The US Bond Market and the Adani Empire
Special Report
THE Adani saga continues, this time based on the US Securities and Exchange Commission (SEC) filing cases of bribery and hiding key facts from investors in the US Courts. The US SEC has taken two sets of action: criminal charges of $ 265 million for bribery and misleading of investors by various Adani officials, including the big man Gautam Adani, his nephew Sagar Adani, and others. This has led to a steep fall in the share price of the companies Adani Green and Adani Energy Solutions. The US SEC has also filed civil suits in New York alleging that Adani family members, its group leaders, and Canadian pension fund CDPQ "schemed to funnel $265mn in bribes to Indian officials to secure solar contracts. The charges are that the company and its executives concealed the bribery from US banks and investors from which Adani raised billions of dollars.
One can argue that the US authorities are exercising extraterritorial jurisdiction by bringing bribery in India—conspiracy to commit bribery—under US laws. Of course, the US has always argued that its laws trump all other country's laws and even international laws, e.g., the International Court of Justice or the International Criminal Court. In this particular case, the key to their involvement (or locus) stems from Adani raising funds from the US bond market. This is what gives the US authorities extraterritorial jurisdiction over Adani groups' acts, even though the projects are in India and Adani bribes were paid to officials here, and not in the US. Simultaneously, the new Sri Lankan government of President Anura Dissanayake is reconsidering the approval granted by the previous government to Adani Group's $440 million 484MW wind power project. Meanwhile, Total Energy of France, which has been a strong backer of Adani projects in the renewable sector in India, is set to distance itself from the Adani Group.
This time, unlike the short seller Hindenberg's attack on the Adani group of companies, the impact has been more on the two companies named in the SEC complaints: Adani Green and Adani Energy Solutions have already seen losses of in excess of $ 24 billion as their shares continue to fall. Worse, it means a huge blow to Gautam Adani's ability to raise funds abroad—with Fitch and other international agencies downgrading their bonds and stocks—even if his businesses in India are kept out of strict regulatory overview by a friendly government.
Adani has been using foreign bond markets to raise capital for his empire. It also gave his companies a loophole for the Security and Exchange Board of India (SEBI) to argue that since the dollar bonds are being floated in the US, the Indian authorities have no jurisdiction over them. Of course, the bonds floated abroad are based on Adani's share value in India and his companies' profits here. But for the SEBI chief Madhavi Buch and the Indian authorities, it provided a fig leaf for their turning a blind eye to the shenanigans of Adani and his henchmen.
What was an advantage of protecting Adani from scrutiny in India can now boomerang badly on the Adani group. As the stock or the bond market—even international contracts denominated in dollars—are under US jurisdiction, the US cases can lead to fines, other penalties and even jail sentences if there are criminal charges. All these can be settled by negotiations, in which the bulk of the concerned companies could be sold off to pay the hefty penalties the US authorities could impose.
One of these stories —The American Trap: My Battle to Expose America's Secret War against Rest of the World—is recounted in gripping details by Frederick Pierucci with journalist Mathieu Aron. Pierucci, a senior official with Alstom, one of the largest energy companies in the world, was put in maximum security prison for two years. The US authorities imposed a $772 million fine on Alstom, which forced the French company to sell its crown jewels to its competitor, the US power major General Electric (GE).
What and how Adani manipulated the bond market in the US for his benefit may not be of direct interest to us in India. What is important to understand is that the underlying value of the Adani bonds in the US comes from its businesses in India. The Adani companies in the eye of the storm are Adani Green, Adani Energy Solutions and Adani Enterprises. The key issue is the contract of Adani Green with Solar Energy Corporation of India (SECI) for supplying renewable—or green—energy to the respective state distribution companies.
SECI was set up by the central government to kickstart the solar energy sector and help India's ambitious plan for 300 GW of solar power for the grid by 2030. In this case, SECI had floated a tender combining 12 GWs of solar power supply with 3 GW of solar cell and module manufacturing capacity. What was curious about this tender is that, in general, electricity supply companies are not the ones that manufacture power plant equipment. For example, power generating companies in India, such as National Thermal Power Corporation (NTPC), buy power plant equipment from Bharat Heavy Electricals Ltd. (BHEL) or other vendors and sell the generated electricity to the grid. This is also what happens everywhere else: the companies that specialise in producing electricity—the utilities—are not equipment producers. This is true for the renewable sector as well.
In most countries that are the leading renewable producers in the world, whether China, Germany or the US, the companies that produce the equipment that generates electricity are not the ones that generate electricity. Most renewable companies, therefore, could not bid on this contract, as they needed a panel or solar cell manufacturing capacity, leaving only Adani Green and Azure Power, a Gurgaon-based developer, in the fray. Adani Green secured contracts for supplying 8 Gigawatts of solar power and building 2 GW of solar manufacturing capacity while Azure Power secured contracts for supplying 4 GW of solar power and 1 GW of solar manufacturing.
The question that needs to be asked is, what were the reasons for lumping solar cells, panel manufacturing and supplying solar power to the grid? What did setting up solar plants have to do with the manufacturing of solar cells and panels? Was it meant to provide Adani Green with an edge over others? Who drew up this strange scheme of combining a contract for solar power generation with cell and panel manufacturing?
Be that as it may, after securing the bidders for 12 GW of solar supply and manufacturing 3 GW of solar panels/cells, the problem was how to secure the next step: get the state Distcoms to buy this expensive power that SECI had secured. If Adani's green power could not be sold to the distribution companies, SECI would have landed with the power it had committed to purchase without any buyer. This is what the US SEC's complaints (there are two, one a criminal complaint and the other a civil one) make things clear.
According to "evidence" the SEC has seized from laptops and other devices of Sagar Adani and others, Gautam Adani personally negotiated with the state Distcoms for selling the SECI power in lieu of the "consideration" that Adani would pay the concerned state government authorities. Azure Power was also supposed to pay its "share" of the consideration, instead of which it surrendered 2.3 GW of the power to be sold to SECI in favour of Adani Green. According to Article 14, after Adani met the then-Andhra Pradesh chief minister Jagan Mohan Reddy, Reddy agreed to buy 7 GW from SECI for a consideration of Rs 1,750 crore. Odisha, Jammu & Kashmir, Tamil Nadu and Chhattisgarh then chipped in for the rest 5 GW to cover the total of 12 GW that SECI had contracted to buy.
So what was Adani's future profits from the sales thus secured? According to SEC's calculations based presumably on the internal documents seized from the US companies was that Adanis would make about 1-2 billion dollars over 20 years as profits from the Adani-SECI deal. These profits are the reason that the US bond holders were willing to pay money for the bonds of Adani companies, in this case of Adani Green.
Adani's lawyers have argued that the charges against Adani and his companies are not under FCPA (Foreign Corrupt Practices Act), are all "compoundable" and involve only fines, not prison sentences. Let us, for argument's sake, assume the Adani Lawyers are correct, and the charges levelled against the Adanis are only misleading the US authorities and can be settled by a fine. The crime of bribing Indian officials from the CM of Andhra Pradesh and other states is a crime in India. For these crimes, the SEC has documentary evidence, which has now been filed in the US Courts.
So what is the Indian government going to do about it? What will Chandra Babu Naidu's government, which runs Andhra Pradesh now after Jagan's defeat, do about this tainted contract? Ask for the sharing of evidence from the US SEC? Rescind the contracts with SECI, really the one SECI has with Adani? Or is it going to go along with such tainted contracts? The second question is, what will the Security Exchanges Board of India (SEBI) do about it not being reported that the SEC in the US has been investigating the activities of Adani companies? Since the Adani companies raise money through bonds in the US, did they not have the responsibility to report this on their balance sheet? And inform SEBI? What is the SEBI going to do about it?
Last of all, what will the Modi government do about all the doings of the Adani group? SECI, the main player in this game is a central government utility directly under the Ministry of New and Renewable Energy and headed by a cabinet minister Shri Pralhad Venkatesh Joshi. What is their stand on all these issues? Or are they going to do a an ostrich and hide their collective heads in the sand?
All these issues need an answer. On the Hindenburg issue, the government got away with bulldozing the opposition voices in the Parliament with the help of the Speaker of the Lok Sabha and the Deputy Speaker of the Rajya Sabha. Are we going to see more of the same? Particularly as the new Trump Administration may go soft on the Modi dispensation here. And may be even bury the SEC complaints.
None of these will erase the distrust that has now arisen in Adani's business empire, particularly as its empire rests on foreign bonds and financing while generating profits through the familiar route of crony capitalism. These are the questions that both the Modi government and the Adani empire will have to answer. We are awaiting answers from both who have fallen unusually silent on what is roiling the stock market and the peoples' minds. How long will the Modi government remain silent on the issue? What about the AP state government, which has been remarkably quiet about what its predecessor, the Jagan government, has done? Or are we seeing a combination of the Modi and Trump effect here? But for how long? The price of power that the people have to pay is the key issue. Not what the stock market says or what the people in power say.
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