After buying up the Indian interests of the world’s largest cement manufacturer, Holcim of Switzerland, the Adani Group has been catapulted to second position in the country’s cement industry. This acquisition, one of the biggest of its kind for Adani, and in a sector dominated by oligarchs, will complement the Group’s interests in India’s construction industry. Here's how Gautam Adani out-manoeuvred his rivals in by structuring a deal outside India. Following Adani's coup, one of his competitors, the Birla Group (headed by Kumar Mangalam Birla) signalled an intensification of competition by announcing investments in new cement-production capacity.
It was late at night on Sunday 15 May 2022 when Gautam Adani, one of the world's richest men, finalised a deal to acquire the stakes of the Swiss conglomerate Holcim, the world’s largest cement maker, in two companies to become India’s second biggest manufacturer. Two companies featured in Adani's coup - Ambuja Cement and ACC (once Associated Cement Companies). Although Adani’s bid was reportedly lower than that of two other bidders, UltraTech and JSW Cement, he was able to swing the deal by structuring an offer outside India that would entail no payment of capital-gains tax and minimise regulatory risks for Holcim.
The cement industry in India, the world’s second largest, is oligopolistic in character, with five leading companies accounting for nearly half of the total installed manufacturing capacity. For several decades, the industry has been fighting pitched battles with anti-trust government regulators that have accused cement companies of forming cartels and fixing prices in ways that work against consumer interests.
The two companies acquired by Adani from Holcim have been fined a total of Rs 2300 crore (nearly US $300 million) by the Competition Commission of India (CCI) – a demand that has been disputed at various tribunals and courts, and is currently pending before the Supreme Court of India.
Adani’s bid factored in a possible legal defeat for Ambuja and ACC. For Holcim, the Adani Group’s bid was favourable, despite a relatively lower price, in comparison to the bids by the market leader UltraTech and JSW (Jindal Steel Works) Cement. The advantage came not only from the Group’s reputation to manage the legal and regulatory environment, but also because Adani apparently ensured that Holcim would not pay any capital-gains tax in the country.
As Holcim’s chief executive officer Jan Jenisch told analysts on 17 May via a video conference, the deal was ‘smooth’, ‘simple’, ‘tax-free’, and entailed ‘no indemnification’ from the Swiss side. So how was the deal structured?
Structuring the Deal: Wheels Within Wheels
Two special-purpose vehicles (SPVs) were set up outside India. One entity in West Asia would raise US $1.5 billion from Adani family members, including Gautam Adani’s older brother Vinod Adani, who is based in Dubai. A similar amount would come from a sovereign fund, while step-down subsidiary SPV registered overseas would raise $4.5 billion, claimed The Economic Times. (Simply put, a step-down subsidiary company is a subsidiary company of a company which is a subsidiary of another company.)
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Thus, an Adani Group subsidiary based out of Mauritius, Endeavour Trade and Investment Limited, promoted by Acropolis Trade and Investment Limited (whose beneficial owners are members of the Adani family), would be acquiring Holderind Investments Limited, Mauritius, from Netherlands-based Holderfin BV, resulting in the transfer of 63.11% of Ambuja Cements and 54.53% of ACC. (50.05% of the ACC component is held by the Holcim Group through Ambuja Cements and 4.48% directly.)
The total amount that has been bid by Adani for Holcim’s stake in the two companies totals $10.5 billion (or around Rs 80,000 crore). Of this amount, the Swiss conglomerate would directly get around $6.4 billion. The remaining $4.1 billion would have to be spent by Adani for an open public offer to shareholders of Ambuja and ACC.
This open offer to other shareholders is a mandatory requirement of the country’s financial regulator, the Securities and Exchange Board of India (SEBI). Whenever there is a merger or acquisition of a company whose shares are listed on stock exchanges, SEBI stipulates that the acquiring company must make a public offer to other shareholders at the same price at which the deal was struck. In this instance, the shareholders of Ambuja and ACC may choose to sell their shares to Adani at the rate of Rs 385 per share of Ambuja and Rs 2300 per share of ACC, the underlying prices at which Adani acquired the shares.
Also, SEBI’s rules state that the open offer would be to purchase roughly 26% of the shares of the two companies whose shares are publicly listed on stock exchanges. The regulator also stipulates that the acquiring group (Adani here) would have to deposit the maximum amount that may have to be disbursed to shareholders (of Ambuja and ACC in this case) in an escrow account. An escrow account enables a contractual arrangement in which a third party receives and disburses money for the main transacting parties, with the disbursement dependent on conditions previously agreed to by the transacting parties.
If the open offer is accepted, Adani’s stake in Ambuja and ACC would rise to 89% and 81% respectively. Subsequently, the Adani Group would have the option to reduce its stake in the two companies to 75% or delist them and make them closely-held.
There are two big questions that arise. Why did the deal take place outside India? And where will Adani find the cash to clinch the deal in the coming months?
Deals Outside India Attract No Tax
There was a huge international controversy after the Indian government amended its income-tax law in 2012 to retrospectively tax an overseas transfer of shares that resulted in the transfer of ownership of assets in India to telecommunications multinational Vodafone. The decision was to retrospectively amend the Income Tax Act, 1961, effectively overturning an earlier decision of the Supreme Court.
(Background: The retrospective amendment had inserted provisions in the Income Tax Act, 1961, clarifying that as far as India’s tax authorities were concerned, the government is owed capital gains tax for every transaction that concerns assets located in India, even if the actual transaction takes place outside India’s territorial jurisdiction, and even if none of the transacting parties are Indian entities. This amendment followed the Supreme Court ruling in January 2012 that since the acquisition by Vodafone of the assets of Hutch in India was effected through a transfer of ownership stake in a Cayman Islands-based entity between a Dutch subsidiary of Vodafone and a Hong Kong subsidiary of Hutch, the transaction was outside the territorial jurisdiction of India’s tax authorities and could not be subjected to capital gains tax by the revenue authorities of the Ministry of Finance in India.)
The retrospective amendment meant that Indian tax authorities could tax capital gains that accrued on transfer of shares outside the country on any transaction that had taken place since the Income Tax Act was enacted in 1961 all the way till the law was again amended in 2012.
This amendment to the law was reversed by the Narendra Modi government two years ago. The 2020 amendment to the Income Tax Act specifies that the Indian government has the right to tax a merger or acquisition that takes place between or among entities registered outside the country if over half the value of assets is located within India, and that too only prospectively (not retrospectively). The Adani-Holcim case will be the first of its kind since the 2020 amendment relating to indirect transfer of shareholdings and will test the provisions of the double taxation avoidance agreement (DTAA) between the governments of India and the Netherlands.
According to Holcim, less than half of the value of the underlying assets of the two companies (Ambuja and ACC) is in India, thereby making the transaction not taxable. Jenisch has been reported as stating that the transaction will be tax free and that the approval of the CCI is expected as Adani does not have ‘building materials’ in its portfolio. He added that ‘no further due diligence’ is required for the transaction to go through in the coming months.
The Morning Context website quoted an unnamed industry executive saying: ‘The SPV in the Middle East and the step-down SPV, which could be registered in the Cayman Islands, are privately held. They don’t have to declare financial information.’
Where Will the Cash Come From?
The Adani Group is highly indebted. An analysis of the seven listed entities in the group – Adani Enterprises, Adani Ports & SEZ (Special Economic Zone), Adani Power, Adani Transmission, Adani Green Energy, Adani Total Gas and Adani Wilmar – by Business Standard indicates that the Group’s gross debt stood at Rs 2.2 trillion (around US $28 billion) at the end of March, a rise of 42% over the previous year. The group’s debt-equity ratio is at a four-year high of 2.36 against 1.98 in March 2019, the analysis added.
Whereas Adani is one of the most indebted among India’s major business conglomerates, it also has an awesome debt-servicing capacity, especially with public-sector banks bending over backwards to provide it more and more loans. It is pointed out that a significant portion of Adani’s local debt is short-term and that the Group prefers to borrow long-term from outside India. While the Group’s critics argue that Gautam Adani’s businesses generate relatively little cash and large dividends, he continues to obtain fresh loans easily. An important consideration could be his perceived closeness to India’s ruling regime, led by the right-wing Hindu nationalist BJP headed by Prime Minister Narendra Modi.
Whereas Holcim left India after entering the country’s cement industry in 2005 ostensibly because it wants to divest its interests in cement and focus on green building materials, Adani has expanded at a frenetic pace in the infrastructure sector. It clearly sees considerable synergy between its other business interests and the cement industry, an industry which has been growing faster than the Indian economy as a whole. India has plentiful reserves of limestone, the crucial raw material used in the production of cement.
Cement demand is expected to grow in the years ahead after a 12% fall in production between the year ended 31 March 2020 and the following year. Stock prices of cement firms have risen faster than the rest of the share market. Cement prices, too, have shot up this year because of the rising costs of power and fuel: from an average of Rs 369 for a 50 kilogramme bag in January to Rs 395 in March, a rise of 7%. Prices are expected to rise further.
By acquiring Holcim’s stake in Ambuja and ACC, Adani has in one fell swoop gained control over 13-14% of India’s cement market, against 25% controlled by UltraTech in the Aditya Birla Group. After it completes formalities to acquire Ambuja and ACC in the coming months, Gautam Adani, said by Forbes to be one of the world’s 10 richest men, will head a new cement empire with an installed manufacturing capacity of 70 million tonnes per year in 23 cement making factories, 14 grinding stations, 80 ready-mix concrete plants and over 50,000 distribution partners across India.
After developing huge assets in power generation, transmission, and distribution; coal mining; seaports and airports; and real estate, Adani has now made a flamboyant entry into the cement business. This will help the group consolidate its dominance over important segments of India’s economic infrastructure. As for Holcim, it certainly believed it should not be looking a gift-horse in the mouth.