Abir Dasgupta has posted this information on the Mastodon network and asked the public to share the story. As his former employer seems to have ditched him, the ILR is publishing it in full.
This should come as no surprise to regular readers of the ILR. See for example our article on Why Big Business Prefers Lobbying the Government to Free Markets
I’ve been a journalist for a little over two years now. Four months into my career, I experienced the delight of being sued for defamation by a corporate giant, disowned by my organisation, and eventually pushed out. I have been independent since then.
Thankfully, I was able to find a reasonable arrangement as a freelancer that has made it easier than it could have been.
The offending article can be read here : Modi Government’s Rs 500-Crore Bonanza to the Adani Group (The Wire)
Covering Adani has become something of my beat, for over two years.
One major thread of this coverage has been of the over invoicing scandal, in which Adani is one of the main players.
This is to cover everything that is so far publicly known about the scam which is worth up to Rs 29,000 crore by a conservative calculation.
The Directorate of Revenue Intelligence (DRI) is an investigation agency that comes under the Revenue Department in the Finance Ministry. It functions under the Customs Act and investigates import and export transactions.
In December 2014, it was reported that DRI had conducted raids at over 80 locations across the country.
It had found that a number of companies associated with the power sector were showing inflated costs for their imports of coal and equipment.
The majority of the suspected imports were of coal from Indonesia.
India imports around 20% of its coal requirement from Indonesia. It increased substantially between 2009-2011 due to a shortage of domestic coal, and the inability of the public sector Coal India Limited to ramp up production.
Coal from Indonesia primarily fed coastal “ultra mega power plants” of capacities upwards of 2000 MW. Companies like Adani, Tata, Essar, and Reliance all own such facilities.
The way the scam worked was:
Coal shipments would arrive from Indonesia to Indian ports directly. However, the invoices corresponding to those ships would take a “detour” through other countries.
A “middle-company” located in such places as Dubai, Hong Kong, Singapore and others, would be shown as the exporter in the invoice shown to customs authorities.
Another set of invoices the DRI unearthed, showed the sale by the original exporters to the middle-companies. At a much lower price.
It was not just two sets of invoices that the DRI had found.
It had also found two sets of contracts – between the actual exporter and the middle-company, and the middle-company and the importer – agreeing to sell coal of a particular quality at a fixed rate.
Again, the latter contracts were shared with the customs authorities.
The DRI also found 2 sets of test reports for each import.
The quality of coal is certified by a testing lab, and their reports are attached the customs documentation. Customs sometimes tests coal of a particular shipment to check if it matches the stated quality.
The DRI found one set of reports that rated the coal imports at a lower level, and the second set at a higher level.
The two quality ranges, corresponded to the two sets of contracts. The companies used the higher sets.
In addition, the DRI also found comparable evidence to suggest that in a few cases, imports of heavy equipment used in setting up power plants and transmission infrastructure had also been similarly “over-invoiced.”
The way this worked to the companies’ benefit was, they were all in different sections of the power generation chain.
At the end, in most of India except in a few cities, electricity is supplied to the public by government owned distribution companies (discoms).
The discoms buy electricity from the generating companies.
The tariff at which discoms by electricity are based on the generator’s fuel cost. By charging higher tariffs based on inflated costs, they could recover super profits.
In all, the DRI alleged, Rs 29,000 crore had been siphoned out of the Indian public’s pocket by these companies through over invoicing.
In March 2016, the DRI issued a “lookout” circular to customs authorities across the country, detailing this modus operandi, and listing the companies involved. This is that circular.
It was first reported here, in this story that made the circular public and named the companies for the first time. There were a few big ones.
They included :
– six companies in Gautam Adani’s Adani group
– two in Anil Ambani’s Reliance ADAG group
– two in the Ruia family’s Essar group
– four in the Hyderabad based NSL group
– one in N Srinivasan’s India Cements group.
Four public sector companies were named too: National Thermal Power Corporation, Metals and Minerals Trading Corporation, Metal Scrap Trading Corporation and Karnataka Power Corporation.
As soon as this was out, people realised that this over-invoicing had a bearing on a number of ongoing cases.
Power tariffs are fixed based on bids that companies make for new power projects. In their bid, they specify a tariff based on their expected fuel costs. The lowest quote wins.
Once a power plant is built and ready to supply, its tariff must be approved. This is done by the Electricity Regulatory Commission of the state involved. This body approves and declares every tariff.
If a tariff has to change for any reason, it must go before the state regulator to be approved.
Companies such as Adani and Essar that were supplying power based on Indonesian coal, had for months then been before the Central Electricity Regulatory Commission (CERC) asking for an increase in the tariff they could charge.
This was because, they claimed, the Indonesian government had passed a law that made coal much more expensive, after they had fixed their tariff based on lower costs.
Clearly, if the Indonesian coal that this claim was based on was over-invoiced, this should have had a bearing on those cases at the CERC.
The CERC had already granted the increased tariff though, and the case had gone in appeal to the Appellate Tribunal for Electricity (APTEL). The APTEL had also granted the increase, but had ordered the CERC to revise it based on a different formula.
Putting the “compensatory” tariff on account of the increase in the cost of Indonesian coal, and the over-invoiced coal and power equipment, the scam now added up to over Rs. 50,000 crore.
This story that covered the developments up to this point. I got to hear that at the first hearing at the CERC that followed the publication of this article in the Economic and Political Weekly, people showed up in protest brandishing copies of the magazine.
The way a DRI investigation works is specified under the Customs Act.
When it suspects customs fraud, the DRI is permitted to investigate suo moto, without any other body’s sanctions. Once an investigation is complete, the DRI issues a show cause notice (SCN) to the accused party, which then gets a chance to respond and present its defense.
These hearings are conducted by, and the SCN is then ruled upon by an adjudicating authority of the rank of Additional Director General, Customs.
By August 2016, the DRI had issued SCNs to four companies.
Two Adani group companies had received notices in May 2014 worth Rs 5500 crore. These related to imported equipment.
One had gone to the Essar group in March 2015, worth Rs 2600 crore. This related to imported equipment
One went to a Delhi based company called Knowledge Infrastructure Systems Private Limited (KISPL) in August 2016, worth Rs 12.57 crore. This related to imported coal.
In October 2016, a new official was appointed to the role of adjudication authority in the DRI’s Mumbai Zonal Unit, which had issued these Show Cause Notices. In the months that would follow, this official, K V S Singh would adjudicate on some of these SCNs.
In December 2016, Singh upheld DRI’s investigation in the KISPL case.
However, in August 2017, Singh dismissed the DRI’s investigation in one of the Adani cases, worth Rs 3974 crore.
The contrasting decisions were analysed in this article, that also attracted a defamation suit from the Adani group.
Both cases went in appeal to the Central Excise and Service Tax Appellate Tribunal (CESTAT).
However, complaints started to emerge out of one of those appeals, the KISPL one.
The DRI alleged that one of the officials on the CESTAT bench was conducting biased proceedings, and wrote the the President of CESTAT seeking that he be replaced.
He wasn’t and the CESTAT ruling overturned the adjudication order and exonerated KISPL.
By this point, accusations had started swirling that the investigation was being deliberately mismanaged and set up to fail.
The CESTAT order, which was supposed to be appealed before the Supreme Court, was instead taken to the Bombay High Court. The Bombay High Court of course, threw out the case and now it has finally been appealed at the Supreme Court.
There was another reason to fear for the progress of the investigation.
To conduct its investigation, the DRI needed to look into companies abroad.
In some cases, the Indian corporates were themselves the sellers, having bought coal mines in Indonesia. In all the cases, the foreign “middle-companies’ or “invoicing agents” were subsidiaries of the Indian corporates.
When the DRI approached these corporates seeking documents relating to their subsidiaries, they didn’t cooperate.
Then the DRI sought to recover the documents it needed from banks.
These foreign subsidiaries had all dealt with foreign branches of Indian banks. Four banks were involved – ICICI Bank, Axis Bank, State Bank of India and Bank of Baroda.
DRI wrote to these banks seeking the documents. The private banks, ICICI and Axis, complied. The two public banks, SBI and BoB though, refused.
The DRI then got letters sent to these banks by the Revenue Secretary, and even got the Prime Minister’s office involved, but they refused, citing confidentiality.
Then, the DRI started to issue Letters Rogatory (LRs). LRs are an a formal request that an Indian court can make to a foreign court, requesting its assistance for an Indian investigation in its jurisdiction.
Ideally, using the LRs, the DRI could force the foreign branches of SBI and BoB to cooperate, as well as directly investigate the foreign subsidiary companies.
The Adani group though, wasn’t having it, and decided to challenge the LRs.
In August 2017, the Adani group approached the courts in Singapore, trying to the a DRI issued LR quashed.
When the Singapore court declined to do so, the Adani group approached the Bombay High Court with the same demand.
During the course of that case, accusations arose that the government was not supporting the DRI sufficiently. The Congress accused the government of not appointing a senior counsel to argue at the High Court.
Last month, the Bombay High Court ruled in Adani’s favour.
As I wrote, the verdict threatens to undermine a whole lot more than the Adani coal investigation. The order decided that LRs can only be issued following the procedure in the Code of Criminal Procedure, and all investigations by government agencies under special acts like the customs act, cannot issue LRs.
This would affect the DRI, the ED, Income Tax and the SFIO, all of which use special acts.
Because of all these concerns, in 2017, the Center for Public Interest Litigation, a Delhi based NGO run by Prashant Bhushan, filed a PIL before the Delhi High Court, requesting that the government institute a Special Investigation Team (SIT), comprising officials from the DRI, the CBI, the ED and Income Tax, to conduct a coordinated investigation.
The DRI’s investigation only looked at the customs violation. The others would look at tax fraud, money laundering, and conspiracy charges.
Meanwhile, remember the cases about tariffs? Those have already turned in the favour of the generating companies.
In April 2017, the Supreme Court delivered a landmark judgement. The APTEL orders granting higher tariffs had been appealed. The Supreme Court declared that the companies had knowing taken the risk of changes in price of inputs while bidding for power projects, and thus could not pass on the risk to power consumers. It set aside the APTEL order.
For a while, this order seemed like it had killed three huge power plants in Gujarat, owned by Adani, Tata and Essar.
The three plants stopped production. Talks were going on about these being declared NPAs. A proposal that the government take over the power plants was floated. It was reported that they would be sold to the government for a token amount of Rs. 1.
The government had other plans though, and found a way.
The Supreme Court had ruled based on the existing contracts between the power generators and discoms. What its ruling didn’t prevent was for those contracts to be renegotiated.
This is precisely what the Gujarat government did, in a panel that it set up for this purpose.
The result of that process? A new formula was calculated, whereby customers would still bear most of the brunt of the increased cost, and it was written into an amended contract.
In another instance, also benefiting the Adani group, state electricity regulators in Rajasthan and Maharashtra managed to interpret the Supreme Court’s order in a manner that produced the opposite result.
Where that order had debarred compensation for increased cost of Indonesian coal, in these two cases, the regulator allowed precisely that, based on a tenuous legal argument.
Having to pay out these massive compensatory tariffs is threatening to bankrupt several public sector power distribution companies.
Unions of power sector employees, such as the All India Power Engineer Federation have been smarting at these developments, and are now desperately filing intervention applications at the CERC, the APTEL and the courts, trying to have their voices heard in these tariff cases.
Last week, the DRI filed an affidavit at the Delhi High Court, responding to the PIL requesting an SIT.
The DRI explained that all its other investigations were on hold, while the cases already under adjudication played out. The outcome after appeal of KISPL case, the one decided Adani case, and the letters rogatory case, will determine whether it will go ahead with all its other investigations.
Meanwhile, the PIL is still going on at the Delhi High Court.
This issue is also nominally under the radar of the government appointed SIT on black money, that was set up in the months after Modi first came to power.
Nothing has come of it though. One investigation that the CBI had initiated, it later shut down citing jurisdictional issues.
It appears the whole issue is being systematically shut down. In 2017, a DRI official had told the media of interference of an “outside hand.”
As far as I am aware, a handful of journalists across a few publications are covering it diligently. There have been multiple defamation suits due to articles on this subject alone.
However, the scandal has not gotten big yet. For some reason, of 10 scams that are reported, only 1 makes it big on primetime media. This is one of those that hasn’t.
The power companies involved, together, supply electricity to over half of India. The over invoicing scandal has stolen all of our money.
FINALLY, Abir says : If you’ve read till this point, and can do something to amplify this story, please do.