Implosion (52 page)

The leaked US cable said that an economist who had been studying the effectiveness of the state government’s programmes had reported that ‘with only four to five companies executing the projects through numerous subcontractors and little oversight, there are many opportunities for graft in the irrigation schemes’. India’s Comptroller and Auditor-General criticized cost and time over-runs in a report, which was submitted to the government early in February 2013.
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None of the contractors had met project completion dates, and only 16 out of the 86 projects had been finished. In a draft report submitted in July 2012, the CAG said that the state had neither enough funds nor water to implement the plans.
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Jalayagnam appeared to consist of a large number of contracts that were awarded without any assurance on the completion of works within specificed time periods and budgets, said the report. On one project, four firms obtained 16 contracts worth Rs 22,885 crore by forming joint ventures in 16 different combinations.

Jagan’s Companies

Jagan Reddy entered business in 2001, taking over the Bengalurubased Sandur Power Company, which handled small-scale power generation and distribution projects. By 2008, four years after YSR became chief minister, Sandur had spun off an investment company and expanded into real estate and other ventures including Jagan’s Jagati Publications.
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Working with his father, Jagan built up a media, cement and mining (the family’s original business area) empire, including Sakshi TV, Bharathi Cement and Raghuram Cement in addition to Sandur and Jagati.

Along with other key companies that he controlled with investments totalling Rs 797 crore, Jagati Publications became a focal point in 2012 and 2013 for investigations into money laundering by India’s Enforcement Directorate, and for separate corruption inquiries by the CBI into Jagan’s alleged ‘disproportionate assets’. Companies caught up in the assets case included Tamil Nadu-based India Cements, run by N. Srinivasan, who has been a dominant figure in the politics of Indian cricket as the chairman of the Board of Control for Cricket in India (BCCI) from 2011. He was also involved in the IPL championship controversies as chairman of Chennai Superkings, one of the teams. The CBI alleged that India Cements had invested Rs 100 crore in Raghuram Cements and Rs 40 crore in other Jagan companies and, in return, was allowed by the Andhra Pradesh government to draw additional river water for cement manufacturing plants and also received a favourable limestone mining lease in YSR family’s base of Kadapa.
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The allegations were published by Chandrababu Naidu’s TDP. on the party’s website
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with companies such as Matrix Group, Penna Cements, Ramky Group, Aurobindo Pharma, Hetero Group and Mantri Developers listed as allegedly providing funds for Bharathi Cement, Jagati Publications, Carmel Asia Holdings and other businesses run by Jagan, and receiving favours in return.
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The documents allege that Jagan and his father created 49 dummy companies around the country to launder the money they received in bribes. ‘The modus operandi was very simple: investors favoured with land allocations in exchange for their buying shares of the dummy companies at exorbitant premiums fixed by Jagan and Co,’ says the TDP website,
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quoting a First Information Report (FIR) filed by the CBI.

The CAG said in its annual report in March 2011 that a total of 88,500 acres of land was allotted on an ad hoc and arbitrary manner to private parties, ‘depriving the state revenue of nearly Rs 1 lakh crore (Rs 1bn)’. Among the companies named were Vanpic, Obulapuram Mining and Aurobindo Pharma, all of which were already being investigated in Jagan’s cases. ‘Alienation and allotment of land by the state government during 2006–11 was characterized by grave irregularities, involving allotment on an ad hoc, arbitrary and discretionary manner to private persons/entities at very low rates, without safeguarding the financial and socio-economic interests of the state,’ said the CAG. ‘The rates proposed at different established levels of the government hierarchy were disregarded and substantial benefits were unduly granted to private parties. Audit scrutiny revealed that in the test-checked cases, undue benefit of Rs 1,784 crore was given to various entities and persons due to the difference in the rates at which land was allotted and the market value as recommended by the district collector and empowered committee. In many cases of land allotment, the state government ignored the prescribed procedures and disregarded canons of financial propriety.’

In 2012, a 28,000-acre ports and industrial zone development in the state’s Guntur and Prakasam districts called Vanpic (Vadarevu and Nizampatnam ports) became the main focus of inquiries by the CBI, which said it was ‘nothing but a criminal conspiracy to loot the public assets in order to help private parties’.
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Vanpic was promoted by Nimmagadda Prasad, a businessman, through one of his group companies, Matrix Enport. Prasad’s original business was Matrix Labs, a prominent pharmaceutical company that was acquired by Mylan Labs of the US in 2006–07. Known locally as ‘Matrix Prasad’, he has interests in media and is chairman of Maa Television.

In addition to generous tax concessions, the government committed in 2008 to give Vanpic an excessive amount of land totalling some 18,000 acres, according to the CAG,
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allegedly in return for Prasad investing $300–400m in Jagan’s businesses including Sakshi. Investors in Vanpic, besides the Andhra government and Matrix Enport, included Ras Al Khaimah (RAK), one of the United Arab Emirates. (RAK also obtained controversial rights along with the state’s mining corporation and a branch of the Jindal family business group, one of India’s largest steel producers, to mine for bauxite in a protected tribal area, the Araku Valley, where only state agencies are allowed to work
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). Prasad was jailed in 2012 while inquiries continued. In March 2013, CBI counsel alleged in court that, between 2006 and 2009, the government had provided assets worth Rs 17,000 crore for Vanpic ports, an industrial corridor, a greenfield airport project and a shipyard and put the total land awarded at 28,000 acres. In return, said the counsel, Prasad invested heavily in Jagan’s companies.
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In November 2013, the state government cancelled the project,
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claiming it was doing so because it had not been properly cleared with the central government, which sounded like a neat excuse.

Big Names

A clutch of Andhra companies that thrived during the years when Chandrababu Naidu and YSR were chief ministers went on to run big projects in the rest of India and then abroad. They include names such as Satyam in software, and GMR, GVK and Lanco in infrastructure. GMR and GVK each run two of India’s main airports and were responsible along with 13 other companies, at their peak, for a third of the power projects and half the highway concessions.
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They were using the skills and resources that had been built up in Andhra Pradesh over previous decades. These included the close connections with politicians in Hyderabad, Delhi and elsewhere that seemed to encourage risky expansion rather than business caution. Many of the politicians involved are believed to have invested in the projects, channelling accumulated bribe money through sources such as off-shore equity funds. They have all hit problems. Satyam collapsed in a fraud scandal. The others have suffered from over-rapid expansion in the boom years that led to heavy indebtedness, plus India’s general problems of project delays caused by slow land approvals, environmental blockages and shortages of coal for power projects. Today, GMR, GVK and Lanco are among the country’s most heavily indebted companies.
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Satyam and Maytas

The biggest collapse came in January 2009 when Satyam, India’s third biggest software company with 53,000 employees and customers and operations in 66 countries, imploded. This was a rare case of the lid being lifted on India’s rocky corporate governance. It was especially worrying for the country’s international image because it happened in the new software information technology industry. Until the Satyam case, it had been assumed that these companies had better standards than many of India’s old family-controlled groups that habitually switched funds between businesses and into personal accounts. It can now be seen, however, with the subsequent exposure of widespread corruption, to be a prime example of what was wrong.

Satyam, which means ‘truth’ in Sanskrit, was controlled by the family of its then chairman, Ramalinga Raju,
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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
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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.
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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.
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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.
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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’.
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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.
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