CIL forced to ink FSAs through a presidential decree

Coal India (CIL) has been issued a President’s directive ordering it to sign 20 year fuel agreements with power producers. It has also been directed to complete the process within a week. The directive comes in the wake of the recently concluded deliberations of CIL directors after which the company declined to sign fuel supply agreements (FSAs) as was instructed by the PMO.

The PMO on the 15th of February had asked CIL to sign FSAs with power plants that had tied up long-term purchase agreements with distribution companies and had been or would be commissioned by March 31, 2015. For power plants commissioned till December 31, 2011, the FSAs were to be signed before March 31, 2012. Such FSAs were expected to provide relief to power plants with a prospective cumulative generating capacity of 50,000 MW.

The directive also stated that CIL would be faced with penalty if it failed to meet its obligations. However after deliberating on the issue for almost 2 days, CIL refused to sign FSAs as it was reported that at least two of the seven independent directors had opposed it after going through the clauses.

The PMOs on its part had issued the directive after power producers, including Reliance Power and Tatas, claimed that new projects commissioned since April 2009 have been running at a sub-optimal capacity as they were unable to get sufficient coal from CIL. They also claimed that investments worth thousands of crores were at risk due to inadequate domestic supplies.

Now with the President’s directive, CIL is left with little choice than to sign the FSAs. However to make things easier the crucial clause of penalty has been left to the PSU board and the government feels it should set aside CIL’s apprehensions.

Faced with delays relating to land acquisition and environmental clearances, Coal India has been struggling to increase its output in the past few years. For 2011-12, Coal India registered a one per cent increase in output at 435 million tonnes, wiping out the negative growth witnessed in the early part of the year. For 2012-13, the company is targeting 8 per cent growth in output at 470 million tonnes.

While the power producers welcomed the decision, analysts feel the Rs 50,000 crore CIL may stand to lose heavily in case it falters on its commitment to supply fuel to the energy firms. The Government has the right to invoke the ‘Presidential directive' under Clause 37 of CIL's memorandum of association. This allows the Government to overrule the board's decision if no consensus is reached on issues related to national interest

It is perhaps only the second time that the government has resorted to this option to force the maharatna PSU agree to its directive. The government had issued a Presidential directive to state-owned gas utility GAIL India in 2005 insisting on a particular technology for laying the Rs 1,800 crore Dahej-Uran pipeline.