Coal India lowers penalty on failure to fulfill FSA, shares jump 2.6%

After the protracted and loud bickering over the signing of long-term fuel supply agreements (FSAs) between Coal India and power producers, consensus has finally been reached. Coal India has decided to go ahead and sign FSA with power generators. More importantly, Coal India Ltd's (CIL) board decided to lower the penalty applicable if it fails to supply up to 80 percent of the required quantity to power producers to negligible levels.

Under the FSAs, CIL will have to pay a penalty of 0.01 percent of the value of shortfall in case it fails to deliver at least 80 percent of the coal promised to power companies.

While Coal India's shareholders approved, power generators expressed unhappiness at the mild penalty. Ashok Khurana, director general of the Association of Power Producers, told Business Standardthat"the low quantum of penalty, and the fact that it will come into force only after three years, nullifies the concept of assured supply."

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[caption id="attachment_278125" align="alignleft" width="380" caption="Under the FSAs, CIL will have to pay a penalty of 0.01 percent of the value of shortfall in case it fails to deliver at least 80 percent of the coal promised to power companies. Reuters"][/caption]

However, Arup Roy Choudhury, chairman and managing director, NTPC, told CNBC TV18 that he is not too bothered about the exact quantum of Coal India's penalty and is ready to sign an FSA with the company. He is optimistic that CIL will be able to ramp up production and supply the required coal at low cost.

In case Coal India does fall short of providing the required quantity of coal, Roy Choudhury said he is not in favour of importing the commodity. That's because imported coal is far more expensive and it requires passing on the extra costs to consumers, which looks extremely unlikely given the political ruckus that is created every time a state electricity board contemplates a tariff hike.

Given the negligible penalty proposal, Sanjeev Prasad of Kotak Institutional Equities told the business channel that the signing of FSAs had become a 'non-event'.

Nevertheless, assuming that Coal India will be allowed to raise prices by 4-5 percent every year, and barring the imposition of a large mining tax or royalty on coal, the company should be able to maintain its profitability.

The stock is up 2.6 percent at Rs 348 in early trade today.