As the Adani group accumulated assets rapidly, its methods have raised concerns about corporate governance that have wider political economy implications for the country.
The first part of this article, ‘Adani’s Acquisitions: The ‘Inorganic Strategy’ Behind the Purchase of Gangavaram Port’, can be read here, and the second part, ‘Adani’s Acquisitions: Inside the Company’s Growth Machine’ may be read here.
BENGALURU, India — The Adani Group is in a hurry.
Over the last nine years, not only has it expanded within its existing verticals like ports, it has also diversified into a clutch of new businesses like media, defence, drones, solar panel manufacturing (straddling the value chain from polysilicon to solar installations), electrolysers, data centres, urban renewal projects, airports and more.
This game plan brings the Reliance template to mind. Mukesh Ambani built up capacity and then signed a set of deals with big names and brought his debt down to zero.
If Adani rapidly builds a network of assets and boosts its market capitalisation in verticals like ports, it could then offload a chunk to some global port management company, retire debts with the proceeds, and become a zero-debt company.
In the handful of interviews Gautam Adani has given, he has never been asked, or spoken, about his underlying strategy for expansion. The Wire asked the Adani Group’s official spokesperson to comment on this characterisation of its business plans but he chose not to in a brief response (see below) to our questions.
Chasing growth, the group has relied heavily on ‘inorganic growth’, acquiring concessions and firms to rapidly add scale. Apart from acquisitions, the group is also one of the big gainers from the BJP-led Narendra Modi government’s decision to create a bankruptcy resolution process which, instead of working out a bespoke rehabilitation package, simply puts the stressed assets up for sale.
Along the way, as instances like Krishnapatnam and Gangavaram show, the group’s acquisition drive has benefited from state action or support. This backing comes with large rewards for the group – but also risks. On the one hand, it accumulates assets rapidly. On the other, the perception of what Sharmila Gopinath of the Asian Corporate Governance Association calls the “lock step between the government and Adani” deepens concerns about corporate governance and creates the risk of further ESG (‘environmental, social and governance’) downgrades, reducing the group’s access to cheap money. There is also the spectre of legal risk. Some of these acquisitions – like Gangavaram – have already been challenged in court. As the group finds itself under international scrutiny, more cases might be filed. “If the concessions are taken away, his whole ecosystem will come under pressure,” a South Indian port executive told The Wire on condition of anonymity.
These costs, however, are nothing compared to the risks to India’s economy.
The bigger costs of the state-backed acquisition model
While working on this report, The Wire met promoters who were worried about becoming acquisition targets.
“I have just won a PLI,” said the managing director of a South Indian company, referring to the government’s production-linked incentive scheme. “I am worried that the resultant higher profile might make me an acquisition target.”
As a result, firms are seeking strategic investors as a hedge against a hostile takeover by Adani. GMR, for instance, has sold a 49% stake in its airport business to France’s ADP. “They are owned by the French government and so, it is hard to bully them,” said a senior executive in GMR’s airports business. Even the executive whose firm bagged the PLI is scouting for strategic investors.
A second big cost lies in the monopolisation that accompanies such untrammelled expansion. In 2021, after acquiring Gangavaram, Adani announced an additional charge of $3/tonne on Capesize vessels offloading only a part of their cargo at Adani-owned Dhamra, Krishnapatnam and Gangavaram before moving, with a reduced draft, to other ports. The decision was decried by critics as an attempt to monopolise traffic in these large vessels.
In Gangavaram itself, Adani is facing complaints about the abuse of market position – like a hike in its coal tariffs for the Vizag Steel Plant, with predictable impacts on the bottom line of the state-owned steel maker.
Coal importers who baulk at the terms set for using Gangavaram can only use the Vizag port now. “Our fear is that [someone] will next use the fear of pollution to shut down coal handling at Vizag port,” said the owner of a small coal importing firm in Vizag. At the same time, with coal stocks at Gangavaram rising steeply, locals in Gangavaram village told The Wire about heightened pollution, breathing trouble and are now demanding that the government relocate their village.
The Wire asked Adani to comment on these allegations. In its emailed response, however, the company didn’t answer the question.
There are other costs and consequences too. Once Adani acquired Krishnapatnam in 2020, large users of the port – like JSW – got worried. The steel-maker scrambled to acquire Chettinad Cements’ port business. “If the JSW-Chettinad deal happens, Krishnapatnam port will be the big loser because 5-6 million tonnes of cargo which are currently shipped by JSW through Krishnapatnam will shift entirely to the terminals acquired by JSW,” Business Line quoted a port industry executive tracking the deal as saying just before the deal was finalised. “JSW is under strategic pressure to have its own terminals for handling group cargo without being at the mercy of Krishnapatnam port with attendant pricing risks… The strategic urgency for JSW acquiring Chettinad has thus grown after Krishnapatnam was bought by Adani. If it happens, Krishnapatnam will lose revenue of at least Rs 150 crore,” he said.
Shortly after the JSW-Chettinad deal went through, there were income tax raids on Chettinad Cements in December 2020.
And then, there are the national costs – like concentration risk for the economy. “You cannot have all eggs in one basket,” said a relative of Gangavaram promoter D.V.S. Raju. “Help a hundred companies grow. Or the whole sector will get into trouble.”
In the post-Hindenburg world, this fear is coming true. “Ports and airports are cash guzzlers,” said the port executive. “As Adani freezes its capex, what happens to its plans of expanding its ports? What are the national implications of the country’s biggest port operator not adding fresh capacity?”
The short-seller’s report adds another complication as well. If Adani’s cash crunch worsens – and he is compelled to sell some of these concessions – there is no telling who might pick up critical Indian infrastructure like ports. As Forbes reported recently, Vinod Adani had pledged shares with Russia’s tainted VTB Bank.
And then, there is the political economy question of cronyism, both at the national and state levels. “Over the last four years, we have seen a sea change,” said the head of an Andhra Pradesh-based renewables company. “Companies are being forced to [exit]. This has especially picked up since the 2019 election.” Like many The Wire spoke with for this story, he did not want to be identified.
In the past, governments have doled out favours to preferred companies. We are now seeing something new. The charge now being made by businessmen and the opposition is that ruling parties are helping their preferred firms annex their peers.
According to them, this represents a malign evolution in the use of political power in India – and transcends existing definitions of crony capitalism. This also suggests that the problem is not of help being given to just one or two corporate groups. “We will see many more large acquisitions backed by political parties in the next 10 years,” said a former member of the state planning board for Andhra Pradesh.
As the social contract between the people and political parties comes under strain, it is vital that institutions tasked with regulating the corporate sector do the job they are supposed to. So far, however, there is little sign of that.
(M. Rajshekhar is an independent reporter studying corruption, oligarchy and the political economy of India’s environment. He is also the author of Despite the State: Why India Lets Its People Down and How They Cope. Reporting for this project was supported by Pulitzer Center)
Appendix: Adani’s Response to The Wire’s Questionnaire
Thank you for approaching us, please find herewith our response to your query as appended :
These allegations are false and baseless. It is unfortunate that, despite not being true, such allegations are being rehashed.
Over the decades, the Adani Group has proven its expertise in designing, building and managing world class infrastructure projects that bring about primary and secondary economic growth and also employment and benefits to the community. In addition to greenfield projects, the Group has also relied on strategic acquisitions to expand its business. Our business expansion decisions emerge from a careful evaluation of the state of the potential acquisition, its prospects for growth and its synergies with our existing operations, through fair, transparent and well-established business processes. These are business transactions handled professionally, with mutual respect and trust.
It would only be fair that you reach out to the DVS Raju Family too for clarifications in this regard.
Thanx & Regards
Spokesperson – Adani Group