Cover Story
Pros & Cons ♦♦ Making the bigger subsidiaries separate entities would improve their physical performance, but the same cannot be said about the smaller, previously loss making companies. Overall, the impact on coal production is likely to be neutral or positive. ♦♦ CIL’s procurement costs may go up as the company will lose the benefit of getting better negotiation on bulk purchase. This will particularly affect procurment of larger equipment. ♦♦ Operational freedom to subsidiaries would cut one layer in decision making. This may speed up investment decisions and lead to faster project implementation. ♦♦ Project approvals may become difficult for smaller units and those with blocks in forest areas. These companies would lose the weight that CIL as a whole can impose on various departments. The same will be the case with land acquisition. ♦♦ The impact on bottomlines could be neutral. CIL does not get any tax-break for losses incurred by any of its subsidiaries. However, better performance of larger entities could result in improved margins for them. ♦♦ The impact on domestic coal prices would depend on government policies. However, if given the freedom to fix prices, companies with lower cost of operations would enjoy a decisive edge. ♦♦ Apparently, CIL’s restructuring would not have any direct impact on foreign investment in the Indian coal mining sector as the primary difficulty faced by these firms is project clearances which would remain as much a blockade as it is now.
entity and has to take care of its own tax obligations. “However, in a sense, currently the financially stronger subsidiaries work as a cushion for their weaker siblings. This cushion will not be available once the bigger and profitable subsidiaries are separated and turned into listed entities,” a senior official of a coal merchant said. Going forward, it is expected that the operational freedom would enhance the physical performance of the bigger subsidiaries. Due to faster response time, their operational improvement would reflect into their financial performance. As a result, these larger entities would grow in both size and profitability, while the weaker subsidiaries may continue to perform as they are faring now or see tough times. Impact on market
The major impact on the domestic coal
16 Coal Insights, January 2013
market would be visible on pricing of the dry fuel and competition between miners, market sources said. On pricing front, there could be various considerations. The government may choose to continue with the notified pricing system, whereby all the companies would be governed by the same set of prices for various grades of coal. But the recent trend shows the government is thinking on the line of “rationalising” domestic coal prices and may consider bringing changes in the
pricing arrangement in future. Although it is unlikely from the point of view of the present scenario, the government may at some point decide to allow individual firms to charge prices according to their cost structure and/ or demand-supply interplay. “If the privately listed firms are given freedom on prices, in the presence of insatiable demand, this may lead to very serious impact on consumers. The same set of people that are dying for opening up may find it hard to survive that, once and if it happens,” said an
Currently, CIL or MoC takes up the matter of pending approvals with MoEF or other departments as a whole for all the projects taken together. If left to individual companies, such approvals may take double the time to get clearances, the source said, requesting anonymity.