Playing for high stakes

The quiet hum of conversation falters briefly as two mobile phones ring simultaneously. The man holding them peers intently at the screens and passes them to another “assistant” standing nearby — “Anna will call back when he is free” — even as the discussion begins anew. This isn’t a boardroom — it’s an all-too common scene at Chanchalguda Jail in Hyderabad, where YS Jaganmohan Reddy has been lodged since his arrest in a disproportionate assets case.

Come November 27, it will be six months since Jagan’s incarceration, but life seems to be going on with minimal disruption. “It does not matter where I am, work never stops — be it business or politics,” Jagan said to a family friend who visited him a month ago. Certainly, he’s been meeting some 100-odd people daily on average, including YSR Congress party workers, friends and family — never mind prison regulations on visitors. And when he’s not sorting out matters of party or business, Jagan spends his time reading, practising yoga and playing badminton every evening.

“He is up to date on the national political scene — from Bihar to Jammu and Kashmir — and is gearing up for the 2014 elections,” says the friend. That’s true. Already his sister Sharmila is pulling in the crowds and preparing the ground with her 3,000 km padayatra across the state. 

And why not? The 39-year-old novice politician’s thumping victory in the Andhra Pradesh Assembly by-elections in June — where YSR Congress swept 14 out of the 17 seats, demolishing both Congress and the Telugu Desam Party (TDP) — could have only strengthened Jagan’s confidence and resolve. Especially given that this was an election he won sitting in jail. 

But this is not a story on Jagan’s spectacular victory, nor is it about political shenanigans. This is about how Jaganmohan Reddy came out of nowhere, amassed a fortune by getting the best out of “available resources”. 

The chief accusation against the Andhra “Yuvaraja” is that he struck quid pro quo deals when his father YS Rajasekhara Reddy was chief minister that resulted in disproportionate assets — Jagan had declared assets of Rs.365 crore while contesting the by-elections for the Kadapa Lok Sabha seat in 2011. But ask anyone in business or political circles in Hyderabad, and they will tell you that the findings of the Central Bureau of Investigation (CBI), which largely bring out these quid pro quo deals, barely scratch the surface.

“These [findings] capture only the deals that left an audit trail; the bigger chunk of the money, it seems, was made in cash,” says Jayaprakash Narayan, a former IAS officer who started an anti-corruption political party Lok Satta. But really, it’s not how much money was made — although that’s a jaw-dropping sum in itself — but how it was made that makes the story interesting.  

How it all began

In February 2009, when YSR was in power, the TDP-led Opposition in Andhra Pradesh brought out a 331-page book titled Raja of Corruption, exposing blatant violation of several laws by YSR. “It made no difference,” says Nama Nageswar Rao, TDP member of parliament from Khammam. 

Those were happier days for the first family of AP, and YSR was in favour with the Congress high command. He had come a long way in a few short years. A politician of relatively modest means, YSR had put his Banjara Hills house on the block ahead of the state elections in 2003, and sold off a chunk of land; a few years earlier, the insecure father had approached friends to get his only son a job that would fetch him a decent monthly salary. Now, less than a decade later, that same son is worth several thousand crore. His house at Yelahanka near the new airport in Bengaluru is spread across 23 acres of land. “When I visited him at his house, he would be on this enormous white sofa, dressed well and wearing a Patek Philippe limited edition watch,” says a banker, who has dealt with him on a number of occasions.

Back in the 1990s, though, nobody would have guessed Jagan would do so well for himself.  After finishing his schooling from Hyderabad Public School, Begumpet, in 1991, and Bachelor of Commerce from Osmania University in 1994, Jagan was sent abroad to study. But he returned almost immediately and moved to Bangalore to try his hand at real estate. By all accounts, he wasn’t too successful and soon moved to his next venture: mini hydel projects. He raised Rs.2 crore from close friends and relatives to set up two plants, a 1 MW project in Warangal and a 25 MW project in Mangalore. Money was tight, though: after Jagan’s wedding in 1998, it was wife Bharathi’s family that was supporting the couple financially. 

For the next four years, Jagan apprenticed with Lagadapati Rajagopal, YSR’s friend and also a Congress party leader, learning the nuances of the infrastructure business — from doing project appraisals right down to managing execution — at Rajagopal’s company, Lanco. “Jagan had both the aptitude and the appetite — he was smitten by the concept of the big project,” recalls Rajagopal, who is a two-time member of parliament (MP) from the Vijayawada constituency. As the 2004 Assembly elections approached, it became evident that the TDP would be voted out and that the stars were turning favourable for YSR and his family. People began taking him very seriously. As easily as that, money — or the lack of it — stopped being an issue. 

Surprisingly, YSR was not keen on Jagan joining politics. “YSR knew his son was ambitious and aggressive. As a good father, he wanted to keep him away from controversy,” says veteran Andhra politician MV Mysoora Reddy, who recently left TDP to join Jagan. It didn’t really matter, though. “Jagan himself was not in the least interested in politics — for him, politics was only a means to further business interests,” says a business associate who has worked with him closely. 

And business interests were becoming evident. The boom in mineral and land prices — two resources over which the government had complete control — was just beginning when YSR was made chief minister, and Jagan understood the value of both. With 48 minerals, from iron ore and bauxite to granite, limestone and beach sand, Andhra Pradesh accounts for over 10% of India’s mineral production, and land became much sought-after especially as rising real estate prices coincided with the government’s grand plans to set up SEZs. Both these developments meant the state machinery could be exploited to cut deals in favour of “interested” parties. 

Underground operation

YSR’s determination to keep his son away from politics extended to barring him from even entering the secretariat in Hyderabad. But that didn’t stop Jagan from getting off to a rocking start in Bangalore from 2003 onwards. At the heart of his empire-building were his close ties with a partner who ruled a country of his own making, the kingdom of Bellary. 

In that “country”, miners would barter a third of their output to conduct hassle-free business in the state. “Some 120-odd companies were mining 300,000 tonnes of iron ore each day across Andhra Pradesh and adjacent Karnataka — barring a handful of companies, all the miners has acceded to pay protection money,” says Lok Satta’s Narayan. Given that many, if not most, mine-owners had been given mines gratis or through some push-and-pull in the past, negotiating a fixed output in exchange for no harassment wasn’t a bad idea at all.

And given that iron ore prices were soaring, there was more than enough money to go around. It costs not more than Rs.300 to produce a tonne of iron ore and at the peak, the selling price was more than 10 times that price, so the arithmetic of mining deals was mind-boggling. Assuming a selling price of Rs.3,000 per tonne, a third of the daily output (that is, 100,000 tonnes) would fetch Rs.30 crore. That translates to nearly Rs.11,000 crore per annum, and roughly Rs.55,000 crore for five years. 

The self-styled Raja of Bellary was Gali Janardhan Reddy, and Jagan and Gali initially came together because of the Reddy-community connection. Until the BJP came to power in Karnataka in 2008, Gali was a nobody in the state. But he had quickly realised the advantage of leaning on his powerful friends in the community. Gali’s real riches — and those of Jagan — were the result of illegal mining through a company that is named after a small village in Anantapur district, 315 km from Hyderabad.

The YSR administration bent over backwards to accommodate Gali’s Obulapuram Mining Corporation (OMC), from helping in extending the lease and doctoring the lease renewal dates and resisting fresh survey of mines that would have stopped illegal mining, to withholding allotments in adjoining lands so illegal mining could continue and giving land liberally at throwaway prices. OMC’s turnover in FY04 was Rs.35 crore, with a nominal profit of Rs.1.05 crore; by FY09, it had crossed Rs.3,000 crore with a net profit of Rs.700 crore. Much of the money was made flaunting rules or exploiting loopholes using various state-owned institutions. A prime vehicle was Andhra Pradesh Mineral Development Corporation, whose then-chairman VD Rajagopal is now behind bars for being an abettor (see story on page 87).

In exchange for these favours, Jagan received 50% of the booty. Not directly, of course. OMC agreed to sell 50% of its output at operational cost and nominal 5% profit to a company called Red Gold Enterprises whose CEO was also the CEO of Sajjala Iron & Steel, Bellary. That company is owned by Sajjala Diwakar Reddy, whose brother Sajjala Ramakrishna Reddy heads Jagan’s media business and is a close friend. Ramakrishna was also a key face for the YSR Congress Party during the recent elections. 

Empire building

Mining became the fodder for most other businesses Jagan would enter into. Much of the mining output was under-invoiced and exported to China through benami front companies, and the illegal income parked in tax havens to be repatriated as investments through shell companies. For instance, in Sandur Power, one of Jagan’s first business ventures, he allegedly routed money through two foreign companies that are said to be his own (See: Jaganmohan Reddy’s business empire). The CBI charge against Jagan is that not only did he move money out of the country through hawala and then bring it back to plough into his businesses, but also that he “whitewashed” his money through corporates that allegedly benefited from the YSR administration.

Aiding him in all this was a coterie of friends and associates. But those close to Jagan say that all decisions are ultimately his alone. And it was he who decided the modus operandi and the terms of all deals. His inner circle includes two brothers involved in diamond trading in India and the Far East. The brothers, one of whom is based in Mumbai, are well-known in political circles for their clean way of doing a dirty business — the business of hawala transactions and changing the colour of money. Before the state elections in 2004, sources say, the brothers gave Jagan an unsecured loan of Rs.2 crore and soon after, made a Rs.4-crore preferential capital investment in Sandur Power.

Later, a Rs.125-crore investment from 2i Capital and Pluri Emerging Company into Sandur Power was structured through Asia Infrastructure, a protected cell company (PCC). PCC companies are routinely used to route hawala money as investments. CBI enquiries reveal that Asia Infrastructure, in turn, got money from Whitehall Associates and Wellmade Incorporated — and one of the brothers is the director of Whitehall. Incidentally, when Asia Infrastructure was started it had a capital of Rs.1 crore; five years later when it shut down (conveniently after Jagan bought back shares from 2i and Pluri), the capital had risen to Rs.1,100 crore. The local press in Andhra Pradesh says the deal is still being investigated by the CBI. 

The mastermind of this labyrinthine deal and, indeed, all others was Jagan himself. “The deal with the Gali brothers set the stage for an open-door policy — any big deal with a large payoff was sure to be worked out,” says Rajagopal. 

Despite his political background, Jagan wasn’t well-connected — most deals happened at the instance of businessmen. Take, for instance, the Vadrevu and Nizampatnam Port Industrial Corridor (Vanpic). It was industrialist Nimmagadda Prasad — the biggest investor in Jagan’s businesses, deploying over Rs.500 crore across media, cement and power — who came up with the proposal for an integrated port-based industrial area. Prasad negotiated with Ras Al Khaimah, one of the seven emirates that constitutes the UAE, to come in as partner, which would enable the AP government to approve the contract without competitive bidding. The level of corruption was huge: the project was originally allotted 400 acres of land for the two ports, but ultimately 13,000 acres was acquired from farmers in cash.

“More importantly,” says TDP’s Revanth Reddy, MLA from Kodangal constituency in Mahbubnagar district, “while the government bought the land at Rs.70,000 per acre, it was sold to Vanpic at Rs.3-4 lakh per acre and Vanpic started re-selling the land at Rs.7-12 lakh an acre.” Moreover, Prasad eventually sold off a substantial part of his stake in Vanpic to infrastructure company Navayuga, while the emirate also sold 25% of its holding, so Navayuga ended up with a 60% stake in the project without competitive bidding.”

An opportunistic businessman

Take a good look at Jagan’s decisions and it’s obvious that he has a natural instinct for business, knowing just when to cut and run and when to settle in for the long haul. His choice of key businesses — cement and media — then, not only display his opportunistic streak but also his prowess as a strategist.

A banker of a state-owned bank tells this tale. His bank had lent to a couple of jewellers in Hyderabad, who started defaulting. Their properties were attached but there was no hope of any recovery because the jewellers had underworld ties and would not concede. “Jagan bought out the bank’s outstanding loan of Rs.45 crore, confidently,” says the banker. “With those assets, he must have made a killing.” 

And then, consider cement. Andhra Pradesh has India’s largest limestone reserves. Owning limestone reserves is not only a key source of competitive advantage, it also creates an entry barrier for new companies in the business. Obviously, many players, including multinationals, were keen on setting up capacities in AP; instead, Jagan, too, decided to set up his own cement plant. “Any politician would have just said yes to each of the businessmen and quickly made his cut. This is where the businessman in Jagan came to the fore,” says Rajagopal.

In 2007, Jagan acquired Raghuram Cements, renamed it Bharathi Cement and quickly ramped up capacity to 5 million tonnes with an outlay of Rs.1,700 crore at its plant in Kadapa. He roped in Prasad, Dalmia Cement and India Cement as investors and in April 2010, sold 51% in the company to France’s Vicat for Rs.2,500 crore, offering a profitable exit to the investors.  The three investors, who put in approximately Rs.440 crore between 2007 and 2009, must have tripled their money, at least, on exit in 2010. 

In FY12, Bharathi clocked revenues of Rs.1,200 crore and is a debt-free company with presence in six states: Maharashtra accounts for 60% of sales while 25% comes from Andhra Pradesh. Not surprisingly, once Bharathi Cement was established, very few limestone quarrying leases were given in the Kadapa region.

Media — The business of politics 

Turn on Sakshi TV and you’ll see flowers being conferred every second on an image of a smiling man on the right corner of the screen. He’s no god or even godman — YSR’s place of pride on the channel is a telling sign of the political underpinnings of a channel that claims to be a purely party-neutral, for-profit business.  

The man who would oversee Jagan’s media business, then, had to be a trusted lieutenant from the existing set-up. Enter Sajjala Ramakrishna Reddy, an old media hand who had previously worked with Eenadu, Andhra Bhoomi and Udayam before settling into the family business. The diverse experience across regional publications would have made Ramakrishna the ideal candidate to launch Jagan’s media business, but he would have still fallen short without his Kadapa link. Ramakrishna prefers to downplay the link. “I knew YSR from Pulivendula as we belonged to the same region,” he says mildly. 

Cracking the media business in AP was no mean task. Ramoji Rao’s Eenadu, which has been around since 1974, had a near monopoly with circulation of 1.05 million; its closest rival, Vaartha, had a circulation of approximately 650,000. 

Dislodging Eenadu from the top was near impossible, but it had to be done. Rao was close to TDP supremo N Chandrababu Naidu — both belonged to the Kamma community, which begrudges Reddys — and Eenadu was increasingly becoming a TDP mouthpiece. Ramakrishna then had a seemingly simple diktat from Jagan when setting up Jagathi Publications in 2007, the year before the paper was launched: “Have all the qualities of Eenadu — and then some more.”

Jagan went straight for the jugular when he launched Telugu newspaper Sakshi, unveiling 23 editions on the same day across the state — no media company has had a more aggressive launch ever. In 2008, Eenadu was selling 1.05 million copies daily; Sakshi debuted in March with a print run of 1.2 million out of 19 printing presses. “The one-step-at-a-time approach will not work — you will be dead,” Ramakrishna recalls Jagan saying. Unlike Eenadu, Sakshi printed all pages in colour, hired the best machines and brought in Mario Garcia as designer. Ramakrishna recounts an incident that brings out Jagan’s thinking. When the designer suggested a yellow masthead, many people had reservations since that is the colour of the TDP. Jagan, on the other hand, gave the shade the go-ahead: “We can’t let go of something good just because someone else used it first,” was his reasoning.

Now, his newspaper owns that yellow. At present, Sakshi has a circulation of around 1.45 million, with a readership of 14.7 million, and ranks as the eighth-largest publication in India. Rival Eenadu sells 1.6 million copies a day. Ramakrishna says apart from 13,000 agents, the company has 8,000 employees, with 1,500 in marketing alone. Sakshi has 180 offices across the state and the head office alone employs about 600 people. But that isn’t the only reason for its success. Jagan created a stranglehold on distribution, giving sales targets to partymen and political allies in every constituency.

Andhra has 294 constituencies and Sakshi carries four pages every day on each constituency. Using the army of party workers — earlier Congress, now YSR Congress — ensures a deep distribution that’s achieved with little manpower costs in the P&L. “Jagan wanted to get the circulation numbers on Day 1 and everyone, including the MLAs, MPs, Congress mandals and local panchayats, were roped to achieve that objective,” points out TDP’s Revanth Reddy. “It’s a strategy that worked because the MLA would either have to sell or bridge the gap by buying copies themselves.”

Sakshi has been doing pretty well in terms of advertising, too — again, thanks to help from the party in power. Of the Rs.600 crore advertising in Telugu print, Sakshi rakes in Rs.240 crore, while Eenadu gets Rs.350 crore. But there are allegations that Sakshi’s share includes about Rs.150 crore from government advertising, which helped it clock revenues of Rs.365 crore in FY11. “In FY12, after the government ads stopped, our revenues are only a tad lower than the previous years,” says Ramakrishna, without revealing the exact figures. Sakshi TV, on the other hand, isn’t doing as well. Launched in March 2009, the news channel has become No.2 in the state (outside Hyderabad), next to TV9. But then, it’s a cut-throat market — with 23 channels, the largest number of news channels in India is in Telugu.

Two steps ahead

The common thread across Jagan’s main businesses, including Sandur, Jagathi Publications and Bharathi Cement, was that he would sell stake to investors in these company at abnormally high valuations well before they had engaged in any tangible business. Apart from capitalising his main companies before they earned the required credentials, many local networks were also exploited in the whitewashing exercise in order to protect the identity of investors.

The CBI has recorded that two tax consultants in Kolkata, Navneeth Kumar Singhania and Ratan Babulal, were apparently asked by an industrialist in Andhra Pradesh to route money into Jagan’s companies. Accordingly, two companies — Sukuma Kamodian and Shongliar — were born in Singhania’s office with his employees listed as directors; they invested Rs.60 crore into Jagathi Publications making 25 cheque payments in all.

And really, that’s been Jagan’s failing. Unlike politicians who prefer keeping their money safe and anonymous in Swiss bank accounts, Jagan wanted to legitimise his wealth. And as he brazenly grew in affluence — and influence — the bigger corporates in the state increasingly started looking outwards, perhaps preferring not to play by his rules. Rues Suresh Chukkapalli, chairman of the Hyderabad-based Rs.800-crore infrastructure developer  Phoenix Group, “Business has been badly affected in the last seven years or so; there have been no significant investments or industrialisation.”  

Tellingly, the biggest companies out of AP, namely GMR, GVK and Lanco, are not embroiled in any of the Jagan-related controversies. Not so large companies such as Aurobindo Pharma, Hetero Drugs and Ramky Infrastructure, which are alleged to have benefited from cheap land in lieu of investments in Jagan’s media company, although they deny any reciprocal benefits. Listed company Indiabulls Real Estate, too, has invested Rs.78 crore in Jagathi Publications, although it’s not been named in any of the CBI investigations. “Just for the various SEZ projects, some 200,000 acres were allotted. Jagan himself is believed to own a lot of land that is still benami,” says Nageswar Rao of TDP.

 The investigating agency’s charges notwithstanding, not all charges of quid pro quo may be legitimate. “If you get an investment proposal from the chief minister’s son soliciting a few crores, what choice does any businessman have?” asks a promoter who invested in Jagan’s company, explaining why companies may have invested in Jagan’s businesses without getting anything in return. Of course, it is not only about the implicit obligation towards the powers-that-be. “The AP culture is — give bribes upfront and hope something will happen,” says Rajagopal ruefully.

The alliances

In June 2010, TDP’s Rao raised a stink in the Parliament on the contentious issue of 146,000 acres allotted to Rakshana Steel in Bayyaram area (a mandal in Khammam district where Rao is the MP) as part of its mining lease. But the point was never taken up for discussion. “I was a part of the Business Advisory Committee and it took them as much as nine months to bring up the issue. The BJP was reluctant since the Reddy brothers were involved and Congress did not want to antagonise Jagan,” says Rao. Finally, on August 17, 2010, the issue came up for discussion.

Both the mining lease and the land allotted to Jagan’s brother-in-law, Anil Kumar, were cancelled. As was the 14,000 acres of land allotted to Brahmani Steel, promoted by Gali Janardhan Reddy, for a steel plant in Kadapa. “The alliance between the Gali brothers and Jagan Reddy was a strategic partnership to protect their political interests. Whether you have Congress or BJP at the Centre, you would be insulated. Jagan was a master strategist,” says Nageswar Rao. 

Things didn’t turn out that way. In 2009, YSR died in a helicopter crash and the Congress did not want the “father’s establishment to continue with the son,” says Mysoora Reddy. But for someone whose interest in politics was, till then, limited to the commercial interests it promoted and protected, Jagan turned out to be as savvy in politics as he was in business. He set off on the Odarpu Yatra, which was the beginning of his fall from favour of the Congress high command — this was ironically, what would catapult him to pole position in the state election.

“For someone who has never campaigned for elections, he was remarkably good going from one village to another and connecting with people,” says Mysoora Reddy. He had another ace up his sleeve — his Christian brother-in-law. In a state where community is of supreme importance in all aspects of life — personal, political and business — Jagan could garner widespread support. “The Reddys think Jagan is with them, and so do the Christians,” laughs Phenonix Group’s Chukkapalli.

A few months after YSR’s unexpected death, a Canadian film-maker named Satya made a short documentary film on Jagan. The film projected him as Junior YSR. Then 36, with very little experience in politics, the easiest — and best — thing for the young political aspirant would have been to use the larger-than-life image of his father for instant political mileage. Surprisingly, Jagan was not pleased with the idea. “I am Jagan, and would like to be called Jagan,” he prevailed. He’s certainly carved out an unmistakable identity for himself, in politics and in business.