March 5, 2021

India’s Widening Iron Ore Scandal Hurts Stocks

As a result of a government investigative report issued late last week, several stocks have lost value — including shares of Adani Enterprises, the biggest piece of a mining, port and power plant empire built by the billionaire Gautam S. Adani, India’s sixth-wealthiest person.

Adani Enterprises has denied wrongdoing. But it and several other big Indian companies are facing tough questions from investors and policy makers.

The 466-page report, by a former Indian Supreme Court justice who is now a public ombudsman, contends public officials and companies cheated the government of Karnataka state out of billions of dollars in royalty, tax and other payments from a lucrative domestic and foreign trade in iron ore. The ore is an important raw material for steel that has been in great demand in fast growing China and India.

“Huge bribes were paid,” said the report, written by Santosh Hegde, the former justice. “Mafia type operations were the routine practices of the day.”

Analysts say Mr. Hegde’s findings provide evidence of corruption in important parts of the Indian economy, including land and natural resources, that are still tightly controlled by politicians and corporate executives — even as other sectors, including consumer goods, banking and information technology, have become more competitive and open.

Procedurally, it is unclear what will happen next. Mr. Hegde does not have the power to prosecute the companies and individuals he accuses in his report. That is up to Karnataka’s government, which has previously played down concerns about mining, or to the judicial system.

India’s Supreme Court on Friday temporarily suspended all iron ore mining in Bellary, the region that was the main focus of the inquiry. The court in recent years has often led the charge to prosecute officials accused of corruption, and anticorruption advocates hope that it will do so in this case.

The scandal forced the chief minister of Karnataka state to resign on Sunday, although he has denied wrongdoing.

Shares of Adani Enterprises were down nearly 23 percent on Thursday and Friday, but they regained almost 9 percent on Monday.

The stock of another company implicated in the report, JSW Steel, fell more than 10 percent late last week. JSW’s shares dropped by an additional 10.3 percent on Monday, after Citigroup downgraded the stock and put a sell rating on it.

A big break in the investigation occurred early last year. Anticorruption agents raided the offices of Adani Enterprises, which operated an iron ore terminal at the Indian port of Belekeri, on the Arabian Sea, and discovered a document that appeared to be an illicit payroll.

A computer file from 2008 listed payoffs that Adani Enterprises was suspected of making to government officials. The port director, for instance, was paid 50,000 rupees ($1,100) per ship that set sail from the port, the file said. A customs official got 100,000 rupees every three months and 0.50 rupee per ton of iron ore shipped, it said. Police inspectors received 14,000 rupees every month, and local politicians were paid “once in a while,” the file said. The report was issued as Indians increasingly questioned the growing wealth and power amassed by a small elite group. In a separate corruption scandal, government auditors estimated that officials may have cost the federal government $40 billion by giving telecommunications licenses to favored companies rather than auctioning them.

The mining scandal in Karnataka state, which is also home to the technology hub Bangalore, has been brewing for several years. In 2008, Mr. Hegde, who is the state’s lokayukta or ombudsman, produced a report on problems of illegal mining in the state’s Bellary region.

In his latest report Mr. Hegde said the situation had only worsened since then, as the companies had sought to avoid paying royalties to the state and export duties to the federal government, and as companies had mined in forests that were supposed to be protected under conservation laws.

But the government in Karnataka state, which is controlled by the Bhartiya Janata Party, did little to control the mining, much of which was in the hands of three businessmen brothers, the Reddys, who are powerful members of the party.

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