Part 1
Adani’s Acquisitions: The ‘Inorganic Strategy’ Behind the Purchase of Gangavaram Port
Deloitte’s decision last week to resign as auditors of Adani Ports and Special Economic Zone Limited (APSEZ) citing concerns raised by Hindenburg Research has refocused global attention on the Adani group and its business practices. The global auditing firm has said it wanted an independent external examination of the allegations made by the US-based short seller, a request Adani rejected by claiming Hindenburg’s accusations had no impact on any of its financial statements.
Over the past six months, in response to Hindenburg’s allegations of “brazen stock manipulation”, the Adani Group has repeatedly emphasised the health of its underlying assets, most of which were acquired over the past decade.
In 2017-18, the Adani Group’s six listed companies, which account for almost all of its turnover, earned a net profit (EBIDTA) of Rs 3,455 crore. But the acquisition of assets from other companies has helped propel Adani to a higher level. By FY2023, “the conglomerate recorded its highest ever EBITDA at the group portfolio level (combined all group companies) of Rs 57,219 crore.”
In its annual report for FY23, the flagship Adani company APSEZ recently described its strategy in the ports sector as an “inorganic approach”. It said it plans to extend this approach to “the acquisition of companies and services in the transport utility space,” with a “sustained focus on acquisitions at a deep discount value.”
Since the acquisition by the Adani group of assets like ports and airports has been crucial to its phenomenal growth, the process of some of these acquisitions is undoubtedly a matter of public interest.
This is also because allegations have been made – in a PIL before the Andhra Pradesh high court over Gangavaram port and by the Opposition – that the state has shown little interest in maximising its own future revenue share from some highly profitable companies or concessions Adani has acquired, or has even batted for the group in its quest for acquisitions in India and elsewhere, like Sri Lanka and Bangladesh. What one corporate governance analyst has described as an “almost lock step between the government and Adani” has been decried as ‘cronyism’ by the Congress – which has alleged, in the case of Mumbai international airport, for example, that the promoter was virtually strong-armed into selling his asset to the Adanis. The seller, GVK and the Adanis, have denied the charge but questions about the pace and range of acquisitions continue to be asked in the wake of Hindenburg, and not just by politicians. As the noted economist Arun Kumar asked recently, “How did Adani get hold of so many businesses so quickly”?
The answer is complicated because of the range of sectors and businesses the Adani group spans but a closer look at a key sector – ports – and specific acquisitions can give us some insight into the company’s nose for business opportunities and the evolving nature of India’s political economy.
The sale of Gangavaram port
In September 2021, the Adani group announced it had completed the acquisition of Gangavaram port in the Visakhapatnam district of Andhra Pradesh for a total of Rs 6,200 crore.
A press statement by Adani Ports & SEZ (APSEZ) said that it had purchased the Andhra Pradesh government’s entire stake – 10.4% – in the port for Rs 645 crore. The statement noted that the Adani group had earlier – in April 2021 – acquired 31.5% of Gangavaram’s shares from private equity firm Warburg Pincus and had signed an agreement for the controlling stake of 58.1% which was held by the port’s promoter, DVS Raju and family.
Warburg sold its shares to the Adani group for Rs 1,954 crore ($268 million at the prevailing exchange rate). In a parallel move, the private equity firm acquired a 0.49% stake in Adani Ports for Rs 800 crore. The deal with Raju, the promoter, which happened right after the Warburg purchase, involved the Adanis taking control of his stake in exchange for him and his family receiving Rs 3,604 crore worth of APSEZ shares – amounting to 2.2% of the acquiring company at the time.
Gangavaram was a port the Adanis had been interested in for some time. In 2015, when Warburg Pincus had tried to sell some of its shares, it was reported to have variously valued the port at between $1,050 million (Rs 7,000 crore) and $2 billion (Rs 13,000 crore). “Around the same time, Adani emerged as a potential buyer to acquire Warburg’s entire stake [i.e. 31.5%] and even hired investment bank Macquarie Capital to advise on the stake acquisition,” Capital Quest had reported. “However, the deal fell through owing to a valuation mismatch.” Nevertheless, six years later, Adani was able to acquire 100% of Gangavaram for Rs 6,200 crore. This despite the fact that the port’s capacity, which was 30 million tonnes in 2015, had doubled to 60 million tonnes by 2019.
Though the COVID-19 pandemic and its dampening effect on the economy might have played a role, it is not clear why Warburg settled on a lower valuation, setting a benchmark price that Raju and – more controversially – the AP state government subsequently went by. The Wire sent a questionnaire to the equity firm on June 29, 2023, and will update this story if and when their answer is received.
A good deal for buyer
Gangavaram port had posted an EBITDA of Rs 634 crore in FY20. The sale price of a company is a multiple of EBIDTA – a measure of how much it earns every year – with the multiple a measure of the number of years the buyer needs to recoup his purchase price. With Adani paying Rs 6,200 crore, the deal’s enterprise value/EBITDA multiple stood, by Adani’s own calculations, at a relatively low 8.8 – a measure of how good a deal this was for the buyer.
This relatively low multiple is now the subject of a public interest litigation petition in the Andhra Pradesh high court, with the petitioner claiming it was well below global benchmarks for port acquisitions. “In May 2019, when PSA, Polish Development Fund and IFM Global Infrastructure Fund acquired 100% of DCT Gdansk from Macquarie Infrastructure and Real Assets, they paid an enterprise value/EBIDTA multiple of 16,” says the petition filed in 2021 by Satya Bhupal Reddy Vaiza, the executive director of an NGO called REEDS. “Similarly, when Orient Overseas International sold its container terminal to Macquarie Infrastructure and Real Assets, it did so at a multiple of over 20,” said the PIL, which is challenging the state government’s decision to sell its own stake of 10% in Gangavaram to Adani without inviting bids.
Even within India, the deal’s enterprise value/EBITDA multiple stood on the lower side. Just the previous year, Adani had acquired Andhra’s private sector Krishnapatnam Port at Rs 13,572 crore – a multiple of 10.2 – despite it carrying debt of Rs 6,212 crore and, at 64 million tons, having similar capacity as Gangavaram.
In contrast, Gangavaram was debt-free and had a cash balance of Rs 570 crore at the time of acquisition. The PIL, which is still before the court, also alleged that the state government did not follow prescribed norms for valuing its share, nor the value of the land that Adani would now get effective control over. The port concession also included 1,800 acres of nearby land, given by Chandrababu Naidu when he was chief minister. Going by market rates, the PIL claimed, that land was now worth at least Rs 3,000 crore.
Lengthy counter affidavits were filed by the state government (the Adani group was not named as a respondent) between September 2021 and January 2022 disputing the petitioner’s claims on the value of the land and the port as a whole. The last time the court took up the matter was, however, in December 2021. Now, a former revenue secretary in the Union government, E.A.S. Sarma has written to the Comptroller and Auditor General of India noting what he alleges are anomalies in the state government’s sale of its Gangavaram stake to the Adanis and demanded an audit.
To better understand the Gangavaram deal, The Wire met port promoters, spoke to senior executives in ports and other infrastructure companies acquired by Adani and their peers in industry, the relatives and associates of promoters whose firms have been acquired by Adani, a former chief secretary in Andhra Pradesh, former bureaucrats in mid- and senior positions in Andhra Pradesh, including those in the state’s planning and ports department; and the owners of firms that dealt with Gangavaram – like those importing coal through the port, and those offering shipping logistics, as well as activists and trade union leaders working in Gangavaram.
In all, about 45 interviews were conducted. Subsequently, detailed sets of questions were emailed to all the dramatis personae – the Adani Group; D.V.S. Raju; Warburg Pincus, C. Sridhar of Navayuga Engineering Company; K. Muralidharan (formerly at the Andhra Pradesh Maritime Board); KPMG, which valued Gangavaram; the Union ministry for ports and shipping; and Andhra Pradesh CM Jagan Mohan Reddy.
The Adani growth machine
For observers of corporate India, the sprawling Adani group is something of a black box.
Despite being in long-gestation, low-margin sectors like infrastructure – and a much lower group EBITDA than peers like Reliance and Tata – the group has grown furiously. Not only did it direct cash into existing businesses and loss-making arms, it simultaneously acquired rival firms – through buy-outs like Gangavaram and asset sales by India’s bankruptcy courts – and announced large forays into sunrise sectors like green hydrogen, renewables manufacturing and defence. Most recently, it acquired a large media company, NDTV, and added to its considerable presence in the cement sector by buying Sanghi Cements.
Since January, when Hindenburg Research released its report on the Adani group, the spotlight has turned onto the financial arrangements that have enabled this dizzyingly rapid expansion. Hindenburg alleges Adani has used a clutch of offshore entities to push up its share prices, a charge the company denies. In the past, the company has pledged shares to raise debt. It has used international bonds to mop up additional debt. Those borrowed sums are used for not just capex but, as Hindenburg charged, also to smoothen out earnings – and to launch new businesses (Adani has used borrowed funds as equity for new businesses).
An expert panel tasked by the Supreme Court to look into some of the questions raised by Hindenburg concluded that there was no evidence to sustain the charge of stock manipulation. It also concluded that there had been no regulatory failure on the part of the Securities and Exchange Board of India – though repealed provisions had hampered SEBI’s ability to investigate what it noted were “opaque structures” that the Adani group was accused of using.
In the wake of Hindenburg, some investors have highlighted the strength of Adani’s underlying assets. Supporting the group with both cash flows and hard assets, acquisitions account for a large chunk of those assets. As Hindenburg Research says in its report, “(APSEZ) is… the only listed (Group) entity which seems capable of consistently generating substantive positive cash flow: approximately INR 52 billion (US $640 million) as of 31 March, 2022.”
Central to APSEZ’s cash flow is the array of strong assets the company has assembled. Take Adani Ports. Its first port came up in 1998 (Mundra, Gujarat). In the next 14 years, it added two more ports, both in Gujarat – Dahej (2010) and Hazira (2012). Thereafter, its growth has been quicksilver. It added Mormugao (2013); acquired Dhamra from L&T and Tata (2014); set up Tuna Tekra and acquired Katupalli from L&T (2015); signed Ennore (2018); bagged Vizhinjam (2019); acquired Krishnapatnam (2020); bought Dighi through India’s bankruptcy courts and acquired Gangavaram (2021). As this article was being written, the conglomerate bagged the port at Karaikal through bankruptcy proceedings. In all, then, the Adani group has 13 ports – of which, six have been acquired – in India. It also has Haifa in Israel and a terminal in Colombo.
These acquisitions are significant given the history of the sector. The first generation of India’s ports – like Kandla, Paradeep and JNPT – were built by the state. The second generation – like Mundra, Gangavaram and Krishnapatnam – were built after liberalisation as public-private partnerships. Reflecting both cronyism and the need to attract private sector participation in what were untested and risky greenfield projects, the Union and state governments offered generous incentives to promoters. If a project matured and took off after its difficult gestation period, the promoter stood to make a handsome profit. As would the government, which retained a stake in the partnership.
Krishnapatnam’s agreement with the Andhra Pradesh government, for instance, not only gave its promoters, the Navayuga group, an exclusive zone – in which no other port could come up – of 30 kilometres on either side, it also pegged the concession fee payable to the state at just 2.6% (of gross income) for the first 30 years. As the PIL filed in the Andhra Pradesh high court says, the average revenue share offered by other ports/terminals on India’s eastern shore stands at 33.15%. “The revenue share offered in the case of already established major ports was as high as 52% since there is already established infrastructure, ready customer and infrastructural linkages with minimal risk to the bidder/terminal operator,” the petitioners wrote in their affidavit.
A 2015 CAG report on PPP projects in major ports contains similar numbers. In 2005, Dubai Ports International bagged a tender to build and run a container transshipment terminal at Cochin Port Trust by offering a revenue share of 33.3 percent of gross revenues. In 2009, JNPT awarded the project to build a container terminal to PSA Mumbai Investment after it promised a revenue share of 50.828 per cent.
Gangavaram’s terms are the same as those of Krishnapatnam. “Its initial concession [in 2002-03] was given on the basis of a DPR,” or detailed project report, a senior executive at a private port in southern India told The Wire on condition of anonymity. Defending the low revenue share for the government of 2.1% that was written into the initial concession, he said, “There was no asset. Also, these concessions were signed at a time when the economy was growing at the ‘Hindu’ rate of growth.”
By the time Adani acquired Gangavaram, however, the situation had changed. The port had become a mature concession with ongoing operations, an established market position, monopolistic cash flows and vastly transformed surroundings as an industrial area developed around the port. And yet, by acquiring the concession through Gangaravam, Adani will give the Andhra Pradesh government a revenue share of just 2.1 per cent till 2039, i.e. during “the first 30 years of the Concession Period, and at double the rate for [two] extended spells of 10 years each.”
The economics of the deal needs to be underlined. According to the Adani Ports website, Gangavaram can handle 60 million tons of cargo in a year. If Adani charges Rs 300 per ton of cargo, it will generate a top line of Rs 1,800 crore. If Gangavaram settles at similar operating margins like the rest of Adani Ports (44.22%) – its EBIDTA margins in FY21 stood at 59% – it will make Rs 795.9 crore as operating profit. The government’s revenue share, however, will stand at just Rs 37.8 crore.
Effectively, then, the Adani group has acquired a mature asset on greenfield terms. Profits that should have gone to the initial risk-taking entrepreneur or the state government – which could have earned a fatter revenue share by re-tendering the concession as a mature PPP – flow to Adani instead.
The centrality of concessions
Since they become highly profitable after the first ten or so years, matured concessions are not always up for sale. And yet, Adani has picked up six ports in just nine years. It has done so, in the case of Gangavaram, without paying a high EV/EBIDTA multiple either.
In other words, while the company paid Rs 6,200 crore for Gangavaram, after the acquisition, at a multiple of 20, the port could arguably be estimated to be worth Rs 12,680 crore. By pledging these shares, the group could conceivably raise more cash than what it had paid Raju – and then repay those loans through Gangavaram’s cash flows.
The Adani Group told The Wire it has “proven its expertise in designing, building and managing world class infrastructure projects” and that, “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.”
Part 2
Adani’s Acquisitions: Inside the Company’s Growth Machine
The first part of our deep dive into the Adani Group’s acquisitions flagged the centrality of state concessions to a part of the business empire.
Coming with large land banks, ongoing operations, established market position and monopolistic cash flows, concessions like Gangavaram and GVK’s Mumbai Airport add both cash flows and hard assets to the group’s kitty. And so, not only is the group acquiring concessions by buying firms pushed into bankruptcy courts (like Dighi and Karaikal ports), it also buys firms outright from their promoters.
Spectacularly profitable after the first ten or so years, concessions are not always available for sale. And yet, Adani has managed to buy as many as six ports in the last nine years. Some sales have been concluded despite Adani – in the case of Gangavaram, as alleged by former Union revenue secretary E.A.S. Sarma – valuing the assets conservatively.
In addition, some cases saw a coincidental overlap between stake sale and actual or alleged state action. For example, in Andhra Pradesh, Navayuga, the promoter of Krishnapatnam port, found itself in the government’s crosshairs soon after the government of Y.S. Jagan Mohan Reddy came to power. Reddy acted against business houses that had won contracts during the chief ministerial tenure of his political rival, Chandrababu Naidu of the Telugu Desam Party (TDP). In the case of GVK, whose promoters were investigated by the Enforcement Directorate, Congress leader Rahul Gandhi has accused the Modi government of using his agencies to hasten the sale of Mumbai airport to the Adanis.
This pointed accusation has prompted strong denials by the Adanis and GVK. Earlier this year, after Gandhi spoke of the Mumbai airport sale in the Lok Sabha, the GVK Group’s vice-chairman Sanjay Reddy issued a statement saying he had not been coerced into the sale.
In the case of Gangavaram, though industry executives and at least two state government officials and a relative of the port’s promoter D.V.S. Raju – all of whom asked that their identity not be revealed – spoke of state government interest as a factor in the sale, both Adani and Raju denied there had been any official involvement in the deal. “These allegations are false and baseless,” the Adani group said in a statement emailed to The Wire in response to a questionnaire that cited some of these accusations. “It is unfortunate that, despite not being true, such allegations are being rehashed.” As for Raju’s family, it said: “We want to emphasise that this decision was made independently, without any external pressure.”
The backstory of Gangavaram
At one time, the land around Gangavaram must have been scenic.
The shore here seems to inch almost imperceptibly towards the sea. Before the port came, local fisherfolk walked through fields and coconut groves to their boats. As they walked towards the sea, small hills stood to their left – on the other side, the city of Visakhapatnam.
In 1994, the state government decided to build a port on the site of two villages – Gangavaram and Dibbapalem. The idea had been doing the rounds for a while. “Visakhapatnam Port wanted to set Gangavaram as a satellite port and shift polluting cargo like coal – which went to local industries like the Vizag Steel Plant – here,” said a union leader in Visakhapatnam. “Vizag Steel Plant wanted to set up a private port at Gangavaram as well.”
India, however, was liberalising. State-directed capitalism was on the back foot. These proposals – from state-owned entities – went nowhere. Instead, Chandrababu Naidu, Andhra Pradesh’s chief minister at the time, took over the project, saying Gangavaram would be developed as a state port, using India’s brand new Public Private Partnership (PPP) framework.
That was the first time Adani evinced interest in Gangavaram. In 2001, a consortium led by Adani Exports (which would later become Adani Enterprises) participated in the tender. It lost to the only other rival bidder – a consortium led by D.V.S. Raju, a former senior executive at IT giant Satyam and founder of VisualSoft.
Work began in 2005. When local villagers protested, the state bit down. “Protestors were jailed,” said a union leader. “There was a lot of violence at this time. Two villagers died in police firing.” That was in 2006.
The port then came up as planned and operations started in April 2009. Given its deep draft – the seabed off India’s east coast drops steeply just beyond the shore – Capesize vessels could dock at Gangavaram. Given its proximity to the Vizag Steel Plant, not to mention mineral-rich states like Odisha and Chhattisgarh, the port found itself importing and exporting iron ore and coal cargo – and growing rapidly. Built with an investment of Rs 1,850 crore, the port’s first phase hit a cash break-even in 2010-11.
Along the way, it began attracting buyers. “(Stock trader) Rakesh Jhunjhunwala tried around 2012,” said a retired senior official at Vizag Port Trust. “DVS (Raju) refused at the time. He quoted a very high premium.”
In 2015, Adani tried again. “He travelled down to Andhra with his son Karan Adani and aide Rajesh Naithani,” said a senior executive at a south Indian port on the condition of anonymity. “This time around, Raju was more open to an exit. His health wasn’t very good and so, he wanted to monetise at a good valuation.”
Those talks, however, broke down. The reasons are unclear. Neither Raju nor the Adani Group responded to The Wire’s question about these talks. According to the port executive, a disagreement over payment schedules was to blame. According to a former official in the state ports department, however, a difference in valuation was the trigger. “Adani wanted to pay around Rs 5,600-Rs 5,900 crore,” he said. “As for Raju, he wanted [more].”
Things stayed calm for the next three years. And then, two big developments followed.
Prelude to an acquisition, a crucial rule change
India’s model port concession agreement has a grey zone, said the retired Vizag Port Trust official. “While concessionaires can be replaced if they, for instance, default on a loan, the agreement doesn’t clarify if concessions can be sold,” he said.
On being asked why, he said this was probably an omission. “I think the drafters couldn’t imagine an outcome where anyone would want to sell. For the first ten years of its life, the project would have high debt. In the subsequent years, you make a killing. Why would anyone sell?”
These concessions should not be tradable, the port executive said. “The concession is given on the basis of qualifications. In such a set-up – not to mention the Supreme Court order that all natural resources have to be awarded through bids to avoid windfall gains – the government has to re-bid.”
In January 2018, however, the Modi government changed the rules for port concessions, providing an exit route to developers by way of divesting their equity up to 100% after completion of 2 years from the commercial operation date. All that the government said at the time was that this change was made “keeping in view the experience gained in managing PPP projects in port sector during the last twenty years and to obviate the problems being faced on account of certain provisions in the existing MCA.”
The Wire wrote to Sarbananda Sonowal, Union minister for ports, shipping and waterways, asking him about the logic behind this amendment. This article will be updated when he responds.
Enter Jagan as CM
The next consequential development followed in May 2019. On May 30, Jagan Mohan Reddy became the chief minister of Andhra Pradesh. The businessman-politician son of former state chief minister Y.S. Rajasekhara Reddy came to power after a one-year march across the state which positioned him as a mass leader.
Shortly after coming to power, the new chief minister hit national headlines after cancelling the state’s power purchase agreements, alleging cronyism.
He also turned on the state’s infrastructure sector. The first firm to lose assets was Navayuga, a Hyderabad-based EPC company which, like many of its peers, had acquired infrastructure assets in the 2000s. Amongst those assets were two ports – Krishnapatnam and Machilipatnam. Of these, Krishnapatnam was operational. In 2019, on a total income of Rs 2,407 crore, its EBITDA [earnings before interest, taxes, depreciation and amortization] stood at 27%. Apart from these, Navayuga also held the construction contract for the massive Polavaram irrigation project.
Soon after Jagan came to power, Navayuga lost all three projects. On August 1, 2019, alleging discrepancies and delays, the state government took away the contract to build Polavaram from the company and gave it to Megha Engineering, even as Chandrababu Naidu and the TDP cried foul. On August 9, the state government cancelled the Machilipatnam port contract; on September 30, it awarded the project to Adani.
On October 22, the government took away 4,731 acres of land abutting Krishnapatnam. At this time, the port’s future was still unclear. “The government had given them 1,400 acres apart from the port area which they didn’t use,” said the retired Vizag Port Trust official. “And so, the state government began issuing warnings.” It wasn’t as yet clear who Krishnapatnam would go to. “I do not think Jagan had anyone in his mind,” said the retired IAS official. “He just wanted to take over the port.”
In the end, one of the winners from this ‘vendetta politics’ involving Jagan and the TDP – as the Deccan Herald described these events – was the Adani Group.
As government pressure by way of cancellation of projects mounted, the port executive said, the younger son of C.V. Rao agreed to sell his stake in Krishnapatnam to Adani. Shortly afterwards, the rest of the family acquiesced as well.
The first part of the deal, where Adani picked up a 75% stake in the port, was announced on January 3, 2020. The group acquired the rest in April 2021.
The Wire emailed questions to C. Sridhar, the managing director of Navayuga Engineering, the Adani group, and the office of Jagan Mohan Reddy seeking to better understand this process. Adani’s full response is appended below. It didn’t answer specific questions about Gangavaram and Krishnapatnam but said, “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.” This article will be updated when the others respond.
During the tenure of Jagan’s government, the ownership of a number of infrastructure projects appears to have moved to two sets of firms. The first is Adani. The second is to six or so political and business family dynasts, some of whom, like the Aurobindo group, have directors with family links to leaders from Jagan’s party, the YSR Congress.
It is pertinent to mention here that Jagan Mohan Reddy, who has had no public association with the Adani Group, unlike the BJP, himself came to office with significant vulnerabilities. During the UPA years, he had been charged by the CBI in several corruption cases. At the time of his march across Andhra, he was out on bail. This has resulted in the perception that the Union government has leverage over the state government.
The Wire wrote to Jagan Mohan Reddy asking him to comment on these aspects. This article will be updated when he responds.
‘A decision made independently, without any external pressure’
After Krishnapatnam came Gangavaram’s turn. Unlike Navayuga, D.V.S. Raju had stayed aloof from politics. Andhra Pradesh, however, had three private ports – Gangavaram, Krishnapatnam and Kakinada. Three more were coming up – Machilipatnam, Ramayapatnam, and another near Srikakulam. Of these, Aurobindo Realty had bagged Ramayapatnam and Kakinada. The state had cancelled Srikakulam and awarded Machilipatnam to Adani, who had also acquired Krishnapatnam. That left Gangavaram.
Adani had put in a bid for Gangavaram in 2002 but lost out to Raju. And in 2015, as we have described in Part 1, his talks with Raju to buy the port for a total consideration of $2.1 billion did not yield fruit.
When Adani tried again in 2021, however, he found Raju was willing to exit. Asked for the reason why they had now agreed to sell, the Raju family sent an emailed response. “For several years, we have been receiving many proposals from leading global port players,” they said. “After careful evaluation, we found synergies with Adani Ports and have taken a decision for merger and it was purely a business decision.”
The Wire’s questionnaire to Raju included two allegations that a number of sources had made. First, that the Greater Visakhapatnam Municipal Corporation’s February 2021 decision to demolish a part of the Gangavaram boundary wall pursuant to a nine-year-old encroachment complaint from the local industries association had helped firm up the promoter’s mind to exit. And second, that soon after the demolition, a senior political figure in Jagan’s YSR Congress Party met him and asked him to sell. To these allegations, Raju replied, “We want to emphasize that this decision was made independently, without any external pressure.”
The Wire also wrote to Adani and chief minister Jagan Mohan Reddy’s office, seeking their comments. Adani’s rejection of any allegations of state coercion has already been mentioned in this story. Its full response, as mentioned above, is appended at the end of this article. The political leader and the chief minister didn’t respond but Adityanath Das, who was chief secretary of Andhra at the time, also denied the government had played any role. “On the specific transaction between Gangavaram and Adani, we had no say on that,” he said. “From the state government side, there was no coercion.”
In the weeks that followed the sale, the state government also sold its stake to Adani at the same valuation, making Gangavaram a fully-owned unit of Adani Ports & SEZ (APSEZ). It was the government’s decision to sell its stake – without calling for bidding – which resulted in the PIL.
State’s counter to the charge of forgoing revenue
In its counter-affidavit, signed by R. Karikal Valaven, special chief secretary to the government (infrastructure and investment department), the state government said, “The government has secured the best price on market considerations and there is no compromise on maximisation of revenues.”
It said that it had accepted the transaction between APSEZ and D.V.S. Raju on the condition that the terms and conditions of the original concession agreement would be retained. The state government cited a legal opinion from ex-CJI Dipak Misra saying there is “no constitutional mandate for auction under Article 14 of the Constitution”, and that even though “sale by public auction or by inviting tender is the ordinary rule, yet it is not an invariable rule.. there can be exceptional circumstances which may necessitate departure from the ordinary rule… The concept of holding an auction of shares of GPL, in the instant case, unquestionably would be contrary to economic rationale.”
In his opinion, Misra also said that the state government cannot auction its 10.4% stake without offering the first right of refusal to the promoter, which is now APSEZ. He added that “the marketability of 10.4% is very low as the role of a minority shareholder in a company is very minimal.” Misra said that Warburg’s sale of shares to APSEZ was “arrived at by way of an arm’s length transaction between two unrelated private parties and is, therefore, ordinarily a fair transaction. It’s likely that a valuation now undertaken by GoAP will lead to similar value.”
On the allegation that the port’s land had been undervalued, the government counter said, “As per the terms of the concession agreement, the (Andhra Pradesh Maritime Board) will be entitled to purchase the land after expiry of the Concession period by paying an amount calculated after factoring 6.5% as an appreciation every year… in such circumstances, the value attributed to the land by the petitioners and thereby jumping to conclusion that the State is parting with said land without any consideration in non-transparent manner is not tenable.” In addition, KPMG told The Wire, “We have considered the present value of the land escalated at 6.5 per cent.”
Evaluating the valuation
As for the question about whether Gangavaram had been correctly valued, the state government said it had asked KPMG to value Gangavaram’s shares – and that it had asked SBI Capital Markets to study whether it should sell its shares directly to Adani or call for an open bid. In its report, KPMG Valuation Services said it derived Gangavaram’s valuation by, among other methodologies, averaging EV/EBITDA multiples of 14 “comparable” ports. (It used discounted cash flow, comparable port valuations, comparable transactions and Adani’s share buys from Warburg Pincus and D.V.S. Raju as the four indicators to arrive at Gangavaram’s valuation). All these methodologies, said KPMG, netted an average value of around Rs 115 per share.
Given that Adani was offering Rs 120 a share, said the government’s affidavit, both SBICaps and Grant Thornton Bharat LLP suggested a direct sale.
In his interview to The Wire, a senior port executive who asked not to be named said six of the 14 ports studied by KPMG were state-owned ports in China with low EV/EBIDTA multiples. In contrast, the multiple for private ports in the list ran as high as 23. And, as the PIL said, two other international ports – DCT Gdansk and a container terminal of Orient Overseas International – sold at EV/EBITDA multiples of 16 and “over 20” respectively. The Wire retains a record of this and other interviews but is both entitled and bound to protect its sources.
The Wire wrote to Amit Jain of KPMG Valuation Services asking why he thought the comparison they had made was valid. This article will be updated when he responds.
Aside from the debate over valuation, the state government’s decision to sell its stake in the first place has also been questioned. The state had given land many years ago based on nothing but a DPR and agreed to a low revenue share. Now that there was a flourishing deep-water port in Gangavaram, able to berth large vessels, and now that this port was being acquired by India’s largest private port company, was the government foregoing a lucrative potential revenue stream by selling its 10.5% stake instead of holding on to it and even extracting better terms?
In his letter to CAG G.C. Murmu, retired IAS officer E.A.S. Sarma challenged the state government’s decision to sell its 10.4% stake for Rs 664 crore saying that even back in 2017, the port’s valuation had stood at at least Rs 7,500 crore (i.e. $1 billion; going by reports of Warburg’s valuation of Gangavaram at between $1 billion to 1.4 billion at the time). “The value of the port would have increased since then, over the next four years, as a result of the addition to its assets, its increased throughput and the increased market value of the 1,800 acres of land in its possession,” he wrote. “Keeping these developments in view, the state government ought to have retained its own equity share in the port.”
The state government didn’t respond to The Wire’s questions. Its arguments countering the PIL have been quoted above.
The Wire also asked the Adani Group to comment on the seemingly mismatched valuations of Krishnapatnam and Gangavaram – and the comparison with state-owned ports. In its statement, the group didn’t answer that specific question, saying instead: “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.”
Elsewhere, allegations that the Centre stepped in
While in Krishnapatnam’s case, the initiative and decision that culminated in the port’s sale were, at least, formally that of the state government, Mumbai International Airport Ltd saw the Union government facing accusations of being a factor.
In the sale of the GVK-owned Mumbai airport to Adani, GVK Airport Developers Ltd was the holding company for GVK Airport Holdings, which owned 50.5% of MIAL. Of the rest, 26% was held by the Airports Authority of India. Two South African private investors – ACSA and Bidvest – held 23.5% between them. Apart from owning the concession for Mumbai airport, MIAL also held the concession – and a 74% stake – in the upcoming Navi Mumbai International Airport.
By 2019, under pressure from its lenders’ consortium, GVK was planning to sell a 49% stake in GVK Airport Holdings to the Abu Dhabi Investment Authority (ADIA) and its partners. In February 2019, however, Adani announced it had struck a deal to pick up Bidvest and ACSA’s 23.5% stake in MIAL. ADIA went to the Delhi High Court asking it to stop the sale. GVK too blocked the deal, citing the right of first refusal.
When it couldn’t stump up the cash, the matter went to court. Things stayed in limbo till June 27, 2020, when the Central Bureau of Investigation filed an FIR saying GVK had siphoned off Rs 705 crore – and caused a loss of Rs 310 crore to the exchequer by creating false work contracts. On July 2, the agency conducted searches at GVK’s offices in Mumbai and Hyderabad. On July 7, the Enforcement Directorate filed a money laundering case. On July 28, its officials raided GVK’s offices as well and said it would charge its promoters with money laundering.
The media reported on August 24 that talks were underway between GVK and Adani. By August 30, 2020, Adani had bagged MIAL. The deal netted Adani two prime airport concessions – the existing one at Mumbai; and the upcoming one at Navi Mumbai.
While the justification for the CBI’s allegations against GVK cannot be established until the matter goes through all levels of an open judicial process, it is worth noting that the CBI informed the special court in Mumbai in January 2023 that no government official was found to be involved in the corruption case registered against the GVK Group and that it was no longer pressing charges under the Prevention of Corruption Act. What remains now is only the charge of cheating. On July 4, 2023, however, a special CBI court set aside the summoning order issued by the trial court against all 58 persons accused of cheating, including G.V.K. Reddy and Sanjay Reddy. As for the ED’s charges, the agency has maintained radio silence on the matter since the end of July 2020 and there has been no development in the public domain since then.
Though this visible overlap between Adani’s takeover talks for Mumbai airport and the investigative agency raids was a first for India Inc, market regulators and Indian newsrooms chose not to look into whether these developments were linked or unconnected.
After Rahul Gandhi accused the government of arm-twisting the GVK group into selling MIAL to Adani, GVK’s V. Sanjay Reddy made a public statement denying he had been coerced. “As far as GVK is concerned there was no pressure on GVK either from Adani group or from any agencies. We sold [the] airport due to our own commercial interest,” he said. Similarly, both D.V.S. Raju and Adani have denied the state government played any role in the Andhra port transactions.
And yet, it is worth considering whether Adani would have been able to smoothly acquire Krishnapatnam – or Gangavaram in its entirety – if the Jagan Mohan Reddy government had not acted the way it did. In the case of these two ports, even assuming the state wasn’t looking to expressly benefit anyone, the fact remains that Adani – along with Aurobindo Realty – was the biggest gainer from the increasingly Darwinian politics of Andhra Pradesh.
In the case of MIAL, the unfortunately timed crackdown on GVK came from the Narendra Modi government’s law enforcement agencies.
Part 3
Adani’s Acquisitions: Why India Needs to Keep Track of the Costs
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’. Courtesy: The Wire.)
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.
Responding to these allegations, Mr GV Sanjay Reddy, Vice-Chairman of the GVK Group, has publicly stated his views (two links given as below):
- Link 1: Arijit Barman, “We needed a strong financial partner who could do a deal quickly: GV Sanjay Reddy, GVK Group”, 31 August 2020, https://economictimes.indiatimes.com.
- Link 2: “‘No pressure from anyone to sell Mumbai airport’, says GVK Group after Rahul Gandhi’s remarks in Parliament”, 8 February 2023, https://indianexpress.com.)
It would only be fair that you reach out to the DVS Raju Family too for clarifications in this regard.
Thanx & Regards
Roy Paul
Spokesperson – Adani Group
