What is the Action Three Years After Notice to Adanis for Inflating Costs

The Adanis are again in the news, and for the same reason as earlier – buying coal and equipment cheap, hiking up the price through Adani intermediaries, and then charging higher prices to the consumers. The current exposé deals with equipment prices. The total extent of the foreign exchange illegally transferred to a company controlled by Gautam Adani's brother Vinod Adani, in the offshore haven of Mauritius, is to the tune of Rs. 1,500 crore.

The impact of such a price increase of coal and higher cost of equipment would have been passed on to the consumers, increasing the electricity tariff by Rs. 1.00 to 1.50 over a five-year period. The total scam could be anything between Rs. 50,000 to Rs. 100,000 crores! And Adani's are not the only ones in this business of inflating coal and equipment prices. The others are Ambanis, Ruias, and similar big fishes. This is crony capitalism at its worst.

Paranjoy Guha Thakurta's exposé on coal imports in Economic and Political Weekly (EPW) had detailed how Adanis had been buying coal from Indonesia and then jacking up the price of coal via Adani-owned intermediaries in Dubai. They had also manipulated the calorific value of coal -- the coal increasing its heating value “miraculously” while being shipped from Indonesia to India. This difference in price, as bought in Indonesia and sold in India, was syphoned off into tax havens. The Adani Indian entity was also given a higher tariff, based on the inflated coal price.

Guha Thakurta's article on the issue of inflated equipment costs had reported, “Two years ago, in 2014, the DRI issued show cause notices alleging over-invoicing of power plant equipment to the tune of Rs 6,000 crore by a number of companies in the Adani Group. The notices alleged that the Adani Group had over-valued capital goods imported by Adani Power Maharashtra Limited, Adani Power Rajasthan Limited and Maharashtra Eastern Grid Power Transmission Company Limited. These companies were alleged to have indulged in a “trade based money laundering scheme” by mispricing equipment and by routing invoices through an intermediary in the United Arab Emirates, allegedly a ‘front company’ of the group.”

These articles have not been taken down by EPW and continue to be there on their website.

What is the impact of inflating fuel or equipment cost on the consumers? Coal costs are pass through, meaning that the power plant is paid the full cost of fuel that it buys (or imports). Typically, fuel cost is 50% of the energy cost, the other 50% being other running costs and the cost of capital. Adani's importing fuel and showing a higher cost by using an Adani intermediary meant that for every unit of energy it sold, it realised an extra benefit ranging from Re 0.50 to Rs. 1.50. The long-term impact on the consumers for inflated equipment costs due to higher tariffs is much bigger than syphoning off the foreign exchange. The consumers have to pay for this through higher electricity cost, till the capital cost is completely paid for.

The current Directorate of Revenue Intelligence (DRI) report now made public by The Guardian, UK deals with one of these companies, Maharashtra Power Eastern Grid Power Transmission Company Limited (MEGPTCL), a wholly owned subsidiary of Adani Enterprises Ltd., the flagship company of the Adani Group. MEGPTCL had two intermediaries – PMC Projects (India) and Electrogen Infra FZE, Dubai, both of which were owned by Adanis. MEGPTL procured equipment from a number of companies in South Korea and China through the above two intermediaries. The task of the Dubai intermediary was to buy the equipment from the manufacturers and then sell it to PMC, who in turn sold it to MEGPTCL. The final price to MEGPTL was 4 to 10 times that of the original cost of the equipment.

The DRI report makes its the modus operandi clear, “As a part of the modus operandi, though the goods were shipped directly to PMC/MEGPTCL in India by overseas suppliers who were OEMs, but for enabling inflation of invoices, it was made to appear on paper as if the goods are being supplied by EIF. Accordingly, back-to-back contracts were being signed between PMC (the contractor for MEGPTCL) and EIF, UAE in one hand, and EIF, UAE and the four OEMs on the other. But the facts that the back-to-back contracts of EIF, UAE with the OEMs were signed in India, that too by Shri (name blacked out in the document), an employee of PMC, shows that the said supply contracts were planned, conceived and executed in India by the same set of persons and that it was a sham transaction.”

While the document put up by Guardian blacks out the names of the Adani employees, Guha Thakurta's EPW piece names some of them. He had written, “Vinod Adani appears to have conspired with other employees, including Jatin Shah and Moreshwar Rabade, to “execute the planned conspiracy of syphoning foreign exchange abroad.”

There is a further advantage to the owners in inflating the capital cost of the plant. In most plants, the banks give loans to the “founders” – the original investors who set up the plant. The original investors bring in about 20% to 30% of the plant cost. If the cost of equipment can be increased artificially, the founder's equity is nothing but the recycled cost of the equipment syphoned to tax havens, reappearing later as founder's equity. This was the Enron scam in Dabhol and why its plant and equipment cost was much higher than similar plants elsewhere.

The DRI Report, dated 15.5. 2014, clearly the basis of some of Guha Thakurta's pieces in EPW, now makes clear that the Adanis have been under the scanner for quite some time. The report also documents that the companies concerned – PMC and MEGTPCL – refused to part with full information in spite of repeated opportunities. The amount that was syphoned was to the tune of Rs. 1493,84,72,484 (nearly Rs. 1,500 crore). The Report ends with the declaration that the goods imported under 57 bills having an aggregate value of Rs. 1887,06,49,088 crore (approximately Rs. 18870 crore being seized under the Section 110 (I) of the Customs Act, 1962.

This is already three years after the DRI Report has been issued. A number of adjudication notices have been issued to Adani's. What has happened in these cases for the last three years? Has any real action being taken against Adani's though DRI noted the fraud, and “seized” the equipment of MEGPTCL in 2014? Has Adani's proximity to the Modi government slowed down the action against his group of companies?

The other issue for the consumers is with respect to increased electricity tariffs the consumer is being forced to pay. How has the increased profits in 2014 to Adani's, which have been reported to be 50%, due to “compensatory tariff”, allowed to still continue over the last three years? Even after detection of the fraud? While “truing up of the costs”, did MEGTPCL submit revised costs based on the DRI Report? Or did it inform MERC that it has received notice from Customs Department challenging its capital costs? If not, will MERC that issued the tariff orders earlier based on partial information, now address the issue of overcharging of the consumers?

Disclaimer: The views expressed here are the author's personal views, and do not necessarily represent the views of Newsclick.