Here’s Why Congress Could Face Trouble From ED, CBI Probe Into Diversion Of Mumbai Airport Funds By GVK Group

Indian conglomerate GVK Group has landed itself in a mess with the Central Bureau of Investigation (CBI) filing a case against it in an alleged scam of diverting the Mumbai International Airport Limited (MIAL) funds to the tune of Rs 705 crore.

The construction-to-energy-to-hospitality-to-airports firm, based in Hyderabad, is also under scrutiny by the Enforcement Directorate (ED) on charges of money laundering through these fund diversions.

Given the connections of the conglomerate’s 83-year-old founder G V K Reddy, developments with regards to the GVK Group could also land the Congress in problems.

Reddy’s son Sanjay is married to the daughter of T Subbiarami Reddy, who was a minister in Manmohan Singh’s cabinet. Reddy was conferred the Padma Bhushan award by the Singh’s United Progressive Alliance (UPA) government in 2011. More of this later.

Charges Against G V K Reddy

Reddy has been charged with siphoning off funds through various means from MIAL, in which his group holds 50.5 per cent stake.

Even reserve funds of MIAL, in which the Airports Authority of India (AII) holds 26 per cent stake, to the tune of Rs 395 crore had been siphoned off to finance the group’s other arms. Foreign investors Bidvest of Australia and Airports Company of South Africa hold 13.5 per cent and 10 per cent stakes respectively.

According to the CBI’s first information report (FIR) filed on 27 June, MIAL’s expenditures were inflated with employees of other GVK companies being paid from the airport company’s account, though they were not involved with the airport’s running or maintenance in any way.

Besides Reddy and his son Sanjay, CBI has filed criminal cases against 12 others including officials of MIAL, AAI and other firms on charges of cheating, fraud and criminal conspiracy under the Prevention of Corruption Act.

CBI officials fear that the scandal could be worth over Rs 1,000 crore. The agency carried out search operations at GVK’s headquarters in Hyderabad and its Mumbai office last week.

CBI officials say that the mismanagement of the MIAL began in 2012 when its expenditures were inflated, while its earnings were shown lower. The sum thus aggregated was used to meet the personal expenses of the group’s promoters and relatives.

The reserve funds, which were actually sanctioned by AAI, were withdrawn by registering bogus contracts as actual work done by MIAL.

Bogus Contracts With Relatives’ Firms

The AAI had given GVK 80 hectares of lands, which were under developed, for redevelopment. The conglomerate showed as if it signed contracts with nine firms that were owned by Reddy’s relatives for development.

It used these bogus contracts to transfer Rs 310 crore from MIAL reserve funds to these nine firms. In addition, these companies availed of input tax credit for bogus projects, thus causing more loss to the government.

The ED has come into the picture since it suspects that the amount involved in the scam could have been used for money laundering.

In particular, the ED will investigate the bogus contracts and the group’s other entities.

As per the revenue-sharing agreement GVK entered with the Union government, it should give 38.7 per cent of the revenue that MIAL generates to AAI as annual fee.

The GVK Group has also allegedly diverted MIAL’s surplus of Rs 385 crore since 2012 to finance its other subsidiaries.

A tactic followed by GVK Group to divert the funds was by creating record of a bogus board meeting of the Mumbai Airport Limited, and it authorised the management to lodge the reserve and surplus funds in banks as fixed deposits.

The deposits were made in Hyderabad whereas MIAL is based in Mumbai, according to the CBI. The deposits were used to raise loans and other funds for GVK Group firms from the banks.

AAI Agreement With GVK Group

In 2006, AAI entered into agreement for operation, management and development of the Mumbai airport as part of the government’s airports modernisation and upgradation programme.

MIAL was then set up as a public-private partnership venture, which also gave the airports authority the first right on the revenue earned.

The diversion of MIAL funds is in contravention of this agreement, according to the CBI, which suspects there could be many more such fake contracts.

Besides these, the GVK Group is alleged to have assigned premium retail areas at Mumbai airport to the relatives of the promoters at very low lease rates. This has also affected MIAL revenue.

Expenses for personal travel of Reddy, his family, relatives and his group employees who had nothing to do with the airport were also paid for from the airport accounts.

AAI officials have also been charged in the FIR because the CBI claims that they were aware of these diversions and irregularities but chose to keep quiet.

G V K Reddy’s Rise From A Humble Origin

G V K Reddy came from an agricultural background with his family being based in Nellore in Andhra Pradesh. He started his career as a small contractor and got a deal in the construction of the Nagarjunasagar Dam — work for which took 14 years to complete after its inauguration in 1956.

He shifted to Hyderabad then, buying huge tracts of land. He constructed plush hotels and leased them to the Oberoi Group first and then to the Taj Group.

The GVK Group owns three five-star hotels in the niche Banjara Hills area in Hyderabad besides one more in another part of the city.

Thanks to his political connections, he walked away with the contracts to modernise Mumbai and Bengaluru airports. Reddy sold his stakes in Bengaluru airport to Canadian Fairfax Group of Prem Watsa last year to cut the group's mounting debts. It had run over Rs 30,000 crore as debts.

Why Congress Could Face Problems

The rise in GVK Groups’ fortunes run parallel to the tenure of the United Progressive Alliance (UPA) government from 2004.

Since Reddy was close to the bigwigs in the Congress party, he reportedly allowed his group's private aircraft to be used by the party’s leaders. At least a couple of prominent Congress leaders used the aircraft for election and private purposes.

In return, MIAL was given a free hand to raise passenger service fee and other charges.

The CBI and ED investigations are now expected to cover all angles and there shouldn't be any surprise if the diversion of funds leads to the doors of the Congress and a couple of its prominent leaders.

On the other hand, G V K Reddy's problem could affect the Navi Mumbai airport project for which his company has won the bid.