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.

The curious case of Russian oil deals that benefited Essar, hurt ONGC

When Russian President Vladimir Putin visited Delhi in December 2014, his camaraderie with Prime Minister Narendra Modi was widely noted. What received less attention were the curiously asymmetric deals that an oil company controlled by the Russian government went on to sign with Indian companies over the next two years.

First, between September 2015 and October 2016, Kremlin-controlled Rosneft sold 49.9% in its Vankor oilfield in the northern parts of eastern Siberia to Indian public sector oil companies. According to oil and gas experts in Russia and India, the Indian companies significantly overpaid Rosneft.

Towards the end of these transactions, in October 2016, Rosneft announced its purchase of a refinery and port owned by the Essar Group in Gujarat. The price surprised observers in both Russia and India – it was much higher than initial valuations.

Reuters reported it was the biggest-ever foreign acquisition in India and Russia’s largest outbound deal. It rescued debt-ridden Essar Oil from bankruptcy. It also gave Rosneft access to the large Indian market at a time it faced sanctions slapped by the United States in 2014 as retaliation for Russia’s annexation of Crimea in Ukraine.

But what about India’s government-owned oil companies?

Did they gain at all?

India’s curious inflexibility in trying to fix its bad loan crisis is leading to unforeseen problems

India’s crackdown on companies that have defaulted on loan repayments is reshaping the country’s economy in fundamental ways. As the first three articles in this series detailed, competitive advantage is being tilted towards larger firms because only a handful of buyers is picking up most of the insolvent firms on sale. Between the resulting consolidation and the fact that most of these firms are changing hands at low rates, existing companies will struggle to compete. In addition, regional companies are being pushed into businesses beyond their core strengths.

These processes have been in motion since January 2016, when India’s banks, prompted by the Bharatiya Janata Party-led government and the Reserve Bank of India, started taking defaulting firms to the National Company Law Tribunal in an attempt to recover outstanding loans.

These structural transformations have been caused by the curious inflexibility that characterises India’s insolvency proceedings, which place the blame for bankruptcy entirely on the firm’s promoters, experts said. “The government is not making any concessions,” complained the chief financial officer of a steel plant in Chhattisgarh which has slipped into insolvency proceedings. “It is just putting the project up for sale.”

Inflexibility also shows in how these distressed projects are being rehabilitated. This is obvious from the way the proceedings have unfolded for a thermal power plant set up some 10 years ago by a well-regarded business group in North India. The group’s chief financial officer, who is in his mid-50s, said in his 35-year career, he has never seen anything similar to India’s bankruptcy proceedings that his unit is now facing.

We have the fourth — and concluding — part of our series on India’s insolvency proceedings out today. The first part, to recap, had flagged some curious patterns showing up as companies change hands to argue we need to pay more attention to these proceedings.  The second looked at the handful of buyers picking up most of these stranded assets. The third looked at what this means for local capital as global capital (and big capital) comes in.  Today’s piece builds on those observations, using them to point out the self-damaging inflexibility that characterises India’s insolvency proceedings, tries to understand its origins, asks if there was a better way to handle all this, and then ends.

India’s proceedings to recover bad debt are reshaping Chhattisgarh’s economy – and politics too

A baton is changing hands in Chhattisgarh.

Big companies are entering the state’s steel and power sector, using India’s ongoing insolvency proceedings to buy distressed firms. At the same time, Chhattisgarh’s local steel makers, several of whom entered the power sector in the mid-2000s, are looking beyond these two sectors.

Part Three of our series looks at how NCLT will affect the provincial business classes of India — as the buyers detailed in Part Two come in.

As India tackles its bad loans problem, large local groups and global funds are gaining advantage

By March, seven companies had evinced interest in buying Lanco Infratech.

The company began life in 1986 as a construction contractor, but grew into a power and infrastructure behemoth after liberalisation. Much of this growth was funded by bank loans. In June 2017, after missing its loan repayments, the company found itself on the Reserve Bank of India’s first list of defaulting companies that would have to face insolvency proceedings. At the time, Lanco Infratech owed Rs 45,200 crore to banks and another Rs 5,300 crore to its business partners.

The list of companies that queued up to buy the infrastructure firm was intriguing. There were seven large bidders, four of them from outside India. They operated in disparate fields from international finance and energy to mining and real estate.

Lanco Infratech illustrates a broad pattern that is becoming apparent as India’s National Company Law Tribunal tries to recover bad loans from companies. The tribunal is selling these companies in whole or auctioning off their parts. Alongside, some companies are making their own attempts to reduce debt by selling off some of their units. Through this process, a small group of Indian and foreign companies are taking most of the assets on sale.

Out today, the second part of our series on India’s hugely important insolvency series. This one looks at the folks buying up stranded assets in india.


India’s bid to fix bad loan crisis is reshaping its corporate sector – and creating new challenges

After a long break, I finally — and rather sulkily — resumed work in the middle of August. Out today, the first of my trademark long-winded and tremendously depressing series: on how India’s business insolvency cases are coming along. The series — it is a four-parter — essentially argues that India needs to pay far closer attention to how these insolvency cases are faring, that these are taking the country into uncharted waters. For more, click here.