Coal India : A Delisting Candidate???

On Friday, 24th August 2012, Coal India was one of the leading stocks in the bourses. It closed at 367.05 up 2.2% with a robust volume of 4.47 Million shares. Its average trading volume for the past 6 days has been around 2 Million shares. It has crossed the 360-362 level resistance commendably. Thus, from the technical point of view, the stock is all set for rising further. Several experts may come out with a buy call tomorrow for the stock given the fact that no bad news came regarding the stock over the weekend and the foreign markets also closed strong on Friday.



The major news driving the
stock were two, or that is so as per the various news articles. The first one is certainly the one that is not letting the parliament function. The Coalgate Scam! Our ever benevolent prime-minister Mr. Manmohan Singh wants to answer the opposition regarding how what he did was the best choice and that there is no scam as such but its CAG which is leading a defamatory drive against the government (pun intended). But, the opposing leaders are not keen to hear the monotone of our 'Lotus-like' (A flower surrounded in mud) prime-minister on this because somehow they feel that 'Lotus' is their proprietorship (Again, pun intended!).
FM Mr. P Chidambaram, Law Minister Mr. Salman Khursheed and Coal Minister Mr. Sriprakash Jaiswal organized a press conference to answer the queries of the press regarding the CAG report. The FM's argument was a little funny, to say the least, that there is no scam till there is no mining. That is to say that since the allotment of the coal fields to the companies, most of them have not mined the coal from the fields allocated to them and hence this should not be considered as a scam as the coal is still in the 'womb of mother earth'! God save India!!!
It's the same kind of defiant argument which a rash driver makes when you ask him 'What if your bike would have hit me?' He would say, "Lagi to nahi na?"
I agree that the amount mentioned by CAG is highly inflated and even at 2005 prices, these are exorbitant to say the least. But, the point that CAG has raised is that there has been tweaking of rules and pouring of favors to sycophants in case of coal allotment. Whether a natural resource like Coal has to be given out with an arbitrarily fixed price or through auctions is a matter of a country's policy and there can be debate over it but that cannot be labeled as a scam. However, asking bids for one mine and allotting three for the same project is something which is what has created the whole furor here.


Anyways, the debate is going to be a long drawn one. Both the leading parties of the country are involved in it in one way or the other. And till the time it rages on, there will be policy paralysis in terms of coal reforms and allotments of fields. Most likely, several fields would be de-allotted as the government has the habit of going back into its defensive cocoon on every such issue. The situation in this case is worse because Coal India does not have a public-face committee like TRAI as in the case of telecom. Government is the biggest stakeholder and the soul decision maker (any doubts?) here and they would try to curtail as many controversies as they can for the next one year or so. And what's the best way to do that than by not doing anything?



The power sector will be the one that will be directly hit. There will be huge coal imports in the coming days as the coal controversy would start to choke the power plants which are already running at pathetic PLFs (Plant Load Factor). The banks and financial institutions would be the next contingency as the leading banks of India have lent more than 2.5 Lakh Crore to the power sector and have been waiting for recovery for so long. Banks profitability will take a deep hit as and when they start to realize such loans as NPAs (Non-Performing Assets). The power producers would be forced to increase the power rates (some have already started it) and this would hurt the industries and common people tremendously. All in all, the contingency effect will affect everyone. To me, the situation visualizes like the one in which a man (here country) has been held by his throat (here coal production) and now slowly his whole body is giving up.
If the Coal India board does not act on its own to take care of the situation, there do not seem to be rosy days for the company in the near future amidst the controversies.


The next important news, and the one which actually inspired me to write the blog, is the buzz regarding Coal India promoters' willingness to ask for the power to buyback shares in the upcoming AGM on 18th September. Now this is interesting and if true, has a potential to drive the stock beyond 400 levels too. But why does Coal India want to buyback its shares when it has only recently gone public? In general, why do companies go for a buyback? Companies go for a buyback if they feel that their shares are undervalued in the market or they have huge cash pile and they do not want to spend it on dwelling out dividends to the stakeholders or they want to slowly delist from the bourses.


Another theory doing the rounds is that the government wants to use this as a means to meet its divestment target by selling a part of the 90% stake back to the company. But this is something which does not make much sense given the point that as per SEBI's guidelines, any public-sector listed company has to ensure a minimum of 10% public shareholding and if it is not so, then it has to be done within a couple of years, precisely by August 2013. (The same norm for private sector listed companies is set at 25%.) Buyback of shares by Coal India will pull back shares from the retail investors too as SEBI's regulation says that the retail investors' should have a 15% quota in the share buyback through the tender route. This would push Coal India further from the requirement of minimum 10% public shareholding of its equity. Otherwise ofcourse, if the company plans to divest again as and when the economic situations improve.
So, I think, the company is ONLY seeking for the power of a buyback and would not be doing so soon. Thus, this rally in the stock is not going to last longer.


But what if the company wants to delist itself from the bourses in the coming years. Or rather it is forced to do so as the choking economic conditions do not let it to divest its shares by the time the deadlines arrive in a couple of years. Several companies with very low public share-holding will be taking this path in the coming future. Delisting of Coal India would make a lot of sense for the government too as the government might not be very comfortable with sharing the reins of a cash cow with the public and other big investment firms (Read TCI) which have the capability to sue the government on corporate governance issues. With the whole of Coal India to itself, the government can go on with its arbitrary decisions in the name of nation-building without any resistance whatsoever.
Well, I may be a little prejudiced against the government on this. So, lets not stretch it any further on what is in the GOI's mind.
Lets look at it from an investor's point of view. Generally, a share buyback or a scrip delisting leads to a lot of appreciation in the share prices.
Lets have a look at some of the recent delistings:



Stock	Price on delisting day	Movement after delisting buzz
Patni	515.8	38.44%
Atlas Copco	2720.75	46%
Nirma	255.65	18%
Midas Pharma	28.55	35%
Alfa Lavel	3946.5	79.1%
Astrazeneca Pharma*	1883*	51%*

*Astrazeneca is yet to be delisted.


There have been some stocks which have shown negative movement after their delisting news but they are very few and the depreciation has also been limited. Thus, what I intend to suggest is a delisting candidate holds a lot of promise of price appreciation for a retail customer. And if the company is a blue chip like Coal India, one should certainly not miss out on it.
Some other probable candidates for the delisting buzz within the next year are Gillette India, BOC India, Purvankara Projects, DB Corp, Blue Dart, Novartis India etc.