The adjudicating authority in the Directorate of Revenue Intelligence case on alleged over-invoicing of power equipment has evidently been sympathetic to the Adani group. But this is just one instance.

On August 22, the adjudicating authority in the Directorate of Revenue Intelligence (DRI) absolved two Adani group companies, Adani Power Maharashtra Limited (APML) and Adani Power Rajasthan Limited (APRL), of all charges laid out in a showcause notice (SCN) issued by the DRI in May 2017.

It had been alleged in this SCN that the companies overvalued equipment for power generation to the tune of Rs 3,974 crore by conniving with an intermediary, Electrogen Infra FZE (EIF), United Arab Emirates (UAE). The DRI had issued another SCN to the Adani group for Rs 1,526 crore (for a power transmission project) in May 2014 and a third in September 2016 for around Rs 1,000 crore. It is reported that the adjudication is still pending in the last two SCNs.

The order of the adjudicating authority (K.V.S. Singh, the additional director general for adjudication at DRI) ruled against the DRI in favour of the Adani group companies. It should be noted that UK-based publication, the Guardian had made public for the first time, on August 15, the other SCN alleging tax evasion of Rs 1,526 crore, and the Congress demanded a Supreme Court-monitored probe into the allegations, in a media conference on August 18. It may be in the realm of speculation to underline a link between these events, but what is not speculation is the detailed DRI investigation report put out in this website for public interest.

The DRI investigation had alleged:

That the relation and transactions between APML, APRL and the intermediary EIF, are far from kosher.

That EIF was nothing more than a front company to allegedly inflate invoices.

That EIF’s links with Vinod Shantilal Adani, elder brother of Gautam Adani, who had earlier served on the board of directors of Electrogen Infra Holdings (EIH) Pvt Ltd, Mauritius, (holding company of EIF, UAE), and the Adani group in India, through various shell companies based in tax havens, were beyond doubt.

That EIF, UAE, invoiced the goods to APML and APRL at a substantial premium, inflated beyond prudent business acumen, whereas the boiler-turbine-generator (BTG) and other equipment were directly received by Adani group from original equipment manufacturers (OEM) suppliers in China and South Korea.

After a perusal of the order, it appears that it failed to seriously evaluate or engage with the detailed findings of the DRI investigation in the SCN. In an enquiry dealing with import of goods and specific findings of the DRI regarding over invoicing, there is no significant discussion of the amounts involved.

How is a 220% markup justified?

The order, without any basis, justifies the alleged fraud by stating that the “global tender followed international competitive bidding process”. There is no indication in the order about the details of the process. The adjudicating authority proceeds on the assumption that EIF is an engineering procurement construction (EPC) contractor for a routine turnkey project for setting up a power plant. There is no evidence which shows that EIF has provided any EPC service whatsoever beyond the supply of goods from OEM suppliers. Even in that case, the goods were delivered directly to India from the manufacturers. A cursory glance at the website of EIF raises serious doubts about the nature of the company. Is it a phantom website of a company that deals with contracts worth thousands of crore rupees?

The order justifies the mark-up (that is, the over-invoicing) because of an extended warranty and EPC services. It is claimed that the OEM suppliers offered a limited warranty of between ten months and 24 months. According to the response to the SCN by the noticee, EIF offered an extended warranty for ten years. This business practice is justified by the company on the basis of the supposed extra risk taken upon by EIF. Even if it is taken at face value, how can a markup of 220% be justified on the basis of this extended warranty?

The adjudicating officer compares the contract between EIF and OEM and the Adani group companies and EIF. He comes to a strange conclusion that because some clauses in the latter contract are more stringent than corresponding clauses in the contract between EIF and OEM, the contract must be genuine. It could be anything on paper. Most importantly, the DRI investigation found that for every consignment there were two set of invoices, one raised by the actual supplier (OEM) and the other raised by EIF on APML and APRL. Both the invoices have the same number but different values of the cost of equipment. This crucial evidence has been dealt with in a wishy-washy manner in the order by treating the latter as a lumpsum contract for services and as coming under the jurisdiction of state electricity regulatory bodies.

Turning a blind eye to a bogus relationship?

The order feigns ignorance in its understanding of how a corporate fraud is carried out. The fact is there has been a formal attempt to cover up the connections between different companies in the entire transaction chain. EIF is 100% owned by EIH, Mauritius. EIH is in turn 100% owned by Asankhya Resources Pvt Ltd (AR), incorporated in the Cayman Islands, a jurisdiction which is notorious for tax evasion through shell companies. Further, AR is owned by Eagle Holding Ltd, which is a nominee shareholder in Asankhya Resources Family Trust, for which, Vinod Shantilal Adani, brother of Gautam Adani, and a promoter of the group holding company, Adani Enterprises Ltd, is the controlling authority of the trust.

It is indisputable that within a mere two months after signing of the agreement between Adani group and EIF, Vinod Adani became a director of EIH, which is the holding company of EIF. Clearly, the intention always was that the contract would be among companies owned and controlled by the Adani group. The agreement was signed a few months prior to the takeover of ownership by Adani allegedly to hoodwink the Indian authorities.

Interestingly, Vinod Adani claims he has never have been involved in the day to day functioning of EIF, a wholly owned subsidiary of EIH. However, on May 19, 2011, the board of EIF authorised him to sign documents for and on behalf of EIF. This proves Vinod Adani was perhaps not revealing the full truth about his connections with EIF which were not only formal but also that he was one of the key controlling persons in the company.

Similarly, two individuals who were employees suddenly resigned to join SME (as EIF was then known). This also happened at the time of signing of the agreement which makes it clear that the Adani group was sending personnel to EIF prior to its takeover by Vinod Adani himself. Moreover, the Adani group were the guarantors for the loan from the ICICI Bank to EIF. Essentially, the shares of Adani Power Ltd and/or Adani Enterprises Ltd were pledged to ICICI for the purpose of obtaining a loan for EIF. This establishes a strong relationship between the two entities.

This is a clear instance of related companies pretending to be unrelated. Common ownership and control of all these companies is beyond dispute and in fact, the transfer of shareholding and the appointment of directors and officers seems to have been staggered only to present a prima facie defence that these are not related companies. The adjudicating officer seems to have fallen for this stilted defence hook, line and sinker.

The rot runs deep

The Adani group’s stock response to the allegations has been: “The fact that our projects have incurred the lowest cost across central, state and private utility players has gone to establish the robustness of the processes followed by our group.”

Let us for a moment take the statement at face value. With mounting evidence of over-invoicing and therefore inflation of costs associated with power generation and transmission, the question is how is the Adani group able to deliver low costs in comparison to other competitors?

A possible answer may lie in the fact that the rot in the power sector has set in deep. The DRI reports relating to the exposé in the Guardian and the recent order are only the tip of the iceberg. Whether it is import of coal or import of power generation equipment or power transmission equipment, there is always an opportunity to inflate invoices. The practice of companies indulging in trade-based money laundering schemes, as noted by the DRI, by mispricing equipment or coal, and routing invoices through intermediaries or shell companies, has been prevalent for some time.

A 2016 article goes further and investigates the different methods through which electricity tariffs are artificially inflated, therefore hurting the consumers. It goes on to state that the DRI is investigating 40-odd companies for allegedly over-invoicing coals from Indonesia. The numbers highlighted in the article are mind-boggling. See the excerpt below:

The three methods through which electricity tariffs have been artificially inflated are – over-valuation of imported coal to the tune of Rs 29,000 crore, over-valuation of power plant equipment to the tune of Rs 9,000 crore and compensatory tariffs awarded to the tune of at least Rs 10,000 crore, or possibly higher.

In other words, power companies like those in the Adani group are apparently purchasing power plant equipment from their own subsidiaries or associates at very high prices and recovering the cost from the aam aadmi. The central and state electricity regulatory authorities allow a rate of return on equity for generation companies between 14.90% and 15% and for transmission utilities at 15.5% (for example, Power Grid Corporation of India Ltd). The regulatory commissions, while fixing the tariff take into account depreciation and the costs of operation and maintenance based on the original cost of equipment. Thus if the cost of equipment is artificially inflated it has a multi-dimensional impact on tariff for consumers, anywhere between 50 paise and Rs 2 per unit or kilowatt hour.

Investigations being blocked

On August 25, India Today reported that the DRI is preparing to give State Bank of India (SBI), ICICI Bank and Bank of Baroda (BOB), a rap on their knuckles for non-cooperation with the DRI investigation in the Rs 29,000 crore coal import scam. The DRI alleges that branches of these banks, mostly in Singapore, have withheld evidence against companies under investigation. According to the article, DRI officials have indicated that someone was trying to stall the evidence from reaching them. India Today quoted an unnamed official saying, “After issuing the letters rogatory (LRs) to a few countries, case details have started coming in. Even countries like Singapore are more than willing to share the evidence with us, but it looks like an ‘invisible outside hand’ is stopping it from happening. The central government has been informed about it”.

Interestingly, an Adani group company has moved a Singapore court in an attempt to block information to DRI. The website of the Singapore court shows that a case filed by Adani Global against the Attorney General and others was listed for hearing on August 21. The case aims to seek a stay on a demand “to produce documents pertaining to Indonesian coal imports from Adani’s subsidiaries”.

All these instances, including the recent flawed adjudication order, reveal an organised attempt at scuttling various investigations being pursued by the DRI.

We are left with a few important questions:

Will the government accede to the demand for setting up a Special Investigation Team monitored by a sitting judge of the Supreme Court to look into the corrupt practices of over-invoicing in the power sector? Will inflated power costs by up to Rs 2 per unit, wherever these companies are producing and transmitting electricity, be brought down to provide relief to consumers? Will the Ministry of Finance appeal against the adjudicating authority’s order to the Customs, Central Excise and Service Tax Appellate Tribunal (CESTAT)? Will the case be probed under the Prevention of Corruption Act because the adjudicating officer (K V S Singh), according to reliable sources, did not hear the other side – namely, those who had conducted the investigations and filed the SCN in his own department?

Only time will tell.

Varun Santhosh is adviser to professor M.V. Rajeev Gowda, member of parliament and chairman, All India Congress Committee Research Department and can be contacted at varunsanthosh@gmail.com or @santvarun on Twitter. The views expressed are personal and not of his employers. He acknowledges inputs from Sarim Naved, Akash Satyawali and Paranjoy Guha Thakurta.

This article was originally published on The A Files.