It will be referred to the government,” said another official. “We are trying to segregate the honest from the dishonest people.” The board-driven safeguards come in the wake of greater scrutiny of the company’s decision-making processes. One small shareholder has filed two lawsuits against it alleging mismanagement. They will come up for hearing in December. The Children’s Investment Fund Management (UK) Llp hedge fund has sued the government and CIL in the Delhi and Kolkata high courts.
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