State-owned firm Coal India Limited is all set to launch the biggest initial public offer in October when it will offer ten percent of its equity. The company expects to raise $3 billion through this stake sale.

Following the policy of selective disinvestment, the Indian government has announced to sell ten percent share of its equity aiming at raising funds to fulfill long-term policy goals like poverty elimination and infrastructure development. The funds would also be used for acquiring coal mines overseas to meet the rising domestic coal demand.

Stock Markets

From the point of view of the Indian stock markets the public offering couldn't have come at a better time. The Indian stock market has been pretty dormant for the last few months, the Coal India IPO could attract investors back to the markets. Crisil, one of India's leading rating agencies, has given the highest possible rating of 5/5 to the IPO.

The biggest IPO in the Indian market till date was launched by Reliance Power in January 2008. Launched amidst the global financial crisis the Reliance Power IPO tanked the Indian financial markets with the Bombay Stock Exchange falling a staggering 834 points on the day of listing while the shares tumbled 17 percent below their listing price.

The Coal India IPO is unlikely to suffer a similar fate given the relatively improved global economic conditions and being a government-owned company. The price band of the offering ($5.22) is also very attractive in comparison to that of Reliance Power ($10).

Energy Security

The proceeds from the stake sale would give Coal India an added leverage to buy cola mines overseas. Although India is among the largest coal producing nations, its manufacturing units and power plants have been facing shortage of coal for quite sometime now. Several private and state-owned companies have bought coal mines in countries like Indonesia and Australia.

Coal India itself has approached several Australian and American coal mining companies to buy stake in their mines. These companies include Rio Tinto, Hancock and Peabody Energy.

The quality of Indian coal is inferior to those found in the other parts of the world. The calorific value of Indian coals ranges from 4000 to 5000 kcal/kg while the imported coals usually have the calorific value of 6000 kcal/kg. Additionally, the Indian coals also have significantly higher ash content which reduces the actuall energy output per unit of coal used.

Coal remains the most dominant source of energy for the Indian economy and keeping in mind the voluntary goal of reducing carbon intensity by 20 to 25 percent by 2020, the switch to high calorific value coals seems logical.

One of the top priorities for the Indian government is the elimination of poverty and sustainable economic growth. These goals can be achieved only through infrastructure development. India needs to expand basic infrastructure to its villages and for that it needs to add manufacturing capacity and build scores of power plants.

Considering the massive demand for energy and the need for capacity addition, India could certainly use all the financial and strategic resources at its disposal to acquire energy assets around the world.

Hat tip: AFP
Image: Nostrifikator (Wikimedia Commons)

The views presented in the above article are author’s personal views and do not represent those of TERI/TERI University where the author is currently pursuing a Master’s degree.