The dangerous precedence of high dividend payout by Coal India Ltd and the road ahead

Pratim Ranjan Bose

Money is the source of all evils!

India’s cash rich State-owned oil companies learnt it many years ago. Now it’s the turn of Coal India to face the truth.

On January 14, the company declared a record 290 per cent interim dividend aggregating nearly Rs 18317 crore, approximately $3 billion at current exchange, as special (interim) dividend for 2013-14. The total outgo is more than double the dividend payout for 2012-13.

The move was aimed to help its promoter, India Government, to tide over the fiscal gap. As a 90 per cent owner of the company, the government will get nearly Rs 16485 crore as dividend, up by approximately Rs 8500 crore compared to last year.

Government earlier planned to mop up the sum, which is nearly one-fourth of the budgetary gap, through a 5 per cent disinvestment programme. But the plan was cancelled in early December due to strong objection from labour unions.

The ruling Congress-led UPA did not want to ruffle feathers of vast pool of coal employees ahead of the General election in April-May 2014. CIL was asked to compensate the loss.

Cash cow

This is not the first time CIL is used by the government as a cash cow.

Ever since the company turned around in the end-1990’s, it has been a heavy contributor to the government coffers either by way of taxes, that kept on rising with increasing production, as well as dividend.

From a mere 289 million tonne in 2002-03, CIL’s sales volume has increased by 61 per cent to 465 mt in 2012-13. The 1.6 times growth in sales had a direct impact on tax revenues. And, last year the nation collected a staggering Rs 36,000 crore or $5.8 billion in taxes from the coal company. The money was divided between the India government and the coal producing states.

But, what has grown faster is the dividend pay out.

Dividend History of CIL

Year	Dividend paid (in crore)	Government’s share of dividend	Rate of Dividend (%)
2005-06	1263	1263	20
2006-07	1500	1500	23.748
2007-08	1705	1705	27
2008-09	1705	1705	27
2009-10	2210	2210	35
2010-11	2463	2217	39
2011-12	6316	5685	100
2012-13	8843	7959	140
2013-14	18317	16485	290 (Interim)

Despite selling coal dirt cheap, when compared to global prices, the increasing volumes and better housekeeping (compared to its earlier avatar, when CIL was used as a vehicle to fulfill the socialistic goals of the closed economic era that ended in 1991), saw CIL’s cash boxes ringing.

The results are evident in the company’s cash reserves. The same company that approached the World Bank in 1997 for a $ 1 billion line of credit to finance its five year capital expenditure, today has a cash reserve of Rs 62,000 crore or $ 10 billion, which is a shed lower than its turnover of Rs 68,000 crore ($11 billion) and nearly two-and-a-half times the estimated capital outlay for the Plan period (2012-17). The company earned a profit of Rs 17356 crore in (2.8 billion) in 2012-13.

The indications are clear. CIL is earning more than it could spend  and is accumulating an ever increasing cash reserve.

Government steals opportunity

That doesn’t mean it was any less eager to spend. During last seven-eight years CIL was genuinely aspiring for hitting a higher growth trajectory. A huge plan was rolled out to expand production capacities at home and acquire mining assets abroad.

While the overseas acquisition initiative gave way to cumbersome, yet binding, government regulations applicable to State-owned companies; the domestic production growth was slower than estimated due to increasing structural hurdles (land acquisition, rehabilitation and resettlement and, environment and forest clearances) on Indian mining industry.

The result is: CIL’s production grew by a mere 14.5 per cent between 2007 and 2012 as against the projected 36 per cent. Which means the company went on piling up cash.

There was no way this cash be invested in taking equity exposures in other businesses. There are restrictions even in entering any new business in the same energy vertical (like electricity generation). Government was not interested either in removing the structural hurdles, that restricts the growth of domestic coal output. It was interested in cash.

With equity capital remaining same, CIL’s dividend payout doubled between 2005 and 2010. But, the pay out started picking up at faster paces from 2011 (100 per cent).

The rest is history.

A dangerous precedence

By every means, CIL had little reason to fork out such high dividend (290 per cent) in this fiscal.  

After years, the company reported a decline (10 per cent) in net profit in the first half of 2013-14, courtesy the government policies that forced it escalate supplies to power sector at less than average price (which itself is half the global coal prices) and, lower returns from e-auction (due to a softening of global prices).

In 2012, Coal India was forced to commit supplies to nearly 78,000 mw new power generation capacities that will come on stream in phases. Of the total nearly 40,000 mw capacity is already in place. The rest are scheduled for commissioning before April 1, 2017.

CIL does not have as much coal to fulfill this commitment. And, if all the power projects come up in time, the miner will end up paying heavy penalties.

Clearly, there are serious concerns over the company’s earnings outlook. And, under normal circumstances, it shouldn’t have paid such a high dividend at this juncture.

But, the government insisted that it needs its share of the unutilised cash. And, that may just be the beginning of the problem.

If the opinion polls are correct, India is going to have another coalition government at the Centre in 2014. And, chances are high that it would be a weaker government (than UPA-II), with smaller regional parties or the new-born anti-corruption Aam Aadmi Party, playing king makers.

The history says, such governments are unlikely to take the disinvestment agenda ahead and will be more dependent on other methods to fill coffers.

To their satisfaction, the UPA-II left a dangerous precedence of extorting Coal India. India’s national miner may now be forced to fork out as large sums as dividend.

It’s a different matter that any such tactics, if pursued, may threaten the very existence of the National miner in the longer term.

But, then the Indian politics have hardly cared for well being of State-owned companies in last two decades. So, they may end up killing the goose that lays golden eggs.

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Picture Courtesy: Business Line and Finolexblog.com