Penalty on Coal India Ltd. by CCI : Reasons and Implications

The Competition Commission of India has imposed a penalty of Rs.1773.05 crore on Coal India Limited and its three subsidiaries for abusing their dominant position as supplier of coal to power companies. CCI held that CIL through its subsidiaries is operating independent of market forces and enjoys undisputed dominance in production and supply of non-coking coal in India. Apart from cease and desist orders, it also directed CIL to Modify FSAs suitably.

The Order came post complaint filed by Maharasthra State Power Generation Co. Ltd and Gujrat State Electricity Corporation Ltd. They alleged low quality coal dispatches at high prices and non transparency in contract conditions.The lopsidedness of FSAs have been a bone of contention between CIL and Power Producers in the past.However the fact that these FSAs have been foisted upon CIL without completely considering the ground realities is being absolutely overlooked in the order.

Clauses of FSAs in particular were directed to be modified related to sampling and testing procedure, charging transportation and other expenses for supply of ungraded coal from the buyers, capping compensation for supply of stones.

The clause for sampling and testing relates to quality of coal. Price charged for ungraded coal is also challenged.Notably as per provisions of FSAs in 2009, Coal India is charging Rs. 1 per tonne for such ungraded coal, which seems in my view good in accounting practice as there need to be a minimum billing and for ensuring other control aspects of movement of coal.As far as capping compensation for supply of stones is concerned, at present as per FSA compensation is given within 2 months of the date when notice for such stone being dispatched is brought to notice of the company, obviously after following check. The compensation has been capped at .75 pc for companies which sources coal from companies other than Coal India too. The Present practice of compensation is being followed in respect of other companies.

CIL appealed against the order before the Competition Appellate Tribunal which ordered to maintain status quo until further orders. However this is just a stay and the liability for penalty is still alive. There may be more penalties in way as CCI has also received more complaints .

In case of unfavourable decision for CIL in future, it has the option of approaching Supreme Court. 

However the case holds wider implications which are

• This is the first time CCI has moved against Public Sector entity and imposed a penalty. Thereby signalling its neutral stand over both sectors. CCI explicity expressed that they are aware of the regulated environment in which CIL operates, hence playing down the observation being made by CIL Board that CIL doesn't enjoy commercial freedom.
• We can expect the indifferent attitude of Government as the penalty will help in the objective of fiscal correction.Its worth mentioning that in India any penalty imposed by independent regulator goes to Consolidated Fund of India.
• The amount will not be allowed as Business expenditure under Income Tax Law hence adding tax burden. To put it differently the gainer in case of penalty being imposed will be only government. It will get Income Tax, Penalty amount and also will not have to share anything with the shareholders..!! (In other case it would have got Dividend distribution tax and sizable dividend.)