The Children’s Investment Fund has initiated legal action against the Indian government for alleged breaches of international treaties over its investment in Coal India.

The move escalates the activist investor’s battle with the board of Coal India, in which it is the largest foreign shareholder controlling close to 2 per cent of shares. The state owns 90 per cent of the company.

It also comes amid a political scandal that has mired the Indian government in allegations of corruption. The coalition was accused last week by the auditor-general of foregoing $210bn in potential revenues by selling coal assets too cheaply to some of the country’s leading industrialists.

The fund manager, which has about $8bn of assets under management, accuses the Indian government of directing Coal India to sell assets at below-market prices and obstructing the development of the business.

In a letter sent to the ministry of finance on Tuesday, a copy of which was obtained by the Financial Times, London-based TCI said it was giving formal notice of a dispute under two bilateral trade agreements between India and the UK, and India and Cyprus (where TCI’s funds are domiciled).

According to the letter, the government has “seriously impaired the business activities and operations” of the company.

If a settlement is not reached within six months, the fund said, under the terms of the treaties international arbitration would begin.

Alok Perti, India’s coal secretary, denied having received a letter from TCI, according to local television reports on Tuesday. Mr Perti said the fund was free to sell its shares if it was unhappy with the company’s performance.

TCI earned a reputation for picking boardroom showdowns before the financial crisis, but lowered its profile after costly losses in 2008 and ill-fated activist investments in Japan and the US. The confrontation with Coal India is the most significant battle TCI has picked in years.

Oscar Veldhuijzen, a TCI partner, said the hedge fund had been trying to resolve its concerns with the company and the Indian government amicably since last summer.

“We tried to do it the soft way,” said Mr Veldhuijzen. “We tried to do it in a very constructive way and all we got was us being ignored and the board [of Coal India] following the instructions of the government.

“The most effective way, we decided, was to go through the BIT.”

Challenging the Indian government through the local courts could take years, Mr Veldhuijzen said.

Arbitration through the treaty between the UK and India is a relatively untested process that could drag on, one lawyer said. Mr Veldhuijzen, however, said it was in the interests of the Indian government to settle with TCI quickly to avoid a protracted dispute.

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