What would a brief history of India Inc look like?
At the time of independence, India’s private sector was dominated by a clutch of business families.
Their reign continued into the license raj years – and then was challenged by newcomers like Dhirubhai Ambani. In the 1990s, the country saw the flowering of a new generation of companies. These were the post-liberalisation firms in both new sectors like IT, ITES (IT-enabled services), healthcare and telecom as well as older sectors like infrastructure.
Relations between these promoters and India’s political leadership covered a broad spectrum. Firms operating in sectors where the government had a relatively small role – think IT – had low interaction. Firms in government-heavy sectors – like infrastructure – made larger allowances for India’s political economy. Some stayed equidistant from political parties, donating to all. Others forged opportunistic alliances with the party in power. Yet others were owned (covertly or overtly) by politicians themselves.
Political patronage itself stayed opportunistic. In both the captive coal block allocation scam and Arunachal Pradesh’s hydelscam, firms willing to pay trounced more established rivals and bagged coal blocks and hydel MoUs. This was broad-spectrum crony capitalism. As this reporter has written earlier: “Companies with political links got what they wanted. And so did others. All that mattered was their willingness to pay.”
In this system, it was hard to say who was in the driving seat. Industrialists could get their way through bribes. Politicians could determine who got the largesse.
With Gautam Adani, India is seeing something new. According to economic commentators, the government has chosen his group as a ‘national champion’ – and is encouraging its expansion into a clutch of sectors critical for India. At the same time, the financial underpinnings of the group are opaque – like its quicksilver pace of growth despite the absence of cash cows in the group; shadowy investors; charges of stock-price manipulation, and a thick density of related-party transactions.
This combination needs to be understood. How was the group chosen as a national champion? Is that the right strategy for India – or could it push India closer to a pairing, as described by James Robinson and Daron Acemoglu, between an extractive political institution and an extractive economic institution, both working for a few?
The latter worry is not an imagined fear. Given the financial pressures to win elections, India’s political parties are increasingly kleptocratic. As for Adani, there are multiple instances of him abusing his market position.
In all, Adani represents a new chapter in the evolution of India Inc. The Wire has strung together a reading list that traces his journey towards becoming a “national champion”.
1. The backstory: In 2013, Economic Times profiled Adani, describing his early days – importing plastic granules from Gandhidham; upgrading into wider trading; and then backwards integrating into Mundra port – and his consequential alliance with then-chief minister Narendra Modi. As the paper says, Modi took charge in 2001 as CM but “did not want to depend on Pramod Mahajan, who was managing the BJP’s finances”. As for Adani, he wanted to grow big in a state that already had Reliance.
2. Adani in Gujarat: Under Modi, the company saw meteoric growth in Gujarat. Its record was mixed. On one hand, it created a world-class port complex at Mundra. On the other, its growth was underpinned by state support. It got government largesse, as described in multiple CAG reports; the SEZ at Mundra came up without an environment clearance; rival ports like state-owned Kandla made a series of decisions which hurt them but benefitted Mundra; one could go on. The Union government, run by the Congress-fronted UPA at the time, played along as well, taking the environmental violations at Mundra port as a fait accompli.
3. The first Modi term: Once Modi came to power at the Centre, Adani went national. Scroll looked at the group’s growth between 2014 and 2019 – a mix of inorganic growth (where Adani bought stranded assets off India’s bankruptcy courts); growth in existing businesses; and forays into new sectors.
4. How the group financed this expansion is a puzzle. In 2018, for instance, it announced future expenditure of Rs 167,000 crore despite a net profit of just Rs 3,455.34 crore. The answer seemed to lie (partially) in an arrangement where the group floated new companies, pledged their shares to raise money, and then deployed those funds across the group – to shore up struggling firms; and as equity to start more new firms. Researchers in Australia too flagged similar patterns.
The government stayed supportive. It set up a committee to ensure Adani Power did not slip into bankruptcy proceedings.
The group also benefited from other government decisions. One instance is Adani’s power project at Godda. Another instance is the claim by a Sri Lankan power official that Modi had asked Gotabaya Rajapaksa to award a project to Adani. A third instance is airports, where rules were changed to get him in.
In tandem, investigations into the group went nowhere – like the DRI investigation into coal imports.
5. The government’s preferred ‘national champion’: When the NDA first came to power, business circles speculated that Modi would create five or six large business houses – to cut down on Reliance’s overweening dominance in India’s political economy. Relations between India Inc and the government were changing. See this issue of Seminar for more.
— Milan Vaishnav (@MilanV) October 5, 2020
The names of a few firms did the rounds in the first term – Vedanta in mining; Dilip Buildcon in construction; JSW in steel; Adani in infrastructure; etc. By 2019, however, Adani had eclipsed them all. Modi began relying more on Adani, using the group to meet India’s global commitments on fronts like decarbonisation. The group forayed into defence, drones, polysilicon, and more. In a report, FT called him “Modi’s Rockefeller”. The underpinning of this expansion, however, remained sizeably unclear.
6. The mystery of the investment funds: Then came a report from The Morning Context, saying a handful of investment funds invest almost solely in Adani – most of the group’s free float was with them. Economic Times followed up when NSDL froze these funds’ accounts due to “insufficient disclosure of information regarding beneficial ownership”. Speculation grew that these funds had been used to drive up Adani share prices – which could then be pledged as collateral by the group.
7. Enter, Hindenburg: In its report, the short-seller sizably focused on these funds. It was followed by a rebuttal from Adani late on Sunday night. By Monday morning, Hindenburg had released its own response. Read all three documents and you will have a fairly decent sense of how the group finances its operations.
As things stand, Hindenburg isn’t the only organisation to say Adani Enterprises are over-valued. Here is Hindu Businessline. It steers clear of Hindenburg’s report but finds overvaluation all the same.
8. Post-FPO Adani: As this article gets written, the group’s FPO has been a success – retail investors stayed out but a handful of big industrialists stepped in. On February 1, however, Adani shares began falling once markets opened. In tandem came the news that Credit Suisse will not accept bonds of Gautam Adani’s group of companies as collateral for margin loans – a line of credit that lets clients borrow against the securities they hold. One wonders what happens next.
On his Substack page, historian Adam Tooze asks what l’affaire Hindenburg means for Adani’s dynamic with Modi.