1.

CORPORATE GOVERNANCE: THE CONCEPT

The concept of corporate governance is gaining momentum because of various factors as well as the changing business environment. The EEC, GATT and WTO regulations have also contributed to the rising awareness and are compelling us to think in terms of adhering to the good governance

practices. Corporate governance, by the very nature of the concept, cannot be exactly defined. However, there can be no two opinions that effective accountability to all shareholders is the essence of corporate governance. The following definition should help us to understand the concept better. Corporate governance is not just corporate management; it is something much broader to include a fair, efficient and transparent administration to meet certain well-defined objectives. It is a system of structuring, operating and controlling a company with a view to achieve long- term strategic goals to satisfy shareholders, complying with the creditors, employees, customers and suppliers, and legal and regulatory requirements, apart from

meeting environmental and local community needs. When it is

practised

under a well-laid out system, it leads to the building of a legal, commercial and institutional framework and demarcates the boundaries within which these functions are performed.1 Corporate governance cannot disregard the diverse interests

shareholders, lenders, employees government, etc. It is

1

believed that

Corporate governance: Time for a Metamorphosis The Hindu July 9, 1997.

shareholders would unknown; similarly

increasingly assert the

their

rights,

hitherto

virtually

lending institutions, having to justify their

performance in a market-driven environment, have no choice but to demand effective and efficient corporate governance; besides FIIs with substantial foreign investment in India would demand greater transparency and

internationally recognised, sound corporate practices. The new paradigm of governance to bring about quality corporate governance is not only a

necessity to serve the diverse corporate interests, but it is also a key requirement in the best interests of the corporates themselves. Corporate practices in the matter of disclosure, transparency, group accounting, role of directors, degree of accountability to the shareholders, lenders and overall public good are some of the critical issues which require a fresh and closer look. A framework for addressing concerns public good, such as regard for environment, overall conservation of resources, cost effective managerial inputall these would, among other things form part of the core of corporate governance. Government can play a catalytic role in creating the enviroment for quality governance through an appropriate regulatory framework. Corporate leadership and its mindset would determine the sort of governance that would ultimately evolve. The Cadbury committee has also defined the term Corporate also

Governance and according to the committee, it means, (It is) the system by which companies are directed and controlled. It may also be defined as a system of structuring, operating and controlling a company with the following specific aims:(i) (ii) (iii) Fulfilling long-term strategic goals of owners; Taking care of the interests of employees; A consideration for the environment and local community;

(iv) (v)

Maintaining excellent relations with customers and suppliers; Proper compliance with all the applicable legal and regulatory

requirements. We may also note what the CII constituted committee has to say on the definition, Corporate governance deals with laws, procedures, practices and implicit rules that determine a companys ability to take informed managerial decisions vis--vis its claimantsin particular, its shareholders, creditors, customers, the State and employees. There is global consensus about the objective of good corporate governance: maximising long-term shareholder value. Further the Kumar Mangalam Birla committee We may constituted by SEBI has observed that, Strong corporate governance is indispensable financial reporting structure. According to ICSI, define corporate governance as a blend of rules, regulations, laws and voluntary practices that enable companies to attract financial and human capital, perform efficiently and thereby maximise long term value for the shareholders besides respecting the aspirations of multiple stakeholders including that of the society.2 In India, the question of corporate governance has come up mainly in the wake of economic liberalisation business, as well and deregulation of industry and

as the demand for a new corporate ethos and stricter

compliance with the law of the land. In the context of the unique situation in India where the financial institutions hold substantial stakes in

companies, the accountability of the directors, including non- executive directors and nominees, has come into sharp focus.3 In the UK and USA the corporate system and structure is characterised by diffused ownership and shareholding, as a large percentage of shares is
2 3

Corporate Governance Reporting (Model Formats) by ICSI 2003 Corporate Governance: The new paradigm Charted Secretary October 1997

subscribed by the public. They have a well developed capital market with active shareholder participation. Firms are norms and investor protection. The focus subject to strict disclosure

of good governance in these

countries is the code of best practices. However, the Japanese and German models are somewhat different. There is a close association between the financial institutions and the firms, as with the predominant shareholders. Both have close relationship towards their commitment to a philosophy of lifetime association. In India, a strident demand for evolving a code of good practices by the corporates themselves is emerging. In the global perspective, it may constitute a necessity to cut through prevalent questionable practices, the maze of

indefensible management attitudes to

stakeholders and penetrable non-disclosures

It is believed that shareholders would

increasingly assert

their

rights,

hitherto virtually unknown; similarly the lending institutions, having to justify their performance in a market-driven environment, have no choice but to demand effective and efficient corporate governance; besides FIIs with substantial foreign investment in India would demand greater transparency and internationally recognised, sound corporate practices. The new paradigm of governance to bring about quality corporate governance is necessity to serve the diverse corporate interests, but it is requirement in the best interests of the corporates themselves. not only a

also a key

1.1.1

Corporate Governance Abuses and the General Scene

In the Indian business groups, the concept of dominant shareholders is more

amorphous. The

promoters shareholding is spread across several friends

and relatives and also corporate entities. It may be difficult to establish the total effective holding of this group. However, the aggregate holding of all these entities taken together is typically swell below a majority stake. Since financial institutions have historically played a passive role, it paves the way for the promoters acting as the dominant shareholders, despite they may not even be the largest single shareholder. The promoters are thus enabled to play all the games that a dominant shareholder can play, namely structuring of businesses and transfer of assets between group companies, preferential allotments of shares to themselves, payment for services to closely held group companies and the like. This has led to the situation of what could be termed, There may be many financially sick companies but no financially sick promoters. Thus corporate governance abuses perpetrated by a dominant shareholder poses a difficult regulatory required dilemma; The regulatory intervention is therefore to be concerned with micromanagement which are related to with regard to the Indian

routine business decisions. The general scene follows:4

corporate sector, as perceived by Dilip Kumar Sen may be noted, which are as

Companies are often run as if they were the managing directors or CEOs personal freedom;

Those at the helm are only about the principal shareholders interests, any benefit to other shareholders is only consequential;

Majority of directors are unaware that they are agents of shareholders and their position is one of trust and faith

Participation of non-executive directors in

meetings whether of the

board or any committee thereof is inversely proportional to the health of the bottom linebetter the bottom line lesser the participation.
4

A Few leaves of Corporate governance, The Hindu Business Line dated 2nd October 2003

Most directors do not consider it necessary to update themselves on changes in laws, regulations;

Non executive directors do not see themselves as watch-dog of

the owners. Boardrooms are invariably filled up by yes men who do not raise relevant questions. Except in a crisis even nominee directors tend to play a passive role at board meetings and do not oppose the proposals of the management. Therefore, the author amount of regulation practices of the above article, concludes, Hence, no true spirit of good corporate

can enforce the in

governance

a company unless it comes

from within the

organisation.

1.1.2

What are the objectives of corporate governance?

The development of corporate governance concept is naturally and essentially related to the objectives of corporate governance and it may be important to note what the Introductory framework has to say on this:5

Good governance is integral to the very existence of a company. It inspires and strengthens investors confidence by ensuring companys commitment to higher growth and profits. It seeks to achieve following objectives: (i) That a properly structured Board capable of taking independent and objective decisions is in place at the helm of affairs;
5

Corporate Governance Reporting (Model formats) by ICSI 2003.

(ii)

That the Board is balanced as regards the representation of adequate number of non-executive and independent directors who will take care of the interests and well being of all the stakeholders;

(iii)

That the Board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information.

(iv)

That the Board has an effective concerns of stakeholders;

machinery to subserve the

(v)

That

the

Board keeps the

shareholders

informed of relevant

developments impacting the company; (vi) That the Board effectively and regularly monitors the

functioning of the management team; and (vii) That the Board remains in effective control of the affairs of the company at all times. The overall endeavour of the Board should be to take the organisation forward, to maximise long-term value and shareholders wealth.

1.1.3

Code convergence in Asia

The points of convergence, according to Code Convergence in Asia: Smoke or Fire?6, the following observation has been made: Although Asian countries are not moving towards identical systems of governance, there is a striking agreement among the proponents of reform in each country on the centrality of certain principles and these include: Enhancing shareholder value as the primary focus of companies, and upholding or extending shareholder rights (this is accepted, even in places like China, as a fundamental prerequisite for the development
6

Corporate Governance International, Vol. 3 Issue 1, March 2000, pp. 23-37

of capital Markets). The need for non-executive and independent non-executive directors to provide an outside view on strategic direction and to counterbalance the executives on the board (or to help strengthen the supervisory

board vis--vis the management board in two-tier systems). The usefulness and of board committees responsible for audit, of

nomination

compensation and

comprising a

majority

independent directors. The importance of higher levels of information disclosure from listed

companies. Allowing or encouraging institutional investors to act as a check against management and a lever for enhancing board independence.

Some

of these principles have been

incorporated into laws and

regulations governing companies and securities trading, or have been expressed in the listing rules of stock exchanges. Most are now included in codes of best practice developed over the past two years, and may or may not be mandatory. The Cadbury Committee. A spate of scandals and financial collapses in the UK in the late 1980s and early 1990s made the shareholders and UK Government therefore

banks worry about their investments. The

recognised the insufficiency of existing legislation role of self-regulation as a measure of controlling scandals and financial collapses. In order to

prevent recurrence of business failures, the Cadbury committee was set up by the London stock Exchange in May 1991 inter alia to help raise standards of corporate governance. The Code of best practices (1992) of the Cadbury

committee report spelt out the methods of governance needed to achieve a balance between the essential powers of the Board and their proper accountability.

1.1.4

Developments in India

On account of the interest generated by Cadbury committee report and also in the wake of Government initiatives to respond to corporate developments world over, the following major developments have taken place: The Confederation of Indian Industries Industry (CII), the the Associated and

Chambers Exchange

of Commerce and Board of

and

Securities

India constituted committees to recommend 1996, took a special

initiatives in corporate governance. The CII, in initiative on corporate governance. It

was the first institutional

initiative in Indian industry. The objective being to develop a code for corporate governance to be adopted by the Indian companies (private sector, the public sector,banks and fiancial institutions which are corporate entities), a code by CII carrying the title Desirable Corporate Governance was released. The SEBI appointed committee, known as the Kumar

Mangalam Birla committees recommendations led to the addition of Clause 49 in the Listing Agreement. Compliance of provisions of Clause 49 was largely made mandatory by listed companies. The recommended that committee

there should be a separate section on Corporate section was

governance in the Annual Report of companies. This

required to detail the steps taken to comply with the recommendations of the committee and thus inform the shareholders of specific initiatives taken to ensure corporate governance. The committee accorded

recognition to the three vital aspects of corporate governance, namely accountability, stakeholders. The Department of Company Affairs (DCA) appointed a study group on 15.5.2000 under the Chairmanship of the then Secretary DCA to suggest ways and means of achieving corporate governance. The study group appointed a task force. The study group recommended the setting up of an independent, autonomous centre for corporate excellence with a transparency and equality of treatment for all

view to accord accredition and promote policy research and studies, training and education and awards etc., in excellence through greater shareholders participation, the field of corporate favoured

improved corporate governance. It

formal recognition of corporate

social responsibility, non-executive directors being charged with strategic and oversight responsibilities,

minimisation

of

interestconflict

potential,

and

also

suggested

application of corporate governance principles to public sector. The Department of Company Affairs also constituted on August 21, 2002 a high level committee, popularly known as Naresh Chandra

committee, to examine various corporate governance issues and to recommend changes in the diverse areas such as the statutory

auditor-company relationship, rotation of statutory auditors, procedure for appointment and determination of audit fees, restrictions if necessary on non-audit fees, independence of auditing functions, ensuring presentation of true and fair statement of the financial affairs of companies, certification of financial statements and accounts,

regulation of oversight functionaries, setting up

an independent

regulator and the role of independent directors. The committee has made very significant recommendations for changes, inter alia, in the Companies Act. Yet another major development includes the constitution of a

committee by SEBI under the Chairmanship of Shri N.R. Narayana Murthy, for reviewing the implementation of corporate governance code by listed companies. The mandatory recommendations of the

committee on various matters are detailed in the Annexure. The Department of Company Affairs also has set up a proactive standing company law advisory committee to advise on issues like inspection of corporates for wrong doings, role of independent directors and auditors and their liability, suggesting steps to enhance imposition of penalties. A High powered Central Coordination and Monitoring committee

(CCMC) co-chaired by Secretary DCA and Chairman SEBI was also set up to monitor action against vanishing companies and unscrupulous promoters, who misused funds raised from public. SEBI has also undertaken a project for development of a

comprehensive instrument by a reputed rating agency for rating the good corporate governance practices of listed companies.

1.1.5

Good Governance and Value Addition

What benefits or value addition, the corporates are likely to achieve through sound and effective provided by ICSI corporate governance practices? The answer, as

runs as follows and the road map is Factors which add

greater value through good governance, may be summarised as follow:7 Adoption of good governance practices stability and growth to the

enterprise. Good governance system, demonstrated by adoption of good corporate governance practices, builds confidence amongst stakeholdders well higher as prospective stakeholders. price to the Investors are as

willing to pay

corporate demonstrating strict adherence to

internationally accepted norms of corporate governance.

Effective governance reduces perceived risks, consequently reduces cost of capital; it also enables board of directors to take quick and better decisions which ultimatley improves bottom line of the corporates. In to-days knowledge driven economy, demonstrating excellence in skills has become the ultimate tool in the hands of board of directors to leverage competitive advantage. Adoption of good corporate governance practices provides long-term sustenance and strengthens stakeholders relationship. respect.
7

A good corporate citizen becomes an icon and enjoys a position of

Potential

stakeholders

aspire

to

enter

into

relationships

with

Corporate Governance Reporting (Model Formats) by ICSI 2003

enterprises whose governance credentials are exemplary.

1.2

CORPORATE GOVERNANCE RATING/BENCHMARKING CORPORATE GOVERNANCE

According to SEBI sources,SEBI has no intention to making rating of governance of listed companies mandatory. According to SEBI, it may be wrong to conclude that governnce norms compelled companies to sacrifice long-term interests or outlook in the pursuit of short-term interests and

responses to market signals. SEBI has commissioned a study to determine

the cost of compliance incurred by companies in respect of the regulatory framework, including Clause 49 of the listing agreement. The Narayana Murthy committee on corporate governance code had gone about its work in a highly professional and democratic manner and SEBI wanted that the professionals should study the issues raised and its recommendations, including the proposal for facilitation of whistle blowing; ICRA rated companies, adopted certain parameters which

and procedures for the

purpose and the agency clarified that it normally required four to six weeks and the rating was not an audit or certification of regulatory compliance by the listed company and the exercise was not a guarantee against fraud. Its primary focus in the rating was on the business processes. Key variables analysed structure, stakeholder in rating included the shareholding processes, board transparency and structure, governance processes, financial

management relationship, starting

structure and disclosures and

discipline. The

point was an assessment of the corporates in clause 49 of the

compliance with statutory regulations as laid down

listing agreement. Feedback from independent directors was a key part of the rating process. International Finance Corporation, Washington which also carried out rating of companies followed OECD guidelines. The and developing best

corporation faced the task of adopting the model

practices suited to companies in emerging economies. Global experience showed that good governance helped corporates in accessing capital, especially long-term finance and equity. The IFC , as a major lender, looked at corporate governance as a tool to reduce investor risk and took account of the risk to reputation arising from bad governance. It was observed that companies which focused much on short term profits tended to lose in the long-term. Further according to international research, corporates with sound governance practices received higher premium for the shares in the stock market. Measuring Corporate governance practice: It may be noted that Standard & Poor has recently launched a new service, known as Corporate Governance Scores, to evaluate corporate governance practices, both at a country and at a company level. In the case of country governance

assessment, the analysis starts with an evaluation of governance issues at

the country level.

Depending upon

the level

of support, a country

would be assessed as providing strong support, moderate support or weak support. The primary focus of this analysis is at the country or national level. However when the external environment is affected by the policies of

regional/state governments, the focus of analysis would be modified to consider such influences. In the country governance analysis the following four main

areas are considered: legal infrastructure, regulation, information infrastructure and market infrastructure. The second part of the analysis is concerned with company analysis

which is concerned with evaluating the practices at individual companies. Standard and Poor assigns scores to a companys overall practices using a synthesis of the OECDs and other international codes and guidelines of

corporate governance practices. The analysis has four main components. These four components and sub categories are as follows: Component 1 concerned with ownership structure, relates to transparency of ownership structure, concentration and influence of ownership. Component 2 concerned with financial stakeholder relations , has subcategories such as regularity of, access to, and information on shareholder meeting, voting and shareholder meeting procedures and ownership rights. Component 3 concerned with financial transparency and information

disclosure comprises sub-categories like quality and content of public disclosure, timing of, and access to, public disclosure and independent and standing of the companys auditor. Component 4, concerned with board structure and process, is related to Board structure and composition, role and effectiveness of board, role and

independence of outside directors and directors and executives compensation, evaluation and succession policies.

The Anglo-Saxon system focuses primarily on the shareholder, while others, such as the interest German system, attempt to achieve a greater balance of

between shareholders and other external stakeholders (creditors,

employees, the community, the environment etc.). By addressing the interest of both creditors and shareholders, the scoring model recognises the importance of stakeholders right beyond the rights of the shareholder. Finally how can corporate governance scores can benefit different sections? Investors can use the scores to identify and compare corporate governance standards of different

companies in their portfolios or the risk characteristics associated with the corporate governance practices of potential investments. Corporate governance scores and the accompanying analysis also helps investors understand how a companys management treats the interest or shareholders, including

minorities.

Coal India Limited is the worlds largest coal miner, with a production of 435 million metric tons (MT) in 2011-2012. There is significant pressure on CIL to deliver annual production growth rates in excess of 7%. The company has a 2017 production target of 615 MT.8 Coal Indias track record raises questions over its ability to deliver this rate of growth. In addition, serious governance issues are likely to impact CILs financial performance. These pose a financial and reputational risk to CIL, its shareholders and lenders, while macro- economic issues in the Indian energy economy pose a long term threat to Coal India. CILs attempts to access new mining areas are facing widespread opposition from local communities and environmental groups. With its reliance on open-pit mining, access to new mines are essential for CIL to achieve production targets. CIL has grown reliant on shallow, open pit mining for 90% of its production, and has lost in-house expertise on deep mining techniques. CIL has a record of poor corporate governance, manifested in rampant corruption, poor worker safety and repeated legal violations. This has, in the last year alone, led to penalties and closure notices for over 50 mines, threatening both its financial performance and reputation. CILs financial performance has been affected by directives from majority shareholder Government of India to keep coal prices artifically low.9 According to one estimate, this cost CIL $1.75 billion in the 2012-13 financial year alone.10 The government has also taken away coal blocks allocated to CIL and given them to private players.11 Changing economics of coal power in India; renewable energies are becoming cost- competitive even as coal faces increased regulatory scrutiny and public opposition. Questions have been raised over CILs extractable reserves, with former CIL officials and government functionaries questioning the methodology
8

http://timesofindia.indiatimes.com/business/india-business/Coal-India-Limited-targets-615-MT-production-by2016- 17/articleshow/13889230.cms 9 http://www.livemint.com/Home-Page/VrblhcvwspntNfpvNeaNDK/Coal-India-cuts-prices-revenue-may-take-ahit.html 10 http://articles.economictimes.indiatimes.com/2012-10-13/news/34414662_1_oscar-veldhuijzen-partner-tci-cil 11 http://articles.economictimes.indiatimes.com/2012-10-25/news/34729902_1_thermal-plants-mw-plantthermal-power/2

used to compute CILs coal reserves.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE ISSUES Risks To Coal India's Present And Future Profitability I. CORRUPTION: CIL has a record of corruption at all levels, including senior management positions. Since October 2011 alone, the following violations have been reported: October 2011: Indias Central Bureau of Investigation (CBI) conducted simultaneous raids in 22 different places on officials of CIL subsidiary Northern Coalfields Limited. The officials were found to have shown undue favour to equipment suppliers. Cases have been registered against several officials, including then Chairman/Managing Director of NCL. According to the CBI, a huge production loss due to malfunctioning of machines/ accessories and huge monetary loss due to purchase of machines equipments of higher costs were (sic) caused.12February 2012: Officials from CIL subsidiary Central Coalfields Limited implicated in a $300,000 scam involving excessive payment to a private contractor.13 In a separate case, a General Manager of Bharat Coking Coal Limited, another CIL subsidiary, was arrested on corruption charges.14 May 2012: The CBI investigated the disappearance of coal worth an estimated $36 million from Central Coalfields Limited, a CIL subsidiary.15 The CBI reported that between 40% to 66% of coal from the three mines under investigation was missing. July 2012: Illegal diversion of coal by officials of Western Coalfields Limited, a CIL subsidiary.16In one subsidiary alone, Mahanadi Coalfields

12 13

http://articles.timesofindia.indiatimes.com/2011-10-22/indore/30310745_1_ncl-cbi-sleuths-raids http://articles.timesofindia.indiatimes.com/2012-02-24/ranchi/31094423_1_ccl-central-coalfields-limitedservice-tax 14 http://articles.timesofindia.indiatimes.com/2012-02-28/ranchi/31106954_1_cbi-raids-offices-bccl-bharat-cokingcoal 15 http://articles.timesofindia.indiatimes.com/2012-05-24/ranchi/31838478_1_coal-shortage-cbi-raids-centralcoalfields- limited 16 http://articles.timesofindia.indiatimes.com/2012-07-30/nagpur/32941539_1_wcl-ballarpur-area-westerncoalfields- thermal-power-stations

Limited, between 2005 and March 2012, 158 separate individuals were found guilty and penalized for corruption offences.17

II. LEGAL VIOLATIONS: Coal India Limited has a record of repeated violations of environmental legislation in India. This hampers productivity and raises the threat of stranded assets with several mines facing closure notices. 2005-ongoing: The Durgapur Rayatwari colliery, operated by Western Coalfields Limited (WCL), was ordered to cease operations in 2005 by the Bombay High Court. WCL appealed the order in 2005 and the case is currently being heard by the Supreme Court of India. March 2010: Indias Comptroller and Auditor General (CAG) stated that as of March 2010, 239 of Coal Indias mines were operating illegally, without necessary environmental clearances.18 Many of these mines proceeded to subsequently procure post-facto clearances, but several have faced the threat of closure. August 2011: 22 mines operated by the same CIL subsidiary BCCL were served closure notices, also for operating without necessary forest clearances.19 May 2012: 43 CIL mines operated by CIL subsidiary Bharat Coking Coal Ltd. (BCCL) were served closure notices by the local state Pollution Control Board for operating without necessary forest clearances.20May 2012: CIL subsidiary Mahanadi Coalfields Limited was fined ~ $237 million (Rs.13 billion) for illegal coal extraction in the Samaleswari coal mine. The same month, the company was ordered to close nine of its mines as operational licenses had expired and not been renewed.21 September 2012: Six mines operated by CIL subsidiary Mahanadi Coalfields Limited shut down for operating without necessary environmental clearances.22 As of October 2012, the case is being heard by the courts.

17 18

letter from MCL to Greenpeace dated June 4, 2012 http://articles.economictimes.indiatimes.com/2011-09-07/news/30123089_1_underground-minesenvironmental- clearance-mining-activities 19 http://www.dnaindia.com/money/report_jharkhand-shuts-22-mines-of-coal-india_1579378 20 http://www.telegraphindia.com/1120319/jsp/jharkhand/story_15266729.jsp#.UEkUyT3cCSo 21 http://www.business-standard.com/india/news/odisha-slaps-rs-1306-cr-finemahanadi-coalfields/475564 22 www.business-standard.com/india/news/mcl-moves-scclosurecoal-mines/485238

II. III.

POOR SAFETY RECORD: CILs poor safety record opens the company to legal liabilities and compensation claims and has been the cause of labour unrest in the past. In 2011, CIL reported 52 fatalities in their mines and 250 serious injuries.23 In 2010 alone, CIL operations resulted in an official death toll of 95, with another 183 serious injuries. From 2007 to 2009, there were 194 deaths arising from operational accidents and 904 serious injuries.24

IV. WATER AND AIR POLLUTION: Pollution resulting from coal mining operations is widespread in all of CILs major operational areas. This has been documented most notably in the case of the Damodar river25 in the eastern state of Jharkhand which flows through the Karanpura coalfields where CIL subsidiary Central Coalfields Limited is active.26 High levels of pollution in most CIL mining areas pose a risk to the companys operations. In 2010, a moratorium on new coal projects was imposed in several coalfields due to critical pollution levels, forcing CIL to suspend expansion plans. The ban remains in place in four major coalfields as of November 2012.27 Apart from hindering production due to closures, CILs environmental record also exposes the company to legal liabilities. Recent changes make it easier to claim compensation for environmental damage through the National Green Tribunal.28 If these compensation claims are filed, they could further affect mine production. V. CHILD LABOUR, FORCED DISPLACEMENT & POOR REHABILITATION: A report by the Haq Centre for Child Rights, New Delhi, has documented specific examples of child

23

Coal India Limited, Annual Report & Accounts, 2011-2012

24 25

Coal India Limited, Annual Report 2010-2011 http://www.rediff.com/news/slide-show/slide-show-1-how-coalmines-made-damodar-the-river-ofagony/20110217.htm and Tiwary, R.K., & Dhar, B.B. 1994 26 Centre for Science and Environment, 2003. http://www.rainwaterharvesting.org/Crisis/River-Damodar10.htm 27 http://articles.economictimes.indiatimes.com/2012-04-17/news/31355436_1_industrial-clusterscomprehensive- environmental-assessment-environment-ministry 28 http://envfor.nic.in/modules/recent-initiatives/NGT/

labour in the mines of Central Coalfields Limited, a CIL subsidiary.29 From the Haq Centres report, it is clear that the company is not exercising due diligence to curb the practice, creating legal liabilities.

BREACH OF FIDUCIARY RESPONSIBILITY Minority shareholder TCI (UK) has accused the Coal India management of breaching their fiduciary responsibility, in respect of its coal pricing policies and the signing of Fuel Supply Agreements with customers on disadvantageous terms. TCI has initiated legal action against both the Government of India (as majority shareholder) and the Board of Coal India Ltd. on these grounds, in separate cases. In its letter dated March 12, 201230 to the Board of CIL, TCI makes the following points: 1. That on January 31, 2012, the Board of CIL reversed a coal price increase on the basis of a directive from the Ministry of Coal, Government of India on December 31, 2011. This is even though coal pricing is officially deregulated. As a result, CILs coal prices remain up to 70% below that of landed imported coal, despite a demand supply mismatch. TCI estimates that in the current financial year alone this has cost the company $1.75 billion, and $43 billion since the IPO in 2010.31 2. That the Prime Ministers Office has also directed CIL to sign Fuel Supply Agreements with independent power producers guaranteeing 80% of the contracted quantity, failing which CIL would be penalized. This amount of subsidized coal is far in excess of what CILs board is ready to supply and again threatens the revenues of the company by forcing it to sell most of its coal at a subsidized price, and threatening it with financial penalties. A separate report by financial analysts Equitorials, commissioned by Greenpeace, has estimated

29

Haq: Centre for Child Rights & Dhaatri Resource Centre for Women & Children. 2010. Indias Childhood in the Pits A Report on the Impacts of Mining on Children in India. http://www.haqcrc.org/publications/india%E2%80%99s-childhood-pits- report-impacts-mining-children-india 30 http://coal4india.com/Coal4India/c4i5.pdf 31 http://coal4india.com/Coal4India/PressRelease1210.aspx

CIL's likely financial penalties resulting from the FSAs at nearly US $300 million over the next five years.32

CONCLUSION Coal Indias record of legal violations and internal corruption expose it to significant financial liabilities. Coal Indias operating model poses a significant risk to the environment, to local communities and by extension to investors. The companys expansion plans face resistance from local communities, environmental groups and the falling price of renewable power in India. Coal Indias reserves could be significantly overstated and its outdated mining practices are preventing full exploitation of coal in existing mines. Investors should consider whether CILs reliance on highly destructive open-pit mining in forest areas threatens the long-term financial viability of the company and whether its neglect of Environmental, Social and Governance issues exposes the company to financial and reputational risks.

32

http://www.greenpeace.org/india/en/publications/Study-of-Impact-of-the-Presidential-Directive-to-Coal-India