On the mechanics of Gautam Adani’s extraordinary expansion across India

For a long while now — ever since my colleagues at Economic Times and I profiled Gautam Adani in 2013 — some of my friends and I have been wondering how the Adani Group funds its growth. Is there a mismatch between the quantum of its balance sheet and the quantum of its investments?

That question resurfaced late last year while reporting on India’s insolvency proceedings. As Scroll.in reported at the time, the Adani Group was one of the biggest buyers of stranded assets. These purchases, notably, were a part of a larger burst of growth which has seen the group rapidly expand across India. Not only have its existing businesses continued to grow, the group has also expanded into several new businesses. As we noted, with some head-scratching, one of those new businesses was sewage treatment under the aegis of the Namami Gange programme. Others included data centres, defense and more.

A couple of months ago, as my stint at Scroll.in began drawing to a close, my colleagues and I took a closer look at this question. Our first report described the company’s expansion — and contrasted that with the group’s balance sheet. The second report, published a day later, took a deeper look. Here is what we found.

Not only does the group raise money from overseas, it also raises a lot of money within India – in the form of bank loans, borrowing against shares and pledging assets. This money circulates within the group through a high-density of related party transactions. Adani Group subsidiaries borrow money by offering the shares they hold in listed group companies as security. Sometimes, they use these borrowings to purchase equity in sister companies – even those in unrelated businesses. Or they lend this money to group companies. Step-down subsidiaries – or the subsidiaries of group companies – pledge assets and raise money, which is then loaned or invested in group companies.

Put together, these patterns tell me how companies close to power grow — they gamble on growth, scrambling to become as large as they can while favourable conditions last. Working on this story, I think I also deepened my understanding re the risks such firms run — this extends beyond on the trope of political risk; chasing growth, these companies take risky bets, partly due to their own unique compulsions, and partly because they figure the policy environment can be used to push even unviable projects into viability. This raises questions on whether the projected cash flows will fructify, especially if the favourable conditions changes.

Such groups also engender complex outcomes for an economy. An infrastructure consultant I spoke to in Delhi was sanguine, seeking Adani’s rise as another point in a very familiar trajectory of economic growth. Every economic era, he said, has been dominated by a few companies which had proximity to power, access to capital and technical expertise. “In the US and Russia, abuse of power by large corporation is far bigger than what you see in India,” he said. “As long as good assets are created, efficiently run and capital pulled in from the world over and put to use in India, I welcome it.”

But it’s not that simple. Because of its connections to power and finance, a dominant player might indeed be able to build infrastructure, Michael Walton, a senior professor in public policy at Harvard’s Kennedy School of Governance, emailed. “In an economy that is a hybrid of rules and deals, with major infrastructure backlogs, this may bring real social and economic benefits,” he said.

However, he added, such companies also comes with costs. “On the economic side, a dominant player is highly likely to use their monopoly power to extract rents, to build at high cost and close down competition.” Indeed, the growth of Adani ports has been accompanied by complaints that the government is weakening state-owned ports like Kandla and Paradeep.

There are also political costs, said Walton, who is currently studying Latin America’s Odebrecht. “Such dominance can distort politics, though legal or illegal electoral finance, and directly and indirectly public deliberation over policies.”

The fallout is a market loaded against less politically-connected companies. After all, such firms can take bets other companies cannot. Such an instance comes from Adani Power (Mundra). Even as other companies put their power projects on sale, the Adani group doubled down and kept infusing cash into Mundra. In tandem, as Scroll.in reported this March, the group tried to get approval to pass higher coal prices to end customers — and eventually prevailed after the Bharatiya Janata Party governments in Gujarat and the centre stepped in.

The fallout is also a vulnerable economy. Given huge amount of borrowings, if the projected cash flows do not materialise, lending sectors will get affected too. At the same time, if the group in question is a monolith lording over most of the public utility space in infrastructure, consequences of it landing in trouble are likely to radiate outwards and touch other parts of the economy as well.

All of which makes me wonder what the coming months will hold — especially with the slowing economy.

ps: And yes, that is it. The Scroll stint is over. I reached Mizoram in the third week of February, 2015. Worked on Ear To The Ground till November, 2017. And worked again on the central government from 15 August, 2018 till now. It has been a good run. I have learnt a lot. Made a lot of new friends. Lost some illusions about the country and several about myself. The plan is to now switch off for a bit, finish writing a book, and get back to cycling.

More on the asymmetry that rules India’s business insolvency process

Since October last year, Scroll has been (intermittently) reporting on how India’s insolvency proceedings are coming along. Cumulatively, these reports flag a couple of peculiar patterns.

A lot of companies are up for sale — In a country with 7500 companies with a topline over Rs 250 crore, 2511 companies are slated for insolvency proceedings. There are very few buyers. Ergo, companies are changing hands at very low rates, creating in effect a giant fire-sale of Indian companies. This asymmetry between buyers and sellers is interesting. Even as most debt-saddled companies find themselves in insolvency courts, others (a very small set) continue on an acquisition spree.

An example here is Adani Enterprises. One of the most debt-saddled companies in the country, it continues to acquire companies and announce new projects with gusto. One answer why lies in today’s report.

Do please take a look.