COMPLETING MAJOR TRANSFORMATION

Pursuant to nationalization of coal sector in early seventies, Coal India was formed as a holding company with 5 (five) fully owned subsidiary companies on 01.11.1975. Prior to nationalization, the growth in the coal sector was less than 2% per annum. This was primarily due to paucity of investments caused by poor return – coal prices being non-remunerative. By then, the High Powered Fuel Policy Committee had identified coal as a dominant source of energy for the country and a growth of more than 5% per annum was clearly the basic requirement to enable the country to achieve commensurate growth. Enhancing coal prices, regulated by that time through Colliery Control Order, to a level that could attract investment was not a socio economically feasible solution. Instead, massive infusion of public funds to make the sector grow faster was identified as a logical step. This was the main reason for nationalization leading to formation of Coal India.

2. Hence, during the initial period from 1975-91, a large number of coal projects were taken up without emphasizing financial viability as a key decision criterion. A number of coal projects that indicated losses at the planning stage were taken up for implementation. On the top of this, a major revision in wages by about 80% was allowed in recognition of the fact that wages of coal workers prior to nationalization were abysmally low. Coal prices were revised

usually much after major increase in costs arising from periodic revision of wages. On such occasions of price revision, certain elements of costs such as depreciation or items such as return on equity were not considered. It is important to note that budgetary support was provided by way of equity and loan at a ratio of 50:50. There was partial default in meeting the loan repayment and loan liabilities to the Government, which was not considered to be a serious issue at that time. This phase of ‘coal at any cost’, continued till 1991.

3. While CIL during this period could achieve the mandate of transforming the growth rate of coal production from less than 2% at the time of nationalization to a CAGR of 5.3%, it developed, for obvious reasons, certain major balance sheet problems. In other words, the sickness at birth manifested itself into a serious crisis by that time. The accumulated losses reached a peak of Rs.2499 crores. Also the overdue liabilities to the Government aggregated to Rs.2229 crores.

4. It was at that time that Government, as a part of its new economic policy, also decided to phase out budgetary support to CIL. It was, however, decided to empower Ministry of Coal with the authority to revise coal prices once in a year by adoption of a BICP laid down formula. This enabled CIL to earn profits after long wait in 1991-92 (Rs.167 Crores). The profits gradually increased to Rs. 611 crores in 1995-96. Certain pragmatic decisions were taken by the management by that time. In the first instance, financial viability was adopted as a key decision criteria for approval of projects. A minimum internal rate of return of 16% at 85% capacity utilization was laid down as the cut off. Strong financial discipline was introduced pursuant to which default of debt service payments to Government was completely stopped from 01.04.1992 i.e the beginning of the VIII Five Year Plan. Upon building a highly creditable record of debt payment to the Government, a proposal was submitted for capital restructuring of CIL to take care of the old over due liabilities of Rs.2229 crores. In a land mark decision by the Government, the financial restructuring package was approved in February 1996 when Rs.892 crores of interest liabilities were waived, Rs.904 crores of plan loan repayment arrears were converted to preference equity and Rs.433 crores of non-plan repayment arrears were allowed a moratorium for repayment and interest accrual for a period of 3 years, to be repaid thereafter in three equal installments. At about the same time, CIL decided to adopt an approach to corporatize the financial flows between itself and the subsidiary companies. CIL’s access to the surplus generated by the profit making subsidiaries, unrestricted hitherto, were restricted to receipt of dividend under a laid down transparent policy. Corpus, thus, created at CIL was utilized to meet the debt service obligations and residual amount, if any, was utilized to provide strategic support to the loss making entity only for the purpose of maintaining their productive capital assets and to supplement requirement of fund for implementation of Voluntary Retirement Scheme. The period 1991 to 1997 was a crucial phase in the transformation of CIL - from a highly loss making entity to a profitable enterprise, by adoption of pragmatic policies. Post capital restructuring, CIL was in a position to approach World Bank and Japanese Bank for International Cooperation for financing a time slice of investment during the IXth Plan. A loan of 1.06 billion US Dollar was sanctioned out of which 522 million Dollars was utilized to implement 24 highly profitable large open cast projects in 5 subsidiaries of CIL. This provided the foundation for financial consolidation of CIL and its subsidiaries during the late nineties.

5. During this period a decline in coal prices internationally and reduction in import duties on coal led to a situation when domestic coal was out priced at a number of coastal destinations in the country. The production growth was constrained by demand-growth during IX Plan period being limited to only 2.2% per annum. However, the X Plan period witnessed substantial demand-growth that led to unfolding of the production capacity created during IX Plan. Coal production during X Plan grew from 279.65 million tonnes (2001-02) to 360.91 million tonnes (2006-07) i.e. by about 81 million tones, till then the highest in any plan period. Domestic coal prices were running at a substantial discount to international prices at all destinations in the country. The entire growth was financed from internal resources. Besides the payout to the Govt. in the form of debt servicing, dividends and taxes was in excess of Rs.1700 crores. Even after achieving the aforesaid, substantial correction in the balance sheet could also be achieved. The debt to total capitalization i.e. the debt as a percentage of debt plus net worth declined from a level of 60% in 2001-02 to less than 10% by 2006-07.

6. The beginning of the XI Plan brought in formidable challenges for Coal India. The production was targeted to grow from 360.91 million tonnes to 520.50 million tonnes during this period. This growth of nearly 160 million tonnes is roughly twice the best growth of 81 million tonnes achieved in any plan period (X Plan) and 45% more than the incremental coal production achieved in IX & X Plan period taken together. The annualized growth rate required to achieve the above was 7.6% as against 5.4% achieved in the tenth Plan period.

7. During 2007-08 i.e. first year of XI Plan various constraints came in the way of pushing the growth beyond the rate achieved during X Plan period. However, in 2008-09 the coal production grew by about 6.4%. This further improved to 6.8% in 2009-10 when CIL achieved a production of 431.27 million tonnes. The growth achieved in the first 3 years is already over 70 million tonnes. Financially the company is virtually free from all debts and is actually sitting on cash reserves of about Rs.39,000 crores (7.4 billion US dollars) as on March 2010.

8. In summary Coal India has been a story of complete transformation. It meets 40% of the primary energy requirement of the country at half the world prices insulating the end-users from volatility of coal prices globally and yet operating with profit margin of 30% by contributing to the exchequer over Rs.7000 crores annually (2009-10) as taxes on profits, dividends and dividend taxes. This makes the company one of unmatched strategic relevance.

_________

The Success of Coal India IPO

Background:

All the hard work, tenacity, fortitude and perseverance of over three decades made CIL a strong entity among the Indian corporate. The next logical step was to get the status as a Navratna company. CIL pitched for ‘Miniratna’ status, precursor for ‘Navratna’, on the strength of its physical and financial performance which resulted in the company achieving the desired status in March 2007 along with five of its subsidiaries. Again the status of CIL was elevated to ‘Navratna’ in October 2008, within a short span of 17 months.

‘Navratna’ conferred by Government of India is a privileged status provided to select state owned enterprises playing a significant role in economic development of the country. ‘Navratna’ means a lot more in terms of empowerment and the increased powers will help CIL in taking speedier decisions on many business issues. However, the ‘Navratna’ status came with a condition that CIL’s listing may be done with in three years from October 2008 – the month when CIL gained ‘Navratna’.

Government had decided to disinvest 10% of equity in CIL. The paid up equity of the company is Rs.6316.36 Crores. The total number of shares offered were 63.16 crores expected to raise over Rs.15,000 Crores at the higher end of the price band of Rs.225 – Rs.245. The exercise of Coal India’s Initial Public Offer (IPO) was a monumental effort considering the size of the company. CIL had submitted its exhaustive Draft Red Herring Prospectus (DRHP) during the month of August 2010 with the capital market regulator Securities & Exchange Board of India (SEBI) and the final Red Herring Prospectus in September 2010.

The Success:

CRISIL the leading credit rating agency in the country has assigned maximum grading of 5 to CIL’s proposed IPO – the best for any public sector. The grading indicates that the fundamentals of the IPO are strong compared to other listed securities in the country. Similar grading was given by other credit rating like ICRA & CARE . Not many companies have this kind of rating.

Post listing, CIL will be the largest employer amongst listed entities in the country. An analysis by a financial news daily indicated that CIL’s IPO could be the third largest in the world and the largest to hit the Indian market till date.. Importantly, IPO would help in unlocking the market value of the company. With added transparency and increased accountability in its corporate governance, CIL shall be even more diligent and responsive to the need of its stake holders.

But what happened on 21 October 2010, the day CIL’s IPO closed, was astounding. History was made. Innumerable road shows involving count less man hours of effort across the country and in US, Europe markets had resulted in the grand success of CIL’s IPO.

The IPO the largest so far in Indian capital market was over-subscribed 15.3 times. The resounding success of record shattering success of the company’s public offer with the aggregate funds flowing amounted to Rs.2,33,000 crores which was so far unheard of in the Indian capital market. The over-subscription of the issue happened in all the three major segments i.e. Qualified Institutional Buyers (QIB), HNI and retail. The QIB for which there was a reservation to the extent of 50% of the net issue of the shares, the over-subscription was as much as 24.7 times. Around 770 QIB investors had put in over US dollar 38 billion i.e. Rs.172,000 crores which by itself is also an all time high in the history of Indian IPO. In the retail segment nearly 16.45 lakhs applications were received – the highest among all PSU IPOs so far and the amount flowing in is more than Rs.11,000 crores. This is also the highest so far in the Indian capital market. Interestingly, the foreign investors alone had put in around US $ 27 Billion which is equal to first ten months of FII investment in India this year.

Most importantly, a national asset was offered to public as ‘peoples’ ownership’ in PSUs. Having registered , CIL’s immediate gain would be the company can pitch in for status elevation from the present ‘Navratna’ to that of ‘Maharatna’. The resultant additional powers would help CIL in taking speedier decisions for investing in its projects.

4 November 2010 was a historic day not only for CIL and PSU fraternity but also for the Indian Capital Market in general. CIL share was listed and closed over Rs.342/- on the first day of trading .

The transformation of Coal India over the years is one of the fascinating stories of business transformation anywhere in the world.

COMPLETING MAJOR TRANSFORMATION

Pursuant to nationalization of coal sector in early seventies, Coal India was formed as a holding company with 5 (five) fully owned subsidiary companies on 01.11.1975. Prior to nationalization, the growth in the coal sector was less than 2% per annum. This was primarily due to paucity of investments caused by poor return – coal prices being non-remunerative. By then, the High Powered Fuel Policy Committee had identified coal as a dominant source of energy for the country and a growth of more than 5% per annum was clearly the basic requirement to enable the country to achieve commensurate growth. Enhancing coal prices, regulated by that time through Colliery Control Order, to a level that could attract investment was not a socio economically feasible solution. Instead, massive infusion of public funds to make the sector grow faster was identified as a logical step. This was the main reason for nationalization leading to formation of Coal India.

2. Hence, during the initial period from 1975-91, a large number of coal projects were taken up without emphasizing financial viability as a key decision criterion. A number of coal projects that indicated losses at the planning stage were taken up for implementation. On the top of this, a major revision in wages by about 80% was allowed in recognition of the fact that wages of coal workers prior to nationalization were abysmally low. Coal prices were revised

usually much after major increase in costs arising from periodic revision of wages. On such occasions of price revision, certain elements of costs such as depreciation or items such as return on equity were not considered. It is important to note that budgetary support was provided by way of equity and loan at a ratio of 50:50. There was partial default in meeting the loan repayment and loan liabilities to the Government, which was not considered to be a serious issue at that time. This phase of ‘coal at any cost’, continued till 1991.

3. While CIL during this period could achieve the mandate of transforming the growth rate of coal production from less than 2% at the time of nationalization to a CAGR of 5.3%, it developed, for obvious reasons, certain major balance sheet problems. In other words, the sickness at birth manifested itself into a serious crisis by that time. The accumulated losses reached a peak of Rs.2499 crores. Also the overdue liabilities to the Government aggregated to Rs.2229 crores.

4. It was at that time that Government, as a part of its new economic policy, also decided to phase out budgetary support to CIL. It was, however, decided to empower Ministry of Coal with the authority to revise coal prices once in a year by adoption of a BICP laid down formula. This enabled CIL to earn profits after long wait in 1991-92 (Rs.167 Crores). The profits gradually increased to Rs. 611 crores in 1995-96. Certain pragmatic decisions were taken by the management by that time. In the first instance, financial viability was adopted as a key decision criteria for approval of projects. A minimum internal rate of return of 16% at 85% capacity utilization was laid down as the cut off. Strong financial discipline was introduced pursuant to which default of debt service payments to Government was completely stopped from 01.04.1992 i.e the beginning of the VIII Five Year Plan. Upon building a highly creditable record of debt payment to the Government, a proposal was submitted for capital restructuring of CIL to take care of the old over due liabilities of Rs.2229 crores. In a land mark decision by the Government, the financial restructuring package was approved in February 1996 when Rs.892 crores of interest liabilities were waived, Rs.904 crores of plan loan repayment arrears were converted to preference equity and Rs.433 crores of non-plan repayment arrears were allowed a moratorium for repayment and interest accrual for a period of 3 years, to be repaid thereafter in three equal installments. At about the same time, CIL decided to adopt an approach to corporatize the financial flows between itself and the subsidiary companies. CIL’s access to the surplus generated by the profit making subsidiaries, unrestricted hitherto, were restricted to receipt of dividend under a laid down transparent policy. Corpus, thus, created at CIL was utilized to meet the debt service obligations and residual amount, if any, was utilized to provide strategic support to the loss making entity only for the purpose of maintaining their productive capital assets and to supplement requirement of fund for implementation of Voluntary Retirement Scheme. The period 1991 to 1997 was a crucial phase in the transformation of CIL - from a highly loss making entity to a profitable enterprise, by adoption of pragmatic policies. Post capital restructuring, CIL was in a position to approach World Bank and Japanese Bank for International Cooperation for financing a time slice of investment during the IXth Plan. A loan of 1.06 billion US Dollar was sanctioned out of which 522 million Dollars was utilized to implement 24 highly profitable large open cast projects in 5 subsidiaries of CIL. This provided the foundation for financial consolidation of CIL and its subsidiaries during the late nineties.

5. During this period a decline in coal prices internationally and reduction in import duties on coal led to a situation when domestic coal was out priced at a number of coastal destinations in the country. The production growth was constrained by demand-growth during IX Plan period being limited to only 2.2% per annum. However, the X Plan period witnessed substantial demand-growth that led to unfolding of the production capacity created during IX Plan. Coal production during X Plan grew from 279.65 million tonnes (2001-02) to 360.91 million tonnes (2006-07) i.e. by about 81 million tones, till then the highest in any plan period. Domestic coal prices were running at a substantial discount to international prices at all destinations in the country. The entire growth was financed from internal resources. Besides the payout to the Govt. in the form of debt servicing, dividends and taxes was in excess of Rs.1700 crores. Even after achieving the aforesaid, substantial correction in the balance sheet could also be achieved. The debt to total capitalization i.e. the debt as a percentage of debt plus net worth declined from a level of 60% in 2001-02 to less than 10% by 2006-07.

6. The beginning of the XI Plan brought in formidable challenges for Coal India. The production was targeted to grow from 360.91 million tonnes to 520.50 million tonnes during this period. This growth of nearly 160 million tonnes is roughly twice the best growth of 81 million tonnes achieved in any plan period (X Plan) and 45% more than the incremental coal production achieved in IX & X Plan period taken together. The annualized growth rate required to achieve the above was 7.6% as against 5.4% achieved in the tenth Plan period.

7. During 2007-08 i.e. first year of XI Plan various constraints came in the way of pushing the growth beyond the rate achieved during X Plan period. However, in 2008-09 the coal production grew by about 6.4%. This further improved to 6.8% in 2009-10 when CIL achieved a production of 431.27 million tonnes. The growth achieved in the first 3 years is already over 70 million tonnes. Financially the company is virtually free from all debts and is actually sitting on cash reserves of about Rs.39,000 crores (7.4 billion US dollars) as on March 2010.

8. In summary Coal India has been a story of complete transformation. It meets 40% of the primary energy requirement of the country at half the world prices insulating the end-users from volatility of coal prices globally and yet operating with profit margin of 30% by contributing to the exchequer over Rs.7000 crores annually (2009-10) as taxes on profits, dividends and dividend taxes. This makes the company one of unmatched strategic relevance.

_________

The Success of Coal India IPO

Background:

All the hard work, tenacity, fortitude and perseverance of over three decades made CIL a strong entity among the Indian corporate. The next logical step was to get the status as a Navratna company. CIL pitched for ‘Miniratna’ status, precursor for ‘Navratna’, on the strength of its physical and financial performance which resulted in the company achieving the desired status in March 2007 along with five of its subsidiaries. Again the status of CIL was elevated to ‘Navratna’ in October 2008, within a short span of 17 months.

‘Navratna’ conferred by Government of India is a privileged status provided to select state owned enterprises playing a significant role in economic development of the country. ‘Navratna’ means a lot more in terms of empowerment and the increased powers will help CIL in taking speedier decisions on many business issues. However, the ‘Navratna’ status came with a condition that CIL’s listing may be done with in three years from October 2008 – the month when CIL gained ‘Navratna’.

Government had decided to disinvest 10% of equity in CIL. The paid up equity of the company is Rs.6316.36 Crores. The total number of shares offered were 63.16 crores expected to raise over Rs.15,000 Crores at the higher end of the price band of Rs.225 – Rs.245. The exercise of Coal India’s Initial Public Offer (IPO) was a monumental effort considering the size of the company. CIL had submitted its exhaustive Draft Red Herring Prospectus (DRHP) during the month of August 2010 with the capital market regulator Securities & Exchange Board of India (SEBI) and the final Red Herring Prospectus in September 2010.

The Success:

CRISIL the leading credit rating agency in the country has assigned maximum grading of 5 to CIL’s proposed IPO – the best for any public sector. The grading indicates that the fundamentals of the IPO are strong compared to other listed securities in the country. Similar grading was given by other credit rating like ICRA & CARE . Not many companies have this kind of rating.

Post listing, CIL will be the largest employer amongst listed entities in the country. An analysis by a financial news daily indicated that CIL’s IPO could be the third largest in the world and the largest to hit the Indian market till date.. Importantly, IPO would help in unlocking the market value of the company. With added transparency and increased accountability in its corporate governance, CIL shall be even more diligent and responsive to the need of its stake holders.

But what happened on 21 October 2010, the day CIL’s IPO closed, was astounding. History was made. Innumerable road shows involving count less man hours of effort across the country and in US, Europe markets had resulted in the grand success of CIL’s IPO.

The IPO the largest so far in Indian capital market was over-subscribed 15.3 times. The resounding success of record shattering success of the company’s public offer with the aggregate funds flowing amounted to Rs.2,33,000 crores which was so far unheard of in the Indian capital market. The over-subscription of the issue happened in all the three major segments i.e. Qualified Institutional Buyers (QIB), HNI and retail. The QIB for which there was a reservation to the extent of 50% of the net issue of the shares, the over-subscription was as much as 24.7 times. Around 770 QIB investors had put in over US dollar 38 billion i.e. Rs.172,000 crores which by itself is also an all time high in the history of Indian IPO. In the retail segment nearly 16.45 lakhs applications were received – the highest among all PSU IPOs so far and the amount flowing in is more than Rs.11,000 crores. This is also the highest so far in the Indian capital market. Interestingly, the foreign investors alone had put in around US $ 27 Billion which is equal to first ten months of FII investment in India this year.

Most importantly, a national asset was offered to public as ‘peoples’ ownership’ in PSUs. Having registered , CIL’s immediate gain would be the company can pitch in for status elevation from the present ‘Navratna’ to that of ‘Maharatna’. The resultant additional powers would help CIL in taking speedier decisions for investing in its projects.

4 November 2010 was a historic day not only for CIL and PSU fraternity but also for the Indian Capital Market in general. CIL share was listed and closed over Rs.342/- on the first day of trading .

The transformation of Coal India over the years is one of the fascinating stories of business transformation anywhere in the world.