Will Adanis' Indictment in the US Curtail the Money for India's Solar Ambitions?

What are the wider implications for the financing of solar energy projects? Will it blow up the financing needed to realise our solar power ambitions?

(Photo: Kamran Akhter/The Quint)

Solar power is the future of energy.

Coal, the environment-unfriendly fuel, is getting phased out. Gas, the costliest option, is not available for power generation. Wind potential is getting fully utilised. It is the abundance of solar insolation and increasing cost competitiveness that makes solar power the best and most environmentally sustainable alternative for meeting the planet's electricity needs.

India also has ambitions of establishing more than 50 percent of its power generation capacity in solar by 2030. By 2050, India wants solar electricity generation to meet about 40 percent of its total electricity demand.

This big expansion of solar power is dependent on three critical factors: the technology, i.e., the best solar cells and modules in order to capture sunlight, profitable operations of generation capacities, and the abundance of cheaper finance for building highly capital-intensive capacities.

India is vulnerable on two fronts already — dependence on Chinese companies for technology/project imports and lack of profitability in state-owned DISCOMs, jeopardising the profitability of all electricity generation companies, solar included.

The indictment of Gautam Adani and six others in a US court impacts the finance pillar the most. It already has its first casualty. Adani Green Energy Limited (AGEL) cancelled its $600 million bond issue in the US on the day of the indictment.

What are the wider implications for the financing of solar energy projects? Will it blow up the financing needed to realise our solar power ambitions?

Adani Indictment Arose on Account of Finance Raised in the US

The solar energy projects of 12 GW awarded by the Solar Energy Corporation of India (SECI) in the auction to AGEL (8 GW) and Azure Power (4 GW) in the manufacturing-linked solar power contracts were to be fully established in India. No American company was involved in procuring, installing, or operating these solar power projects.

The alleged bribes were also paid or promised in India, by Indian companies/businessmen to Indian politicians and officials. The US Foreign Corrupt Practices Act (FCPA) was not included in this indictment as no American company offered bribes to Indians.

It is the finance (loans and bonds) raised in the US financial markets by both AGEL and Azure Power that connects the bribery allegations in the indictment to India.

The US securities laws require a comprehensive set of disclosures to protect their investors' interests. It is the wrong and misleading disclosures relating to offences under the FCPA and securities laws that have led to the Adanis being charged with crimes of securities fraud, wire fraud, etc.

The indictment will most likely be followed up with either a settlement or a conviction, both most likely with severe financial penalties, including a categorical denial of access to US financial markets for the Adani companies.

Ability to Raise Finance Severely Dented

AGEL has already cancelled the $600 million bond offering.

The indictment has effectively made US financial markets inaccessible for AGEL and other Adani companies. These companies cannot even think of raising funds in the US markets until, and only if, they are able to negotiate plea bargains that allow them to settle the indictment without formally pleading guilty.

Two other consequences will affect the Adani Group’s ability to remain adequately funded for executing their ambitious solar electricity generation plans.

Firstly, existing foreign lenders and investors (about $10 billion outstanding) have begun stopping disbursements from already approved funding. In times to come, these financiers might even recall loans already disbursed. Indian lenders (another $10 billion outstanding) might also push the panic button. If this happens, it will squeeze the Adani companies massively.

Second, the credit rating of Adani Group borrowings and issuances will be adversely affected. Existing loans and bonds might also be downgraded. Already, a negative outlook has been placed on certain bonds of the Adani companies by one rating agency. Others are likely to follow suit. This will make Adanis' access to foreign funds much costlier, even if some lenders and investors remain willing to finance.

AGEL has ambitious plans to build a largely solar energy generation capacity of 50 GW (currently 11 GW) by 2030. A large part of it is to be funded by loans and bonds raised abroad, primarily in the US markets. This is at risk now.

This episode is likely to cast a long shadow on other renewable energy companies as well if they intend to raise funds abroad, particularly in US markets. More questions are likely to be asked about India’s financial market governance, regulations, and disclosures.

We can only hope at this stage that there are no adverse implications for other Indian companies with respect to this increased reluctance and scrutiny.

Other Discontents in Renewable Financing

There are three other major discontents.

The first one is the increasingly doubtful scenario of grants and public finance from developed countries to developing countries.

The industrialised and developed countries have been under pressure to provide large-scale public finance to developing countries to enable the implementation of their nationally determined contributions (NDCs) to reduce carbon emissions. The developing countries needed about $1.3 trillion annually to do so as computed by UN agencies.

After fractious negotiations during the just concluded COP 29 in Baku, the developed countries have promised only $300 billion by 2035, that too with several caveats including mostly private and multilateral finance.

India called the Baku deal an optical illusion and rejected it. The path to global finance for renewables from industrialised countries is littered with difficult-to-overcome obstacles from now onwards.

Second, there is a definite cooling off (sell-off) by sovereign and pension funds to invest in India’s renewable sector.

Of late, some of the iconic investors in this space like the GIC have begun putting up their RE investments on sale. Azure Power, which sold out/surrendered 2.33 GW capacity for transferring to the Adanis, was also owned substantially by a Canadian fund CDPQ (Caisse de dépôt et placement du Québec). They have perhaps fully exited from Azure.

Third, India’s contracting model for renewables is faltering.

The SECI model of auctioning RE capacities, which has been the bedrock of auctioning capacity creation for generating solar power, has been facing many challenges, and is now under-performing and getting bogged down.

Recently, Reliance Power was alleged to have submitted a fake bank guarantee in one of the SECI tenders. SECI has debarred it from bidding in RE tenders for three years.

SECI contracts have been bankable: the winners were able to raise bank finance. Equity investments, including from foreign investors, also flowed in, linked to SECI auctions. This will surely be adversely affected.

These three discontents are likely to muddy the waters in renewable financing in the near future, adding to the woes from the US indictment.

Restore Credibility to Maintain Access to Global Finance

AGEL has enormous profitability, around 80 percent to 90 percent operating profits, i.e., profits before interest, taxes, depreciation, and amortisation (EBITDA). With no fuel and operational costs worth the name, RE projects only have EBITDA costs. The cheaper the finance, the better the profitability as it increases EBITDA margins. There has to be, however, loads of finance available for investing in projects.

For raising abundant global finance, access to the American financial markets is crucial. To maintain continued access to the US markets, India must act credibly on the alleged Adani misdemeanours.

Immediate and credible investigation and prosecution, if the allegations are found to be true, for corruption/bribery and securities law violation, are also necessary to send the right signals to foreign investors and financiers.

The Indian authorities should also encourage the Adanis to submit to US jurisdiction and work out an appropriate settlement without pleading guilty to remove the current hangover.

Essentially, it is up to us whether we resuscitate India’s renewable energy dream or weaken it more.

(The author is former Economic Affairs Secretary and former Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)