Activist UK fund The Children's Investment Fund Management (TCI) threatened legal action against Coal India's directors for not protecting minority shareholder interests, underlining investor dissatisfaction with state-run Indian companies.

TCI, which held a 1.01 per cent stake in the world's largest coal miner at the end of 2011, said in a letter issued Monday that Coal India's directors were acting against interests of stakeholders by " blindly " accepting government instructions to roll back a recent increase in coal prices.

"The essence of our concerns is that we can no longer tolerate abuse of minority shareholders and poor corporate governance," TCI partner Oscar Veldhuijzen said in an email.

"By not acting in the interest of the company, the board of Coal India is effectively destroying huge amount of value which affects the people of India the most," he added.

State companies in India are often valued at a discount to private-sector peers, in part because some sell their output at subsidised levels.

A recent $2.5 billion auction of state-run Oil and Natural Gas Corp attracted little international investor interest, partly because of a lack of clarity on how much of the government's fuel subsidy burden it would have to bear.

TCI accused the government, Coal India's largest shareholder with a 90 per cent stake, of hurting the miner's commercial interests by forcing it to sign fuel supply agreements with power producers, guaranteeing to supply 80 per cent of contracted quantity.

Domestic Indian coal is 45-70 per cent cheaper than imports.

"If no clear commitments are made public to provide parity of coal prices to import prices, we will strongly consider taking legal action against individual board members for breach of fiduciary duties," TCI said in the letter.

Officials at Coal India were not available for comment.

Coal India, which produces nearly 80 per cent of the coal in Asia's third-largest economy, in January bowed to pressure from the government and reversed a price increase after protests by power producers struggling from domestic coal supply shortages.

It is in the process of implementing a new mechanism linking prices to gross calorific value (GCV) of the coal it produces, and will review the pricing mechanism in April.

India holds about 10 per cent of the world's coal reserves, but the state miner has struggled to get swift environment clearances and land acquisition approvals for its mines, forcing expensive imports of more than 100 million tonnes annually.

In 2010, the Indian government sold a 10 per cent stake in Coal India for $3.4 billion in the country's largest ever initial public offering.

At 0805 GMT, shares in the company, now India's fourth largest by market value, were trading 1.4 per cent higher in a firm Mumbai market.

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