Navin Jindal's toughest hour

Last Updated: Wed, Nov 14, 2012 05:00 hrs

Naveen Jindal, the chairman and managing director of Jindal Steel and Power Ltd (JSPL), has reasons to feel miffed. The share price of his flagship has fallen 30 per cent since April 1, the beginning of this financial year, to 384.4 last Friday. The 30-share Sensex of the Bombay Stock Exchange has risen 6.8 per cent in the same period. This has caused significant erosion in his net worth. JSPL promoters together hold 59 per cent stake in the company. The erosion is the direct result of some adverse press he has received in the last few months. First, he had to pull out of the ambitious $2.1 billion Bolivian mining and steel venture in June. Then, in August, the company's name figured in the Comptroller & Auditor General's report on allocation of coal blocks between 2006 and 2010-the infamous Coalgate. In September, allegations surfaced that he had used coal from captive mines to sell power at high prices in the market, thereby profiteering from an inexpensive national natural resource.

The month also saw Jindal get into a scuffle with a TV reporter and questions being raised on his hefty salary package. In October, Jindal got into another row when he alleged that two TV journalists (of Zee News) demanded Rs100 crore from his company for suppressing damaging information.

The controversies could affect Jindal in another way. Apart from being an industrialist, Jindal is also a politician; he represents the Congress in Parliament from the Kurukshetra constituency in Haryana. He is known as a youth icon and a crusader who successfully fought for the common man's right to unfurl the national flag. Soon, the Congress will begin to compile the list of its candidates for the general elections in 2014. To figure on that list, Jindal should stay away from all controversies. On the contrary, the onslaught of controversies doesn't seem to stop for the 42-year-old businessman.

JSPL has always been regarded as an efficient company. Its revenue has almost trebled in the last five years alone. Its revenue of Rs 13,333 crore for 2011-12 was 40 per cent higher than 2010-11; its net profit of Rs 4,004.2 crore was an improvement of 5.2 per cent over the previous year. The current year, too, began on a happy note with the company commissioning two new power units in January-at Raigarh in Chhattisgarh and Angul in Orissa.

Things took a turn in June when JSPL formally communicated to the Bolivian government its intent to terminate the showcase $2.1 billion contract for developing the El Mutun iron ore mines, the world's largest deposit of the mineral.

At the heart of the problem then was an ugly dispute-one that later landed in the International Court of Justice-between the two sides over gas and land availability for the project. Jindal alleged that Bolivia had reneged on its gas commitment (for use in a power plant that would have, in turn, fired the steel factory), while the Evo Morales-led grnment accused the Indian company of not making the promised investments. In July, the Bolivian government confiscated JSPL's assets in Porto Suarez apart from initiating criminal proceedings against some senior managers of the company.

What could have been a highly profitable overseas business venture for Jindal - the project came with assured iron ore availability -turned out to be a wasted effort. Jindal had already invested $90 million in Bolivia and had committed to invest another $600 million. The investment had to be written off JSPL's books. The project was lost at a time when commodity prices were at an all-time high and Jindal had already started exporting iron ore from Bolivia.

Even as the Bolivia episode was reaching its unintended end, the company's name figured in the CAG report on coal block allocation tabled in Parliament on 17 August. The national auditor had alleged that by not resorting to bidding, the government extended undue benefits totalling

~1.86 lakh crore to corporations. The CAG report covered 57 blocks, including four held by JSPL with geological reserves of 2.1 billion tonnes. The company was amongst the highest beneficiaries of coal reserve allocation.

A fortnight later, in early September, a media report questioned the profitability of JSPL. The report argued that the company owes its success to selling in the merchant market power generated by burning coal from its captive coal blocks. Jindal Power, a JSPL subsidiary, has been operating a 1,000-Mw coal-fired power plant at Raigarh since 2008. The plant uses coal from two captive mines -Gare Palma IV/2 and Gare Palma IV/3- located seven kilometers away. The news report said that despite having cheap coal from the captive mines, JPL sold power at the highest prices of Rs 4.30 per unit in 2010-11 and Rs 3.85 per unit in 2011-12. The company's coal cost works out to Rs 650 per tonne, including Rs 147 paid as royalty to Chhattisgarh, against the cost of buying coal from Coal India at Rs 700 per tonne.

JSPL Group Chief Financial Officer Sushil Maroo says in the absence of power-purchase agreements, the company was left with no option but to sell in the open market. There were, he claims, "extensive and prolonged" efforts by Jindal Power to enter into long-term PPAs. "In fact, in the absence of a PPA, we had a lot of difficulty in getting banks to provide funds for financial closure of the project. Finally, the loans were given to us after guarantees were given by the parent company," he says. Can Jindal be blamed in the controversy over merchant sales? As a matter of fact, there is no explicit provision in the block allocation letters that would prevent a captive miner from selling power derived from captive coal in the open or merchant market.

More was to come. In September, questions were raised on Jindal's salary after a news report highlighted how he topped the executive pay charts for listed companies in the country with a package of Rs 73.4 crore in 2011-12. This was followed by Stakeholders Empowerment Services (SES), an investor watchdog, calling to put Jindal's package under the scanner. The firm had also asked institutional shareholders to restrain Jindal from having the power to decide his and his whole-time directors' salaries. JSPL's shareholders dismissed SES's call. Maroo says too much is being read into Jindal's salary package. JSPL shareholders had approved a remuneration of Rs 11.96 crore for Jindal, including perks, allowance and provident fund. In addition, a 2 per cent commission of the net profit was allowed. The commission for the financial year 2011-12 stood at Rs 61.46 crore, which took the total remuneration to Rs 73.4 crore.

"There are a large number of cases in India where promoters are being given much higher remuneration and commission ranging from 3 per cent to 5 per cent of the net profit. In JSPL's case, only 2 per cent commission on net profit is being given to the chairman and managing director," Maroo says. Under the Indian Companies Act, an executive head's compensation cannot exceed 5 per cent of net profit and directors' compensation as a whole cannot exceed 11 per cent of profit without government permission.

Experts say that the company might have been in the centre of some controversies but the hype can be attributed to the ongoing overall negativity in the market surrounding power and coal companies in general and is not limited to JSPL. "Broadly, there is hardly anything JSPL, or Jindal in particular, can be blamed for in the context of issues being talked about. In the merchant sales controversy, the block allocation letter never said whether commercial sale of power is allowed or not. Even on the issue of salary package, his remuneration is well within the permissible limits," says a senior analyst from an accounting and consultancy firm who does not wish to be identified.

He also says that the company's "strong fundamentals" are likely to act in its favour in the coming months. "As long as the company continues to possess its coal blocks, power generation cost will remain low. Also, the high gap between demand and supply of power would ensure that merchant power rates stay above Rs 4.5, or even Rs 5, per unit," he says. The analyst also adds that the current allegations may have led to speculations impacting sentiments, but only for a short time.

Maroo insists there is no negative sentiment around JSPL."The coal blocks have been allotted to JSPL and its associated companies following all the rules, regulations and guidelines in force. There is no adverse remark in the CAG report against the company," he says.

The controversies notwithstanding, the company says it is on track to achieve its planned investment of a mammoth Rs 130,000 crore in steel and power projects under implementation across Orissa, Jharkhand and Chhattisgarh.

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