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TCI v/s GoI

Published on Fri, Mar 30,2012 | 22:22, Updated at Fri, Oct 12 at 17:10Source : CNBC-TV18 |   Watch Video :

Our top story this week - can small beat big? Can 1% beat 90%? Can minority beat majority? Can TCI beat GoI? It's a David versus Goliath battle as foreign hedge fund investor TCI, owner of a 1% stake in Coal India, goes up against the government of India, that owns 90% of Coal India! Whichever way it goes, this battle will write a new chapter in shareholder activism in India. Payaswini Upadhyay gets experts to analyse TCI�s legal options

Dear Board Members'

And thus began The Children's Investment Fund or TCI's battle against Coal India's board, its management and its biggest shareholder - the Government of India. In a 6 page letter TCI detailed the several instances that allege that the Board of Coal India is acting against the interests of the company and all its stakeholders

For instance, last year when the Board showed no opposition to a draft Mining Bill that "proposes to increase coal mining taxes effectively by 39%"

And that Coal India has failed "to raise coal prices"

It also cited the "underpricing of FSA coal to market levels"

TCI accused the Board of "acting purely at the behest of the state".

Oscar Veldhuijzen
Partner, TCI
"We were told by the previous CMD that he was forced to reverse that price hike. We asked them how did it happen. Under the Right to Information Act, we got a letter through the Calcutta Court and the letter is written by Mr Perti- who is the Secretary of the Ministry of Coal- instructing Coal India to reverse the price hike. At the point, we said, enough is enough! This is just becoming a joke right now."

But Coal India, in its IPO prospectus, had stated that "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."

Shardul Shroff
Managing Partner, Amarchand Mangaldas
"The fact that there was a risk factor stating that they could price the coal at less than the market or less than international prices is a complete debunking of claim that the portfolio manager has put up because it's in the face of the terms of the prospectus."

Oscar Veldhuijzen
Partner, TCI
"At the time of the IPO, we sat down with the management, with the stakeholders and it was made clear to us that the Board has full discretion when it comes to important matters such as pricing. Now the Board has proved rather dysfunctional and didn't stand up for minority shareholders. There is something positive happening. May be you've noticed that a letter was sent by 6 independent Board members to the government objecting these FSA agreements because they felt it was not in the interest of minority shareholders. There is clearly some traction because we will come after them if they don't take their responsibilities seriously and we will take legal action against these Board members."

And so, on March 12th, TCI with a 1% shareholding in Coal India threatened to take legal action against the Board for not acting in its fiduciary duty. But what can a 1% minority holder do without Board representation or muscle in a shareholder meeting?

Well TCI has the option of filing an oppression and mismanagement suit against Coal India but only if it has the backing of shareholders holding at least a tenth of the total share capital. In coal India's case, 10% would amount to the entire minority block.

The other option is to go after Coal India's Board via a civil suit

V Umakanth
Assistant Professor, National University of Singapore
"TCI will have to bring a derivative action on behalf of Coal India against the Directors. It's not easy to bring derivatives action in India. Firstly, the Companies Act, expressly, does not recognize the concept of derivative action. So one has to borrow that from Common Law. There are also procedural hurdles. The Civil Procedure Code treats this as a representative action which means that they will first have to get the permission of the court because they are bringing it on behalf of the company rather than directly."

On March 15th TCI wrote to the Coal Secretary Alok Perti"raising the same concerns. Perti responded by asking TCI to go sell-off!

So this week, TCI used the third legal option available to it- it invoked India�s bilateral investment treaties with UK and Cyprus, the 2 countries through which it has routed the Coal India investment.

Shardul Shroff
Managing Partner, Amarchand Mangaldas
"The BIT says that the government of India has to do everything that promotes and protects investments. But if the investment terms itself stipulate that this is the risk factor to the investment and the purchaser, having knowledge of those risk factors, has bought into the shareholding of Coal India, then it cannot be said by that investor that the government of India causes loss."

V Umakanth
Assistant Professor, National University of Singapore
"I think it will be a challenge to see whether portfolio investors in the stock market can take advantage of the BIT because if that is allowed, then it certainly is going to open the floodgates to all sorts of litigation, may be, by FIIs and other foreign investors. So I don't think that's really the intention of BITs to start with."

Promod Nair
Partner, JSA
"To be honest, Bilateral Investment Treaty jurisprudence has been liberalized to such an extent that a portfolio investor is now recognized to have as many protections as an investor which brings in FDI into a country. If you look at the definition of investment under many of these Treaties, it is expressly contemplated that an investor which invests purely in shares of a company would still be a protected investor for the purposes of any substantive protections under BITs."

TCI has sent the government of India a notice alleging that the government's interference in Coal India amounts to expropriation and that the government failed its treaty obligations to accord TCI fair and equitable treatment.

Promod Nair
Partner, JSA
"Now 'fair and equitable' treatment ensures to investors like TCI that they would be accorded 'fair and equitable' treatment by the host country. The provision is so vast that it encompasses within it a number of sub- protections- for eg- the protection of legitimate expectations of the investor. The protection against arbitrary conduct on the part of the government and so on. Now TCI may be able to say that it had legitimate expectation when it invested in Coal India that CIL will be allowed to play in a level playing field and that it would be able to take commercial decisions in its commercial self-interest. Now if that doesn't happen and the government dictates what Coal India should do, then that might be arbitrary action that might amount to defeating the legitimate expectations of the investor and that might provide TCI the basis to advance a claim under the Bilateral Investment Treaties."

V Umakanth
Assistant Professor, National University of Singapore
"One other case that that I have come across is an investment by El Passo energy of the US in certain Argentenian companies and the issues there were also similar where after the financial crisis in Argentina, the government came out with a whole range of reforms which affected their investments. One of the arguments that the Government of Argentina took that these are only minority stakes and they should not be entitled to the benefits of BITs. But the arbitral Tribunal there, which was ICSID, rejected that argument and said that even minority shareholders are entitled to the benefit of BIT. The difference, to me, seems to be that it was a strategic investment in certain companies whereas here, it�s a portfolio investment into a public listed company and I think, this is a big difference between that and this case which remains untested."

TCI's actions maybe why Coal India's Independent Directors have refused to sign government ordered fuel supply agreements that they believe are unviable. TCI's actions maybe why the government is considering a presidential directive to force Coal India to sign the FSAs.

Oscar Veldhuijzen
Partner, TCI
"Today the government is threatening to intervene if the Independent Directors don't co-operate with the FSA agreements which is sabotaging the IDs on Coal India's Board. I clearly don't think that's helpful for them; they are strengthening our legal case, day by day, by shooting themselves in the foot by intervening and making sure that no further investments will take place."

Shardul Shroff
Managing Partner, Amarchand Mangaldas
"Whilst the Stock Exchange has listing conditions, in the context of a government company listing, they do not delete the provision where the government of India is the principal shareholder- the company maintains in its Articles of Association to the effect that they are bound by Presidential Directives because it is a prescription contained in the Companies Act that the government company is one which is controlled by the principal shareholder, namely, the GoI."

It's a long battle ahead for TCI. Under Treaty provisions, TCI has to give the government 6 months for an amicable settlement; only then can it approach an international tribunal. But the hedge fund is no pushover. In 2005, TCI with an 8% stake successfully stalled a Deutsche B'rse bid to take over the London Stock Exchange. 2 years later, TCI with a 1% stake in ABN Amro successfully pushed it to sell out. In 2008, it opposed the Vedanta restructuring and the next year actively fought against a Japanese power company board. That makes it a battle veteran with deep pockets and a loud voice. May be loud enough to rally other investors in India's public sector companies? If that happens the government will have to do more than just ask foreign investors to"sell-off!"

In Mumbai, Payaswini Upadhyay

 
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