Coal India shares recovered much of their losses later in the day to close down nearly half a per cent at 341.60 as investors focused on the company's still strong balance sheet. -Reuters Photo

NEW DELHI: Shares of Coal India fell Wednesday after the government directed the mining giant to sign guaranteed supply deals with domestic power producers, overriding concerns about the impact on profits.

The rare directive was issued late Tuesday after state-run Coal India missed a deadline set in February by Prime Minister Manmohan Singh to sign the agreements by March 31 with producers facing a supply crunch.

Coal India is already struggling to meet output targets and the company's board members were alarmed at the prospect of having to pay penalties if it was unable to fulfil the commitments it was ordered to make to domestic power firms.

The company's shares slipped two percent in intra-day trade Wednesday after the directive was announced.

In 2010, the government raised $3.4-billion by selling a 10 per cent stake in Coal India which is responsible for 80 per cent of the nation's coal output.

Power companies run by powerful industrialists such as Anil Ambani had been lobbying the government to guarantee supplies, saying lack of coal was stalling plans to build new plants to address India's chronic energy shortage.

Domestic coal prices are discounted by as much as 40-70 per cent from the international price, and Coal India's minority shareholders, such as London-based hedge fund TCI, argued that the government move breached their rights.

Coal India “should be run for shareholders without being abused by the government for the benefit of a few politically connected industrial companies,” the fund's manager Chris Hohn told the Economic Times newspaper on Tuesday.

TCI last week said it was launching legal action against Coal India, saying the discounts to domestic power companies contravened its obligation to maximise value for shareholders.

Coal India shares recovered much of their losses later in the day to close down nearly half a percent at 341.60 as investors focused on the company's still strong balance sheet.

Coal India's three-month to December net profit rose 54 percent to 40.38 billion rupees ($821 million dollars) from a year earlier.