GeoGlobal deal tainted by lack of diligence, not corruption

Earlier this week, anti-corruption crusader Arvind Kejriwal went public with sensational allegations of corruption against the Gujarat government headed by Chief Minister Narendra Modi in a case involving GeoGlobal Resources, a Barbados-based company, and the Gujarat State Petroleum Corporation (GSPC).

The allegations centred around the fact that GSPC gave - free of cost - 10 percent of participating interest - in its gas fields in the Krishna-Godavari Basin to GeoGlobal and Jubilant Enpro P Ltd, an Indian company owned by the husband of Birla family scion, media baroness and Congress loyalist Rajya Sabha MP Shobhana Bhartia.

Kejriwal pointed out that the companies had not been selected on the basis of a bidding process. "If we dig deep into this, it may yield a scam worse than the 2G spectrum scam,'' Kejriwal said.

Even though the allegations centred around the government headed by Modi, arguably the most buzz-worthy politician of our times, and were timed so close to the upcoming Assembly elections, Kejriwal's bombshell, such as it was, didn't get much media attention.

Kejriwal's core allegations were themselves lacking in weight.

On the face of it, this seems counter-intuitive, given the widespread perception that the liberal media is ready to go to town with allegations against Modi and shatter the aura of incorruptibility that envelopes him. But there may have been several reasons to account for the failure of Kejriwal's allegation to gain much media resonance.

For one thing, Kejriwal's press conference was badly timed. On a day when television channels were giving saturation coverage of the scintillating debate in the Lok Sabha on a BJP-sponsored motion seeking withdrawal of the government's proposal to permit FDI in multi-brand retail, Kejriwal's latest in a long line of exposes had to compete for eyeballs with the drama in Parliament.

Secondly, as with most of his recent exposes, this too was little more than a recycling of published media accounts of the case, with no value addition. Just late last week, Tehelka had published a cover story making the same allegation against the Gujarat government. Kejriwal's reheat-and-serve press conference did not take the story forward except to provide the spin that the fact that a Congress loyalist MP's husband's firm had been rewarded in this fashion pointed to a cosy relationship between the BJP government in Gujarat and the Congress.

As he did when he levelled allegations against BJP president Nitin Gadkari's business connections with NCP leaders in Maharashtra, Kejriwal sought to project the BJP and the Congress as being joined at the hip on corrupt deals from which both their constituents profited. It is part of his ongoing effort to position his Aam Aadmi Party as a political alternative to the two main national parties - at least insofar as the Delhi Assembly elections next year are concerned.

But there may be one overarching reason to account for why Kejriwal's allegations - or even the underlying expose by Tehelka magazine - did not gain as much chatter value as they otherwise might have.

For one thing, it hasn't been established that there was any corruption in the transaction, and it is far from certain that the companies emerged from the deal with any gains to show for it. In fact, in both GeoGlobal's case and with Jubilant Enpro, the companies may end up being a little worse off from it.

Indicatively, under the terms of the deal which both Tehelka and Kejriwal highlighted as indicative of a "sweetheart deal", GeoGlobal did not pay a single cent for its 10 percent stake, and even the company's 10 percent share to the cost of exploration was borne by the GSPC.

But far from pointing to corruption, such a partnership - known as 'carried interest' partnership - is widely prevalent in international private equity and hedge fund deals; under this provision, a general partner may receive a share of any future profits as compensation despite not contributing any initial funds. Such methods of compensation seek to provide an incentive for the general partner to work towards maximising performance - and profits.

And particularly given the fact that oil exploration exercises don't come with any certainty of success, the general partner's involvement is not risk-free.

Given this perspective, the deal involving GeoGlobal seems at worst to be a case of the failure of GSPC to carry out due diligence while forming a consortium with the two private companies in its eagerness to acquire technical capability to prepare geological models for exploration of the KG Basin fields.

In particular, the most striking thing about GeoGlobal Resources is that at the time that the deal was struck, the Barbados-incorporated company had a paid-up capital of only $64. The company was in the operational control of Jean Paul Roy, a Canadian geologist who had worked with several global oil companies and with a reputation for preparing geological models for exploration.

The timing of the whole process is illustrative of why the Gujarat government may have slipped up on the due diligence process. GSPC formed the consortium with GeoGlobal and Jubilant Enpro on 27 March 2002. The date is significant: it happened exactly a month after the Godhra train burnings, and the riots in the State, which were the cause of much political uncertainty in the State. Modi had been Chief Minister for barely a few months, and was something of a political lightweight. And there was even fevered speculation that Prime Minister AB Vajpayee was under pressure to force Modi to step down as Chief Minister.

It was in those troubled times that the consortium was formed; the formal deal was signed in March 2003. But even by 2005, based on its experience of working alongside Roy, the Gujarat government had woken up to the fact that its consortium was a flawed one. These strains were accentuated in 2005, when Modi made an over-the-top announcement that the GSPC's field in the KG Basin held 20 trillion cubic feet of gas, valued at an estimated $50 billion.

Those figures were truly astonishing, and would have made it the country's largest discovery of natural gas reserve in the KG Basin. Modi called it a "great leap forward for Gujarat" and a discovery that would propel the State to the status of the "petro-capital of the country". He even christened the project as "Deendayal", meaning "saviour of the poor."

However, Roy contested that claim, and noted that Modi's claim was "premature". But the strains in the relationship had already become entrenched, and by 2006, the Gujarat government had awoken to the fact that it was stuck with a potentially embarrassing deal on its hands. It therefore wrote to the Oil Ministry noting that it wished to terminate its partnership with GeoGlobal. It also wrote to the company asking it to contribute its share of the exploration costs. That demand for payment is now the subject of a legal tussle.

And although GeoGlobal claims that it owes no payment since commercial operations haven't begun, in notices to its shareholders it has flagged the risk that it might be required to cough up.

"There can be no assurance that Gujarat State Petroleum Corporation may not be successful in its efforts to obtain payment from the Company on account of exploration and development costs it has expended on the KG Offshore Block for which it asserts the Company is liable or that efforts to resolve the differences between the Company and GSPC relating to this issue can be resolved amicably," it noted.

So, while there is a case to be made that the GSPC was perhaps less than diligent in the choice of its consortium partners when it entered into the deal in March 2002, barely a month after the riots - for which it was justifiably wrapped on the knuckles by the CAG - it seems a stretch to allege that the transaction was tainted by corruption, particularly in the absence of prima facie evidence.

So, if Kejriwal's allegations against Modi fizzled out less than spectacularly, it wasn't just because his exposes are running into the law of diminishing returns, but because in this instance, the core allegations were themselves lacking in weight.