Implosion: India’s Tryst with Reality
Page 38
Satyam, which means ‘truth’ in Sanskrit, was controlled by the family of its then chairman, Ramalinga Raju,61 who was closely linked with various politicians, including Chandrababu Naidu and YSR. Raju inherited a family textiles business and then moved into construction. In 1987, he set up Satyam, which became one of the first to use India’s low-cost software engineers to work at home and abroad for US and other companies. Satyam expanded rapidly as a market leader in the 1990s software boom, and in 1998 launched Satyam Infoway (Sify), one of India’s first private sector internet service providers that was also the first to be floated on the US stock market (and was later sold to private equity firms).
The Rajus’ infrastructure company, Maytas, received favours on contracts from the state government including YSR’s Jalayagnam projects, and eventually drained funds out of Satyam for real estate speculation. This business tainted Raju’s and his companies’ reputations. Questions were being asked by potential investors in the early 2000s about his business ethics, with allegations of tax evasion and over-pricing in a 1999 takeover of IndiaWorld.com, an Internet portal. In 2001, a stock market official told me that he did not expect Sify’s membership of the American NASDAQ stock exchange would stop Ramalinga ‘falsifying its subscriber base figures in order to boost its share price’.
The reports and allegations of unethical operations tended to disappear without any legal action, and official inquiries came to nothing. In the over-hyped investor enthusiasm of the time, these worries were mostly overlooked, and were partially allayed in the early 2000s by assurances that Raju was improving the company’s governance with new board members. Rumours continued to circulate in the following years, but Raju emerged in 2006 from his relatively low-key life to become chairman of NASSCOM, the software industry’s national trade body, which boosted his and Satyam’s image.
With hindsight, it can be seen that Raju’s crony business practices were revealed publicly when YSR’s government was heavily criticized in September 2008 for awarding a Hyderabad metro railway contract to Maytas.62 E. Sreedharan, who built and ran the Delhi Metro and is regarded as an international expert, alleged that there was a possible land scam on the proposed public-private-partnership project that Maytas had secured on a build-operate-transfer (BOT) basis from YSR’s government. In a letter to Montek Singh Ahluwalia, deputy chairman of the Planning Commission, Sreedharan cautioned against using BOT deals, which Ahluwalia favoured, for building such railways.63 Sreedharan alleged that Maytas ‘has a hidden agenda which appears to be to extend the metro network to a large tract of his private land holdings so as to reap a windfall profit of four to five times the land price’. Sreedharan’s views, however, were swept aside by the YSR government which, unsuccessfully, demanded an apology from him and threatened legal action. (The Maytas contract was cancelled in July 2009 and the project was awarded a year later to L&T.)
The next sign of trouble came on 16 December 2008 when the markets forced Raju to reverse a sudden move by Satyam to take over Maytas. That evening (India time), after local stock markets closed, Satyam announced it was spending $1.6 bn surplus cash to buy out two privately held Maytas real estate and construction companies, Maytas Properties for $1.3bn and 51 per cent of Maytas Infra for $300m. The market reaction was swift – Satyam lost 55 per cent of its value on the New York stock market and there were strong attacks from investors and analysts. By the end of the day (US time), Satyam had cancelled the deal. Raju claimed implausibly that the Maytas companies would have helped ‘de-risk’ Satyam against a downturn in the software business, though that made little sense when construction and real estate businesses were harder hit than information technology outsourcing companies that were conserving cash to help weather the global economic slowdown. Rarely had a company been brought into line so rapidly and publicly – and it might not have happened if Satyam had not been quoted in the US because in India it might have merely caused some headlines and then been shuffled out of the news.64
A few weeks later, Raju resigned and admitted in a letter to the company’s board that he had been inflating Satyam’s profits for several years. Cash and bank balances and other favourable figures had been overstated, resulting in artificial balances of Rs 5.88bn in the three months ending the previous September. His attempt to merge Maytas into Satyam ‘was the last attempt to fill the flctitious assets with real ones’, aimed at filling the fraudulent holes in Satyam’s balance sheet with genuine Maytas assets. ‘It was,’ wrote Raju, ‘like riding a tiger, not knowing how to get off without being eaten’.65 In July 2010, however, he retracted his statement while appealing for bail.
Satyam was rescued with the initiative led by the Indian government and is now part of the Mahindra group, capitalizing on the software skills that Raju had squandered in his family’s race for Maytas’s infrastructure projects. Both companies, and the Raju family, became the subject of extended inquiries by the finance ministry’s Enforcement Directorate, which handles foreign exchange and money laundering cases, and the CBI. Raju was in jail from January 2009 till November 2011 when he was released on bail.66
In October 2013, the Enforcement Directorate filed charges against Raju and 47 other people, plus 166 companies, for offences under money laundering legislation.67 The charges included selling and pledging of Satyam shares at in?ated prices, receiving bonus shares under employee stock option schemes, and dividends on the inflated shares through inter-connected transactions involving 327 front companies ‘which were used to layer the proceeds of crime’.
GMR, GVK and Lanco
GMR has one of the highest profiles among the large Andhra-originated infrastructure companies, stemming from multiple interests in India and abroad. Founded by G. Mallikarjuna Rao, the chairman, it is a classic example of entrepreneurial drive mixed with effective project management and assiduous cultivation of contacts among politicians and bureaucrats. Rao started in the family’s jute and gold businesses and moved on to work in Andhra’s public works department before setting up a company to produce cotton ear buds, and then a brewery and a sugar mill. Next, he bought shares in the Bengaluru-based Vysya Bank, where he became chairman before selling his stake to ING of the Netherlands for a reported Rs 350 crores.68
He began in infrastructure with power plants in Tamil Nadu and Karnataka in the mid-1990s, and highway projects on the Golden Quadrilateral highway programme in the early 2000s. Mobilizing his widespread contacts, he obtained the contract to build and operate Hyderabad airport, with a 63 per cent stake in partnership with the Indian and Andhra governments and Malaysia Airports Holdings. The airport opened in 2008 and was followed by a concession for the New Delhi airport, plus airports in the Maldives (which it later lost in a contract dispute) and Istanbul. At its peak, GMR had 17 power projects operating or under construction, four airports, nine highways totalling over 700 km and interests in coal mining – all achieved in less than 20 years. This led the group to become over-extended by 2011 when it was also running into delays on various projects, and financial problems on the Delhi airport.69 It began shedding assets, including stakes in a Singapore-based energy business, the Istanbul airport, plus highway and power projects that were hit by delays70 – though it did pick up a new Philippines airport contract in December 2013.
The biggest controversy to hit GMR concerned the Delhi airport, which its consortium won after a contentious bidding process presided over by Praful Patel as aviation minister. The deal was criticized in a CAG report in April 2012, which estimated that there were losses in government taxes and passengers’ charges totalling some Rs 3,750 crore, partly caused by commercial development arrangements on the 4,800-acre site.71 It also criticized the consortium’s right unilaterally to extend its 30-year concession for another 30 years, which had not been in the initial government plans but had been approved by Patel. These findings were challenged by GMR, which denied obtaining any special benefits.
GVK was founded by G.V. Krishna Reddy, who comes from a family that in the pa
st has held top posts in the Andhra government, as well as carrying out irrigation and road contracts. He owns several of Hyderabad’s leading hotels run by the Taj group, and since the mid-1990s has developed power projects, the Bengaluru and Mumbai airports, and a special economic zone in Tamil Nadu. More recently, he has taken on two airports in Indonesia and bought a $1.26 bn controlling stake in Australian coal mines with plans for a total investment of $10bn to create one of the world’s largest thermal coal mining operations. Hit with heavy debts, the group has been selling stakes in its airport business and power businesses.
The third leading company, Lanco, is the most politically high profile of the three companies, having been led initially by Lagadapati Rajagopal, the Congress MP and a key YSR supporter. His brother L. Madhusudan Rao and brother-in-law G. Bhaskara Rao now run the group, which claims to be India’s largest private sector power producer and also has coal mining interests in Australia. To improve its image, Lanco moved its headquarters from Hyderabad to Gurgaon on the outskirts of Delhi but it became over-extended and lost large-scale projects for lack of funds, pulled out of others, dismissed a large number of employees, and formally announced a debt-restructuring process in 2013.
Some time in the future, Andhra’s years of fraud and deception will almost certainly be seen, in the traditions of early American business, as merely one of the stepping stones that a new economy takes when it suddenly enjoys unexpected riches, and the prospect of much more, if politicians are suborned, rules bent and the state cheated.
For now, the Andhra companies have fallen from favour with more conventional investors. Barring the sort of scandals that emerged with Satyam and the YSR investigations, they should recover though, even if it is some time before they and their business families can regain credibility with savvy Indian and foreign investors. Too many private equity and other firms have been caught by what looked like sound deals and honest entreprenreurs for this to happen quickly, especially with the current investigations and pending court cases. Yet one should never under-estimate investors’ ability to turn a proverbial blind eye when offered the prospect of quick profits – a thought that no doubt brings a glimmer of hope to such companies.
Notes
1. http://ridingtheelephant.wordpress.com/2009/01/07/satyam%E2%80%99s-raju-lifts-the-lid-on-indian-corporate-fraud/
2. http://ridingtheelephant.wordpress.com/2009/09/04/a-chief-minister%E2%80%99s-death-highlights-contradictions-of-indian-politics/
3. http://ridingtheelephant.wordpress.com/2009/09/04/a-chief-minister%E2%80%99s-death-highlights-contradictions-of-indian-politics/
4. http://ridingtheelephant.wordpress.com/2009/12/18/hyderabad-sinks-from-software-to-scams-as-greed-and-wealth-swamp-politics/
5. Conversation with JE, July 2013
6. Harish Damodaran, India’s New Capitalists, p. 92 and following, Permanent Black, Delhi 2008
7. Jawaharlal Nehru, The Discovery of India, p. 307 http://www.scribd.com/doc/31927774/The-Discovery-of-India-Jawaharlal-Nehru
8. Swaminathan Aiyar, ‘Declassify report on the 1948 Hyderabad massacre’, The Times of India, 25 November 2012, http://blogs.timesofindia.indiatimes.com/Swaminomics/entry/declassify-report-on-the-1948-hyderabad-massacre
9. ‘Rock Formations of Hyderabad’, Society to Save Rocks, http://www.hyderabadgreens.org/rocks.html
10. ‘Telangana is more advanced than the rest of AP’, http://www.indian express.com/news/backward-telangana-is-a-myth/734444/
11. India’s New Capitalists by Harish Damodaran p 121, Permanent Black, Delhi 2008
12. http://www.indianexpress.com/news/centre-says-a-guarded-yes-to-telangana/552114/
13. ‘Jagan is president of YSR Congress’, 2 February 2011 http://www.thehindu.com/todays-paper/tp-national/tp-andhrapradesh/article1479332.ece
14. JE, ‘India Calling: East Meets West at the Internet Frontier’, Fortune magazine, 17 April 2000.
15. www.aponline.gov.in/Apportal/HumanDevelopmentReport2007/APHDR_2007_Chapter4.pdf
16. IPDL website http://www.idpl.gov.in/about_us.html
17. P. Sainath, ‘Why Farmers Die’, June 2004, http://www.indiatogether.org/2004/jun/psa-farmdie.htm
18. http://planningcommission.nic.in/data/datatable/0512/databook_117.pdf
19. P. Sainath, ‘Why Farmers Die’, June 2004, http://www.indiatogether.org/2004/jun/psa-farmdie.htm
20. ‘Reddy in the Rough’, http://indiatoday.intoday.in/story/ys-reddy-guarding-off-corruption-charges/1/156002.html
21. http://ridingtheelephant.wordpress.com/2009/09/04/a-chief-minister%E2%80%99s-death-highlights-contradictions-of-indian-politics/
22. 7 Sept 2009, http://www.in.siasat.com/english/news/clp-claims-417-die-wake-ysrs-deathpolice-could-not-confirm
23. 16 Sept 2009, http://indiatoday.intoday.in/story/Families+paid+to+claim+YSR+shock+deaths/1/61917.html
24. ‘Deifying YSR’, 14 September 2009, https://www.google.co.in/search?q=deifying+YSR&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=? refox-beta&channel=f?b
25. http://ridingtheelephant.wordpress.com/2009/12/18/hyderabad-sinks-from-software-to-scams-as-greed-and-wealth-swamp-politics/
26. A. Srinivasa Rao, ‘How Jagan Reddy became the richest Lok Sabha MP in India, and what is his real worth?’, Mail Today, 28 May 2012, http://indiatoday.intoday.in/story/how-jagan-reddy-became-the-richest-mp-in-india-and-what-is-his-real-worth/1/197981.html
27. ‘How did democratic values collapse?’, 15 June 2012, http://millenniumpost.in/NewsContent.aspx?NID=4022
28. http://ridingtheelephant.wordpress.com/2012/06/15/andhra-pradesh-political-corruption-hits-sonia-gandhi-and-congress/
29. 11 December 2010, http://www.timescrest.com/society/mavericks-myth-money-4235
30. ‘Jagan Mohan Reddy sent to jail as special prisoner’, The Times of India, http://articles.timesofindia.indiatimes.com/2012-05-29/hyderabad/31887391_1_vijay-sai-reddy-sakshi-newspaper-odarpu-yatra
31. ‘Andhra leader’s arrest shows CBI reform is essential’ http://www.business-standard.com/india/news/arrested-independence-/475828/
32. http://ridingtheelephant.wordpress.com/2012/06/15/andhra-pradesh-political-corruption-hits-sonia-gandhi-and-congress/
33. 15 June 2012, http://www.ndtv.com/article/south/election-results-jagan-sweeps-polls-will-be-chief-minister-in-2014-predicts-sister-231640
34. 8 June 2012, ‘Costliest elections ever in State’, http://www.thehindu.com/news/states/andhra-pradesh/article3501694.ece
35. 12 June 2012, http://www.ndtv.com/article/south/80-per-cent-turnout-in-andhra-pradesh-by-polls-jagan-mohan-reddy-on-trial-230500
36. ‘Congress MP’s father killed in bomb blast’, Indian Express, 24 May 1998, http://expressindia.indianexpress.com/ie/daily/19980524/14450754.html and http://www.hindu.com/2004/04/13/stories/2004041305380500.htm
37. ‘Beyond Media Images’, a letter from YSR, EPW, 31 July 2004, http://www.epw.in/system/files/pdf/2004_39/31/Beyond_Media_Images.pdf
38. ‘Money backs “Son-rise” in Andhra’, Mail Today, 3 October 2009 (no internet link working)
39. JE conversations with Hyderabad sources
40. ‘Andhra Pradesh cancels land allotment to IMG’, IANS, 29 September 29, 2006 http://www.india-forums.com/news/business/3852-andhra-pradesh-cancels-land-allotment-to-img.htm
41. The Times of India, 4 November 2012, http://timesofindia.indiatimes.com/city/hyderabad/IMG-Bharatas-Rao-defends-MoU-with-state-govt/articleshow/17081258.cms
42. ‘YSR’s “sheer size” of corruption shocked US diplomats’, First Post, http://www.firstpost.com/politics/ysr-reddys-sheer-size-of-corruption-shocked-us-diplomats-85356.html
43. Company website: http://www.lancohills.com/
44. Golden Mile plots sold at Rs 55,000 a square yard, The Hindu, 21 July 2006, http://www.hindu.com/2006/07/21/stories/2006072120400400.htm
45. P Sainath, ‘A short history of messing up’, 8 June 2012, The Hindu, http://www.thehindu.com/opinion/lead/article3501815.ece
47. ‘Jalayagnam delay: CAG raps State government’, The Hindu,7 February 2013, http://www.thehindu.com/todays-paper/jalayagnam-delay-cag-raps-state/article4387789.ece
48. ‘Rs 186,000 Crore Illusion’, Down to Earth, 15 July 2012, http://www.downtoearth.org.in/content/rs-186000-cr-illusion
49. TDP political party website: http://www.telugudesam.org/tdpcms/scams/rajaofcorruption/Chapter16.pdf
50. http://www.thehindubusinessline.com/news/jagan-assets-case-india-cements-md-srinivasan-other-accused-appear-in-court/article5304110.ece
51. ‘“Raja” of Corruption’, http://www.telugudesam.org/tdpcms/scams/rajaofcorruption/
52. ‘Flow of Funds’, http://telugudesam.org/jagancorruption/?page_id=13
53. Ibid.
54. ‘3 mantris cleared Vanpic in a day’, TNN, 6 June 2012 http://articles.timesofindia.indiatimes.com/2012-06-06/hyderabad/32078329_1_cbi-court-cbi-counsel-vanpic
55. CAG report for the year ending 31 March 2011; tabled in the Andhra Pradesh Assembly March 2012
56. The Andhra Pradesh Mineral Development Corporation obtained mining rights because it is a state corporation but a clause in its contract enabled it to bring in the private sector if it lacked the technology, so it joined up with Jindal and RAK. ‘Cancel bauxite mining leases in Vizag: House panel’, The Hindu, 9 January 2013, http://www.thehindu.com/news/national/andhra-pradesh/cancel-bauxite-mining-leases-in-vizag-house-panel/article4289962.ece
57. ‘Nimmagadda roped in RAK to bag Vanpic project: CBI counsel’, The Times of India, 21 March 2013, http://articles.timesofindia.indiatimes.com/2013-03-21/hyderabad/37901956_1_aj-jagannadham-qatar-massad-nimmagadda-prasad
58. ‘AP cabinet cancels Rs 16,000 crore port, industrial corridor project’, Mint, 19 November 2013, http://www.livemint.com/Industry/BdV9O249hA3Q6RI0yWJ1MP/AP-cabinet-cancels-Rs16000-crore-port-industrial-corridor.html