In 2005, two different business groups forayed into new ventures. One into commercial aviation, the other into gas exploration. Both announced their entry in a grandiose manner — one with India’s largest order of Airbus fleet, the other with India’s largest discovery of gas reserves. They had both borrowed Rs.6,300 crore each in five years since their launch. Both business bets went awry. The airline shut down after raking up dues of over Rs.9,000 crore to banks. The energy business is still functioning, with dues of Rs.19,700 crore. The airline is Kingfisher Airlines and the energy business is Gujarat State Petroleum Corporation (GSPC) and its foray into the Krishna-Godavari (KG) basin. Kingfisher Airlines and its promoter Vijay Mallya are rightfully scorned at, deservedly stripped of their assets and reputation and justifiably vilified. Shouldn’t GSPC be subject to similar scrutiny?
In an earlier article ( >“The new KG scam”, April 18 ), I had outlined the contours of a massive fraud in the disguise of a business bet. Let’s be clear — businesses can take risks and can fail. Certainly, public sector businesses fail more often. But the GSPC saga is not a mere case of a business bet turning sour. To recap, in June 2005, then Gujarat Chief Minister Narendra Modi made a grandiose — more grandiose even by his standards of bombast — statement of India’s largest gas discovery in the KG basin made by GSPC. By 2010, GSPC admitted that there was no or very little gas in the KG basin. It would have been prudent then for any business, even a public sector undertaking (PSU), to cut down on its investments and recoup any losses. Instead, GSPC went on a massive borrowing spree, despite its admission that there was no gas to be found in the KG basin.
The bars in the chart show annual gas reserves of GSPC from 2005 to 2015, as estimated by the globally renowned reservoir appraiser, Gaffney, Cline & Associates, and disclosed in GSPC’s annual reports. Notice how since 2005, the estimated reserves have been decreasing rapidly every year. The dotted line on the same chart shows GSPC’s loans from banks and financial institutions, for its gas exploration activities. See how that line has increased from zero to nearly Rs.20,000 crore in this time period. When the company’s own estimates of its gas reserves in KG basin have been coming down sharply, how was GSPC allowed to borrow so much money every single year? Where did this money come from? And what was it used for?
A bewildering balance sheet A consortium of nearly 15 PSU banks lent about Rs.20,000 crore to GSPC over the past 15 years. These banks include the State Bank of India, Vijaya Bank, Union Bank of India, Bank of India and so on. According to the Comptroller and Auditor General (CAG) report of 2015, the interest costs on these loans alone are Rs.1,800 crore per year. However, GSPC’s net income before interest in 2015 was only Rs.80 crore. Which means it does not have enough money to pay the interest on its borrowings. So, technically, isn’t GSPC insolvent? Should it not be declared as a defaulter by these banks? A current Deputy Governor of the Reserve Bank of India (RBI) served as a director on the board of GSPC between 2006 and 2013 and even chaired its audit committee which typically approves such borrowings. Perhaps the RBI can ask these banks what the status of these loans to GSPC are, similar to how it has questioned other loans to other companies.
If there was no gas to be found, then what was all this borrowed money used for? Typically when businesses borrow for new projects or expansion, they tend to hire more workers, build more factories etc. However, GSPC’s wage bill was constant in this time period, indicating that the company did not hire more employees. However, a category called “Other expenses” saw a jump from Rs.16 crore in 2006 to Rs.500 crore in 2013. What these “other expenses” entailed is perhaps best left to one’s imagination.
GSPC’s loans and advances to its subsidiary companies ballooned from Rs.18 crore in 2005 to Rs.2,000 crore in 2015 — it has various subsidiaries including joint ventures with the Adani Group. It also spent nearly Rs.2,000 crore in buying equipment and fixed assets such as oil rigs. One such vendor that was contracted to supply oil rigs to GSPC was a company called Tuff Drilling. Drilling in the KG basin has proved extraordinarily tough but this delightfully named company has sailed easily. Tuff Drilling was only incorporated in 2006 after Mr. Modi’s boast. By all accounts, its promoter had an apparel business. It received an order in 2010 from GSPC worth several hundred crores of rupees to supply sophisticated deep water platform rigs for gas extraction in the KG basin. Recall, this was after the realisation that there was no or very little gas to explore in the KG basin. Tuff Drilling’s promoter is also alleged to have been an active supporter of the Vibrant Gujarat investment summits. Suffice to say that Tuff Drilling could not handle the transition from garments to gas and is now bankrupt.
All of this information has been put together through forensic analysis from various sources of financial reports of the company, CAG and documents filed with various regulators in India and abroad. It is abundantly evident that the squandering of Rs.20,000 crore of loans from banks is not a simple case of a business bet going awry. Neither is this political vendetta.
Apologists for GSPC can couch this misadventure in technical terms of the complexity of the exploration business or cite examples of other PSUs or private companies that have similarly failed in these energy quests. That is not the point here. That there is a damning CAG report of GSPC malfunctioning is a fact. That GSPC borrowed recklessly from PSU banks is indisputable. That the KG basin gas exploration mission was a mere alibi for such borrowing is blatantly obvious from this analysis. That there are big names involved is well known. Key officials have got lucrative post-GSPC posts. Then isn’t the right next step a deeper, independent judicial inquiry into the sordid politically-masterminded GSPC KG basin saga?
Jairam Ramesh is a Congress Rajya Sabha MP.
