Modi told his friend he’d much rather have the episode behind him and focus instead on doing whatever it takes to get back into Chidambaram’s good books. And if his friend could do anything about it, Modi said he could get him the moon.
If we were to pause for a moment now and break the anecdote into its many pieces, a fairly accurate portrait of Lalit Modi begins to emerge. To start with, there is the fact that Modi can be generous to a fault. That explains his willingness to take a hair cut on the blimp deal for his friend. Old timers from the days Modi started out at his father’s business, remember him as a man who wouldn’t bat an eyelid while attempting to curry a favour for anybody he knew or sought his help.
But when push comes to shove, he cuts a good deal. Which is why, he could convince MRF to pay out as much as it did for the blimp deal. That he is opaque as well comes through the fact that nobody knows for sure how much exactly.
Much has been made and written of his brusque and arrogant nature. Both of which are on abundant display when he tried to bulldoze his way through Chidambaram’s office. Fact is, he is also a bully. And the defining trait of all bullies is that they cow down where glowered at. Why else do you think he’s been desperate to mend fences with Chidambaram?
Then of course, there is his legendary capability to execute relentlessly what he sets his mind to. How many men do you know of who can take one of the largest sporting shows on Earth and move it to another country in three weeks flat? For that matter, how many men have you heard of who’s built a franchise that’s worth more than $4 billion in just about three years?
All of this said, a couple of questions remain. How in the devil’s name did Modi manage to pull off something as significant with an entrepreneurial zeal that can be only described as mercurial? More importantly, how did he manage to create the astronomical valuations that the IPL now commands? Answers to these questions reveal a tale of uncanny entrepreneurship and a remarkable ability to subvert the system he operates in.
To understand how, you ought to first turn your gaze at Modi’s inspiration — the National Football League (NFL) in the US. He loves the way it operates, the glamour and buzz it generates and how every opportunity is monetised. To anybody who cared to listen, Modi pleaded that with the kind of passion cricket generates here, it was entirely possible to transplant the model into India and create a league that equals the NFL in size, if not bigger.
Even as he was trying to pitch the idea to potential owners, investors and the government, he stared a rather peculiar situation in the eye. His role model, the NFL, is an unincorporated association. Think of it as a loose federation with members in joint ventures with each other to ensure the league’s interests are accorded priority. There is no government nominated body that runs it. Instead, it enjoys
anti-trust protection and the primary objective of the league is profit maximisation for members.
In India though, if the IPL were to take shape, it would need the blessings of the Board of Cricket Control in India (BCCI), of which he was a member. The issues with operating it under the aegis of the BCCI were that it is an association whose stated objective is to popularise cricket in the country; it falls under the purview of the Societies Registration Act; and is exempted from paying taxes because, on paper, it is a not-for-profit entity.
From a potential bidder’s perspective, it meant a couple of things. The first comes with the dichotomy of bidders being registered as for-profit entities, whose sole interest in a league owned by a not-for-profit, is profit maximisation.
Secondly, that in spite of them paying big monies to own a team, they would have no say in the running of the league. On the contrary, they would pay out of their pockets to build the league while the BCCI raked in returns without having to invest anything. Not just that, the league would continue to be owned by the BCCI. This goes against the fundamental grain of similar business models in other parts of the world, including the NFL.
And finally, the league would be run by Lalit Modi, a member of the BCCI, who would eventually function as chairman and commissioner of the IPL as well. Without owning a stake in any of the franchises, what, they asked, would be his incentive to run the league in a manner that protected their interests? To address these concerns, Modi had to do two things. One, work his backside off. And two, subvert the system.
He did the first admirably. In seven months flat, he put the IPL together. He got one of the world’s best sports economists to work with him. He went about sponsorships the right way. He got a good TV deal, tied up with stadiums around the country and ensured enough corporates got interested in owning teams. He brought Bollywood to the IPL. He got one of the best names in management, IMG, on board because that would mean credibility. He cleared matters with international cricket boards to make sure players would be available for auctions. And he made sure they would earn a lot more than if they did playing for their countries.
As for subverting the system, he did that as admirably. Part I of the subversion included owning a personal stake in the league; Part II involved managing valuations in the league to keep everybody happy.
Image: Vikas Khot
CAUGHT IN THE HEADLIGHTS Shilpa Shetty, co-owner, of Rajasthan Royals
To understand how Modi pulled it off, a bit of economic theory becomes essential. In the world of sport leagues, how a team is valued is based on a few parameters. These include the population of the city a team is attached to, the sport infrastructure available there and average household surplus among other variables. For instance, the higher the household surplus, greater the chances for long term growth in ticket sales and merchandise.
If these parameters were strictly applied to cities for which franchises were on sale, Ahmedabad and Pune ought to have been offered to bidders during the first round. Instead, Jaipur, (Rajasthan Royals) and Chandigarh (Kings Punjab XI) made the cut. Kolkata (KKR) too, with a low surplus income of just 39 percent, also ought not to have been up for grabs.
But they were there. Not just that, they were valued cheap. Of the three, only Chandigarh could find a significant businessman (Ness Wadia) to buy into it. Intriguingly, these are the three franchises Lalit Modi is alleged to own indirect stakes in.
Now, the math begins to get interesting. While the economics don’t make sense, the kind of deals Modi got into on behalf of the league would ensure that the smaller franchises would start turning in profits even before anybody imagined they would. It works like this. Jaipur was sold for $67 million. This is to be paid in 10 equal installments over 10 years, an annual payout of $6.7 million. Factor in all other costs and the total annual payout works out to roughly $12 million.
As against this, the team rakes in $10 million from TV rights. Then, between all of the franchises, they split 60 percent of the money that comes in from sponsorships while the league keeps the rest. Add to these gate receipts, local sponsorships to be milked and everything else in between and suddenly the venture becomes a money spinner. In turn, it serves to drive valuations through the roof compelling consortiums to bid for cities like Kochi with amounts like $333 million that make no business sense.
If he hadn’t rubbed people the wrong way, he would perhaps continued in the saddle. But too many people want a slice of him — especially those in the BCCI and the IPL Governing Council. “We often did not know what was happening,” says a member of the BCCI.
Nothing was ever out in the open. There is talk of how for the recent auction, Modi advised bidders on the amount they should bid. Gautam Adani of the Adani Group bid $315 million for Ahmedabad.
Rendezvous Sports World, the winners of the Kochi franchise, says Modi had asked them to bid $297 million for Kochi. But they had heard stories of how Modi could not be trusted. “Modi had advised Subashji (of Zee Sports) to bid $490-500 million for rights to BCCI’s matches in 2006,” says an ex-employee of Zee involved in the process back then. “Subhashji took his advice and was shocked when Nimbus bid $612 million.”
But not taking Modi’s advice has hurt companies as well. The Anil Dhirubhai Ambani Group found this out the hard way. It had bid for six franchisees in 2008. Their bid for the Jaipur franchise fell short by $300,000. What is not known is that Modi had advised them to make a much higher bid. “Contrary to what people say Modi’s advice would have worked for us,” says an ADAG executive who did not wish to be named. The bidders thought it was a ploy to get them to pay higher for a small city like Jaipur and ended up on the losing side.
Even in the recently aborted auctions, Modi’s hand was evident. It may be true he had vested interests in making sure Adani and Videocon won Ahmedabad and Pune. But it is also true that their bid amounts, both of which were under $250 million, made perfect business sense. But when Sahara and Rendezvous Sports World got into the game and bid higher, against Modi’s advice, equations changed. Modi knew even a franchisee like Mumbai will not be worth more than $350 million in 2017 — 10 years after Reliance bought it. There is no way Pune and Kochi can deliver those kinds of returns to their owners.
To that extent, what Modi did was sheer genuis. Drive up valuations, but not to a point where it gets untenable. If franchises make losses in the long run, he knew the league is doomed.
There are doubts about the IPL’s future if Modi is removed. Will his replacement, Chirayu Amin, be able to give the same amount of commitment? And more importantly with its numero uno decision maker gone, will the IPL retain its ability to think on its feet? “Modi is a one-man show,” says a person who works with him. “You would think someone who handles hundreds of crores worth of deals would have learned to delegate. But no, even for the MRF blimp that cost a measly Rs. 15 crore, Modi took the call,” he says. Amin is a BCCI member with no stake in any franchise. He runs his own company. Will he bring the same amount of energy into the IPL? And more importantly will he be able to balance franchisee interests along with BCCI interests?
The IPL may run along without Modi but don’t expect the same style and grandeur that he brought to the event. Yes, his wings need to be cut because too much power in one individual’s hands is bad for any organisation. “Modi hasn’t put any systems in place. You get the feeling he is actually indispensable,” says a sponsor.
Of course it is hard to believe that people like Mukesh Ambani and Vijay Mallya would let their investment go to rot. They will step in and bring much needed professionalism to the IPL.
Modi may have to bow out of the IPL. What next for him? He has a few options. His mentor Sharad Pawar is the president elect of the International Cricket Council (ICC). He will move to the ICC later this year. Maybe he can find a role for his protégé over there. But it will be difficult for Modi to go there with a tainted reputation. The English and South African cricket boards have been looking to emulate the IPL’s success. Modi has that option open as well.
As we put this story to bed, Modi tweeted: Thank you all for your message (sic) of support. I am still chairman of the IPL. Just suspended. Wait — we have just begun.
Vijay Bharadwaj is head, research at Sport18
(This story appears in the 30 November, -0001 issue
of Forbes India. To visit our Archives, click here.)
