INTRODUCTION
AN INVITATION
TO BOMBAY
The envelope was hand-delivered
to our house in Golf Links, Tan enclave in New Delhi whose name captured the
clubbable lifestyle of its leisured and propertied Indian residents, soon after
we had arrived in the middle of a north Indian winter to begin a long
assignment. It contained a large card, with a picture embossed in red and gold
of the elephant-headed deity Ganesh, improbably carried on the back of a much
smaller mouse. Dhirubhai and Kokilaben Ambani invited us to the wedding of
their son Anil to Tina Munim in Bombay.
In January 1991, just prior to
the explosion in car ownership that in later winters kept the midday warmth
trapped in a throat-tearing haze overnight, it was bitterly cold most of the
time in Delhi. Our furniture had still not arrived-a day of negotiations about
the duty payable lay ahead at the Delhi customs office where the container was
broken open and inspected-and we camped on office chairs and fold- up beds,
wrapped in blankets.
The Indian story was also in a
state of suspension, waiting for something to happen. The Gulf War, which we
watched at a big hotel on this new thing called satellite television, was
under- cutting many of the assumptions on which the Congress Party's family
dynasty, the Nehrus' and Gandhis', had built up the Indian state. The Americans
were unleashing a new generation of weapons on a Third World regime to which
New Delhi had been close; its Soviet friends were standing by, even agreeing
with the Americans.
The Iraqi invasion of Kuwait had
pushed up oil prices and forced the Indian Government to evacuate some three
million of its citizens working in the Gulf. The extra half-billion dollars all
this cost India was pushing the country close to default on its foreign debt. Officials
from the Ministry of Finance were already negotiating a bail-out from the IMF
in Washington; the IMF was setting stiff conditionalites in effect a complete
shift from Nehru's model of high external protection for the economy and
government allocation of savings. Even the CNN clips of Tomahawk cruise
missiles zipping neatly down the streets of Baghdad were in themselves part of
another breach in India's walls. The cities who ran the national TV monopoly or
the big newspapers no longer had India's half illiterate population to
themselves.
Little of this was admitted in
New Delhi. The coalition government of V P Singh, which had swept out the
glamorous Rajiv Gandhi on a battery of corruption scandals, had itself
collapsed in November after less than a year in office. India was ruled by an
even smaller coalition of opportunists under a wily politico called
Chandrasekhar, kept in office at Rajiv's pleasure for who knew how long.
Everyone clung to the autarkic, Third World verities. Politicians and journalists
pounced on the slightest admission by their fellows that perhaps India's vision
of the world had been flawed and it had better adjust to the new order. At the
Ministry of External Affairs, in the red sandstone majesty of Sir Herbert
Baker's Secretariat buildings, a bright young official on a new economic desk
assured me that India's finances were strong enough to take the strains. At a
party of intellectual's young academics and filmmakers in rough cotton
kurta-payjama suits scoffed at the prospects for satellite TV. How would the
advertising payments get out to the broadcaster through the maze of foreign
exchange controls? Which foreign companies would want to plug products they
could neither export to India nor make locally?
The wedding invitation was a good
excuse to break away from this stalemate in New Delhi, and make contact with
the Indian commercial class in Bombay. There it looked as if a raw
entrepreneurial spirit was straining to break through the discouraging
political crust. Word of the Ambani family and their company Reliance
Industries had spread to Hong Kong as prime examples of this brash new India
which might finally have its day, courtesy of the changes the Gulf War
symbolised.
Everything
about the Ambanis, in fact, was a good magazine story 'The young couple's
courtship had been a stormy one, ready-made for the Bombay show-biz magazines.
The bride, Tina Munim, was a girl with a past. She had been a film starlet,
featuring in several of the Hindi-language films churned out by the hundreds every
year in Bollywood most including improbable violence, song-and-dance routines,
and long sequences with the female leads in wet, clingy clothes. Before meeting
Anil, Tina had had a heavy, well-publicised affair with a much older actor. The
groom, Anil, was the tear away one of the two Ambani boys. His parents had
frowned on the match. Bombay's magnates usually tried to arrange matches that
cemented alliances with other powerful business or political families. This one
was not arranged, nor did it bring any more than certain popularity. Hired
assailants had been sent with acid and knives to scar Tina's face, so went the
gossip (apocryphal: Tina's face turned out to be flawless).
Anil had
threatened suicide if he could not marry Tina, went another rumour. Finally,
the parents had agreed.
The father, Dhirubhai, was no
less colourful and even more controversial. He had first worked in Aden in the
1950s. I recalled a stopover there in my childhood, aboard the S. S. Oronsay, a
buff-hulled Orient Line ship, en route to my father's posting in London with
his Australian bank in 1958. The image was of grim, dark- brown peaks
surrounding a harbour of brilliant blue, a host of merchant ships tied up to
moorings, and a busy traffic of launches and barges. The trip ashore was by
launch, landing at Steamer Point, where Arabs and Indians besieged the white
faces, trying to sell us Ottoman-style cushions or to drag us into their
duty-free shops. Now someone like those desperate salesmen in Aden was a tycoon
in Bombay.
Ambani
had got into polyester manufacturing in a big way, and got huge numbers of
Indians to invest in shares of his company, Reliance Industries. In India, the
home of fine cotton textiles, it seemed that people couldn't get enough
polyester. The only constrain on local producers like Reliance was the
government's licensing of their capacity, or where they built their factories.
To jack up his capacity, Ambani had become a big political fixer. In the recent
minority government formation, it was said; his executives had been shuttling
briefcases of cash to politicos all over Delhi. There had been epic battles,
with the press baron Ramnath Goenka of the Indian Express and with a textile
rival from an old Parsi business house, Nusli Wadia. A year or so earlier, a Reliance
public relations manager had been arrested for plotting to murder Wadia. The
man had been released, and nothing was moving in the case. Was it genuine or a
frame-up? Indian colleagues were not sure: no conspiracy was accepted at face
value.
So we took our
first trip inside India, making our way down to New Delhi Railway Station in a
yellow-and-black cab, one of the 1954 Morris Oxford design still being made in
Calcutta, in the rose-coloured haze of a winter afternoon; letting a red-
shirted porter heave our bags on his head and lead us to the train,
establishing our rights to the coveted two-berth compartment in the middle of
the First Class Air- Conditioned carriage from the list pasted by the door. The
train slid across the fat beige northern landscape of wheat-stubble and square
houses as night fell. In the morning we were trundling past palm trees and
mangrove-bordered creeks before humming into Bombay through suburban stations
packed with commuters.
If New Delhi was a city of books,
discourse, seminars and not much action or precision, Bombay was one where
people made the most of the nine-to-five working day before battling their way
home to the distant suburbs. Most crucially, Bombay had accepted the telephone
as a medium of dialogue-not merely as a preliminary to an exchange of letters
setting up a meeting. It was also unashamedly concerned with money and numbers.
New contacts like Pradip Shah, founder of India's first rating agency for
corporate debt, with the slightly alarming acronym of CRISL, or Sucheta Dalal,
a business journalist at The Times of India, or Manor Murarka, partner of the
old stock broking firm of Batlivala & Karani, rattled off the details of
industrial processes, forward- trading in the share market or conversion dates of
debentures at bewildering speed.
The wedding was going to be big,
so big that it was to take place in a football stadium, the same one where
Dhirubhai Ambani had held many of his shareholders's meetings. But it began in
an oddly casual way. As instructed, we went mid-afternoon to the Woodhouse
Gymkhana Club, some distance from the stadium. There we found guests milling in
the street outside, the men dressed mostly in lavishly cut dark suits and showy
ties, moustaches trimmed and hair brilliantined. The women were heavily made
up, laden with heavy gold jewellery, and wearing lustrous gold-embroidered silk
saris.
Anil Ambani appeared suddenly
from the club grounds, dressed in a white satiny outfit and sequined turban,
sitting on a white horse. A brass band in white frogged tunics struck up a
brash, repetitive march and we set off in separate phalanxes of men and women
around the groom towards the stadium. Every now and then, the process would
pause while the Indian guests broke into a pro- vocative whirling dance, some
holding wads of money above their head. The stadium was transformed by tents,
banks of inarigolds and lights into a make-believe palace, and filled up with
2000 of the family's closest friends and business contacts. They networked
furiously while a bare-chested Hindu pundit put Anil and Tina through hours of
vedic marriage rites next to a smouldering sandalwood fire on a small stage.
Later, the guests descended on an elaborate buffet on tables taking up an
entire sideline of the football pitch, starting with all kinds of samosas and
other snacks, working through a selection of curries and breads, and finishing
with fruits and sweets wrapped in gold leaf. The next day, the Ambanis put on
the same spread-if not the wedding ceremony at another reception for 22000 of
their not-so-close friends, employees and second-echelon contacts.
Retrospectively, by the standards
of Bombay a few years later, it looks a modest and traditional affair. Before
their joint marriage of three children in 1996, the ingratiating Hinduja family
had an elaborately illustrated book prepared on the Hindu marriage and sent to
all invitees. Other business alliances were celebrated with elaborate
stage-sets based on the ancient epics; lines of elephants led the processions
of the grooms and diamonds were pasted to the foreheads of women guests. But at
the time, the sheer size of the wedding was seen as a sign that
Dhirubhai
Ambani had made it through the political travails of 1989~90 and was
unabashed-and certainly not strapped for cash or friends.
It was fattening to be there and
to have a Reliance public relations manager take me up to meet the Ambanis-
flattening, within a month of arriving in India, to meet the country's fastest
moving, most controversial tycoon. An interview was promised shortly, once the
festivities were over. An early cover story was clearly a possibility, an
antidote to the gloomy political news out of Delhi. It would help my standing
at the Far Eastern Economic Review if India was an upbeat business story and I
was right on to it.
That of course was the desired
effect. Reliance was desperate to raise funds for expansion and was looking to
foreign sources, so some image-building in a prestigious magazine was highly
useful. A newcomer to India would be more inclined to play down the
controversies and look at the company's prospects.
The interview, when it took place
a month or so later, was stimulating. Dhirubhai Ambani came limping around a
huge desk when I was ushered to a sofa and greeted me warmly. Despite the obvious
effects of a stroke in a twisted right hand, his mahogany skin was smooth and
healthy, his hair plentiful and slicked back decisively in a duck's tail. His
attention was unwavering. Disarmingly, Dhirubhai admitted to many of the
youthful episodes that were the subject of rumour, and responded evenly when I
raised some of the criticisms commonly leveled against him. He didn't mind
people calling him an 'upstart's or even worse names. It just meant they were
trapped in their complacency while he was racing ahead. But the disputes were
now 'history's and the former critics were now all his 'good friend's buying
their polyester and raw materials from him.
'The orbit goes on changing,'s he
declared airily. 'Nobody is a permanent friend, nobody is a permanent enemy.
Everybody has his own self-interest. Once you recognise that, everybody would
be better off.' However, Ambani did point to an unfortunate trait in his
countrymen. 'You must know that, in this country, people are very jealous.' It
was not like in Hong Kong or other East Asian countries, where people applauded
each other's success, he claimed. In India success was seen as the prerogative
of certain families. But he didn't really mind. 'Jealousy is a mark of respect,
he said. The interview resulted in a cover story for the Far Eastern Economic
Review which portrayed Ambani as the business underdog trying to break through
the government's red tape and the prejudices of a tired Bombay business
establishment. Naturally enough, Ambani and his PR men were pleased. His one
quibble, I was told, had been my pointing out some glossed-over problem areas
in the Reliance annual reports, which had been put in the notes to the
accounts, fine-print areas that only the professional analysts re-ally read.
The comments were true enough, but they made it look as though Reliance was
unusual among Indian companies in these practices.
The Reliance public relations
office continued to be attentive, supplying advance notice of newsworthy
events. At one point later in 1991, there was another glimpse of Dhirubhai
Ambani's energetic mind. His Delhi office passed on a request for information
about Indonesia's engagement in the late 1980s of the Swiss cargo clearance
from Societe Generale de Surveillance (SGS) to administer its imports and
exports, thereby sidelining the country's notoriously corrupt customs service
for several years. I sent off some clippings, intrigued that the man accused of
smuggling whole factories through the ports of India now seemed to be
advocating Swiss efficiency in place of the lax administration of which he had
supposedly taken advantage. The proposal got to a high level in the government
before being canned, but not before causing panic in the Indian customs
service-which may have been all Dhirubhai wanted to do anyway.
There were daily updates from the
Reliance PR staff on an issue of convertible securities issued in the Euro
market in May 1992, the first by an Indian company and tangible proof of
India's reforms reconnecting it to the world economy. There was a
company-organized trip out of Bombay up to its new petrochemicals plant at
Hazira, involving a bumpy fight in a chartered turboprop to the airfield at
Surat, bare of airport terminals or navigational aids as far as could be seen,
and a drive through the old textile trading city, squalid despite its lucrative
silk and diamond industries- and, a couple of years later, notorious for an
outbreak of bubonic plague. Across the Tapti River, a glittering array of pipes
and towers had indeed come up, and cryogenic tankers full of sub-zero ethylene
were tied up at the jetty. Reliance was clearly not just a paper empire.
But the history of political and
corporate activity had put a sinister shadow across the gleaming success. M
through the government changes of 1990 and 1991, the press carried references
to a certain large industrial house's supporting this or that party or being
behind certain politicians. Scores of party leaders, ex-ministers, senior
bureaucrats, and heads of the big government- owned banks and corporations were
said to be Ambani friends' or Ambani critics'. Mostly it was the friends, it
seemed, who got the jobs.
People made bitter and cynical
remarks about the Ambanis in private. The press cover-age, especially in the
Indian business magazines, had a repetitive quality. A myth was being created
and sustained. At a meeting of shareholders in a big Bombay engineering firm
named Larsen & Tourbo late in 1991, convened to approve a takeover by the
Ambanis, this undercurrent of hostility welled up into a physical melee. In the
shouting and jostling, the two Ambani sons had to fee the stage. The
controversies kept continuing right through the 1990s.
Dhirubhai Ambani attracted
adulation or distrust. To his millions of investors, who had seen their share prices
multiply, he was a business messiah. To one writer, he was a 'Frankenstein
Monster's created by India's experiments with close government control of the
economy.
'There are three Dhirubhai
Ambanis, one of his fellow Gujaratis, a writer, told me. 'One is unique, larger
than life, a brand name. He is one of the most talked about industrialists and
for Gujarati people he has tremendous emotional and sentimental appeal. He is
their ultimate man, and has inspired many emulators. The second Dhirubhai Ambani
is a schemer, a first-class liar, who regrets nothing and has no values in
life. Then there is the third Dhirubhai Ambani, who has a more sophisticated
political brain, a dreamer and a visionary, almost Napoleonic. People are
always getting the three personalities mistaken. In a legal chamber lined with
vellum-bound case references, a senior lawyer took an equally stark view. Today
the fact is that Ambani is bigger than government,' said the lawyer in all
seriousness. 'He can make or break prime ministers. In the United States you
can build up a super corporation but the political system is still bigger than
you. In India the system is weak. If the stock exchange dares to expose Ambani,
he tells it: I will pull my company shares out and make you collapse. I am
bigger than your exchange. If the newspapers criticise, he can point out they
are dependent on his advertising and he has his journalists in every one of
their departments. If the political parties take a stand against him, he has
his men in every party who can pull down or embarrass the leaders. He is a
threat to the system. Today he is undefeatable. Surprisingly, the role played
by Dhirubhai Ambani received only cautious side-references in most books about
contemporary Indian politics. No biography of him was in the bookshops,
although Indian journalists and commentators had produced 1quickie's
biographies of other new celebrities in vast numbers. The work of the economic
historians largely cut out in the 1960s. The few biographies of other Indian businessmen
were commissioned works, not very well written, and notable for a worshipful
attitude to the subjects. No one drank, cursed, cheated or philandered. Their
workers were all part of the family. Almost everyone lived an abstemious
vegetarian life, accumulating wealth only to give it away to temples, hospitals
and schools.
By 1992, Reliance was tapping
investors in Europe for funding, and international investment funds were being
allowed to play the Indian share market directly. A few years later, the company
had started borrowing in New York on a large scale. The Ambani story was
becoming of greater interest outside India, at least to investors and perhaps
to a wider audience watching the explosive growth of capitalism across Asia.
The idea of this book occurred in 1992, and I put it to Dhirubhai Ambani later
that year at a second meeting in his Bombay office. Ambani seemed receptive,
and agreed that his life story could be inspiring for a younger generation of
Indians as well as interesting to those thinking of dealing with India. I left
the meeting with an understanding that he had agreed to talk about his life at
meetings to be arranged and that, if so, I would show him the completed draft
as a courtesy and listen to any objections-but retain the final say on the
content. The book would not be credible otherwise, Ambani concurred.
A year slipped away without
further progress, and then relations with Reliance took a downturn. By the end
of 1993, Reliance was in the bidding for several oilfields in the Arabian Sea.
The government oil search corporation had discovered the fields but did not
have the funds to build the huge production rigs, gas compressors and pipelines
that were needed. Several contacts among rival bidders were alleging that the
tender was being rigged in favour of Reliance. Indian politicians and
bureaucrats are masters at tilting an 'pen and transparent' tender into a
one-horse race, by techniques such as keeping the weighting of bidding factors
uncertain or secretly promising later con-cessions to compensate for
underbidding. In the event, Reliance swept the field, and a director with one
of the losers told me: 'we were shafted, and for the wrong reasons.'
Writing about this would not
advance my request for access to the Ambanis for the book, but my duty was to
the magazine that employed me. The first of two articles in the Far Eastern
Economic Review about the oilfields battle drew a bitter complaint from Anil
Ambani that the report was 'defamatory' a complaint not sent directly to me, or
to the magazine, but in a letter sent to the head of one of the rival
companies, the Australian resources giant BHP, and copied to the heads of the
American and Australian diplomatic missions in New Delhi.
Thereafter, I wrote occasionally
about Reliance and, in July 1995, left my job with the magazine to spend more
time on the book. A letter to Dhirubhai Ambani informing him of this move went
unanswered. Over the following 18 months, the research led me into all corners
of Bombay life, from the slum homes of the semicriminal underworld to the
offices of powerful business tycoons, to several cities and towns in Gujarat on
crowded Country buses and trains, to converted churches in London and Leicester
ringing with the Hindu chants of the Gujarati Diaspora.
The reception varied. Almost
everyone wanted to know if the book was authorised or sponsored. It was
neither, I said, but Ambani had been told and so far had not expressed to me a
view either way about it. Many of those people who knew Dhirubhai Ambani in his
early days in Junagadh and Aden and then starting his business in Bombay were
willing to talk. Some others-such as his former Aden colleague and Middle East
coordinator in Dubai, Bharat Kumar Shah, asked for a letter of clearance from
Ambani himself, which again was not forthcoming. One Bombay journalist who
agreed to share his knowledge picked up the telephone immediately I arrived at
his flat and rang Anil, Ambani's office. 'I have told him if you are wanting
scandal you will lose the whole story', he said down the phone to the executive
who answered. The next day, I was invited to lunch by a pair of Reliance public
relations executives and quizzed closely about my intentions.
Dhirubhai Ambani did respond to a
birthday greeting sent at the end of December 1995, but there was still no word
about his attitude to the book. A month later, however, I few especially to
Bombay for an interview arranged with his former export manager's Rathibhai
Muchhala, who according to numerous other sources 'new everything's about the
early days. At the appointed time, Muchhala was not at his office in the
industrial belt behind Bombay's airport. A secretary telephoned him: he was at
the Reliance head office. Muchhala was sorry, but Ambani's office had advised
him not to meet me.
Ambani's personal assistant,
Dinesh Sheth, then confirmed this: there were several proposals for biographies
and some months earlier Dhirubhai Ambani had indicated to his staff that he did
not want at that stage to encourage or co-operate with any of them. Sheth
professed ignorance of my previous letters, so I sent another the next day,
offering to come at any time to discuss the book.
Ironically, the reception among
those figures who had been critics or opponents of Reliance was also wary.
Phiroz Vakil, a senior advocate in tiny chambers in Bombay's old Fort, surveyed
me intently while stuffing Erinmore Flake tobacco into his pipe and warned that
people would suspect I was being used by the Ambanis to draw out information.
Among some others, my earlier favourable write-ups of the Ambanis still told
against me. 'I suppose you think he's a hero,' said the retired Finance
Ministry official and Cabinet Secretary Vinod Pande, down the phone.
Others just seemed too
battle-weary when I rang the Orkay Silk Mills chairman Kapal Mehra and asked to
meet him, there was a long pause. 'I'm afraid that won't be possible,' Mehra
said. The former Prime Minister Viswanath Pratap Singh did not reply to a
letter and giggled nervously when I cornered him at a cocktail party in New
Delhi. No, he could not possibly talk about any one company, Singh said, easing
away quickly. Those who did agree to talk for the most part insisted on
anonymity: they had to live in India, they explained. Word of some of these
meetings must have been passed back to Reliance, for in January 1997 a stiff
letter arrived from Kanga & Co in Bombay, lawyers for Dhirubhai Ambani and
the company, warning that their clients understand and apprehend that the pro-
posed publication contains material which is defamatory to our client's. It was
claimed that in no time 'had there been any attempt to verify the material with
the clients. Action for exemplary damages and injunction against publication
were threatened if the book was defamatory. At this point it had not even been
completed, let alone delivered to the publishers.
Fortunately, the several
controversies that hit Reliance in the second half of 1995 produced a deluge of
paper from Indian Government agencies. The various reports opened up many
previously obscure and controversial aspects of the company's operations. At
the same time, the controversies compelled Reliance to give its own
explanations, which became part of the public record. Even so the overall
result, unavoidably, has been a book that becomes progressively less intimate
to its subject as the story advances, drawing more on published reports,
available documentation, and anonymous interviews with those who had engaged
with Dhirubhai Ambani and Reliance Industries from the outside. The book is less
satisfactory and less sympathetic, perhaps, than it might have been with
co-operation from the Ambanis and access to them. As my research and writing
progressed, however, word came from several sources that the family was
compiling its own record of Dhirubhai Ambani's life and his company's growth,
so a version of events from the inside may also be put to the public soon.
A PERSUASIVE YOUNG BANIA
Among all the 550-odd princely
rulers left, with British Residents at their shoulders, to run their domains in
the last years of the Raj, few were more eccentric than Mahabat khan, the Nawab
of Junagadh. The Nawab's family had run this fiefdom, one of several in a
political jigsaw covering the Saurashtra peninsula in Gujarat, since a faujdar
or military commander of the Mughal Empire named Sher Khan Babi founded his own
subordinate dynasty in 1690. Two and a half centuries later, this warrior's
descendant was best known for his love of dogs. Mahabat khan had 150 of them,
with an equal number of dog-handlers on his payroll and individual quarters for
all the canine retinue. To celebrate the 1wedding'of one canine pair, the Nawab
was reputed to have spent two million rupees (then worth about £150 000
sterling) and to have given his 700 000 subjects a public holiday.
The Nawab was the first political
target to come into the sights of Dhirubhai Ambani, although it is unlikely
that he was ever specifically aware of it. It was during a movement aimed at
overthrowing the Nawab's rule and securing Junagadh's accession to India during
the Partition of British India in 1947 that Ambani, then a teenage high school
student, had his first experience of political organisation and his first
brushes with authority.
It was the only moment in modern
times that Junagadh has figured in the calculations of nations and statesmen.
Even in the 1990s, Junagadh and its surrounds, known as the Kathiawar region,
remains one of the quietest, most traditional regions of India, and one of the
least accessible in the otherwise busy northwest coastal area of the country.
A few times a week, a turboprop
flies into the simple airstrip at Keshod, unloading people from Bombay or the
Gujarati Diaspora overseas coming to visit their relatives and make offerings
to family gods at local temples. In the town itself, clusters of 1940s Ford
Mercury taxis wait for groups of passengers or for hire at weddings. The
railway network was built to connect each of the several former principalities
of Kathiawar to the outside world rather than with each other. Once you are in
Kathiawar, all now part of Gujarat state, traveling between towns often means
one or more changes of line and extensive doglegs and backtracking in the
journey. The last steam engine on regular service in India, apart from scenic
mountain railways, puffed between Junagadh and the Gir sanctuary for the last
Asiatic lions until 1996.
The land itself is dry, open and
stony. The monsoon rains quickly run off down the short rivers and nuilahs that
radiate from the central rocky hinterland out to the sea. The roads are lined
with stunted pipul (fig) trees, and the stony fields are fenced with straggling
rows of cactus. The standard building material is a porous dun- coloured stone
cut by saws into ready-made blocks from pits near the seashore. There are few
of the modern ferro-cement extravagances built by the newly rich, hardly any of
the industrial plants and their residential colonies seen extending out into
farmland in other Indian regions, and only a few private cars.
But if the landscape is
monotonous, Kathiawar's people compensate for it with riotous colour where they
can. The women drape themselves with cotton scarves tie- dyed in red and
orange. The local scooter-taxi is the Enfield motorcycle grafted to a fat tray
resting on two wheels at the back, with the handlebars decked with coloured
lights, electric horns and whirling windmills. The homes of wealthy merchants
are decorated with mouldings of swans, peacocks, flamingos, parrots, elephants,
lions and tigers. Massive double doors, twelve-paneled, with heavy iron studs,
open tantalisingly on to huge inner courtyards.
A blood-drenched history and
complicated mythology are attached to the landmarks and constructions of
Kathiawar. On the coast to its west, at Dwarka, is the place where Lord Krishna
died. To the south, the temple of the moon at Somnath is a centre for Hindu
pilgrims from all over India. In the steep Girnar hills above the city of
Junagadh, long staircases take pilgrims to Jain temples dating back to the 3rd
century BC.
Looming over Junagadh city, the
fortified rock-citadel of Uparkot has inscriptions and cave-sculptures from the
time of the 3rd century BC ruler Ashoka. The city was an important centre for
Hindu rulers of Gujarat in the first millennium. Then, starting with the Afghan
warlord Mahmud of Ghazni, who invaded in 1024 AD and pillaged Somnath, Junagadh
suffered four centuries of sackings. Mughal rule gave it some stability with
Muslim rulers controlling its largely Hindu population. Both its rulers and its
people were passive onlookers in the contest for India's trade among the
English, Dutch and Portuguese, whose galleons fought vicious battles off the
Gujarat coast. A five-metre long cannon broods over the town from the ramparts,
a relic of an unsuccessful attack on the Portuguese trading post at Diu, on the
coast southeast of Junagadh, by the feet of Sultan Sulaiman the Magnificent of
Turkey in the 15th century.
At night, seen from the coastline
at the south of Junagadh, processions of navigation lights travel left and
right along the horizon. The seaborne traffic between the west coast of India
and the Arabian ports goes on as it has for millennia, ever more intense.
Gujarat was the trading hub of
ancient India, where Indian cottons and silks were traded to Arabs and later
the first English East India Company in return for silver, gold, incense and
coffee from the Red Sea port of Mecca. Up until the early 15th century, Chinese
junks had also come to western India. Later India and India-based European
traders became the trade intermediaries between the Arab and Chinese spheres.
The Gujaratis were prominent in this pre-colonial Indian Ocean trading network,
with the wealth of India in its cloths, indigo, opium and spices merchandise.
The small ports of Kathiawar took
part in this trade. Diu handled much of Gujarat's trade with Aden in the west
and Malacca in the cast. Gold, silver, quicksilver, vermilion, copper and
woollen cloth would be exchanged for Indian gold and silver embroideries and
brocades and for cotton muslins of a fineness expressed by trade terms such as
abrawan (running water), baft hava (woven air) or shabnam (evening dew).
Later of course the East India
Company grabbed its monopolies in opium, tea, indigo and spices in a three-way
trade equation between China, India and Europe, topped up later by the British
Empire with gold bullion from Britain's new colonies in South Africa and
Australia at the southern corners of the Indian Ocean. Indian entrepreneurs-in
Calcutta the Marwari traders and moneylenders originally from Rajasthan, in
Bombay the Parsis (Zoroastrians originally from Persia)-began moving into
large-scale industrial production late in the 19th century.
Smaller traders also took
advantage of Pax Britannica by taking steamer passages to all corners of the
Indian Ocean and Southeast Asia-no passports were needed-and opening small
stores and service stations. Most were from Gujarat; a large proportion of
these from Kathiawar. Two of the biggest commercial families in Uganda, the
Mehtas and the Madwhals, came from Porbander, and the thriving Chandarlas of
Kenya came from Jamnagar. Until 1938, the free port of Aden was part of the
Bombay administration. The East African shilling, the currency of the Red Sea
and Indian Ocean trade, was virtually pegged to the Indian rupee in value.
The Gujaratis were stingy with
their customers and stingy with themselves. Bhaskar Bhattarcharya, a television
broadcaster in New Delhi, spent his childhood years in Uganda where his father
was a British colonial official. The epicurean ways of the Bhattarcharyas from
Bengal contrasted sharply with those of the Patels or Shahs from Gujarat. 'When
we first arrived, the women took my mother aside and said: this is the way you
do things,' he remembers. 'If you were invited for dinner, you got a couple of
vegetable dishes and rice. My parents liked to splash out, and serve meat and
fish to their guests. Of course, by the time we left, the Gujarati peon in my
father's office had probably saved more than he had.' The wealth was the result
of rigorous saving, abstemious living, and endless hours of work by unpaid
family members -a migrant's success story in many parts of the world. In East
Africa, it created a resentment that led to the expulsion of the Indian traders
and appropriation of their assets after the colonies became independent in the
1960s. The effect was to find the Gujarati diaspora worldwide, to start the
process of capital accumulation again.
Among the Gujaratis, the people
of Kathiawar are renowned for their exuberance of speech, inventiveness and
commercial drive. 'This is a place of have-nots,' notes Shecia Bhatt, a former
editor of the magazine India Today's Gujarati-language edition. 't is a barren
land, but out of stone they somehow draw out water. The people are so colourful
because the landscape is so colourless. They fill their heads with colour.
Amongst Gujaratis, the best language is among Kathiawaris: so many words. Even
the trading class will have extraordinary expressions. Kathiawari traders have
more vibrant terminology than other traders. They were the first to go out of
India for better prospects. Adventure is second nature to them. They have less
hypocrisy. All of the other business communities affect modesty to the point of
hypocrisy. Dhirubhai Ambani is part of that culture.' In one sense, Ambani was
born to be a trader, as his family belongs to a Bania caste, a section of the
Vaisya category (varna) in the traditional Hindu social order whose roles are
those of merchants and bankers. This instantly provided a whole network of
relationships, a community and social expectations that made commerce-taking a
profit from buying and selling in markets, the accumulation of capital - an
entirely natural and honourable lifetime's occupation.
Although socially below the
Brahmins (priests and scholars) or the Kshatriya (warriors and landowners) and
rarely part of aristocratic elites, the Vaisya castes came to exercise enormous
power across India. They marshalled huge amounts of capital, which funded the
campaigns of maharajas and nawabs and at times the British trade and military
expansion when the budget from London ran short of operational needs. Centuries
before the modern banking system, Vaisya shroffs or bankers were the conduits
of a highly monetised Indian economy, remitting vast sums around India at short
notice through a sophisticated trust system based on hundi (promissory notes).
The commercial instincts of
Gujarat's Vaisya were encouraged by a convenient interpretation of Hinduism
preached by the holy man Vallabhacharya in his wanderings around the region
early in the 16th century Another widely followed religious school known as
Shaivism (from the god of creativity and destruction, Shiva) had preached that
the world was unreal and an impersonal abstract essence was the absolute
reality and truth. The Jain and Buddhist religions, which had sprung from
Hinduism, also preached privation, renunciation and destruction of the self.
Vallabhacharya saw a personal god who created and sustained life, for whom
living life to the full was a form of devotion. His school became known as
Vaishnavism, as the focus of devotion was the god Vishnu's playful avatar
(incarnation) Krishna, perhaps the most widely adored and human face of the
divine among Hindus.
In his classic text on the
Vaishnavas of Gujarat, the scholar N. A. Thoothi pointed out that this
naturally appealed to the people of a land richly endowed with opportunity like
the central parts of Gujarat. It was a philosophy that justified their way of
life and gave a divine purpose to their roles as providers and family members.
It also fitted the rising social status of the Banias in Gujarat, overriding
the formal varna hierarchy.
As Vaishnavism grows, the Varnas
decline. We have noticed, for example, how the Vanias [Banias] have reached a
social status as high as that of the Brahmins themselves. This upsetting of the
balance of the Varnas has been greatly due to economic causes. The merchant and
the financier and the capitalist have, by sheer force of wealth and power, for
a while become dictators over all, even over the priestly class. A
justification of their way of living, a theory of life and a pathway suited and
helpful to the living of a life engrossed in work and duty as a man, husband,
father, citizen and so on, a hope that such a mode of life as they live is
acceptable to the highest deity - the Gujaratis naturally sought for all these.
Ambani's particular caste is
called the Modh Bania, from their original home in the town of Modasa north of
Ahmedabad before a migration many centuries ago to Saurashstra. The Modh are
one of three Bania castes in this part of Gujarat, who might eat meals together
but who would each marry within their own caste. They are strict vegetarians,
and only the men take alcohol. Their practice of Hinduism follows the
Vaishnavite path. But the main object of their pilgrimages, on marriage or the
start of a new business venture, is a black-faced idol with a diamond in his
chin located in a temple at Nathdwara, a small town in the barren hills behind
the lake city of Udaipur in Rajasthan. This idol represents Srinath, an avatar
or incarnation of Lord Krishna, and was brought to Nathdwara from Mathura
(Krishna's birthplace) by a holy man to escape the depredations of the fierce
anti-Hindu Mughal emperor Aurangzeb. For reasons that are not clear, Srinath
has become the familiar god of the Modh and other Banias. Portraits based on
the Nathdwara idol are often seen in the offices of Bania businessmen.
In later years, Ambani and his
family made frequent visits to the temple of Srinath, flying into Udaipur
airport in his company's executive jet and driving straight up to Nathdwara. In
1994, Ambani built a large ashram (pilgrim's rest-house) in Nathdwara for the
use of visitors. The three-storey building, faced in a pink granite, is
dedicated to the memory of his parents.
If
the Modh Bania practise piety in the temple, and abstemious ways in their homes
they are known as fiercely competitive and canny traders in the marketplace,
with no communications about taking advantage of opportunities for profit. A
saying in Gujarat goes: 'apale hojo kadh, pan angane na hojo Modh's meaning:
'It is better to have a leucoderma [a disfiguring skin pigment disorder] on
your forehead than a Modh as guest in your house.' Like other Bania castes of
the region, the Modh Bania looked far beyond their immediate patch. For
centuries it has been a custom for young men to make trading voyages to Arabian
ports, building up personal capital over nine or ten years hard work and modest
living before returning to marry and take over the family business. Sons
inherited family property in equal proportions, with the oldest son assuming
the authority of family head.
But all this
was a nebulous heritage for Dhirajlal Hirachand Ambani, born on 28 December 1932.
His home-town was Chorwad, literally meaning 'Settlement of Thieves' though no
one seems to remark on that. It is set a mile or so back from the fat Arabian
Sea coastline where the Nawab had a two-storey summer palace built of the
dun-coloured stone quarried from pits nearby. The railway from Junagadh
bypassed the town to the cast, looping towards the old port of Veraval and
Somnath.
His father, Hirachand Ambani,
seems to have been a diffident trader when he tried his hand at petty commerce,
as a wholesaler in ghee (clarified butter, a cooking medium in India). He is
recalled by many acquaintances as a 'an of principle's meaning perhaps that he
was too good-willed to be good at making money. He is better remembered as a
village schoolmaster in the administration of the Nawab of Junagadh. From
1934-36, Ambani senior was headmaster of the Chorwad primary school, whose
classrooms with their battered furniture remain little changed around a
tree-lined yard across the road from the town's bus stand.
The industrialist and
parliamentarian Viren Shah, whose family also comes from Chorwad, remembers
Ambani senior as a stocky man with a dark-brown skin, normally dressed in a
white turban, long coat and dhoti (a piece of cloth draped into a rough
pantaloon). The village schoolmaster was private tutor for several years for
another member of the same family, Jayan Shah, who remembers him as a good
teacher and very strict.
Hirachand Ambani made little
money, and lived in extremely austere circumstances. The family home still
stands in a hamlet called Kukaswada, two or three miles outside the main part
of Chorwad. It is a two-roomed stone dwelling with a stamped carthern floor,
entered by a low doorway and dimly lit by openings under the caves. Ambani was
married twice, having a son from his first marriage (named Samadasbhai) before
being widowed. His second marriage gave him five more children, with Dhirajlal
or Dhirubhai as his diminutive became-in the middle.
The family's poverty did not keep
the Ambanis from contact with better-off members of their social peer group.
The Bania occasionally got together for meals or picnics. The Ambani children
mixed freely with the Shahs, who were already prospering from a move to the
then hub of British commerce in Calcutta, where they set up India's first
factory making aluminum cooking pots.
The two houses of the Shah family
in Chorwad, Shanti Sadan and Anand Bhavan, were big and rambling in the
traditional style. As well as learning all the ways of business, the children
were expected to learn various sports including horse riding, swimming and
athletics, and to take their turn milking the 20 cows and 10 buffaloes kept in
the gardens. The Shah family had become early followers of Mahatma Gandhi-also
a Bania from Kathiawar-and often gave him accommodation in Calcutta. An uncle
of Viren Shah and Jayan Shah had even retired from business and become a
Gandhian social activist in Chorwad, carrying out upliftment work among its
Harijans (the former Untouchables) and running a fitness camp for youth.
Jayan Shah remembers Dhirubhai,
who was about seven years younger than him, coming to Anand Bhavan. Jayan
Shah's father took an interest in other people children, lending them books to
read and asking them to do odd jobs around the house. Dhirubhai was welcomed
with great affection, and returned it with respect. Later, when he had gone
away to work overseas, Shah remembers him dropping by to pay his respects
during a vacation back in Chorwad, arriving with great gusto and a feeling of
an old relationship.
The guild-like support of his
merchant caste helped Dhirubhai continue his education after finishing at his
father's old primary school. In 1945, he moved up to Junagadh and enrolled at
the Bahadur Kanji High School. This shared with a university college a large
yellow stucco edifice on the outskirts of the city that had been built in 1902
by the nawab of the time and named after him. Because of his family's poverty,
Dhirubhai was admitted as a free student. He found accommodation in a boarding
house funded by the Modh Bania for children of their caste.
The Second World War had largely
passed by Kathiawar, save for overfights by military transports and the
occasional visit of the new army jeeps. The movement for Indian independence
had not. On returning from South Africa, Gandhi had established his ashram in
Ahmedabad, the main city of Gujarat, and carried out many of his agitations
against British rule in the same region, including the famous 'Salt March's to
the sea to protest against the government monopoly of salt in 1930.
His activities were financed by
Indian industrialists from the Hindu trading castes, fore-most among them the
Calcutta-based Marwari jute-miller G. D. Birla. His abstemious lifestyle was an
extension of their own ideals, more familiar to them than the Anglicized
manners of the Nehru family. But a real self-interest was also involved. The
industrialists also saw in the Bania-born Gandhi a counterforce within the
Indian National Congress-the main secular vehicle of the independence
movement-to the socialist and communist ideas that had taken a strong grip on
the thinking of educated Indians. Gandhi's ideas of industrial devolution to
the villages were intrinsically opposed to the proposals for state capitalism
and central planning of investment then being promoted by the Left in India as
elsewhere in the world.
In Junagadh, the ideas of Gandhi
and Sardar Patel, the Hindu nationalist lieutenant of Nehru who was also a
Gujarati, cast a strong influence. The Nawab, with his Indian Political Service
Resident Mr. Monteith at his side, was automatically put in defence of the
status quo. His police force and its detective branch kept a close watch on the
independence movement, and carried out many arrests of agitators throughout the
1940s.
At the Bahadur Kanji School,
Dhirubhai was quickly infected by the independence mood. Krishnakant Vakharia,
later a leading lawyer in Ahmedabad, was two years ahead of Dhirubhai at the
school and met him soon after his arrival in Junagadh. The two took part in a
gathering of students to discuss the freedom movement. Vakharia recalls that
all were inspired by the nationalist ideals of Gandhi, Nehru, Patel and most of
all the socialist Jayaprakash Narayan, then still in the Congress Party.
The Modh boarding house where
Dhirubhai was staying became the headquarters of a new group to push these
ideals, which they called the Junagadh Vidyarti Sangh (Junagadh Students'
League). The objective was to take part in the national independence movement
and Gandhi's swadeshi (self-reliant) economic programme, which involved
boycotting imported factory made goods in favour of village craftwares such as
home-spun cotton (khadi). Activities were to include meetings to salute the
proposed national fag of India-the saffron, white and green tricolour with the
ox-wagon wheel in the middle, which was then the Congress fag-as well as
motivation sessions and sports meetings for the other students.
Vakharia became the president of
the Sangh, with Dhirubhai and another student called Praful Nanavati serving as
secretaries. 'e organised a lot of functions, like saluting the national fag,
and took a lot of risks,' said Vakharia. At one time we printed pamphlets with
a photo of Gandhi, and with that we approached some leading citizens to be our
sponsors-but no one agreed. In Junagadh at that time no one was allowed to even
utter "Jai Hind" or "Vande Mataram" , or sing national
songs. Even wearing khadi made you a suspect in the eyes of the Nawab's CID. In
1946, the students learned that Kaniala Munsi, a lawyer who was later a leading
Congress Party politician and a minister in Nehru's first government, would be
visiting Junagadh. They decided to invite him to address their members in the
compound of a boarding house for lain students. The Nawab's police summoned
Vakharia, Dhirubhai and Nanavati, and threatened the three with arrest,
expulsion from school and trouble from their parents unless they gave an
undertaking that no political speech would be given.
It is here that Dhirubhai shows a
spark of his later genius at bringing apparently irreconcilable demands into an
accommodation, if through a dubious intellectualism. "He had said that a
literary figure would deliver a speech,' said Vakharia. Dhirubhai whispered
that there was nothing wrong in giving this undertaking. "We are not going
to give the speech. If there is any breach in the undertaking, it's a problem
between Munsi and the police." Munsi came and delivered a rousing speech
in favour of early independence.
As 1947 wore on and partition of
British India along Hindu Muslim communal lines became more likely, the
political position of the princely states came under great scrutiny. By August,
when the transfer of British power was due, all the rulers came under pres-sure
to accede to either India or Pakistan. In most of the more than 550 states, the
decision was clear-cut because of geographical position, the religion of the
ruling family, and the predominant religion of the population.
Three difficult cases stood out
after 'Freedom at midnight' on 15 August. In Kashmir, contiguous with both
India and Pakistan and with a Muslim majority, the Hindu ruler wavered. In the
immensely wealthy and large central Indian state of Hyderabad, which had a
Hindu majority, the Muslim Nizam had dreams of independence from both India and
Pakistan. Then there was Junagadh, what the historian H. V Hodson called 'The
joker in the pack'.
Junagadh was close to the western
side of Pakistan, and had a Muslim ruler. But its fragmented territory was
interlocked with that of neighbouring Hindu-ruled states, and its people were
mostly Hindu. Moreover, it contained the great Hindu pilgrimage sites of
Somnath and Dwarka.
In 1946, the Nawab's prime
minister and closest adviser, the Diwan, had become sick and gone into prolonged
convalescence. Stepping into his shoes in May 1947 as acting Diwan came Sir
Shah Nawaz Bhutto, a politician from Sindh active in the Muslim League of
Mohammad Ali Jinnah, the father of Pakistan. (Bhutto himself was the father and
grandfather of two later prime ministers of Pakistan, Zulfikir Ali Bhutto and
Benazir Bhutto.) Bhutto kept in close touch with Jinnah and had the Nawab obey
his advice to 'Keep out under all circumstances until 15th August'. Then, on
the day of the transfer of British power, the Government of Junagadh announced
its accession to Pakistan. Hodson believes Jinnah never actually thought
Junagadh would be allowed to join Pakistan. The objective of the exercise was
to set uncomfortable precedents for Nehru in the more pressing contest for
Kashmir and perhaps Hyderabad. If Nehru agreed to a plebiscite in Junagadh,
which he eventually did, it would help Pakistan's case for a popular vote in
Muslim-majority Kashmir. If the Junagadh ruler's decision was accepted, over
the wishes of his people, the same could apply in Hyderabad. If the Indians
simply marched into Junagadh, protests against a similar Pakistan, use of force
in Kashmir would be greatly weakened. Nehru adopted the course of negotiation
while throwing a military noose around Junagadh in the neighbouring Hindu-ruled
states, which had all acceded to India. Two subordinate territories of
Junagadh, the enclaves of Babariawad and Mangrol, were taken by Indian troops
on 1 November 1947 without bloodshed.
Meanwhile, Indian nationalists
began agitating within and without Junagadh for the overthrow of the Nawab. In
Bombay on 25 September, they declared an Arazi Hakumat or Parallel Government
under the presidency of Samaldas Gandhi, a relative of Gandhi who was editor of
the newspaper Vande Mataram. From a temporary base in Rajkot, Gandhi kept in
touch with supporters inside Junagadh by human couriers simply walking across
the open frontiers of the isolated state. Other nationalist journalists,
including the editors of the Gujarati newspaper janmabhoomi in Bombay, called
for volunteers to gather in Bhavnagar and other cities close to Junagadh for a
non-violent invasion.
The students in the Junagadh
Vidyarti Sangh threw their limited weight against the Nawab also. 'we were too
scared to carry out physical sabotage like attacking power stations,' said
Vakharia. 'our sabotage consisted of spreading false rumours to cause panic,
and supplying information back to the provisional government. We used to send
someone to Jetalsur or Jedpur in the Indian union to pass on the information.
In Junagadh, as in many other parts of India, the partition steadily developed
a murderous communal nature. Two Muslim communities, called the Sodhana and
Vadhana, had taken a militant position in support of accession to Pakistan and
mounted big pro-cessions through Junagadh, threatening Hindus with retribution
if they opposed it. As it became clear that Pakistan was in no position to
support the Nawab, Hindus turned on the Muslim minority and massacred whole
communities in some outlying villages.
Food shortages developed, and the
Nawab's revenues dried up. As his administration lost its grip, the Nawab
decided the game was up and made a hasty departure for Karachi, taking with him
all the cash and negotiable assets of the treasury, his family and many of his
dogs (though his consort, the Begum, forgot her youngest child in the royal
nursery and had to turn back to collect the infant). On 8 November, after an
earlier meeting of the State Council, Bhutto wrote to the Indian Government's
representative at Rajkot asking India to take over the state to avoid a
complete administrative break down, pending a honourable settlement of the
accession issues.
The Indian Army moved into
Junagadh without incident on 9 November, and the communal tension quickly
settled down. However, Vakharia recalls a small communal riot breaking out in
Junagadh soon after independence, when some shoe shops belonging to Muslims at
Panch Hatadi (Five Shops Area) were looted by Hindus. The students of the Junagadh
Vidyarti Sangh went to the area to protect the Muslim shops, but their presence
was misunderstood by the police.
One of the students was a fellow
Modh Bania and boarding house companion of Dhirubhai named Krishna Kant Shah,
who had been born in Kenya and sent back to Junagadh for his education. He was
arrested by the police as one of the looters and taken to the lockup early in
the evening. The leaders of the Sangh went to the police headquarters and met
the police commissioner, named Lahiri, to argue Shah's innocence.
'Dhirubhai [who was then 16]
showed a lot of courage in arguing with the police com-missioner to defend
Shah,' Vakharia said. The arguments went on for two or three hours, and all of
us were threatened with arrest for obstruction of justice. But we were
determined we would not go until our colleagues were released. Eventually they
decided to let Shah go at midnight. It was a debt Dhirubhai was to collect from
Shah in controversial circumstances more than 30 years later.
The
people of Junagadh voted overwhelmingly to join India when a plebiscite was
held in February 1948, though Pakistan never recognised it. Dhirubhai returned
to his studies, and took his matriculation in 1949. Vakharia studied law and
continued with his political activity, following Narayan out of the Congress
Party into the new Socialist Party in 1948. On graduating in 1951 he moved to
practise in Rajkot and then Ahmedabad and eventually came back into the
Congress later in an active legal- political career.
With his family
still extremely poor, Dhirubhai had no such option. On finishing high school,
he had to look for work. At the age of 16, Dhirubhai was physically strong, and
already possessed of the persuasiveness that was to mark his later business
career.
It is tempting to look into the
culture of the Modh Bania for an explanation of what his critics see as his
ruthless business ethics and 'shamelessness'. But many other entrepreneurs have
also sprung from the same background in Kathiawar: most would shrink from the manipulation
of the government that became part and parcel of the Ambani operation, even at
the cost of less success.
The answer lies probably in the
deep poverty that his family endured as the cost of is father's devotion to a
teaching career. While he also learned that life is a web of relationships and
obligations, Dhirubhai was fired with an ambition never to become dependent on
anyone or to stay long in somebody else's service.
Early in the 1950s, officials in
the treasury of the Arabian Kingdom of Yemen noticed something funny happening
to their country's currency. The main unit of money, a solid silver coin called
the Rial, was disappearing from circulation. They traced the disappearing coins
south to the trading port of Aden, then a British colony and military bastion
commanding the entrance to the Red Sea and southern approaches to the Suez
Canal.
Inquiries found that an Indian
clerk named Dhirubhai Ambani, then barely into his twenties, had an open order
out in the souk (marketplace) of Aden for as many Rials as were available.
Ambani had noted that the value of the Rial's silver content was higher than
its exchange value against the British pound and other foreign currencies. So
he began buying Rials, melting them down, and selling the silver ingots to
bullion dealers in London. 'he margins were small, but it was money for jam,
Dhirubhai later reminisced. After three months it was stopped, but I made a few
lakhs [one lakh = 100000 rupees] of rupees. I don's believe in not taking
opportunities." Dhirubhai had gone to Aden soon after finishing his
studies in Junagadh at the age of 16, following the long tradition of boys from
Bania families in Kathiawar heading for the Arabian trading ports or the market
towns of East Africa to gain commercial experience and accumulate capital.
A network of personal contacts
kept jobs within the same community. Dhirubhai's elder brother Ramniklal, known
as is Ramnikbhai, had gone to Aden two years before, and was working in the car
sales division of A. Besse & Co. Founded by a Frenchman named Antonin
Besse, the company had developed from trading in animal hides and incense
between the world wars into the biggest commercial house in the Red Sea area,
selling cars, cameras, electrical goods, pharmaceuticals, oil products and food
commodities to both British and French territories in the Arab world and the
Horn of Africa, as well as to Ethiopia.
Another Gujarati, Maganbhai
Patel, from the Porda district, joined Besse as a junior accountant at the age
of 18 in 1931 and was made a director in 1948. He estimates the company
controlled about 80 per cent of the region's commerce soon after the Second
World War. It had 30 branches, and six to eight ships of its own in the
subsidiary Halal Shipping. It was indeed successful: shortly before his death
at the age of 72 in 1948, Antonin Besse made a donation of one million pounds
to endow St Anthony's College in Oxford.
Thereafter, the company was run
by two of his sons, Tony and He was hired, and soon after arrived by steamer in
Aden. As Susheel Kothari notes: 'The first sight of Aden is always a shock.'
The oil-filled blue waters of the port are backed by steep crags of dark-brown
rock, remnants of an old volcano, with no sign of vegetation.
Aden had flourished in Roman
times as a way station on trading routes between Egypt and India. The opening
of the Suez Canal in 1869 revived its importance, and it became a major coaling
port for European shipping to Asia and Australasia. From its occupation by a
detachment of Indian sepoys sent by the East India Company in 1839, Aden had
been an important link in the ties of Britain to the Indian Raj. Until 1937,
when it was put under the Colonial Office in London, the territory was
administered from India. The Indian rupee circulated as its currency until it
was replaced by the East African shilling in 1951.
The outpost had been a punishment
station for British regiments deemed to have shown cowardice or other offences
against discipline while in India. As one of its last governors, Charles
Johnston, noted in a memoir, it had been 'he dumping ground, even as late as
between the wars, to which regiments sent officers who had got themselves into
matrimonial difficulties'.
The colony also became the
entrepot for the Red Sea and Horn of Africa, where deep-water ports were few.
Cargoes of cattle hides, coffee, aromatic gums and pearl shell were brought to
Aden by wooden sailing dhows, and bought by trading firms like Besse, Cowasji
Dinshaw, Luke Thomas and Cory'. In return, basic commodities such as sugar,
rice and textiles were shipped back.
Between the world wars, the
biplanes of the Royal Air Force kept the hinterland quiet by machine-gunning
the villages of any unruly Yemeni tribesmen. Behind this shield of bullets, the
middleman trade flourished. The definitive historian of British rule in Aden,
R. J. Gavin, noted:
Aden indeed consisted of a
hierarchy of brokers from the heads of foreign firms to the lowest workman or
child who offered his labour or hawked in the street. Speculators, hoarders and
price rings frequently sent commodity and foodstuff prices rocketing up and
down, while moneylenders and dealers dampened the effect of this for the rest
of the population at a price which included a claim to social leadership.
Acquisitive individualism was mitigated only by ethnic and other local
solidarities formed outside rather than within the town. Aden's economy
developed rapidly after the Second World War, but its business milieu still had
some of this character when Dhirubhai learnt his basic techniques in the 1950s.
The spur to Aden's growth was the
decision of British Petroleum to build a new oil refinery in Little Aden,
another crater jutting into the sea across the bay from the main town. BP's
existing refinery in the Gulf port of Abadan had been nationalised by a new
Iranian government. The refinery employed up to 11000 workers at any one time
during its construction over 1952-54, and then had a permanent staff of 2500
housed in a comfortable village. This sparked off a construction boom which saw
Aden extend be-yond the wastes and saltpans of the causeway which had been kept
clear for defensive reasons in earlier times.
Later in the 1950s, the British
began concentrating strategic reserve forces in Aden from other bases in the
Gulf and East Africa. By 1964, Aden had some 8000 British military personnel
plus dependents-and their demand for housing kept the construction activity
going. Aden's population grew from 80000 in 1946 to 138000 in 1955.It became a
more modern economy, and air-conditioning ameliorated the hot humid weather in
the midsummer months. But it retained many exotic features, including the daily
inward fight by Aden Airways of the mild narcotic called qat. From a hedge like
bush in the mountains of Ethiopia, the qat leaves had to be consumed fresh and
were delivered to consumers in Aden within a few hours of plucking at dawn. 'It
is not medically harmful, so far as can be ascertained,' noted Johnson, the
former governor, although if taken in excess it lowers the appetite and
produces a characteristic green-faced, cadaverous appearances.
Just before mass air travel
arrived with the first passenger jets, Aden overtook New York in 1958 to become
the biggest ship- bunkering port in the world. As well as for cargo shipping and
tankers, it was a refueling stop for elegant liners of the P &- 0 and
Orient Lines as well as crowded migrant ships taking Italians and Greeks out to
Australia.
Disembarking tourists, brought
ashore in launches from the ships moored out in the roadstead, were immediately
surrounded by desperate Arab and Indian salesmen and touts, offering cheap
cameras, fountain pens, transistor radios and tooled- leather items. After
making their purchases and taking a quick taxi tour around the arid town, most
were glad to get back to their P & O comfort and security. Aden had an air
of menace, of repressed resentment at its naked display of foreign military and
commercial self-interest. As Gavin observed: 'For a thousand years or more Aden
had essentially belonged to the merchants of the world, be they South Yemeni or
foreign, while the people of its hinterland watched with jealousy and poverty-
stricken eyes from beyond its gates. But for the young Gujaratis hired by Besse
& Co, Aden was a kind of paradise and most recall their days there with
great affection and nostalgia. 'we felt it was heaven,'s said Himatbhai Jagani,
a former Besse employee who had been born in Aden, the fifth generation of his
family to live there since their original migration from Gujarat early in the
19th century 'It was tax free virtually, and we never saw an electricity bill
or rent bill till we left. For 14 of us in our mess we paid only 400 shillings
a month for food. We could save about half our salary. It was very
comfortable-we all missed that life.' Home leave of three months came after 21
months straight work in Aden or at one of the Besse outposts around the Red
Sea. The Besse employees went home with their savings to spend by P & 0
liners like the Chusan or Caledonian, sometimes by Flotte Lauro of Italy, and
if nothing else, India's Moghul Lines.
While most of the British
residents lived on the slopes above Steamer Point, socialising at the Gold
Mohar beach club nearby, the 15000 Indians clustered in a few streets of the
Crater district-Sabeel Street named after a refuge for stray and injured
animals set up by rains and Hindus, Danaraja Street, and Bencem Street, named
for the prosperous Jewish trading community that once thrived in Aden and
Yemen. The Besse & Co bachelor's mess occupied four or five buildings
nearby in Aidroos Valley. The Crater had all the features of the Orientalist
watercolours that adorned European drawing rooms at the turn of the century, as
described by Governor Johnston:
Indian merchant families, the
women in saris, the men in their white jodhpurish get- up, are taking the air,
immaculate after the siesta. We drive around a market square with fruit glowing
on the stalls, and enter a narrow street fairly buzzing with exotic life-pastry
cooks, water-sellers, coffee makers, carpet merchants, all the usual figures of
the Oriental bazaar-and pervading the whole thing a strong hot smell Of Spice.
The various expatriate
communities lived in their own social circles, where, in the way of 'hardship
posts', attachments were strong and recalled with nostalgia in later life. The
Hindus from India were probably liked the least by the local Arabs-to whom
Muslims from India and Pakistan complained about India's incorporation of
Kashmir and Hyderabad, but filled a need for white-collar staff that Aden's
schools could not meet, and had their own social circle too.
While his brother Ramnikbhai
worked in the automotive division, Dhirubhai was assigned to the Shell products
division of Besse. As a newly arrived youngster he created an early splash,
literally, by taking a bet while out helping bunker a ship in the harbour that
he could not dive off and swim to shore. The prize was an 'icecream party's
which he won, by swimming through waters that had seen occasional shark attacks
on swimmers outside the nets of its beaches.
As he developed more familiarity
with the trade, Dhirubhai was sent to market Shell and Burmah lubricants around
the Besse network, visiting traders in French Somaliland, Berbera, Hargeysa,
Assem, Asmara (Eritrea), Mogadishu (Italian Somaliland), and Ethiopia. Some
places were not accessible to steamers, so the Besse salesmen would travel by
dhow, the traditional wooden sailing vessels of Arabian waters. Lodgings would
be extremely rough, and the food difficult for the vegetarian Gujaratis.
Dhirubhai was outgoing, robust,
and helpful to newcomers. He was physically strong and proud of his physique.
The other young men tended to be bashful about nakedness in their shared
bathrooms, and a common prank was to whip away the towels they wrapped around
their waists while crossing the living space in the mess. Dhirubhai would walk
around without hiding behind towels. His solid footsteps could be heard from a
distance, and his colleagues soon started calling him 'ama's after a famous
Indian pehelwan (wrestling champion) of the time. Navin Thakkar, a former
colleague at Besse, remembers that Dhirubhai taught him to swim by simply
throwing him into the sea, at the swimming place down near the Aden dockyard
where they used to go on Saturdays and Sundays.
Dhirubhai delighted in stirring
up pandemonium. Old colleagues describe it as bichu chordoa or 'letting loose a
scorpion'. Despite his affability, some of his old colleagues describe
Dhirubhai as a 'dark character's not just because of the darkish skin he
inherited from his father-but for the ambition and risk-taking he hardly
concealed. 'Ramnik was more or less a saintly man,'s said one ex-Besse
colleague who later went to work for Dhirubhai. 'Dhirubhai was a daring one. He
was already advising me to go for business and not to remain in service.'
career with Besse was progressing steadily, and the Shell Division was one of
the most rapidly expanding areas of company business. By 1956, when the Suez
War broke out after Egypt's President Nasser nationalised the Suez Canal;
Dhirubhai was managing the Shell refuelling operation at the Aden military
base. He was also able to observe construction of the BP oil refinery in Aden,
gaining an early insight into the production linkages of the petroleum
industry.
In March 1954, Dhirubhai married
at the age of 22, in a match arranged by his mother (his father had died in
1951) but which Dhirubhai himself had supervised. His partner was Kokila Patel,
the daughter of a postmaster in Jamnagar, the port on the western side of
Kathiawar. Her family was not particularly wealthy, so it was not a financially
advantageous match for Dhirubhai. But Kokilaben was also a Modh Bania, as the
strict caste endogamy of the time demanded and her character complemented that
of Dhirubhai, a solid home anchor very much, grounded in traditional values and
religious piety.
Although he was doing well,
Dhirubhai was far from happy with his position as an employee. 'I saw in him he
was somebody that was different than others,'s recalls M. N. Sanghvi, who
worked alongside Dhirubhai in the Shell division and later went to work for him
back in India. 'I could see he wanted to make something of himself.' His
room-mate Susheel Kothari also remembers the ambition. 'Right from the beginning
he was determined to do something big,'s Kothari said. 'He was never
comfortable in service. He was a born businessman.'s After office hours, which
finished at 4.30 in the afternoon, Dhirubhai would invariably head for the Aden
souk. Initially he just watched the Arab, Indian and Jewish traders in action.
Later he began taking positions in all kinds of commodities, particularly rice
and sugar, in gambles against rises and falls in prices at time of delivery
Doing business on one's own account was strictly forbidden to Besse employees
by the terms of their contract, and his older brother Ramnikbhai disapproved,
so Dhirubhai would simply say he was 'studying the market'.
Dhirubhai made some profits, and
learned the fundamentals of business and money. But he also made some near
disastrous mistakes, which almost wiped out his capital. On one occasion he
suffered a tight financial squeeze when an incoming cargo of sugar was damaged
by sea-water and his customer refused to accept delivery Pending settlement of his
insurance claim, Dhirubhai had to pass the hat among Besse colleagues for loans
to bail himself out.
One particular ally was a Besse
employee named Jamnadas Sakerchand Depala, a relative by marriage, who lent
Dhirubhai 5000 shillings on this occasion. Depala was close to Dhirubhai and
the two usually had lunch together, even after Dhirubhai had married. It was an
odd relationship, another attraction of opposites. Depala was not a worldly man
and lent money again to Dhirubhai for his 'market studies', but had a strong
influence nonetheless. Jamnadas was morally in control of Dhirubhai,'s said
Susheel Kothari, who had been in the same bachelors mess with Dhirubhai. 'If
Dhirubhai was drinking too much, no one else could stop him. He just swear at
them. Kokilaben used to call Jamnadas and Dhirubhai would listen to him.'s
According to one version of events, Jamnadas made considerable sacrifices for
Dhirubhai. On one occasion, so this story goes, Jamnadas and Dhirubhai were
reported to Besse management for their private deals, and got suspended from
service. Jamnadas took responsibility and resigned from service, allowing
Dhirubhai to complete the seven year's service that earned him the right of
residence in Aden.
Another story told by ex-Besse
staff is that, after leaving the company, Jamnadas continued to invest in rice
and sugar deals masterminded by Dhirubhai, and lost heavily, to the point of
losing most of his capital. Jagani remembers Jamnadas being very depressed
around 1961. Whatever the truth of this, Dhirubhai continued to act as though
he was in debt to Jamnadas. Some years later, Jamnadas came back to India and
was given a shop selling textiles for Dhirubhai. After a while Jamnadas stopped
coming to work, but Dhirubhai saw that his salary was paid until his death in
1987.Dhirubhai left Aden in 1958, with his seven years service and right of
residency as a fallback, to try his hand in business back in India.
The house of Besse lasted only
another nine years, as long as British rule in Aden, which was being eroded by
the sandblast of pan-Arabic nationalism. Some of the transistor radios sold at
Steamer Point found their way to the villagers of the Yemen hinterland, who
picked up President Nasser's message of Arab nationalism through Radio Cairo.
Resulting hit-and-run attacks by
rival liberation fronts made Aden unsafe for foreigners. In the second half of
1967, British forces pulled back into an ever- tightening perimeter until the
rearguard was lifted out by helicopter to a naval task force offshore on 29
November 1967.
The territory fell
unconditionally to the National Liberation Front. It applied its harsh version
of Marxism-Leninism, abolishing private property and nationalising most foreign
companies. By then the closure of the Suez Canal in the 1967 Arab-Israel war
had cut Aden's bunkering business. Racked by periodic coup attempts and wars
with northern Yemen, the new state of South Yemen became an economic backwater
and haven for international terrorists-a modern version of the pirates' lair
the British first subdued. Besse &- Co was among the companies appropriated
by the new regime. From retirement in France, former director Peter Besse wrote
in 1996 that the last trading empire ...of my father collapsed on the arrival
of various "People Democratic Republic" governments. Today nothing is
left.
CATCHING LIVE SERPENTS
At the end of 1958, Dhirubhai
returned to India with his wife Kokilaben and first child, a son named Mukesh.
They were expecting their second child (another son, Anil, born in June 1959,
to be followed by daughters Dipti, born in January 1961, and Nina, born in July
1962). From all his years with Besse & Co and all his evenings studying the
market, he had accumulated savings of just 29000 East African shillings-then
worth about US$3000 which, as his Besse colleague Susheel Kothari had reminded
him, would be just 'chutney's back in his homeland.
Dhirubhai was determined to go
into business on his own account. At first he looked at Rajkot, the port city
in his native Saurashtra facing the Rann of Kutch. Krishnakant Vakharia, who
was then practising law in Rajkot, remembers that Dhirubhai came to visit. 'He
was toying with the idea of a dealership in automobile spare parts there,'
Vakharia said. 'I had a friend who was doing just that, and who was not doing
very well. So I advised Dhirubhai that he should not go into this business, and
instead of Rajkot he should go to Bombay.' At request, Vakharia accompanied him
down to Chorwad and stayed there a few days while Dhirubhai sounded out friends
and acquaintances about ideas and help. He found support in the family of
Chambakial Damani, a second cousin (Dhirubhai's grandfather and Damani's
grandmother were brother and sister) who had been working in Aden for family
companies at about the same time that Dhirubhai was there. One business,
Madhavas Manikchand, had imported textiles and yarns from India, ran a transit
business into Ethiopia, and held the agency for Bridgestone Tyres. The other,
Anderjee Manekchand & Co, had imported textiles from India and Japan. When
necessary, Dhirubhai had used the names of these firms during his own
after-hours trading.
Damani's father, Madhaylal
Manikehand, had closed his businesses in Aden and Ethiopia on retiring in 1957,
and decided to put Rupees (Rs) 100 000 into a trading business for his son and
Dhirubhai in Bombay. Vakharia saw the agreement concluded in his presence, and
returned to Rajkot. Dhirubhai and Chambaklal called their new business Reliance
Commercial Corp. The first office was a room of about 350 square feet in
Narsinathan Street, in the crowded Masjid Bandar district of Bombay. It had a
telephone, one table and three chairs. If the two partners and their initial
two employees were all present, someone had to stand.
At first, the business traded spices
back to the partners' contacts in the souk of Aden-betel nut and curry
ingredients- and shipped some cotton, nylon and viscose textiles to Ethiopia,
Somalia and Kenya. But local contacts led them quickly into the frenetic and
potentially profitable business of trading synthetic yarns - one of more than
60 commodity markets serving all of India that were located in Bombay, nearly
all of them run by Gujaratis. The Rajkot lawyer Vakharia had introduced
Dhirubhai to a fellow activist in the Socialist Party, a successful yarn trader
called Mathura Das Mehta. And Dhirubhai's talented nephew Rasikbhai Meswani
(the son of Dhirubhai's older sister), had begun trading in yarns a couple of
years earlier.
At the tiny Masjid Bandar office,
Dhirubhai began to assemble a team that stayed with him for decades as Reliance
grew. They included Meswani, older brother Ramnikbhai who had also returned
from Aden, younger brother Nathwarlal (Nathubhai) on completing his education,
and two former schoolmates from
Junagadh named Rathibhai Muchhala
and Narottambhai Doshi. Dhirubhai also enlisted the services of old
acquaintances from Aden, including Liladhar Gokaldas Sheth, who had been a
dealer in textiles, coffee and foreign exchange in Yemen, Burma and Aden
(suffering several bankruptcies along the way) before settling back as a
foreign exchange dealer in Bombay in the 1950s.
Dhirubhai quickly became a
familiar figure around the streets of Pydhonie, the synthetic yarn trading
district of Bombay where Gujarati merchants then did their business sitting on
spotless white canvas gaddi floor-coverings, entering trades in compendious
ledgers, and consuming endless cups of tea thick with sugar, spices and hot
milk. From late morning until about 4 pm, Pydhonie was busy with trading as dealers
made forward trades, trying to guess the future price of yarn of this or that
micron size.
If cotton and silk had been the
materials of India's textile industry right from the old handloom days to the
industrial looms of the early 20th century, by the 1950s the industry and its
consumers were hungry for the artificial threads created by modern chemical
science. Nylon, viscose and polyester were cheap, hardwearing, quickdrying and
crease proof, and could imitate both cotton and silk.
The problem for yarn dealers at
Pydhonie was not usually to find buyers but to secure supplies. The tightening
of industrial controls and import quotas since Independence had choked supply
of these luxuries as the economic Brahmins of New Delhi channeled national
resources towards new complexes making capital goods such as power stations and
steel mills-what Prime Minister Jawaharlal Nehru called the 'Temples of modern
industry'.
India had one viscose factory
owned by the Birlas, and one government owned nylon plant. The first polyester
fibre plant did not open until the 1970s. These domestic factories supplied
only a small fraction of local demand from textile weavers. Smugglers supplied
some of the demand, bringing in yarn by either misdeclaring cargoes at regular
ports or simply running small ships to the numerous creeks and beaches of
India's west coast. Made-up textiles were also smuggled as well, via Dubai or
Singapore. Indian visitors to Japan's artificial textile industries, then in
their great postwar expansion phase, recall seeing vast production of
sari-length material, for which officially there was no open market in the
subcontinent at all.
The other source came from the
strictly controlled import licences given to registered exporters of textiles,
allowing import of raw materials worth a certain percentage of their export
earnings. Like many others, Dhirubhai realised that these import or
replenishment licences (known as REPS) were as good as money, even though some
of them were officially not transferable and imports had to be made by the
actual user's of the materials. By paying higher margins than any other
traders, Dhirubhai soon became the main player in the market for REP licences.
The margins were tiny in the trade itself - but his dominance also put him in the
position of being able to turn on and off much of the supply of yarn into the
Indian market.
Suresh Kothary, whose family
business was importing agent for Du Pont products including textile fibres,
chemicals and dyes from 1958 to 1993, and also active in yarn trading,
remembers first meeting Dhirubhai in 1964 at the Masjid Bandar office.
Dhirubhai would often drop by at Kothary's shopfront at Pydhonie thereafter,
lounging on the white cotton mattress and drinking tea or coffee. They were in
effect rivals, as Dhirubhai mostly imported his yarns from Asahi Chemicals in
Japan or Ital
Viscosa via a long resident
Italian businessman in Bombay, a Dr Rossi, while Kothary handled only the Du
Pont product from the United States and elsewhere. Dhirubhai was a sporting
rival, Kothary said: 'He would always say: "This is what I'm going to do,
boy!" Whenever he fights an enemy he goes in the open.' Not everyone in
the Bombay textile trade would agree.
Kothary and many others in the
Pydhonie market remember intervention in a market crisis in the mid-1960s when
spiralling textile prices led government authorities to crack down on
speculation in the yarn market by banning forward trading, and then arresting
traders found to be continuing the practice. Consumers must have complained to
the government about fluctuations in prices-some people, about a dozen, were
arrested in the market,' Kothary said.
The trading community was
despondent as their colleagues languished all day in the cells of the Picket
Road Police Station. Approaches to officials by the Bombay Yarn Markets and
Exchange Association got nowhere. Then, late in the evening, Dhirubhai arrived
like a storm at the police station, shouting greetings to the senior officers,
and handing out snacks to everyone. Within an hour, all the arrested traders
had been released, and the complaints against them shelved. Kothary can only
guess at intervention. 'The usual-India!' he said.
Dhirubhai also emerged as saviour
of the market when an even greater supply crisis occurred in 1967, Kothary
recalled. On a report that actual user import licences had been traded and
misused, the Customs authorities in Bombay under the then Assistant Collector,
a Mr. Ramchandani, impounded all incoming cargoes of artificial fibres. The
government insisted that whoever imported the yarn had to be the manufacturer
who wove it into cloth.
According to Kothary, about 40
million rupees (then about US$5.3 million) worth of yarn was seized. Many
traders then defaulted on loans taken out to cover the imports. The entire
artificial textile market was paralysed. 'It could have made us all insolvent,'
Kothary said. 'This is when I came very closely in touch with Dhirubhai. It was
he who saved us all. We fought for about six months. I used to go with him to
lawyers day in and day out. We went to Delhi to see Morarji Desai [then finance
minister]. That was the time I could see he was a wizard. He used all the ways
and means.' The crisis ended as quickly as it started, ostensibly after a
one-day hearing of the importers' appeal in the Customs, Excise and Gold
Appellate Tribunal under Justice Oberoi, who found for the appeal. Kothary
indicates that an agreement engineered by Dhirubhai was behind the judicial
settlement. The details are not revealed, but presumably come under the
category of 'That India!' also.
On their move to Bombay,
Dhirubhai and his young family had moved into an apartment on the 3rd floor of
the Jai Hind Society building in Bhuleshwar, a very crowded district of shops,
markets and residential tenements in the central part of the city. The building
is what is known as a chawl in Bombay: numerous small apartments, often just
single rooms, opening on to open galleries around a central courtyard which is
set back from the street behind commercial premises. Quite often the toilets
and washing facilities are shared at ground level.
Later accounts of Dhirubhai's
early career often paint this home as Dickensian in the extreme. The fat, since
bought by a later tenant, had two small bedrooms, a living room, kitchen and
internal bathroom in 1995. Vakharia, who used to visit the Ambanis for a
holiday each Christmas from 1959 to the late 1960s, remembers it being 'suite
luxurious' compared to the single rooms many Gujarati families had to occupy in
Bombay at that time.
Even so, Dhirubhai and his young
family, eventually two boys and two girls, lived austerely in surroundings that
were crowded, noisy and dirty. The two sons, Mukesh and Anil, who took over
day-to-day management of Reliance in the late 1980s, may have had engineering
degrees and MBAs from American universities, but their lean early years gave
them a hungry ambition unusual in the second generation of a successful Indian
business family.
As his confidence grew in his
Bombay success, Dhirubhai developed his taste for 'letting loose a scorpion's
through practical jokes and whimsy. Vakharia recalls that when he visited
Bombay with his new wife for the first time in 1959, he and Dhirubhai were
invited home by their senior mentor Mathura Das Mehta. Mehta's wife served the
young men mango juice, and kept insisting on refilling their glasses. Dhirubhai
whispered:
"Let's do some
mischief," Vakharia said. The two asked for a fourth glass, and kept then
accepting more. After more than a dozen glasses each, the Mehta kitchen ran out
of mangoes and a servant had to be sent to the market to buy more, which were
all duly consumed. The Mehtas continued to be friends, 'But they never invited
us back for any lunch or dinner at their house', Vakharia said.
Each year, Dhirubhai would make
it a point to play an April Fool's joke upon an elderly employee named
Ghulabchand, an old associate from Aden. For all his experience, Ghulabchand
never failed to fall for it. On one occasion, Dhirubhai announced that everyone
was invited to dinner across town at an address at Mafatlal Bath. Ghulabe hand
was sent in a taxi with Vakharia and another member of the office, Ramanbhal.
At Marine Drive they stopped outside a building, and Patel went in to look for
a fourth member of the group. After 15 minutes waiting, Vakharia also went in.
Ghulabchand eventually gave them all up and took the taxi to Mafatlal Bath,
where he found no one. On returning home, he found Dhirubhai and the others
eating a dinner they had notified Ghulabchand's wife to prepare.
Vakharia recalls another prank in
1965. The India-Pakistan War was on, and a blackout had been imposed on Bombay
for fear of naval and air attacks by Pakistan. About 10 pm, Dhirubhai said:
"Let's go out and take a round of the city." The two drove around the
dark Bombay, with Dhirubhai bluffing police at roadblocks that he was on
official business and handing out small tips of ten rupees or so. 'He got
saluted all the way,' said Vakharia. 'In the way back we saw some lights in the
Japanese consulate, so Dhirubhai went in and told them to close the lights.' On
yet another occasion, around 11 pm on a cold winter night, Dhirubhai announced
an immediate picnic. The cook was told to assemble supplies, and Vakharia and
the family piled into car. Another dozen friends were telephoned and told to
rendezvous in their cars. 'We were not told where we were going,' Vakharia
said. 'We ended up at Rajeswari, about 50 or 60 kilometers from Bombay at about
3 am. The cold was very severe and we went to a dharamsala [pilgrim's lodging]
at a hot springs resort. It was meant only for sadhus [ascetic Hindu holy men].
Dhirubhai said we would all sleep there. After half an hour we were still
shivering and Dhirubhai got up and lit a camp fire. When the sun came up we had
tea, and a bath in the hot springs, and cooked kedgeree on the camp fire. We
told jokes and sang songs, and didn't get back home until late in the
afternoon.' Fast pace caused a rift with his partner Chambaklal Damani in 1965.
According to Vakharia, Damani preferred to trade with great caution, leading to
constant tension with Dhirubhai who was a risk-taker. The final rupture came
after one clash when, at Dhirubhai's urging, Reliance built up a large holding
of yarn in the expectation of a price rise. Damani pressured Dhirubhai to cut
back their exposure. So Dhirubhai sold the yarn stockpile-to himself, in
secret. Two or three weeks later the price of yarn shot up and Dhirubhai made a
killing. 'Later Dhirubhai told Chambaklal: "I am prepared to share profit
with you," Vakharia said. "But in future if you do not know the
business, do not intervene." Many others among Dhirubhai's ex-colleagues
and trade associates also believe the partners were incompatible.
'He takes so much risk that
people fear something will go wrong,' said Vradial Depala, who knew Dhirubhai
in Aden. 'But the risks are all calculated. They are not blind risks.' 'You may
be a co-passenger in a car with me, but if you don't like my driving you might
be a little fearful,' said Manubhai Kothary, a leading Bombay textile exporter
and long-time president of the Silk and Art Silk Mills Research Association.
'Someone advised partner that he
had made sufficient money and now should come out,' said Susheel Kothari, the
ex-colleague from Besse & Co who later worked for Reliance. 's business is
catching live serpents.'s Chambakial Damani himself will say only that 'he
agreed to separate willingly' or that 'he just became separate as friends'. But
he agreed that the version given by Kothari and others about differences over
commercial risk were to some extent true'. Damani went into trading in a new
company, while Dhirubhai and his brothers paid some Rs 600,000 to buy him out
of Reliance. Soon after, Dhirubhai moved the office to bigger premises in the
more central Court House building at Dhobi Talao, named for the laundrymen who
originally worked in the area.
After
ten years at Bhuleshwar, in 1968, Dhirubhai moved his home out of the chawl to
a more comfortable fat in Altamount Road, one of the city's elite areas on a
hill overlooking the Arabian Sea. Fond of driving fast, Dhirubhai had first
bought a Fiat car, and then moved on to a Mercedes-Benz. Later, in the 1970s,
he indulged a taste for flashy automobiles by acquiring a Cadillac, one of the
very few in the country then or since.
Friends
remember him as a dashing figure, the slightly dark skin inherited from his
father (the only such characteristic, some say) offset by a white safari suit,
the hair slicked back into a duck's tail. For a while he put on weight, and
then trimmed down by taking vigorous dawn walks along the three-kilometre sweep
of Bombay's Marine Drive, enlisting friends, colleagues and neighbours as
companions.
Within a year
of splitting with Damani, Dhirubhai took Reliance into textile manufacturing
for the first time. He decided to locate it in Gujarat rather than Bombay,
because of the cheaper land prices, and sent his older brother Ramnikbhai to
select a site. Ramnikbhai enlisted Vakharia, then starting to get known as a
lawyer in Ahmedabad, and the two drove around the state in a small Fiat.
They settled on a 10000 square
metre plot, the last going in a new industrial estate developed by the Gujarat
state government at Naroda, on the fringes of Ahmedabad. Vakharia had got a
contact, state minister for industries Jaswant Mehta, to approve the purchase,
and by a further stroke of luck the farmers owning some 100 000 square metres
of adjacent land were willing to sell. Dhirubhai had a simple factory built,
installed four knitting machines, and appointed his brother as plant manager.
Dhirubhai was again lucky in
that, around this time, the British hold on Aden was becoming more tenuous.
Even ahead of the British withdrawal in 1967, foreign nationals felt threatened
by the insurgency mounted by the People's Liberation Front. Many of the Indians
working for Besse & Co decided it was time to go home. So Dhirubhai had a
ready-made source of educated managers, accountants and salesmen, drilled to
European standards. The word went around that Dhirubhai would find jobs for his
old colleagues, and a dozen old hands from Besse & Co accepted his offer.
Most stayed for the rest of their working careers, with the last few being
retired from senior management positions in 1993 in a deliberate move by Dhirubhai's
sons to rejuvenate the company's leadership.
None of them knew very much about
textile production, however, and it was a case of learning by trial and error.
'All of us were new,'s recalled M. N. Sangvi, who left Aden in 1967 and
immediately joined Reliance. 'It was very small, only about 20 people in the
whole factory, about five or six from Aden. Nobody was familiar with textiles,
and after 15 years in Aden I was not knowing anything about India either. The
first two years, 1966-67, was a very hard time. The product had to be
established. We worked from morning to late evening. Dhirubhai was very
encouraging, and we had a family atmosphere. The employer- employee
relationship was not there. He put a lot of trust in us'.
Susheel Kothari, who had returned
from Aden in 1966, said that at one point in 1967 it appeared the mill would
have to close down because Reliance could not sell the cloth it was making.
Dhirubhai told Kothari that if the factory had to shut down he should do it
gradually and see that no blame attached to his older brother Ramnikbhai. But
the Aden hands rallied. After putting in a full shift at the factory in Naroda,
from 7 am to 3 pm, they would spend the afternoons and evenings touring markets
around Ahmedabad trying to persuade shopkeepers to stock Reliance fabrics. 'We
were determined we should not fail,' Kothari said.
Dhirubhai worked everyone hard,
often calling his managers in Naroda at 6 am from Bombay before they started
out to work. They were expected to solve problems on their own initiative.
Dhirubhai himself set the example. Suresh Kothary recalled one incident when
spare parts were urgently needed for imported machines at Naroda. Dhirubhai had
the parts flown in from Germany, and then discovered that no trucks were
available for the haul up to Ahmedabad. He bought two trucks, one to carry the
parts and one as a backup, and sent up the consignment. The trucks were then
sold in Ahmedabad.
But he was forgiving of honest
mistakes, recalls Sangvi. In one case, Sangvi was over trusting of some
merchants who had placed an order from Patna, the capital city of Bihar state
across in eastern India. Sangvi sent the consignment by rail, collectable on
presentation of a payment receipt at a Patna bank branch. The merchants forged
the receipt and took delivery from the railway yard. Reliance lost 900000
rupees, a considerable sum at that stage, and it took months to recover it.
Sangvi said: 'Dhirubhai just told me: "Nathu, nothing to worry in
business, anything can happen. I know you have done it to increase the sales. I
am with you and you just concentrate on the business." Reflecting back on
his career, as vice-president of the Reliance textile division, Sangvi said: 'I
feel myself very fortunate that I have been working under such a legendary figure.'
I, Patel, who had been recruited by his relative Maganbhai Patel to Besse and
Co in 1953, returned to India in 1965. Soon after, Ramnikbhai Ambani, with whom
he had worked in the Besse automotive division, hired him for Naroda and put
him in charge of the knitting machines. Patel knew nothing about them, but was
sent to West Germany and Japan later for formal training. He stayed with
Reliance until retirement in 1993. 'The years passed before we knew it, we were
so busy,' Patel recalled.
The result was steady growth in
sales and profits for Reliance. In 1967, the first full year of production at
Naroda, the company recorded sales of Rs 9 million in 1967, yielding a net
profit of Rs 1.3 million. Dhirubhai and his family shareholders refused to take
dividends and kept ploughing earnings back into more machines. After a decade
of manufacturing, in 1977 Reliance had a turnover of Rs 680 million, and
profits of Rs 105 million.
In an extensive write-up on the
company in August 1979, the Indian Textile Journal reported on a massive
factory at Naroda occupying 230 000 square metres and employing 5000 staff. It
had banks of machines for texturising or primping artificial fibres to give
particular sheens, machines for twisting the polyester and nylon fibres into
yarns, and machines for weaving the yarns into textiles. The yarns were sold to
other Indian textile manufacturers, or used in-house.
Most significantly perhaps,
Dhirubhai established his own brand name, Vimal (named after a son of his
brother Ramnik), by dint of lavish advertising under the slogan 'Only Vimal'.
This somewhat snobbish slogan, and some well-publicised fashion shows in
top-class hotels, added a touch of class to a product that basically appealed
to the less wealthy market sectors. In addition, Dhirubhai had got around the
reluctance of established wholesalers and shopkeepers to accept a new brand by
creating his own network of shops. Across India, some 400 shops were franchised
to sell the Vimal brand of polyester materials for saris, shirts, suits and
dresses.
In one of the first of many
eulogies to appear in the Indian press, the Textile Journal noted how Dhirubhai
was held in high esteem by his staff, who attributed Vimal's success to his
dynamic leadership. 'Then the construction of the factory was going on, it is
reported, many snakes were seen in the area. According to a popular belief,
appearance of snakes is a good omen. Dame Luck certainly seems to have favoured
Mr. Ambani. Ever since the emergence of Vimal, he has developed the Midas touch.
Everything he touches becomes gold. Everything he starts blossoms into success.
Naturally, nothing succeeds like success.'
A FIRST-CLASS FOUNTAIN
Dhirubhai Ambani remained in
Bombay because manufacturing was only one facet of his business. For a decade,
the textile plant at Naroda was supportive and subsidiary to his yarn trading
activities. In addition, he was steadily augmenting his skills at breeding
money from money, and at wielding political and bureaucratic influence on
government policies and their interpretation. Dhirubhai was never simply an
industrialist, a trader, a financial juggler or a political manipulator, but
all four in one.
From his earliest days in
Junagadh, Dhirubhai had learned that relationships were the key to unlocking
help, and that the law could be argued with. 'One thing I have noted with
Dhirubhai is that if he starts an acquaintance with someone he will continue
it,' said Manubhai Kothary, the trade group Sasrnira's president. 'He never
throws away any relationship.' He was endowed with a photographic memory for
faces and names, and any contact- however feeting - he could try to turn into a
common background on which some affection could be based. For example, Sir
Nicholas Fenn, who was British High Commissioner in New Delhi in the early
1990s, was amazed to find Dhirubhai claiming him as an old friend from Aden. In
the early 1950s, Fenn had been a Royal Air Force pilot flying transports
through to the Far East and Australia. Dhirubhai remembered him from refuelling
stops at the Shell facility at Aden's airport.
philosophy was to cultivate
everybody from the doorkeeper up. 'I am willing to salaam [bow down to]
anyone,' he told a magazine interviewer in 1985, in a statement that shocked
many readers for its bluntness. In the India of economic plans and government
control of the commanding heights' that had developed by the 1960s, a lot of
grovelling was required for businessmen to get the clearances they needed.
Inevitably, the bureaucratic signature needed to move a file from desk to desk
came to have a price on it as well. The Congress Party had degenerated from a
movement of freedom fighters into a dispenser of patronage, with ministers
allocating resources and licences while the bureaucracy worked out ways to make
the process look objective.
After getting on his feet back in
Bombay, Dhirubhai used to make frequent trips to New Delhi. He frequently went
in the company of Murli Deora, a fellow yarn trader who was then working his
way up the Congress Party machine in Bombay. Deora later became the head of the
Bombay Municipal Corporation -the mayor- and then for many years the
representative for South Bombay, the area containing the business district and
elite apartments, in the Lok Sabha (the lower house of parliament).
Dhirubhai and Deora used to catch
an early fight up to Delhi, and park their bags with a sympathetic clerk at the
Ashoka Hotel while they did their rounds of politicians and bureaucrats to
speed up decisions on import licences. Too poor to afford an overnight stay,
they would collect their bags and fly back to Bombay the same evening. Later,
Dhirubhai could afford to keep a room ready at the Ashoka, a government hotel
built in a vaguely Moghul monumental style. His nephew Rasik Meswani also came
into the lobbying activity, and eventually selected a canny South Indian, V
Balusubramaniam, as full-time lobbyist for Reliance in New Delhi. For the
lesser bureaucrats, journalists and others who helped promote the company's
interest in various ways, Dhirubhai's standard gratuity was a suit or sari
length of material made by his factory Gradually Dhirubhai also learned the
channels for large- scale political donations in the top echelons.
In 1966, Indira Gandhi had become
prime minister following the sudden death in Tashkent of Lal Bahadur Shastri,
who had been India's leader since the death of her father Jawaharlal Nehru in
1964. With her only ministerial experience the Information portfolio under
Shastri, but a lifetime of watching her father and her late husband Firoze Gandhi
in politics, Indira was well versed in Congress Party machinations but had a
shallow grasp of policies. Power steadily exacerbated a deep psychological
insecurity and a melancholic nature that led her to place inordinate trust on
unworthy people in her inner circle, as well as on her headstrong son Sanjay,
who was extorting funding for his pet scheme of developing an indigenous
'people's car's .
Among the sweeping economic
changes of 1969 was one small legislative amendment that had the effect of entrenching
corruption, though its ostensible intention had been the opposite. Until then,
a section of the Companies Act allowed directors to make political
contributions to any party. This was repealed in 1969. As on of the officials
who supervised the amendment later admitted, this led to political payments by
black money. Companies had to generate black funds by under/over invoicing,
fictitious sales etc. A pattern of wholesale corruption and large-scale
corporate malpractices, through double-accounting, over- invoicing and underinvoicing,
came into being, creating massive unaccounted-for and therefore untaxed
funds." One of the conduits to Indira Gandhi was a private secretary named
Yashpal Kapur, a Hindu the Western Punjab in the 1947 Partition who displayed
all the financially grasping tendencies this community brought across to Delhi.
In all these Years, her memoir of the Nehru and Indira Gandhi years, the
well-connected magazine publisher Raj Thapar recalls Kapur thus: " one
glance at him and you felt the grease all over you. He was smooth and
unintelligent, outwardly vacuous and inwardly scheming who then only performed
what we called the chai-pani [teamaking] jobs, or so we thought in our
innocence.' By 1971, Thapar noted how Kapur's role had taken on a weird shape.
Yashpal Kapur, that oily cupbearer, was growing in stature by the minute and
his corruption was becoming legend and his ability to get Indira to sign on the
dotted line became the bazaar gossip,' she wrote. Thapar's bureaucrat husband
Romesh, who early had been a trusted confidant of Indira, felt duty-bound to
tell Indira. 'e sought an appointment, went to the office, gave her a run-down
of what the average person was thinking, of how the PM's office now harboured a
nest of corrupt people led by the favoured Yashpal. She was furious. "You
know I would never touch a penny." "Maybe, but you are seen as the
queen bee. The others do the collecting." Thapar went on:"...in
unending string of stories were current about Yashpal's power, how he was sought
by the high and mighty, how he was well in with Sanjay who was beginning, bit
by nibbling bit, to tamper with the administration in his favour. Yashpal was
of course no longer in the PM's office. His place had been taken by his nephew,
R. K. Dhawan, who was rapidly to assume much vaster powers than his erstwhile
uncle and together they were to manipulate patronage in this vast
country." Dhirubhai not only cultivated Yashpal Kapur, says one old
acquaintance, 'e practically purchased him'. In due course, the relationship
passed on to R. K. Dhawan, who moved eventually from the prime minister's
office under Indira and then Rajiv Gandhi into parliament and ministerial
portfolios himself. Over the years, Dhirubhai developed close ties with
politicians in many parties. These included figures such as Atal Bihari
Vajpayee, senior leader of the Hindu-nationalist Bharatiya Janata Party who
became prime minister of a brief
minority government in 1996, and
several on the left such as Chandrashekhar, another short-term prime minister
in 1990-91. But his strongest connections were always with the Gandhi coterie's
within Congress, even though he never liked Indira's socialistic policy phase
in 1969-70, and then later with P V Narasimha Rao who took over the Congress mainstream
and prime ministership in 1991.
The links were not always based
on money, however. Dhirubhai is widely acknowledged to be a masterful exponent
of his own business visions, which have generally been more farsighted than
those of almost anyone else among India's business leaders. He was quick to
grasp that many Indian politicians, officials and bankers could be captivated
by intellectual excitement or flattery at being in the inner circle of such an
emerging tycoon. Should such individuals' later show signs of self-interest or
personal financial difficulty, Dhirubhai or one of his lieutenants would pick
up the signals. A post-retirement job, a business opportunity for a child,
indirect funding or a burst of inspired publicity might then follow for the person
concerned.
Dhirubhai also played on the
perception that he was an outsider and 'upstart' who deserved help to break
through the glass ceilings of vested interest and privilege in the business
community. That there was an inner circle in the 'licence Raj' the allocation
by New Delhi of licences to set up factories and expand production capacity-was
evidenced in 1967 with a report by a Bombay University economist, R. K. Hazare,
to the Planning Commission which revealed that the Birla group of companies had
received 20 per cent of the licensed industrial investment approved by the
government between 1957 and 1966. The early support given by Ghansyam Das Birla
to Mahatma Gandhi had certainly paid off in the independent India ruled by
Congress. Writing in 1981 on Birla's 88th birthday, the journalist T N. Ninan
noted that the Birla companies had multiplied from 20 in 1945 to about 150. 'f
any industrial house benefited from the licence-permit raj,' wrote Ninan, 'It
was the house that Birla built.' Birla's rapid expansion contrasted with the
moderate growth of the Tata group, the Parsi-controlled empire that had grown
strongly under British rule. The then head of Tata, J. R. D. Tata, told an
interviewer: 'I think it wrong for a businessman to run newspapers [the Birlas
had set up The Hindustan Times, the strongest paper in New Delhi], wrong for
him to play a political role ... But it does seem that others who do not mind
mixing politics with business have done extremely well for themselves.' For G.
D. Birla, his political connections and the ostentatious philanthropy that saw
various Birla institutes and garish Hindu temples built around India were all
supportive of his preordained role. As the Bhagavad Gita says, every man must
do his duty, which means if you are a wealthy man, you must do your duty by
your wealth,' the Birla patriarch reasoned. A businessman's karma [fate] is to
amass wealth and his dharma [duty] is to provide for the general welfare. If
political action is involved in this, I don't see why I should feel shy of it.'
One of earliest backers, the
banker and politician T A. Pay, falls into the category of intellectual
sympathizer. Pai came from an extraordinary upper-caste family based in the
tiny village of Manipal on the Karnataka coast, far south of Bombay. It is
still an out-of-the-way place, on a barren hilltop overlooking the sweep of
palm trees and exposed beaches fronting the Arabian Sea. In 1925 the Pai family
had established the Syndicate Bank there. By the mid-1960s it was the tenth largest
Indian bank, with some 190 branches. As well as bankers, the Pai's were
educationists and used their wealth to found a college at Manipal in 1942. It
has since grown into one of India's largest private universities, attracting
fee-paying students from Malaysia, the Middle East and the West Indies.
The Pai's prided themselves on
being discoverers and nurturers of talent. A small museum at Manipal is devoted
to the family patriarch T. M. A. Pai (older brother of T A. Pai) and his
teachings. One cherished precept: 'A pygmy nourished well can become a giant.'
According to K. K. Pai, a family
member who eventually became general manager of the Syndicate Bank. Dhirubhai
was introduced to TA. Pai in the mid- 1960s by a former bank employee named H.
P Rao, who was an insurance agent. The bank was interested in developing its
foreign exchange activities, and began handling some transactions for the young
spice and textile trader. 'Our first impression was that he was very
enthusiastic, very enterprising, a man of ideas,'s Pai said. 'From the
beginning I had the impression he was a go-getter. He was very persuasive, very
convincing in his arguments. He was able to present his case and business
proposals very clearly. He gave me the impression he was reliable and knew what
he was doing.'s The Syndicate Bank became the main financier for Reliance
Textile Industries when it started manufacturing soon after, in 1966, providing
much of the Rs 1,5 million needed to buy the first four knitting machines.
Another early backer was the Industrial Credit and Investment Corporation of
India (ICICI), whose chairman Harkisan Das Parekh, another Gujarati, also took
a shine to Dhirubhai's big schemes.
Dhirubhai continued to impress
the Pais by his insistence on the best equipment and personnel, as well as his
knowledge of the market and its trends. He also made conspicuous donations to
the educational institutes run by the family. Throughout the late 1960s,
Dhirubhai kept in close touch with T A. Pai, making sure he was among the first
to call whenever the bank chief visited Bombay from Manipal, and to give Pai
advance notice of 'any major initiatives. Pai's nephew Ramdas Pai, who later
became president of the Manipal Academy of Higher Education hears Dhirubhai
coming to Bombay airport in 1968 to greet him on his first trip back from
studies in the United States. T A. Pai in turn promoted Reliance where he
could, even to the point of carrying around samples of its Vimal-brand material
in his brief- case to show others.
The bank continued to be the
major lending institution for Reliance even after Indira Gandhi nationalised it
and all India other leading banks and insurance firms in July 1969. Although
the Pais were unhappy about losing their asset, family members like K. K. Pai
continued to hold the top executive positions for many years. T A. Pai's
policies of directing credit to small entrepreneurs, agriculturalists and
business new corners which built up a portfolio of very small but sound loans
for the bank-were exactly what Indira had hoped to achieve by the bank
nationalisation generally. Ironically, the government takeover led to the
steady bureaucratisation of management and lending directed by political
connections rather than commercial viability.
This destroyed the soundness of the
Syndicate Bank and all the other 20 nationalised banks. By the end of the
1980s, the banks' nonperforming assets or bad loans greatly exceeded their
capital base by a wide margin, and but for endless capital infusions by the
treasury almost all would have become insolvent. When private sector banking
was again encouraged, after the 1991 liberalising reforms, the Pai family took
over a small southern-based institution, the Lord Krishna Bank. If offered the
chance to buy back the Syndicate Bank, family members said, they would refuse
it. Immediately after his bank was taken away, Indira consoled T A. Pai by
drafting him to apply his ideas as the first chairman of the nationalised Life
Insurance
Corporation of India. Soon
afterwards, he was inducted as a Congress member of the upper house of
parliament (the Rajya Sabha or State's House) to enable him to become her
government's minister of commerce, handling trade matters. Later in the 1970s,
Pai became minister for industries, which gave him a decisive role in the
allocation of industrial licences. He continued as minister during the
suspension of democracy under Indira's declaration of Emergency between 1975
and early 1977. Pai died in 1981, having realised at the end-his relatives
say-that his talents had been misused as a respectable cover by the corrupt
circle around Indira and Sanjay. 'The enterprise of adventurers always sucks in
plain, decent men,'s commented the editor of the Indian Express, Arun Shourie,
not long after his death. 'The number of times men like C. Subramaniam [another
of Indira's ministers] and the late T A. Pai lied on Maruti [Sanjay's car
project] far exceeded whatever Mrs. Gandhi said about it ...'s Dhirubhai, Pai's
elevation meant that, as well as still having friends in a major bank, he now
had a friend in a key position to approve import schemes and manufacturing
plans.
In the early 1970s, the immediate
pay-off was favourable changes in the import- export regime. Dhirubhai was not
a law- breaker but had a creative attitude towards regulation. As one former
colleague recalled: 'he would say: "You should not do anything illegal.
First of all, the law should be changed." 'He would not go into anything
which was unlawful,' agreed Sasmira Kothary everything he did was permitted to
do by any other man. But his reading of the system! You have a law, the
interpretation which you make - he would take advantage of a particular system
in a way which others could not see. By the time other people started anything
the government was also waking up and the system would be changed.' The key to
profits in the Indian synthetic textile business through the 1970s was access
to supplies of the basic filaments and yarns. Influenced by Mahatma Gandhi's
notions of self-reliance and the virtues of home-spun cotton, and by a strong
lobby of cotton growers, New Delhi had discouraged use of synthetics, regarding
them as a rich man's textile.
India already had a few factories
making rayon (derived from cellulose material, usually wood, pulp) which had
been developed in France in 1891, and the more modern artificial fibres derived
from coal and petroleum including nylon (developed by Du Pont in 1935) and
polyester (first produced in Britain in 1941 and later marketed under
proprietary names like Dacron, Fortrel and Terylene).
But these domestic sources met
only a fraction of the demand, particularly for polyester, as Indians began to
appreciate its durability, lustre (in some forms), colour - fastness, and case
of washing. As well as in pure polyester fabrics, the fibre was in demand for
blending with cotton at both the large industrial mills and the widely
dispersed power-loom workshops.
Former colleagues say Dhirubhai
resisted any temptation to smuggle in supplies. 'Everyone knew smuggling was
there, but Dhirubhai would not want to get involved,' one former Reliance
manager said. 'Government support meant too much to him. We used to buy yarn
that was obviously smuggled because it was cheap. But we were told this should
be kept separate. By the time it reached the manufacturers it would have gone
through many hands. But people knew this was smuggled goods.' Instead, over the
1960s Dhirubhai had steadily become master of the trade in replenishment
licences, which were entitlements to import yarn earned by exporters of finished
textiles and garments. After the war with China in 1962 and another with
Pakistan in
1965, India's external balances were under strain and the government was ready
to entertain more contrived schemes to boost export earnings.
coup was to persuade Pai in 1971
to authorise imports of polyester filament yarn (PFY) against exports of nylon
fabric. Previously, nylon fabric exporters had earned some rights to replenish
their stocks of nylon fibres through imports. Dhirubhai argued that if he could
sell nylon or other manufactured textiles (known as 'art silks' at Rs 4.25 a
yard, more than double the price stipulated in the old scheme, the exporter
should be rewarded by permission to import PFY, which was in greater domestic
shortage because local production was far below demand.
This resulted in what was called
the Higher Unit Value Scheme, which made Dhirubhai a fortune while it lasted.
At that time, the domestic price of PFY was seven or more times higher than the
prevailing international price. Even if the nylon or polyester exports fetched
only a quarter or one third of cost, this was more than offset by the 600 per
cent or more profit on the PFY imports.
Reliance went into a high-profile
export drive, targeting some of the weaker economies of the world. Poland was
one focus, with fashion shows mounted in Warsaw and delegations of Polish trade
officials lavishly hosted by Dhirubhai in Bombay. Another was Saudi Arabia,
where Dhirubhai had another old Aden colleague from Besse & Co's Halal
Shipping division, Bharat Kumar Shah, then working as a trader in Jeddah and
acting as Reliance's Mid-East Co-ordination manager'. Dhirubhai would take out
full-page advertisements in The Times of India to announce special charter
fights taking his export products to foreign markets.
But many senior figures in the
textile industry still believe this export business was mostly bogus. 'f these
goods were not saleable at two rupees, how could they sell at four rupees?',
one remarked. According to this theory, Dhirubhai would have provided his own
export earnings, by sending the money out to the ostensible buyer overseas
through the illegal foreign exchange channels known as havala (accepting the 20
per cent havala premium on the official exchange rate). The goods would be sent
to a free port such as Singapore or Dubai, to avoid customs duty, and then he
disposed of at giveaway prices, left to rot on the docks, or even dumped at
sea. The effective outgoings would be the 20 per cent havala premium on the
funds sent out, and the 60 per cent of the same funds actually spent on buying
PFY overseas for import back into India. The returns would be this 60 per cent
multiplied by seven or more. The profit would be 425 per cent of the outlay.
And as long as Dhirubhai had the 'export remittance's arriving back in his
account in Bombay, he could claim credit for doing his bit for India's trade
balance.
In an interview with the magazine
Business India in April 1980, Dhirubhai said Reliance Commercial Corp accounted
for more than 60 per cent of the exports made under the Higher Unit Value
Scheme. 'he schemes were open to everyone,' he said. 'I cannot be blamed if my
competitors were unenterprising or ignorant.'s Textile trade sources familiar
with that era say this was not exactly the case. The adoption of the Higher
Unit Value Scheme was not widely publicised in 197 1. Dhirubhai had a clear run
of one or two years before other exporters began trying to take advantage of
the same scheme, or putting up similar proposals for other categories of textile
exports. One of these exporters, Bipin Kapadia, later recounted his experience
to Bombay police who sought it as background to the sensational murder
conspiracy case of 1989 (see Chapter 13).
Over two years in the early
1970s, Kapadia's family company Fancy Corp expanded its exports from Rs 2.5
million a year to Rs 15 million on the expectation of receiving import
entitlements for PFY from the Commerce Ministry's Chief Controller of Imports
and Exports. 'On one pretext or another's the authorities withheld the import
licences over a 30 month period in 1972-74, causing Kapadia a huge loss.
Between 1971 and mid-1975,
Kapadia made many trips to New Delhi to plead with officials. At his hotel,
Kapadia told the police: 's used to receive repeated calls on telephone
offering me company of women, threatening me of dire consequences, if I were
not to leave the persuasion of my import licences.' During one such business
trip, Kapadia was approached in the hotel parking lot at night by a
knife-wielding man who called out to him. A friend pushed Kapadia out of the
way, and the man ran off.
In 1974, when some other
exporters managed to get PFY shipments coming through and the domestic premium
began tumbling, Dhirubhai was blamed by his rivals for instigating a complaint
to the Collector of Customs in Bombay, I. K. Gujral, that the others were
either importing 'substandard' PFY or under-declaring the value to avoid taxes.
Gujral seized all the suspect PFY shipments, but did not launch proceedings. It
was not until a year later, after Gujral was replaced by an energetic Customs
officer named J. Datta, that the Customs issued show-cause notices to the
importers asking them to reply to the complaints. In a one-day hearing on I
July 1975, Datta listened to the importers and decided in their favour. The
goods were released, but the PFY premium tumbled to about 100 per cent and all
the importers suffered losses.
The High Unit Value Scheme
continued as long as Indira Gandhi's government did. It enabled Dhirubhai to
gain dominance over the supply of polyester yarn to India's highly
decentralized textile weaving industry, where over 70 per cent of capacity is
spread over thousands of small-scale power-loom workshops.
Dhirubhai became the major
polyester importer in India, from the Italian company Ital Viscosa and the C.
Itob group, Asahi Chemicals in Japan, where his hosts feted the Indian
businessman on his buying trips. Later Reliance switched more of its sourcing
to the American chemicals firm E. I. Du Pont de Nemours & Co (Du Pont),
which had developed technology for a partially oriented yarn (POY, polyester
filament not yet stretched after its extrusion to bring all its long polymer
molecules into alignment or orientation along the length of the fibre) that had
a longer useful life than the other companies'.
The former Du Pont agent Suresh
Kothary recalls Dhirubhai overcoming Du Pont's reluctance to ship to India.
They said India was not used to containerisation, they didn't want any claims.
Dhirubhai said he would never claim. There were then no trucks to take
containers from here to Ahmedabad, and the roads were bad. Somehow Dhirubhai
did it.'s The scale of Dhirubhai's imports grew. Around 1978, says Kothari,
Dhirubhai heard that Du point had idle capacity of 300 to 400 tonnes a month at
its polyester plant in Germany. 'Dhirubhai booked it for six months,' Kothari
said.
In addition, Reliance also built
up to about 50 per cent share of the lucrative business of 'primping's ,
whereby polyester fibre is texturised by passing it through gear-like rollers
to impart a waviness to the filament, or coiled to give stretch- attributes
which make the yarn more opaque, lustrous and easier to dye. Industries
Minister Pai
overruled objections from his department to give Reliance the clearances to
quadruple its texturising capacity in 1975.
Two anecdotes are told about
confident, even brazen, approach to the muttered denigration of his success
that inevitably sprang up. On one occasion, a rival yarn trader allegedly
spread the rumour that Dhirubhai was going bust. He was indeed short of cash,
but went to a public notice board in the yarn market and put up a sign inviting
anyone he owed money to come and have their advances repaid. No one did.
Another story is attributed to D.
N. Shroff, president of the Silk and Art Silk Mills Research Association in the
1970s. Market gossip accused Dhirubhai of black marketeering. Dhirubhai asked
Shroff to convene a meeting of the association's executive committee, which
included many of his critics, and then turned up to face it. 'You accuse me of
black marketing/s he challenged, 'But which one of you has not slept with me?'
All present had bought or sold yarn to Dhirubhai at some stage.
In March 1977, however, Indira
and Congress were swept from power in the elections called after her two years'
rule under Emergency powers was lifted. But her government gave Dhirubhai a
parting gift. Over the 1976-77 fiscal year (April-March) Dhirubhai had
accumulated REP licences both from its own exports and from purchases in the
market, worth some Rs 30 million. On 7 February, about three weeks after the
elections were announced; the government was persuaded to exempt all polyester
yarn imports under REP licences issued since April 1976 from customs duty,
which was then 125 per cent. It was a gift of Rs 37.5 million to Dhirubhai.
Indira's replacement was the
Janata [People's] Government, a coalition of antiCongress parties under
Morarji Desai, the austere and self-righteous former finance minister Indira
had driven from Congress because he had opposed her nationalisation policies in
the late 1960s.
But, at least to begin with,
Dhirubhai fared well under Janata, helped by the good offices of the prime
minister's son, Kantilal Desai. On 22 August 1977, the Janata minister for
commerce, Mohan Dharia, abruptly cancelled the High Unit Value Scheme, and
allowed any REP licence holder-not just exporters of nylon fabric-to import a
specific quantity of polyester yarn.
The
premium on licences for PFY crashed from 500 per cent to 50 per cent almost
overnight. It was reported a year later by the Indian Express that Reliance
stepped into the market to acquire licences at this low premium, and opened
letters of credit for imports totalling Rs 50 million. Then, on 2 September,
the Chief Controller of Imports and Exports (in the Commerce Ministry)
announced another sudden switch of policy. To help Bonafide users of PFY secure
their reasonable requirements, the linkage of exports of synthetic textiles
with the import of PFY was restored with immediate effect. Registered exporters
who had entered form import contracts up to 2 September would be allowed to
import directly. But henceforth all other importers would have to take their
licences to the State Trading Corporation, which would be the sole channel for
imports of yarn.
It was not
until March 1978 that the first supplies of yarn began reaching Indian markets
through the STC. Over the six months till then, Reliance took delivery of all
the PFY supplies for which it had contracted, and was able to squeeze a totally
captive market. The 'Eleven Day Wonder's as the 22 August - 2 September
interval came to be called, seemed tailor-made for the benefit of Reliance.
Whether or not bogus exports were
made under the High Unit Value Scheme by Dhirubhai has never been proven, and
certainly Reliance did make genuine efforts to sell its own products overseas.
Its export manager, Rathibhai Muchhala, became a familiar figure around the
trade stores of the Gujarati diaspora in East Africa, the Mid-East, and later the
United Kingdom, trying to place stocks of Vimal artificial silks. S. B.
Khandelwal, the owner of the emporium Sari Mandir (Sari Temple) in the English
city of Leicester where many Gujaratis settled after being expelled from East
Africa, recalls a visit by Muchhala early in the 1970s. 'They were very anxious
to get into export business,' Khandelwal said. 'I took 200 saris on credit. No
money was expected upfront. Muchhala said: "Just say Shri
Ganesh."(Meaning: Just for luck.)
Up until around 1977, exports
took between 60 per cent and 70 per cent of the fabrics produced at Naroda,
Dhirubhai noted to Business India in 1980. That exports ceased to be a
significant activity of Reliance soon afterwards indicates that they were
propped up by the High Unit Value Scheme and the artificial shortages for PFY
created by import controls.
The new environment encouraged
Dhirubhai to step up his domestic promotion of Vimal and to expand his
franchised exclusive shops to more than 600 by early 1980. Advertisements were
plastered across newspapers and billboards. 'Only Vimal offers you exclusive
innovations in high-fashion wear,' went one, listing products such as Disco
Dazzle Sports Jersey or Supertex dress material.
It was a Rs 10 million a year
advertising spend, then unprecedented in India and more than four times that of
established textile producers such as Bombay Dyeing. And it worked. In 1979,
Reliance Textile Industries raised its sales to Rs 1.55 billion (then US$190
million), making it the largest textile producer in the country.
Dhirubhai had meanwhile decided
to help bring an end to the Janata government of Morarji Desai. The government
had not been particularly friendly to him, after the initial favourable turn in
yarn import policy, and Kantilal Desai had become too controversial a figure to
be much help. A judicial inquiry set up by Morarji Desai in reply to charges of
influence peddling by relatives of ministers did indeed find, in February 1980,
a Prima facie case for further inquiry's that Kantilal Desai had influenced the
government to relax its policy on PFY imports in August 1977.
Dhirubhai put his resources
behind Indira Gandhi's efforts to split the Janata coalition, which focused on
the ambition of the finance minister, Charan Singh, who had a huge powerbase
among the prosperous Jat caste of farmers in Uttar Pradesh. Dhirubhai's role
was to provide the suitcases of cash needed to induce MPs to take the risk of
leaving the government benches and joining the splinter group. In July 1979 the
Desai government fell when Charan Singh's supporters withdrew support in
parliament. Charan Singh, pledged support by Indira's Congress, was invited to
form a government and demonstrate his support within a month. A vote of
confidence was never taken: Indira demanded as a condition that Charan Singh
agree to withdraw legislation setting up special courts to try herself and
Sanjay for alleged crimes committed during the Emergency. This he was unable to
do. In August, the President dissolved parliament and called elections for the
first week of January 1980, with Charan Singh as caretaker prime minister.
Suresh Kothary, the Du Pont agent
in Bombay, was in close contact with Dhirubhai over this period. 'He used to
tell me what was going to happen, and it always did,' Kothary said. 'I asked
him once: "How do you know, are you an astrologer?' He laughed and said:
"Yes." With inflation raging as a result of two years of drought,
Indira surged back to power. The first big party staged to welcome her back in
government was hosted by Congress
MPs from Guiarat, and paid for by
Dhirubhai, at the Ashoka Hotel in New Delhi. Political observers took note that
Indira spent over two hours sitting on the dais receiving well wishers with
Dhirubhai at her side. Kothary remembers that several times during his
turbulent climb to prosperity and influence, Dhirubhai would remark:
'everything that I have done has been kept in the ground, and a first-class
fountain has been built over it. Nobody will ever know what I have done.'
GURU
OF THE EQUITY CULT
Indira Gandhi's return to power
opened a golden period for Dhirubhai Ambani. In 1979, his company barely made
it to the list of India's 50 biggest companies, measured by annual sales,
profits or assets. By 1984, Reliance was in the largest five. Dhirubhai himself
had become one of the most talked and written about persons in India, gaining a
personal following more like that of a sports or entertainment star than a
businessman. It was also the period when Dhirubhai made the most rapid part of
his transition, in the bitter words of a senior non-Congress politician in
1996, '..from supplicant-the most abject kind of supplicant-to influencer and
then to controller of Indian politics'.
Although it was not immediately
obvious, Indira's three years in political exile had reinforced a change in her
thinking about state intervention in the economy. In large part due to the
influence of her son Sanjay, who was to die in 1980 when the light aircraft he
was piloting crashed during some acrobatics over New Delhi, she was less
trustful of bureaucratic direction, and more inclined to give the private
sector its head.
Indian business leaders were also
calling for a drastic relaxation of the licence controls on capacity expansion
and diversification vested in the Monopolies and Restrictive Trade Practices
Commission. One was the head of the extensive Tata group, J. R. D. Tata, who
along with others in the 1940s had willingly laid their heads on the block of
state planning. By 1981, Tata was calling on New Delhi to unfetter the big
business houses. The intellectual tide had turned in favour of economic
liberalisation, though it would not be until a decade later that anything more
than tentative policy change was attempted.
In Indira's case, the
disillusionment on the economic side was matched by a deeper cynicism in
politics. Her second spell as prime minister was marked by callous
manipulations such as the sponsorship of Sikh extremists in the Punjab, and by
unapologetic extraction of political funds from businessmen expecting
clearances from New Delhi. Dhirubhai's cultivation of Indira and other Congress
figures during the Janata period certainly paid off.
In October 1980, Reliance
received one of three licenses given by the government for manufacture of
polyester filament yarn, with the location stipulated as the 'backward' area of
Patalganga in the hills of Maharashtra inland from Bombay. In a field of 43
contestants for the licences, Reliance beat many larger and longer- established
business houses including Birla. Its licensed capacity of 10 000 tonnes a year
was by far the largest (Orkay Silk Mills and J K Synthetics were each cleared
for 6000 tonnes a year), and at the time close to India's entire existing
polyester fibre output.
Together with the Du Pont
representative Suresh Kothary, Dhirubhai and his eldest son Mukesh had already
been to the headquarters of Du Pont at Wilmington, Delaware, and persuaded the
American chemicals giant to sell its technology, including a polymerisation
process not previously transferred outside the United States.
The deal arranged through a New
York-based firm called Chemtex Inc saw Reliance make a US$26.7 million order
for its first PFY plant. Making polyester is a highly complicated chemical
process, involving the reaction of one petrochemical intermediate either
purified terephthalic acid (PTA) or dimethyl terephthalate (DMT)- with another,
monoethylene glycol (MEG), in processes involving heat and then vacuum, using
various catalysts along the way. The resulting polymer, a long molecule, is
pumped in a molten state through fine nozzles to produce the filament. It was
first step in a process of 'backward 'or 'upstream' integration that was to
bring him many plaudits, and a step into the petrochemicals industry where the
scale of business is vastly bigger than in textiles.
As well as an always-open
connection to the prime minister's office, he now had a close and sympathetic
friend as minister of commerce, the Bengali politician Pranab Mukherjee. His
ministry not only helped set trade policy, including tariff levels and
anti-dumping duties, in conjunction with the Ministry of Finance, but conducted
the system of import licences through the powerful office of the Chief
Controller of Imports and Exports-whose corridors in New Delhi's Udyog Bhavan
were thronged with importunate businessmen and their agents.
At the beginning of 1982
Mukherjee became minister of finance, giving him charge of broad economic
policy as well as the details of revenue raising and tax enforcement. The
Ministry of Finance also supervised the Reserve Bank of India, the central
bank, whose governor is often a recently retired head of the ministry. Through
its banking division the ministry also effectively directed the 26 nationalised
banks through highly politicised board and senior management appointments. It
supervised the insurance companies and other financial institutions such as the
Unit Trust of India, and controlled entry to the sharemarkets by Indian
companies.
Under a series of secretaries
that included Manmohan Singh (later finance minister in the 1990s), R. N.
Malhotra, M. Narasimhan and S. Venkataraman, the Ministry of Finance engineered
a revitalisation of India's capital markets in the early 1980s. The key
administrator of this sector was another Bengali, the energetic career
bureaucrat Nitish Sen Gupta, who became the ministry's Controller of Capital
Issues and Joint Secretary (Investment) on 24 December 1979, just before the
return of Indira. Like his ministry head, Manmohan Singh, Sen Gupta had earlier
been a diligent builder of the 'licence Raj'. He had been deputy secretary in
the Department of Company Affairs from March 1968, just as government policy
was changing from what he has called 'benign aloofness to passive intervention
in corporate business', most notably in the nationalisation of major Indian
banks the following year.
In 1969, Sen Gupta had helped in
the abolition of the managing agency's system, whereby families such as the
Tatas wielded control over affiliated companies with very little equity, and in
preparing the Monopolies and Restrictive Trade Practices Act 1969 which
intensified the industrial licensing regime first introduced in 1951. Other
measures which followed included the 'convertibility clause', whereby the
government financial institutions (development banks and insurance companies)
were given the option to convert a proportion of long-term loans to companies
into equity, and the Foreign Exchange Regulation Act 1973 which sharply
restricted the freedom of Indians to hold foreign currency or assets.
On his arrival at the Ministry of
Finance in 1979, Sen Gupta had already begun the transition in thinking that
led him to write in his 1995 memoir, Inside the Steel Frame:
The possession of vast
unregulated power in the hands of the ministers and the bureaucrats inevitably
led to complaints of extortion, inducement and enormous politicisation of the
machinery From 1970 supreme power was appropriated by the Cabinet Committee on
Economic Co-ordination which was headed by the prime minister and for all
practical purposes the prime minister's office became the main decision-making
authority. No worthwhile project could be cleared without the prime minister's
approval. Those who managed to get industrial licences also managed to see to
it that others did not. This was done by money, influence and political muscle
power. A nexus came to be established between a section of industrialists, a
section of politicians and a section of bureaucrats. The principle of market
forces guiding or dictating investment, or of production targets being
determined by demand and supply, was given the go-by, and everything was
decided by administrative fat. Sen Gupta's job was to set the rules by which
companies could raise money by issuing shares or bonds, and then to adjudicate
the prices they could charge for these offerings.
But up to 1979, India's capital
markets were quiet places. Stock exchanges had arrived in the major cities as
part and parcel of the British capitalism imported in the 1880s. The exchanges
were run by cliques of brokers, who set their own rules of trading and rarely
punished one of their own brethren for abuse of clients' trust. After periodic
busts, the general public had learned to distrust the sharemarket. With only
very small percentages of equity traded actively, the managements of listed
companies were concerned more with dividend levels than with share prices. The
bigger companies went to banks for their finance rather than to the market.
Between 1949 and 1979, the average annual total of money raised by, Indian
companies from capital markets was only Rs 580 million (US$71 million at 1979
exchange rates) and the highest in any year Rs 920 million.
By the end of 1983, the amount
being raised had jumped to Rs 10 billion a year, with Reliance playing a
prominent part. According to his memoir, Sen Gupta had taken up a study by an
Indian economist with the World Bank, D. C. Rao, who was then on assignment
with the Reserve Bank of India. Rao suggested greater use of convertible
debentures papers which for a certain period had the character of bonds,
earning interest, but which then were converted to shares earning dividends.
For investors this meant earnings while the company or project was gestating,
with the prospect of equity once it was a going concern. For companies, it
offered a way to slash debt after the start-up and also to avoid going for
loans from financial institutions, who might elect to convert part of the debt
to equity and become major shareholders.
Again, Dhirubhai was primed and
ready for the new policy. As Reliance expanded its production in the early
1970s, he had begun looking at taking it public in order to raise capital. In
1973, Dhirubhai and members of the Pai family had floated a company named
Mynylon Ltd in Karnataka (the Pai family's home state). The intentions remain
obscure, for Mynylon's paid- up capital was only Rs I 1 000. In July 1975,
Dhirubhai took consent of the Karnataka and Bombay High Courts, and carried out
an amalgamation whereby the tiny Mynylon took over the assets and liabilities
of Reliance, which by that time had assets of some Rs 60 million.
By March 1977, the company had
been relocated from Ban- galore back to Bombay and its name changed back to
Reliance Textile Industries. For a period that roughly coincided with the
Emergency-when T A. Pai was a powerful minister-Reliance did not formally exist
in name. The manoeuvre later became a widely used case study in tax
minimisation.
In October
1977, Reliance had gone public, with a public offer of 2.8 million equity shares
of Rs 10 each at par, taken from the holdings of Dhirubhai and his younger
brother Nathubhai. With its shareholding thus broadened to meet listing
requirements, Reliance was listed on the stock exchanges in Bombay and
Ahmedabad in January 1978.
Thereafter Reliance expanded its
equity base through frequent rights and bonus issues to shareholders, while
financial institutions converted 20 per cent of their loans into equity in
September 1979. But it was through the use of convertible debentures that Dhirubhai
made his big splash in the capital markets. Indeed, Dhirubhai had anticipated
Sen Gupta's policy with the Series I issue of partially convertible debentures
by Reliance in October 1979, raising Rs 70 million.
Reliance was not alone in trying
the long disused instrument promoted by Sen Gupta. The Tata group's automotive
firm Telco raised Rs 230 million with a fully convertible issue in 1980,
followed by the Gujarat Narmada Fertiliser Corp with a Rs 430 million issue.
But from late 1980 the issues of partially convertible debentures came from
Reliance in quick succession, raising Rs 108 million in September from its
Series 11 and Rs 240 million from its Series 111 the next year, and Rs 500
million from Series IV in April 1982. Dhirubhai capped that by obtaining from
Sen Gupta clearance to do what should normally be legally impossible:
converting the nonconvertible portions of the four debenture issues into
equity.
By this method, dubbed a
'brilliant and unconventional move's by the magazine 'The Economic Scene's in a
September 1984 cover story on Dhirubhai-Reliance was able to chop Rs 735
million off its debt book in 1983, and turn it into comparatively modest equity
of Rs 103 million, while reserves were raised by Rs 632 million. Instead of an
annual interest bill of Rs 96.5 million on debentures, the dividend burden from
the extra equity was only around Rs 36 million. This transmutation allowed
Reliance to continue raising more quasi-debt, with its E Series of partially
convertible debentures in October 1984 which raised another Rs 800 million.
Sen Gupta denies that he was
unduly permissive to Reliance, or that he ever received any benefits from
Dhirubhai such as share allotments. 'In my first encounter with him I had to
say no,' Sen Gupta recalled. With the third series of debentures, Dhirubhai had
put in a request that the holders be entitled to renounce rights attached to
their implicit share entitlements. Sen Gupta insisted that the debentures were
not shares until converted.
But Reliance was highly persuasive.
On another occasion, Sen Gupta rejected the premium that Reliance was seeking
to put on an issue, on the ground that projected profitability had not been
indicated. Without a pro-forma balance sheet for the current year an extension
of results to date-it could not be accepted.
It was 1 pm that day; Sen Gupta
was due to fly that evening to Bombay for a meeting of his seven-member
committee on capital issues the next morning. Obviously it would be impossible
to have the paperwork ready for this meeting. He told Reliance.
Coming out of the arrivals hall
of Bombay Airport at 7 pm, Sen Gupta was met by accountants from Reliance, and
handed a copy of the pro-forma balance sheet and results for each of the seven
committee members. 'I had no option but to take up the matter at our meeting,'
Sen Gupta said. .
By the end of 1986, Dhirubhai was
to raise an unprecedented Rs 9.4 billion from the public over eight years,
including Rs 5 billion from one debenture issue alone. 'In fact this one
company, Reliance,' wrote Sen Gupta, 'made significant contributions to the
growth of the debenture market in the country through its successive issues of
convertible debentures, a new experiment in running a big business undertaking
entirely
on the resources drawn from the
public at large without being backed by any multinational, large industrial
houses, or without taking term- loans from financial institutions on a
significant scale.
It was not entirely true that
Dhirubhai did not tap the banks, as we shall see, but his heyday in the capital
markets did coincide with the rise of what Indian business magazines came to
call the, 'equity cult's and Dhirubhai can rightly claim some of the credit for
it.
Between 1980 and 1985, the number
of Indians owning shares increased from less than one million to four million.
Among those, the number of shareholders in Reliance rose to more than one
million by the end of 1985. It was by far the widest shareholder base of any
Indian company - and, until the privatisation of major utilities like British
Telecom or Nippon Telephone & Telegraph, probably in the world. It was
evidence of a popular following that made many politicians, especially in
Guiarat where Dhirubhai had earned local hero status-think twice before denying
him anything.
Sen Gupta put the sharemarket
craze down to the entry of three non-traditional classes of investors. One was
the Indian middle class, who had forgotten about their misadventure in the
stockmarket in the Second World War. Another was the expatriate Indian communities,
prospering rapidly in Britain, North America and Southeast Asia after their
miserable expulsion from East Africa in the 1960s, and augmented by direct
migrants qualifying for professional and skilled entry to advanced economics.
Since Pranab Mukherjee's 1982 budget, these non-resident Indians or NRIs and
their companies had been able to invest directly into Indian equities. The
third class was the larger landowning farmers, prosperous after the huge
crop-yield increases of the Green Revolution during the 1960s and 1970s, who
continued to enjoy tax exemption on their income.
The equity cult spread from
nearly 20 major exchanges. The premier bourse was the century-old Bombay Stock
Exchange located in Dalal Street, one of the teeming narrow streets of the
city's Old Fort district where brokers, businessmen, accountants and lawyers
crammed into tiny offices in old stone buildings with the remnants of charming
wooden and wrought-iron balconies.
Although surmounted by a
28-storey office tower of cement, steel and glass, the trading floor in the
podium operated until the mid-1990s much as it had done in the 19th century.
Some computer monitors flickered on the periphery but no one expected them to
keep up with the frenetic trading done by brawling, shouting, gesticulating
'robbers' in blue jackets, or with the thriving after-hours kerb market where
shares were traded informally.
The paperwork was also miles
behind the action. Share transactions were recorded on scraps of paper at
brokers' offices, but transfers were not necessarily lodged with company
registrars immediately. Settlements came every second Friday, causing a
slow-down in trading and sometimes pandemonium when defaults were found. But
brokers and traders need not settle even then, if they could afford the upfront
margin payments and sometimes exorbitant interest rates on finance for a badla
(carry-forward) deal.
Using this prototype futures
system, settlement could be deferred for months, often amplifying speculative
runs in prices. On occasion, a script would pass through 50 buy and sell
transactions before being lodged for transfer of ownership. If the signature of
the original seller did not pass muster, professional forgers operating in the
side lanes of Dalal Street would guarantee an authentic-looking copy. It was an
environment where research was just another word for insider trading, where the
key knowledge was finding out which stocks were going to be ramped upwards or
driven down by cartels of moneybag brokers and operators.
Though it had thousands of listed
companies and a nominal capitalisation similar to that of middle-sized stock
markets like Hong Kong or Australia, the Indian sharemarket was not very
liquid. Huge blocks of equity in the better companies were locked up by
investment institutions or controlling families. Many of the smaller companies
hardly traded at all. The floating equity in the major companies forming the
market indices amounted to a few billion US dollars. Even in the 1990s, a
concerted move with a relatively small amount of funds, upwards of US$50
million, could make the market jump or crash.
Investors outside Bombay who
could not hang around Dalal Street, browse the issue documents sold off barrows
or pavements, or listen to the gossip while snacking on a bhel puri (potato-filled
puff-bread) from a nearby stall, had to rely on a network of sub-brokers and
agents reporting to the fully-fledged stockbrokers in the big towns. They
scanned a new crop of market tipsheets with names like Financial Wizard and
Rupee Gains for news of their stocks. In some small towns, investors impatient
with their remoteness took trading into their own hands: teachers, shopkeepers
and other local professionals would gather after work in public halls to
conduct their own trading, settling on the basis of prices in newspapers from
the city.
It was a situation made for a
populist like Dhirubhai. His ebullience and punctilious nursing of
relationships were transferred to a larger stage, using the mass communications
techniques learned in marketing the Vimal brand name.
'The people of Reliance,' began
one typical promotion, on the cover of an annual report. 'Therein lies our
strength. In the skills of the scientists, the technologists; in the commitment
of the engineers, the employees; in the dedication of the brokers the traders
and above all, in the undisputed loyalty of the investors. These are the people
of Reliance. In their growth lies our growth; in their prosperity, our
prosperity. For we are a family; we are all one. We are ... Reliance.' In those
years, Dhirubhai and Reliance had a success story to tell. On the technical
side, the polyester plant at Patalganga was put up in a fast 18 months, and put
into regular production in November 1982. Construction and the debugging of
production lines had been supervised by Mukesh Ambani, who had been pulled out
of Stanford University immediately on completing his master of business
administration degree, and put in charge of the new project. Aged 24 at the
outset, with a degree in chemical engineering, Mukesh Ambani won his spurs as
an industrial manager at Patalganga.
Reliance made sure that a comment
by Du Point's then international director, Richard Chinman, that such a plant
would have taken 26 months to build in the United States, had wide publicity in
India. 'Reliance Textile Industries, now the fourth largest private sector
company in the country, continues to burn up the track with its blistering
growth record', said the magazine India Today in February 1983. 'Close on the
heels of the commissioning of its polyester filament yarn plant at Patalganga
in Maharashtra, the company has set its sights on still bigger projects.'
Dhirubhai still demonstrated his uncanny grip on government trade and
industrial policy, and their implementation. While the canalization of imports
through the State Trading Corp had been abandoned in April 1981, and polyester
filament yarn (PFY) and partially- oriented yarn (POY) placed on the 'pen
general list's of imports, the right to import the yarn was still confined to
so-called actual users. The Customs House in Bombay took the line that these
did not include large cotton textile mills - despite the growing demand for
cotton-polyester blends-but only the small 'art silk's power-looms.
Reliance had already organised
power-looms as outsources, giving them polyester yarn and taking back their
grey cloth for finishing and dyeing at Naroda, On 23 November 1982, three weeks
after Patalganga went into production, the government put an additional Rs 15
000 a tonne duty on PFY and POY imports, allowing Reliance to raise its prices
and still force India's small yarn crimpers and power- looms to buy its
products. The policy switch had been telegraphed early in November by a
submission made to New Delhi by the Association of Synthetic Fibre Industry
that dumping of PFY and POY by foreign producers under the open general licence
channel was causing a curtailment of local production and pile-up of
inventories, leading to heavy losses.
The All-India Crimpers'
Association, representing about 150 small processors who texturised PFY and POY
into fibre ready for weaving and knitting, took out a series of anguished
newspaper advertisements headlined: 'should the country's texturising industry
be allowed to die?' The crimpers said the case for anti-dumping duty was 'is
leading, distorted and untruthful'. Domestic polyester output had risen 60 per
cent in 1981 to 16000 tonnes, and still fell short of demand estimated at 50000
tonnes a year. The rush into PFY production by new producers scarcely pointed
to a glutted market.
Existing customs duties worked
out to a total 650 per cent on landed costs for importers, topped by further
excise duty and sales tax on the processed product. Texturised polyester yarn
had become more lucrative for smugglers than the traditional gold, wristwatches
and electronics-and huge consignments had recently been intercepted, usually
misdeclared as some other low-duty goods. Instead a case existed for an
immediate duty cut and freedom for anyone to import.
The pleas were ignored. 'The
government has finally declared a deaf car to our cry of anguish,' said the
Crimpers' Association in an advertisement on 7 December. By its calculation,
the effective duty on PFY and POY had risen to 750 per cent with the addition
of the Rs 15 000 a tonne anti-dumping levy. The Reliance plant at Patalganga
immediately exceeded its licensed capacity and produced some 17600 tonnes of
polyester yarn in 1983, its first full year, thereby doubling India's total
output. The extra duty in effect added Rs 240 million to Reliance's revenue. In
late 1984, Finance Minister Pranab Mukherjee announced a new policy to endorse
higher than licensed capacity on the part of industry, and consequently in late
1985 Reliance received an effective retrospective licensing of its capacity to
25 125 tonnes a year.
Along with the clearances for his
capital issues, Dhirubhai also had an easy time from the revenue side of the
Finance Ministry. At no stage did Reliance ever pay corporate income tax on its
profits, or even feel the need to make more than token provision for it.
Constant expansion and heavy borrowing gave ever increasing cost deductions to
offset against profits. Reliance became the most famous of India's 'zero-tax's
companies.
In his budget for 1983-84,
Mukherjee made one of the government's periodic efforts to crack down on such
companies, by introducing an amendment to the income tax law requiring
companies to pay 30 per cent of profits in tax after depreciation but before
other deductions. Reliance avoided this by capitalising future interest payable
on borrowings for its new projects, hugely increasing its asset value in one
hit and allowing greatly increased depreciation claims to deduct from profits.
Reliance remained a zero-tax company for nearly three decades after its
listing. It was only in 1996-97, after the introduction of a 12 per cent ',
minimum alternate tax's on company profits, that it made its first corporate
income tax provision.
The collectors of indirect taxes
were also friendly. While Reliance could not avoid the heavy domestic excise
duties levied on manufactures at the factory gate, it was initially given
considerable leeway in setting aside some production as 'wastage's not
incurring excise. Bombay Customs accepted a 20 per cent to 23 per cent 'bulk
buyer's discount given to Reliance by Japan's Asahi Chemicals up to 1982, and a
7 per cent discount on its purified terephtbalic acid imports thereafter,
whereas in other cases they might have inquired about under-invoicing.
Many officials in charge of
customs and excise were drawn into the Reliance family, rather than adopting
the attitude of arms-length enforcers. The journalist Kanti Bhatt recalls
attending the marriage of Dhirubhai's daughter Dipti in 1983, when he joined
the marriage procession, which in the Hindu tradition follows the groom to the
venue, with the guests occasionally breaking into the twirling dance known as
dandya raas.
'I found myself in the street
playing dandiya raas with the Finance Ministry's chief enforcement officer/s
Bhatt said.For his investors, all this added up to greater profits at Reliance,
which multiplied from Rs 82.1 million in 1979 to Rs 713.4 million in 1985 (8.69
times), on sales that rose from Rs 1.55 billion to Rs 7.11 billion (4.58 times)
over the same years. The company was never India's most profitable, either in
absolute terms or in terms of profit as a return on capital, net worth or
turnover. But for the times, Dhirubhai was unusually generous with dividends,
giving investors a return of at least 25 per cent on the face value of their
shares from the time Reliance was listed.
But it was in the appreciation of
their shares that the early investors in Reliance were rewarded. In its first
year of listing, 1978, Reliance had reached a high of Rs 50, five times the par
value of the share, which was a high premium in those times. In 1980 it hit Rs
104 as Dhirubhai promoted the growth potential of the company's expansion plans
at Naroda and Patalganga, and in 1982 it reached a high of Rs 186.
In that year Dhirubhai
established his name among brokers and investors as a master of the
stockmarket. From the middle of March 1982, a cartel of bear operators reputed
to be based in Calcutta started driving down his and other stocks in the Bombay
market. The selling pressure was intense on 18 March, creating a half-hour of
panic just before the close. The bears sold 350000 Reliance shares, causing the
price to fall quickly from Rs 131 to Rs 121, before Dhirubhai got his brokers
to start buying any Reliance shares on offer. The more they sold, the number
got to 1.1 million shares, the more Dhirubhai picked up, ostensibly on behalf
of non-resident Indian (NRI) investors based in West Asian countries.
Eventually, the friendly brokers bought over 800000 of the shares sold by the bears.
It was an almighty poker game.
The bears had sold short-in other words, they had sold shares they did not own
in the expectation that the price would fall and let them pick up enough shares
later at a lower price. Reliance itself could not legally buy its own shares.
So who were the NRI investors who arrived so providently on the scene with more
than Rs 100 million (then over US$10 million) to spend?
Six weeks later, after several
further spells of bear hammering of Reliance shares, Dhirubhai called his
opponents -20 cards. Every second Friday, the Bombay Stock Exchange stopped new
transactions while its members settled the previous fortnight's trades or
arranged badla finance to carry them over. On Friday 30 April, Dhirubhai's
brokers used their right under the badla system to demand delivery of the
shares they had bought for their offshore clients, failing which a badla charge
of Rs 25 a share would be levied. The bear cartel baulked, throwing the
exchange into a crisis that shut it down until the following Wednesday. In
following days the price of Reliance shares rose to a peak of Rs 201 as the
bear brokers desperately located shares to fulfill their sales, incurring
massive losses.
By
10 May, the Reliance price started easing, signifying that deliveries had been
made. But Dhirubhai and his company had clearly arrived. Reliance was
henceforth treated by major news-papers as a 'pivotal's stock in the market,
and Dhirubhai himself began receiving panegyrics in magazine profiles as the
'messiah's of the small investor. Dhirubhai went on to pick up a further one
million Reliance shares by August 1982 for the mysterious NRIS, bringing the
outlay since March to about Rs 260 million. A few years later, in December 1986
at the time of its massive C Series debenture issue, Reliance advertised that
Rs 1000 invested in Reliance shares in 1977 would have bought an investment
worth Rs 1,10,041 in November 1986, an appreciation of 11,000 per cent. Another
calculation made by Reliance put the gain at 12,234 per cent.
An analysis by S. R. Mohnot in
his Reliance study, points out that to obtain the value quoted in 1986, the
investor would have had to top up his initial Rs 1000 outlay by subscribing to
every rights issue and debenture issue offered to him, taking the total
investment to nearly Rs 30000 for assets and accumulated earnings (interest and
dividends) worth Rs 1,08,278. This was far from thousands of percentage points,
but still equivalent to an annual compound rate of interest of 44.5 per cent.
Tellingly, however, Mohnot noted that, had the investor bailed out at the end
of 1983 after five years, the annual compounded return would have been a still
more impressive 75 per cent.
By late 1984, Dhirubhai had
reached a new plateau of acclamation, and thereafter frequently featured on the
covers of Indian magazines. Over the next year, he announced plans for a
massive expansion of Reliance, by moving further back along the raw
petrochemical chain to become India's first producer of purified terephthalic
acid (PTA), to make the other main input to polyester, monoethylene glycol
(MEC), and to make the associated products linear alkyline benzene (LAB, for
use in biodegradable detergents) and high-density polyethylene, a plastic.
Patalganga would also be expanded via a 45000 tonne a year plant to make
polyester staple fibre (PSF, fibres of a set or staple length, which are spun
together to produce a less shiny yarn than the long flainents in PFY).
Ever bigger debenture issues were
announced-Series E raising Rs 800 million in October 1984 and Series F in June
1985 raising Rs 2.7 billion-and were fully or over subscribed.
Probably the pinnacle of
popularity was reached on 20 May 1985, when Reliance hired Bombay's Cooperage
Football Grounds as the venue for the annual general meeting to approve results
for 1984. About 12000 shareholders turned up to sit under canvas awnings
stretched above the grass and to watch the directors via television monitors.
It was reported as the first AGM ever held in the open, and the largest ever meeting
of shareholders, attracting note just for that fact the next day in The
Financial Times of London.
Dhirubhai arrived in a suit, but
soon got down to shirtsleeves to report the previous year's 58.6 per cent jump
in net profit and to list various new projects totaling Rs 6.72 billion in
outlays. India had recently had its first taste of hostile takeover bids when
the London-based expatriate Indian, Swaraj Paul, had bought into the machinery
manufacturers DCM and Escorts. If anyone tried that with Reliance, they would
have to deal with 1.2 million loyal shareholders, said Dhirubhai to loud
applause.
The shareholders enthusiastically
approved a name change symbolising wider ambitions. The word 'Textile's was
dropped from the company's name. After approval by company regulators in June,
it was simply Reliance Industries Ltd. Accolades followed in the press. The
magazine Bombay said Dhirubhai appeared at the meeting like a 'dark and dapper
messiah'. Business India spoke of his 'Brilliant financial acrobatics' and
'Superlative business performance's which had helped him create corporate
history's and become a 'end in his own age lifetime'. A man whom childhood
poverty had deprived of adequate clothes to wear, has today become the biggest
clothier of the nation,' the cover story said. It might even be divinely
destined, the magazine noted. In the early 1960s, the 'Society astrologer's
Pandit Sundaram in New Delhi told Ambani he would be India's No. 1
industrialist. 'Not so long ago, Dhirajlal Hirachand Ambani, popularly known as
Dhirubhai Ambani, was sneered at as an upstart, condemned as a manipulator par
excellence and written off as a flash in the pan,'s said Business India.
Within the space of seven short
years, Ambani has proved all his critics wrong. Today he is revered by his 12
lakh investors (the largest number for any company) and envied by every
industrialist. His methods have become the gospel for the new generation of
aspiring industrialists. Ambani, an ordinary high school dropout from Chorwad,
in Junagadh district, Gujarat, is seen as the most outstanding practitioner of
a new style of management in which the only thing that matters is - results.
Some more considered analysts
also saw Dhirubhai as a natural winner. 'What Dhirubhai has touched so far has
turned to gold,' wrote authors Margaret Herdeck and Gita Piramal. 'Yesterday,
synthetic textiles. Today, petrochemicals. Tomorrow is only in the mind's eye.
One thing is certain. If Dhirubhai gets involved it will be big ... In Ambani,
there is no hesitation between thought and action. They appear to be one and
the same.' Even the friendliest writers felt compelled to mention that
Dhirubhai had many critics and enemies who called him an arch-manipulator of
politicians and bureaucrats. 'It is not for nothing that this dark horse from
Guiarat has achieved the reputation in textile circles of being the best friend
and the worst enemy one could have,' said Business India. In most cases, these
criticisms were put in a way that gave Dhirubhai the chance for a free kick.
'Ideas are no one's monopoly,' he was quoted as saying by Herdeck and Piramal.
'Those who criticise me and Reliance's growth are slaves to tradition.' If not
to outright conservatism and complacency, the criticisms were put down to
jealousy. But two of India's sharpest business journalists did get Dhirubhai to
admit that stroking government was his biggest task. 'The most important
external environment is the Government of India,' he told India Today's T N.
Ninan and Jagannath Dubashi. 'You have to sell your ideas to the government.
Selling the idea is the most important thing, and for that I's meet anybody in
the government. I am willing to salaam anyone. One thing you won't find in me
and that is ego.' But the criticisms were brushed aside by most investors, it
seemed, as well as by many of the journalists. The dark side of Dhirubhai was
part of his attraction. It was a thumb in the nose at the bureaucrats, the
corrupt politicians, and the exploitative business elite cornering the wealth
of India and wasting it.
For the Gujaratis who formed much
of the business and professional class of Bombay but few of the big industrial
entrepreneurs - Dhirubhai was one of them. He had taken on and beaten the
Parsis, the Marwaris and the Punjabis at their own game. Called 'gujjus' and
often sneered at by other Indian communities for their parsimonious, apparently
money-obsessed ways, the Gujaratis had made it through Dhirubhai. If he had
bent the rules, engineered loopholes, cleverly avoided tax or given bribes, Dhirubhai
was only doing what any other industrialist would do, given the opportunity or
the ability to carry it out. How else would a complete newcomer with no capital
or education get the breaks? A leading management consultant, S. K.
Bhattacharya, was quoted as saying: 'The distinction between Reliance and
others is that it creates the future for itself rather than waste time on
sobbing over government controls and insensitivity of government policies.' It
was a frequently made observation.
The only victims, it seemed, were
the government, which did not get as much tax revenue out of Reliance as
perhaps it should, or the bureaucrats, who could not get their vindictive
pleasure out of blocking or crippling a private sector endeavour. After
centuries of rule by alien governments, many Indians-especially the traders and
farmers-had come to regard anything sarkari (governmental) as trouble. By the
1980s, the government of independent India was similarly suspect in places like
Bombay and Ahmedabad. In rural India, outlaws like the 'Bandit Queen's Phoolan
Devi or the southern sandalwood smuggler Veerapan attained celebrity status,
and evaded capture for years (Phoolan Devi even getting elected to parliament
in 1996, despite pending charges of taking part in a massacre of 20 men). In
the popular Hindi cinema, the lines between good and evil had become confused.
Police and politicians were aligned with gangsters, the hero had become a
khalnayak, a villain or anti-hero.
Dhirubhai worked in an expensive
office in Bombay's Nariman Point business district. He drove around town in a
Cadillac (augmented with a gold-coloured Mercedes by 1985). He took helicopters
out to Patalganga and new sites in Gujarat (even using the Maharashtra state
governor's helipad in Bombay for a while), and as the years went on was in
touch with the highest in the land. But he still looked and felt an outsider.
'Dhirubhai never moved around with the social crowd like the Wadias, the
Godrejs, the Singhanias,' said one senior Bombay journalist. 'He was not
considered in the same league - you know how snooty they can be. He would go to
the Harbour
Bar [at the Taj Mahal Hotel],
have a drink, watch everybody, then leave.' The sense of exclusion may have
been what drove him onwards. It also lent an edge to his public image, turning
him, too, into an anti-hero. Those who followed Dhirubhai in the stock market
were not just part of the Reliance family but members of an unspoken rebellion.
Friends
in the right Places
This was the public face of
Dhirubhai Ambani. Known to a small circle of insiders was a different face.
Shadowing the industrial and marketing activity, the published financial
workings of Reliance was a second operation-the systematic manipulation of
share price, publicity and government policies in order to sustain the Reliance
success story and keep the public money coming in. Every company attempts to
some degree to improve these elements of its operating environment. Few have
ever matched Reliance in its sustained efforts.
By being able to quickly
transform debt into equity, Dhirubhai seemed to have avoided the borrowing trap
that eventually caught up with so many other stars of the global sharemarket
boom in the 1980s. By expanding only into associated products, he created
enormous internal economies for Reliance.
But it was still a balancing act
that required a lot of forward momentum, and constant oiling of the machinery.
It was generally agreed that Reliance's high share price was the single biggest
factor in the case it enjoyed in raising finance. Reliance shares were promoted
relentlessly as a path to rapidly appreciating wealth. Dhirubhai was free with
allocations to friends and clients from the directors' quotas of any issues,
though these share parcels usually come with the stipulation not to sell for
two years' The business chronicler Gita Piramal also noted how central was the
share price:
Arnbani realised that in order to
seduce the public into investing in his schemes, he had to offer them something
above and beyond what they were already used to getting. And this was the
steady appreciation of their share holding ... At the time, Ambani didn't
realise that he had mounted a treadmill from which he would never be able to
step off. Over the next few years, this treadmill speed ever faster, constantly
threatening to whirl out of control. In order to retain the public's support,
Dhirubhai had to ensure that the price of Reliance shares kept appreciating,
month after month, year after year. As long as he kept moving, money poured in.
In theory, that need not have
been the case. Had the funds raised by Reliance been promptly deployed in
productive investment, Reliance would have been able to rest on its laurels
from time to time. But after the fast completion of the PFY plant in 1982 and
the PSF plant in March 1986 at Patalganga, the company's investment targets
constantly slipped. It faced political obstacles in front of new sources of
funds. And in any case, Dhirubhai needed a constant, substantial stream of
income to cover his political payments, top up the official salaries of his
executives with cash (company law then put limits on salaries), and keep
various benefits flowing to his network of contacts. To some extent, this could
be generated by market play in the management shareholding, spread between
scores of investment and trading companies. This meant that Dhirubhai really
was on a spiral he could not get off. Not that he wanted to. His daily activity
was a constant adrenalin rush, in which he continually proved his mastery of
India's markets in yarn, textiles, petrochemicals, shares and finally money
itself.
In the process, Reliance became a
'sure cash flow operation', according to a stockbroker who worked closely with
Dhirubhai. 'They do not distinguish between revenue and capital,' the broker
said. 'They only operate on a cash flow.' Assisting Dhirubhai juggle money
between Reliance, associated private companies, banks and the markets were a
close band of trusted staff. Some were family. Foremost was his nephew,
Rasikbhai Meswani, who knew all the ins and outs of private accounts, including
his contributions to politicians and parties, journalists and others. Others
were old acquaintances from Aden or Saurashtra, like senior managers Indubhai
Seth and brother, Manubhai Seth, or Chandrawadan ('ama's Choksi.) The company
secretary of Reliance, Vinod Ambani (no relation), was in most cases the common
link to the growing number of shelf companies which often had their registered
office, but not necessarily a nameplate, in the same address as one or other of
the Reliance offices around Bombay or Ahmedabad, and whose activities were put
down as trading and investment'.
For example, Hemal Holding &
Trading Pvt Ltd had as directors the old Reliance Commercial Corp stalwarts
Narottambhai Doshi and Manubhai Sheth, as well as Vinod Ambani. Victor
Investments & Trading Pvt Ltd was controlled by members of the Meswani
family. Jagadanand Investment & Trading had Choksi and one Bhanuchandra
Patel as directors. Many of these companies were subsidiaries of a company
called Mac Investment Ltd, incorporated in September 1974 and with its
registered office in the Syndicate Bank headquarters in Manipal. Dhirubhai and
his extended family, plus in-laws and old friends like Rathibhal Muchhala, were
included in Mac Investment's top shareholders in an annual return at the end of
1983.
The story is told that Vinod
Ambani or some other executive once came to Dhirubhai to get some guidance on
what to name the host of new companies' being spawned. Dhirubhai told him to get
out an ancient Sanskrit scripture called 'Vishnu Sahasra Nam's (The 1000 Names
of Lord Vishnu). Many of the investment companies unearthed during later
scandals did indeed bear the names of divine avatars.
If the nerve centre was the
Reliance corporate headquarters in Maker Chambers IV, Nariman Point, or
wherever else Dhirubhai happened to be, the essential plumbing was at the share
registry and transfer agency for Reliance, handling the ownership details and
paperwork of the company's shareholders, some 1.2 million by the end of 1986.
The registry was often described as in-house but was in fact a separate
company, Reliance Consultancy Services Ltd, which had several hundred staff of
its own working in a large building in Bombay's distant industrial suburb of
Andheri.
Dhirubhai met few objections to
his accountancy from his auditors, in particular the firm of Chaturvedi &
Shah, which has cleared Reliance's books from the earliest days. One partner,
D. N. Chaturvedi, spent a lot of his working time in the Reliance head office
year round. The other name in the partnership is a son of a Reliance director
until the early 1990s, Jayantilal R. Shah.
When Reliance went through
difficult patches, one device to tide over poor profitability was to change the
accounting year. Thus in 1978 when the removal of the High Unit Value Scheme
forced a switch to the domestic market just as Reliance was going public, the
company changed from an October-September year to a January-December year, even
though it had moved from a July-June year only two years earlier. In a later
time of troubles, 1987 and 1988, Reliance changed its accounting period in two
successive years-making for four changes in 15 years, before settling on the
April-March year used by most Indian companies.
One way to move the market is by
weight of money. The best way, of course, is to use someone else's money. While
Dhirubhai can rightly claim to be a father of India's equity cult, another
important guru was Manohar J. Pherwani, chairman of the Unit Trust of India for
nearly ten years until November 1989. Though it was set up by an act of
parliament as far back as 1964, the UTI had been quiescent until Pherwani's
arrival. Originally from Sindh (now in Pakistan), Pherwani was a desperately
ambitious man, eager to make his mark, and willing to step outside the orthodox
to raise subscriptions to UTI funds: for example, by sending mobile offices
around middle-class neighbourhoods and prosperous rural areas to sign up new
investors at their homes. During his chairmanship the UTI's investable funds
rose from Rs 4.6 billion (in 1979-80) to Rs 176.5 billion (in 1989-90). Nitish
Sen Gupta quotes J. R. D. Tata as remarking at a seminar in Bombay that 'he
capital market that N. K. Sengupta did so much to create has become a pocket
borough of the UTI chairman, M. J. Pherwani.' Dhirubhai and Pherwani became
close, and their success fed off each other': Reliance's rising share price
meant rising values of UTI units; UTI's heavy investment in Reliance helped
Dhirubhai keep the price going up.
Dhirubhai did have some funds
himself. Reliance's cash reserves could be lent to the associated investment
companies to buy shares, or deposited in banks as informal additional security
against loans to those investment companies to buy shares and debentures. But
more often, the market was moved by information or sentiment, and these funds
used to take a profit.
Until 1993 when the newly
empowered Securities and Exchange Board of India applied new rules, India had
no explicit law against insider trading, though companies were forbidden by
company law from buying their own shares. It was accepted as normal, however,
for companies to see that their share prices were boosted by friendly brokers
and underwriters ahead of issues, and often for sensitive information to reach
some investors ahead of the public. Sharemarket research was not so much
concerned with intelligence about a company's performance as about which
particular stock was being targeted for concerted price ramping and by whom.
But Dhirubhai's year-round intervention in Reliance's share price was, and
remains, highly unusual.
To categorise Dhirubhai as an
inside trader, however, does not do justice to the scope of his activities. His
willingness to 'salaam's anyone and his cultivation of junior staff and
newcomers had by the early 1980s created a huge network of friends in politics,
government ministries and financial circles. Earlier, goodwill had been
cemented by gifts of the famous 'suit-lengths' of material. After the float of
Reliance in 1977, Dhirubhai was able to allocate parcels of shares or
debentures from the 'promoter's quota's of any issue, with a profit virtually
guaranteed by the gap between issue and market prices or by the prospect of
conversion.
Again, Dhirubhai was not unique
in cultivating officials. Many companies had their friends in the bureaucracy.
Businessmen liked to get close to power, and the officials looked to
post-retirement jobs or opportunities for their children. But, as always with
Dhirubhai, it was the degree. His holds were not just in the ministries of
direct relevance to Reliance - Finance, Industries, Commerce, Textiles,
Petrochem - but in others like the Prime Minister's Office and Home Affairs
where the general powers of the government were wielded.
It meant that a signature was
barely on a document or file in the Ministry of Finance, for example, before
Dhirubhai was informed. The inside trading was not just in the affairs of
Reliance Industries Ltd, but in the affairs of the Government of India. The
intervention went beyond information-gathering, to the point of influencing or
even controlling key bureaucratic appointments, and thereby influencing policy
or its interpretation. In many parts of India, government jobs have long been
allocated by auction, the highest prices being fetched by those in revenue
raising and policing agencies where the opportunities for corruption are
greater. In what is regarded as the most debilitated state administration, that
of Bihar, the auction is conducted more or less openly in a cafe in the main
street of the capital Patna. In New Delhi, police promotions and transfers are
brokered by a well-known city journalist.
In Bombay, the competition was
intense among the handful of senior bureaucrats with financial sector experience
for the chairmanships and chief executive positions of the government financial
institutions. Dhirubhai was active in the lobbying when the top posts fell
vacant in the banks, insurance companies and statutory authorities. And as one
old acquaintance noted, Dhirubhai would make a point of telephoning all
candidates and assuring each one of his support. Even if it were not really
decisive, the winner might be left thinking he owed his new job to backing.
most distinctive touch, however,
was in his use of the press. Before him, G. D. Birla may have been equally
master of the Licence Raj, and keen to buy public and perhaps divine favour by
the building of temples and colleges, but Birla disliked the press and never
cared to mix with journalists --- even though his family owned The Hindustan
Times, one of India's strongest English-language newspapers.
Centuries of shielding their
wealth from over-extended maharajas and nawabs, or from a hungry populace, had
made India's merchants wary of ostentation and careful not to be seen to be
overstepping their place in the social hierarchy. In more recent times, the
Licence Raj had unleashed packs of inspectors against private wealth, and
businessmen had learned to be lectured by politicians and officials about the superiority
of economic planning and directed investment.
Dhirubhai shared a certain
contempt for the journalist. 'Throw some scraps to the street-dogs and crows
before you feed yourself,' a family friend remembers him enjoining his sons
Mukesh and Anil in the early days at Bhuleshwar. But he recognised how powerful
the press could be in moulding the thinking of the public and the politicians.
The
huge advertising spend of Reliance gave him an automatic hold over many of the
less established newspapers and magazines. By the early 1980s, the new
technology of computerised composition and photo-typesetting had led to an
explosion of publishing in India, particularly in regional languages where it
overcame the technical problems of complex scripts in an economical way.
Gujarat was no exception to this. Advertising from Reliance was an important
source of revenue for the Gujarati publications in Gujarat itself, Bombay and
overseas.
Dhirubhai used his clout. The
Gujarati columnist Kanti Bhatt remembers being called upon for help by a
newspaper editor who had offended Reliance by printing a hostile paragraph,
apparently fed by a rival Marwari-owned company. Reliance had immediately
cancelled all advertisements.
When he met Dhirubhai, Bhatt
remembers him being furious, even throwing a telephone at one point. Mr. Ambani
called in his advertising manager and said: "Show me our advertising
plans." Then he said to him: "Take out this particular
newspaper." It meant a loss of Rs 600 000 a year for that newspaper.'
After this charade, Bhatt went back to the editor and told him the message was
that nothing could be written against Reliance if he wanted the ads. 'The next
issue was damage control, and a very long and favourable article was written,'
Bhatt said. Advertising was restored.
Later Bhatt was called in by
Dhirubhai himself to find out why a Gujarati publication in Britain had
suddenly begun printing a series of articles critical of Reliance. After
talking to the publisher, Bhatt reported back: Sir, it is a plea for advertising.'
The plea was answered, and the articles stopped. 'You could multiply these
examples by a million,' Bhatt said.
Dhirubhai could not wield the
same power over the big metropolitan newspapers. But he could and did cultivate
their journalists and editors. The Indian press tends to be like most of the
other key institutions in the country: free, but in many parts corrupt except
at the very top. Bombay's underpaid financial journalists are used to receiving
gifts from businessmen wanting publicity, and their proprietors are happy to
have their salary bill subsidised in this way. Press conferences are followed
by buffet meals and drinks, and envelopes containing cash or gift vouchers are
handed out by public relations officers on the way out. The envelope system has
flourished most intensely during bull runs on the stock exchange when new
company floats and issues have come thick and fast, and even a paragraph in a
big English-language newspaper means recognition for a new company promoter.
In Paris, waiters are known to
pay the proprietors of certain fashionable restaurants for the privilege of
being able to wait at the tables and collect tips. In Bombay, some would-be
business correspondents are willing to eschew salary altogether and even offer
a monthly fee to the newspaper in return for being accredited as its reporter.
Reliance was a pioneer of
envelope journalism. A senior commercial journalist in Bombay recalls that
journalists would get vouchers worth up to Rs 2000 for goods at a Vimal retail
outlet called Laffans. Some in senior positions would get regular monthly
payments or issues of Reliance shares and debentures at par. Ambani's moles in
the press were known as the "Dirty Dozen" the journalist said. 'The
point man was Rasikbhai Meswani. He was a thorough gentleman. His door was open
24 hours a day for journalists. People would go to collect on first of the
month.' Dhirubhai also realised that the reporter was not the final arbiter of
what got published.
He also cultivated desk editors
and even editors. One who accepted Reliance debentures for himself, and help in
arranging bank finance to pay for them, was Girilal Jain, editor of The Times
of India for much of the 1980s.The close journalists in the 'Dirty Dozen's
would not only be used to get favourable news about Reliance printed
prominently They also became an extension of intelligence net- work, asking
rival businessmen for their frank views off the record about Reliance and then
reporting them back. On the theory that rumour and gossip are more keenly
heeded because they carry an aura of exclusivity, the pressmen would be used to
plant opinions about the merits of Reliance activities and the failings of
other companies.
Occasionally the journalistic
network would turn up details of illegal or embarrassing activities by rivals
that could be used to obtain peace, or failing that, turned over to authorities
for punitive action or harassing investigation. Many of the journalists
regarded by their colleagues as being in the Reliance pocket would indignantly
deny being bought. Indeed, some would have simply fallen for the perennial trap
of getting too close to a source that had given them many good stories and then
having too much friendship or ego involved to admit any negative news. And
especially for the news magazines that were the liveliest and fastest-growing
section of the Indian media in the 1980s-the last decade before privately owned
television arrived with satellite broadcasts- Dhirubhai and Reliance were a
colourful and fresh story. It was a highly effective image-making operation.
But, perhaps inevitably, some accidental slips allowed the public glimpses of
Dhirubhai's secret manoeuvres.
The opening developed in 1983
when Finance Minister Pranab Mukherjee began giving some details in parliament
to the response by non-resident Indians to the new sharemarket investment rules
he had announced in his first budget, in February 1982. Previously, NRIs had
been allowed to make portfolio investments in Indian shares but were not
allowed to repatriate their funds. The new system allowed NRIS, or companies
and trusts owned at least 60 per cent by NRIS, to put money directly into
Indian shares and to repatriate funds after selling their shares. It was
implemented by the Reserve Bank of India in April that year-just as Dhirubhai
was marshalling his response to the bear attack on his share price.
In a written answer, tabled on 10
May 1983, Mukherjee said that between April 1982 and April 1983, 11 overseas
Indians had purchased shares and debentures worth a total Rs 225.2 million
(then about US$22.5 million) in two Indian companies. It was widely believed
that the two companies were Escorts and DCM, targets of the raider Swaraj Paul.
On 16 May 1983, however, the Calcutta-based Business Standard reported that in
fact all the investments had been made in one company, Reliance, by investment
companies overseas. 'It is believed that all these investment companies belong
to Mr. Dhirubhai Ambani himself, the promoter of Reliance Textiles.' Answering
questions from the leftwing opposition figure Prof. Madhu Dandavate on 26 July,
Mukherjee listed the 11 companies allowed to invest in Reliance, all of which
he said were companies registered in the United Kingdom. Among the conventional
names, two of the 11 stuck out for their cheekiness: Crocodile Investments and
Fiasco Investments. The investments in Reliance accounted for 98 per cent of
all investments made by NRIs under the new scheme- suggesting to critics that
here was yet another policy tailor-made for Dhirubhai.
The tantalising clues were taken
up by The Telegraph, a stable- mate of Business Standard in Calcutta's Ananda
Bazar Patrika group, a hometown press that had little time for Mukherjee even
though he was a Bengali. On 16 September, the- Telegraph's reporters found that
the companies named did not exist. Two months later, on 16 November, the
Telegraph found that eight of the 11 named companies had appeared in the UK
registry - but that the applications to register had not been lodged until 27
July 1983, the day after Mukherjee's reply in the Indian Parliament. All were
made through one channel, on the instructions of a single client.
On 22 November, just as the
parliament was about to rise for a week, Mukherjee tabled a correction to his
26 July reply. The companies were actually registered in the Isle of Man-the
small island community in the Irish Sea. Mukherjee could have said he was
technically right: the island is a British protectorate and part of the United
Kingdom. But like the Channel Islands between Britain and France, it has its
own tax laws and derives much of its income from providing tax shelters for
foreigners. Mukherjee corrected some other minor mistakes in the company names
also: it was Crocodile Ltd and Fiasco Overseas Ltd.
Editorials asked how closely the
central bank had scrutinised the eligibility of the 11 companies under the NRI
scheme, if the finance minister could not even get their domicile right. Pranab
Mukherjee: Minister of Finance or Reliance?' went the headline in the
Telegraph's leader. Facing more questions in parliament and an attempted breach
of privilege motion (rejected by the Congress majority) on 14 December,
Mukherjee insisted the different place of incorporation did not make any
material difference about eligibility and appealed to MPs not to will the
scheme'. The RBI had seen certified statements about the majority shareholders,
but their identities could not be revealed on grounds of banker- client
confidentiality. If black money was being laundered through the NRI scheme, there
were other laws to take care of it.
The press soon followed up the
Isle of Man clue. In January 1984, India Today and other publications revealed
that company searches showed the 11 companies had been registered between 1979
and July 1982, initially with various English names as directors. In July 1982,
the ownership and directors had changed: suddenly 60 per cent to 80 per cent of
the share capital in each company belonged to people with Indian names, mostly
with the surname Shah. In 10 of the 11 companies, common directors were two
accountants domiciled in the Channel Island of Sark, Trevor Donnelly and his
son John Donnelly, both well-known facilitators believed to hold thousands of
directorships in holding companies in various tax havens around the world.
In eight of the companies, the
biggest shareholders were found to be one Krishna Shah, a resident of the
English midlands city of Leicester, and his wife, three sons and a
daughter-in-law. In five companies, a couple called Praful and Nalini Shah, living
in Flushing, New York, were directors. Four companies had one or other of two
residents of Djibouti, Chimanlal and Jyoti Dhamani, on their board. Only in one
company, Tricot Investments were Indian names not on the board.
A mystified India Today reported
that Krishna Shah was a former Leicester city councillor, born in Kenya, who
had come to Britain in 1959 and initially worked as a train guard with British
Rail, before opening his own shop and then setting up a small knitwear factory
which employed only five people. Shah told the magazine's reporter he knew
nothing about any companies in the Isle of Man.
Someone in the companies was
remarkably well informed on investment conditions in India, however. On 20
August 1982, the RBI had lifted a Rs 1 00 000 ceiling on share investments in
any one company by non-resident Indians. Three days later, three of the Isle of
Man companies applied to the central bank to invest Rs 20 million each in
Reliance. Four other companies applied together on 24 September. Six companies
made their share purchases on the same day, 15 October, at the same share
price, which was a significant discount to the then market price.
While each company had paid-up
capital of only £200, three of them had managed to talk the European Asian Bank
to lend identical sums of US$1.65 million to each, through the bank's branch in
Colombo, Sri Lanka, on 26 October 1982. M three bought Reliance shares at the
same price, Rs 128.4 It was a sound piece of investigation, but no link with
Dhirubhai had been found and many questions remained unanswered.
Had the reporters spread their
questions wider in the Gujarati diaspora, they might have discovered a very old
connection. The leading name in Crocodile, Fiasco et al. was the same Krishna
Kant Shah and fellow student activist whom Dhirubhai had helped spring from
jail after the 1947 communal riot in Junagadh (see pp. 13-14). After finishing
his education, Shah had gone back to join the family business in Kenya. In 1964
he moved to Britain on his own, working for an engineering company for two
years and then as a railway guard for eight years. In 1970 he quit British Rail
and set up his own shop in Leicester's Hartingdon Road, selling hardware,
saris, utensils and religious statues, and living in a fat upstairs.
His customer base was the fellow
Gujaratis then congregating in Leicester after their expulsion from Uganda by
Indian Admin at 48 hours notice in 1972, and the more gradual squeeze out of
Kenya by Jomo Kenyatta's Africanisation of commerce. By the mid- 1990s, about
one-quarter of the city's 400 000 population were immigrants, about 80 000 of
them South Asian. Almost all the 65 000 Hindus were Gujarati.
Shah was not very interested in
making money from his fellow migrants. Instead he sought their votes. In 1973
he got himself elected to the Leicester City Council, becoming the first South
Asian on a city council in Britain, and served for ten years. 'He was not a
great businessman,' recalls S. B. Khandelwal, proprietor of the Sari Mandir
emporium in the city. 'He would often close up shop early to go on council
business.' Clearly, Shah did not have millions of dollars to put into Reliance
shares, or the financial knowledge to set up elaborate ownership arrangements
through the Isle of Man, where he had never been, or to take out loans from a
foreign bank in Sri Lanka to finance the purchase of shares in India through an
Isle of Man company. He had however kept in touch with Dhirubhai, and his wife
Induben had become a friend of wife Kokilaben. On trips to buy textile
machinery in Britain, Dhirubhai would take Shah along, while Shah introduced
Reliance's export manager Rathibhal Muchhala to many of the South Asian
retailers in Leicester. In 1972, Dhirubhai brought his wife and children to
Britain for a holiday and the two families spent some time together Later that
year Shah's oldest son Sailash, who had just completed a diploma in textile
manufacturing, went off to a job at the Reliance factory in Naroda, where he
stayed five years before returning to Leicester to help his father set up the
new knitwear business. In 1977, Dhirubhai provided two cars for Sailash's
wedding.
Krishna Kant Shah died in 1986,
in the midst of a fresh controversy about the mysterious Isle of Man companies.
At a meeting in 1995, Sailash Shah maintained there had been no business
connection between his father and Dhirubhai. Asked how it was that the Indian
press and investigators had singled out his family as fronts, he would say
only. 'I don't know how.' That Dhirubhai did have a connection with the Isle of
Man was indicated by the appearance in India during the mid-1990s of one Peter
Henwood. An accountant running a company in the Isle of Man capital, Douglas,
called International Trust Corp (later OCRA Ltd), Henwood had been instrumental
during the 1980s in arranging layers of ownership for offshore holdings through
several tax havens. Dhirubhai had become close to Henwood and his attractive
wife, on whom he showered expensive gifts.
Much later, Henwood tried to
market his services to other Indian businessmen. Dhirubhai became alarmed, and
had Hen- wood followed on his visits to India. To protect his business
interests, Henwood consulted a leading firm of lawyers in India.
Over the years 1982 to 1984,
Dhirubhai also met problems within the Reliance family. In 1982, junior office
staff in Bornbay petitioned the Reliance management about low salaries and
being obliged to work long hours and on holidays without overtime pay. Then
they attempted to join a trade union, the Mumbai Mazdoor Sabha run by R. J.
Mehta. Some 350 were dismissed without notice, ostensibly on grounds of a 'e
organisation', while others were transferred to Reliance offices in Gujarat.
The dismissed workers said muscle men had beaten up one activist and a deputy
personnel manager had waved a pistol at a typist.
In December 1983, Dhirubhai had
hosted a special lunch for all his 12 000 factory staff at Naroda to celebrate
the wedding of his daughter Dipti to Dattaraj Salgaocar, the heir to a
prosperous iron ore mine in Goa. It was a love match-Raj Salgaocar had been
staying in the same apartment building in Bombay's Altarnount Road as the
Ambanis when he met Dipti-but a prestigious one for Dhirubhai, just as he had
emerged as a tycoon himself.
The bonhomie at the wedding covered
some mixed feelings on the factory floor. The Naroda workforce was seething.
Within a few months, the textile hands were agitating for a wage increase,
payment of overtime, and removal of contract labour. Dhirubhai effectively
nudged aside his elder brother Ramnikbhai from management of Naroda, and put
his younger son Anil in charge.
In August 1984, the company
suspended 160 of its workers, and announced formation of a company union, the
Reliance Parivar Pratinidhi Sabha (Reliance Family Representative Union),
including 6700 workers and 1800 staff. 'The concept of unions has no place in
our set up, 'the company's general manager for personnel and administration, H.
N. Arora, told a newspaper. 'He believes in participative management/s
Agitation continued within the plant. On the morning of 28 August, the company
announced suddenly that work was stopping, and the plant was closed. Squads of
Gujarat state police and police reserves waiting at the gate stormed in and
charged the protesters with lathis (long wooden staves) and tear gas.
Dhirubhai rode out this episode,
but with regret. Not only had he lost the earlier affinity with his factory
workforce, but arguments between Ramnikbhai Arnbani and Anil had induced
Dhirubhai's elder brother to distance himself from the company'soperations.6
The blazing success as Dhirubhai
proceeded to his triumphant general meeting in May 1985 carried some dark
shadows. Many of those who opposed him had been crushed in ruthless displays of
the state power he could manipulate: the police lathis and tear gas that fell
on his own workers, the tariff changes and tax raids that hit his business
rivals, or the ignominious transfers given to civil servants who held up his
plans.
The opposition parties had been
alerted to his connections with the ruling Congress Party and Indira Gandhi's
office. The very resistance met by any query about Reliance only encouraged
politicians like Janata's Madhu Dandavate, the Marxists's Somnath Chatterjee or
the Bharatiya Janata Party's Jaswant Singh to press harder. Dhirubhai had a
growing list of critics, and enemies to feed them questions. It only required a
sudden removal of his high-level protection for his complex fast-growth
operation to be dangerously exposed.
The
Great Polyester War
On 23 November 1985, Bombay's
sensation-seeking weekly tabloid Blitz came out with a cover story that soon
had more than the usual crowds browsing at the newsstands. 'IT'S MAHAPOLYESTER
WAR,' shouted the front-page headline. 'It's a Mahabharata War, or rather,
Mahapolyester War-in Indian big business style,'s began a lengthy report that
took up the whole of the front page, and spilled into two full inside pages.
'There are only Kauravas, no
Pandavas, and no Lord Krishna. The reason is that none is without blemish. The fight
is neither for inheriting the earth nor the heaven, but for one of the most
lucrative industrial markets-that is, polyester filament yarn, where profits
soar around Rs 80 to Rs 100 per kg.' Not only that. Blitz told readers in a
front-page subheading: 'The Mahapolyester War goes beyond the industry to
apocryphal stories involving serious political repercussions.'
According
to New Delhi's grapevine, the old Pranab-Dhawan-Ambani axis responsible for
Reliance's booming fortunes is currently reorganising its scattered forces with
V P Singh, the Finance Minister, as its principal target.'s Pictured as
contestants in this dark war without heroes were - Dhirubhai, along with two
competing textile magnates: Kapal Mehra of Orkay Silk Mills and Nusli Wadia of Bombay
Dyeing. Among these Kauravas fighting each other, Reliance (Dhirubhai Arnbani)
and Orkay (Kapal Mehra) are the principal combatants, with Bombay Dyeing (Nusli
Wadia) on the sidelines. Thanks to Reliance and its vast patronage and money
power, Orkay got the wrong end of the sword, with the result that the patriarch
of the family spent Diwali in jail after five attempts to ball him out had
failed.' Blitz's editor, Russy Karanjia, was right that a corporate war was
about to spill over into politics. But his article was wrong about the main
battle. Kapal Mehra had just spent 15 days in jail over the festival of lights
(Diwali) marking the new year in the Hindu calendar. He was facing massive
penalties on charges of evading excise and customs duty. Earlier, his son had
been abducted near Orkay's Patalganga factory, beaten up and dumped in a
drainage ditch some miles away. Mehra was already knocked out of the combat.
In the bigger
fight just warming up, Nusli Wadia was opposing gladiator. And while Wadia was
bleeding, Dhirubhai was on the back foot. After his accolades at the Reliance
shareholders' meeting in the Cooperage Football Grounds in May and the
oversubscription of the Rs 2.7 billion F series of debentures in June, things
had started to go badly wrong for him in the second half of 1985.
But
Blitz was correct in painting this fight over a mundane textile and its
chemical inputs with the colours of an epic. It went on for years, reached to
the highest levels of politics, dragged in some of India's best talents,
sullied some of them and made heroes of others, and caused governments to fall.
Far from being a tabloid beat-up, the Great Polyester War was central to Indian
politics, for critical years in the 1980s- to the point where one former
minister in the central government could state, with only a little
exaggeration, that the course of Indian politics is decided by the price of DMT
[dimethyl terephtbalate]. According to stories put out by Reliance sympathisers
over the years, the war began with a snub.
Back in the late 1960s and early 1970s, the social
gap between Dhirubhai and Nusli Wadia could not have been much wider for two
people in the same industry Dhirubhai was a paan (betel nut) chewing trader
roaming from client to client in
Pydhonic to
sell his polyester and nylon yarns, flashy in personal tastes, and with a
small-town Gujarati social background.
In Bombay, Nusli Wadia was
Establishment. The Wadia family were Parsi, followers of the ancient
Zoroastrian religion in Persia who had fed to the west coast of India in the
10th century AD to escape forcible conversion to Islam. In the 18th century,
the Wadias had become shipbuilders to the East India Company in Surat,
constructing the famous company sailing ships known as 'Indiamen's which
carried cargoes of calico, silk, tea, indigo and opium in their capacious
holds, and rows of cannon in gun ports along their sides to fight off pirates
or force their way into China's ports.
When British commerce shifted to
Bombay, the Wadias followed and joined India's first wave of modern
industrialisation. In 1879, they set up Bombay Dyeing &- Manufacturing Co,
which moved from dyeing of cotton yarn into spinning the yarn and then into
weaving of cotton textiles. Under Nusli Wadia's father, Neville Wadia, chairman
between 1952 and 1977, the company continued to modernise, and became one of
India's largest textile manufacturers and exporters.
Like many Parsi families, they
adopted English ways in speech, dress and social behaviour. Although their
agiaries (fire-temples) and towers of silence (grounds for open-air burial)
were forbidden to others, the Parsis have long been a cosmopolitan element in
Bombay and intermarriage with members of other Indian communities or foreigners
was common. Nevillie Wadia had married the daughter of Mohammad Ali Jinnah,
leader of the Muslim League in pre-independence India. Before 1947, Jonah's
family lived in a big house on Bombay's Malabar Hill, though Jinnah was to move
to the newly created Pakistan of his dreams after the Partition, dying there
within a month of its creation. Nusli Wadia had been born with all the
advantages, and had been educated at schools in Britain. Like his father, Nusli
held British citizenship and traveled widely. As Dhirubhai was beginning his
climb up from the yarn market, Nusli had just returned to join the family
business. He was in his mid-twenties-some 12 years younger than Dhirubhai
handsome in an acquiline way, dressed in quiet but classic English fashion, and
always cuttingly direct in his impeccable English. He moved around in a foreign
sedan between the family's waterfront mansion and the company's
turn-of-the-century stone office building, Neville House, in the grandly laid
out old business district of Bombay, Ballard Estate.
The
Parsis, like many colonial elites, went through a crisis of self-esteem when
the colonial power went home without them. Their own self-image became one of
failure, eccentricity and emasculation. The younger Wadia was the great
exception. He was anything but inclined to relax and live off inherited wealth.
In 1971, his father wanted to sell off the company to the Calcutta-based
Marwari tycoon Rama Prasad Goenka and retire abroad. Nusli Wadia, then 26,
enlisted the support of the Tata patriarch J. R. D. Tata to help in a
shareholders's battle against the sale, and rallied 700 employees in an offer
of a staff buy-out of some shares. His father dropped the sale, and after
handing the company over to Nusli in 1977 settled in Switzerland.
It was the
first of many battles in which Nusli Wadia showed his remarkable fighting
capacity when he felt his own vital interests, or those of friends who sought
his help, under threat. Wadia was never inclined to take a public stage. He did
not join business associations and appear constantly at conferences and
seminars like many other big businessmen, or host lavish parties in hotels. He
avoided the press. But he developed a wide circle of friends and contacts that
came to appreciate his fearless advice. Among them were tycoons many years his
senior, like Tata and later the press baron Ramnath Goenka of the Indian
express.
The Ambani version of the snub is
that Wadia simply refused to buy C. Itoh yarn from Dhirubhai, for reasons that
are not explained. Another variation is that Wadia kept Dhirubhai cooling his
heels in the corridors of Bombay Dyeing. A more elaborate version is that
Dhirubhai called on Wadia at Neville House during the early 1970s, and made a
presentation about the superior quality of his C. Itoh yarn. Wadia questioned
the backing for this claim, whereupon Dhirubhai pulled out a copy of a test
report made by Bombay Dyeing's own laboratory for internal company use. Wadia,
according to this version, told Dhirubhai that next he would find Reliance
telling his laboratory what to report, and that he would not deal with him.
Dhirubhai has not mentioned this
incident, and Wadia has told inquirers he has no memory of it or any other such
encounter with Dhirubhai, though he could not completely exclude it as a
possibility. Whatever the case, Dhirubhai clearly felt put down and, according
to many later articles by friendly writers, nursed the hope that one day he
would have Wadia coming to him as a supplicant. The industrial rivalry
developed after Wadia took over from his father at Bombay Dyeing and started
moves to get the old cotton mill directly into the polyester production chain
itself. In 1978, Bombay Dyeing applied to New Delhi for a licence to set up a
DMT plant, and in December that year it received a 'Letter of intent'(a
preliminary approval) for a 60 000 tonne a year DMT plant to be located at
Patalganga.
It was a move that would have
leapfrogged Bombay Dyeing past Reliance up the petrochemical chain. At the
time, Dhirubhai was just moving towards applying for a licence to make
polyester yarn, using DMT as his initial feedstock. Bombay Dyeing would have
become one of only three domestic sources of the chemical, along with Indian
Petrochemicals Ltd near Bombay and the Bongaigaon refinery in the eastern state
of Assam. Wadia would have been in a position to apply Dhirubhai's own trick of
calling down higher tariff protection and then squeezing a bigger profit out of
dependent clients-who would include the new Reliance plant.
Though he was not close to the
prime minister, Morarji Desai, Nusli Wadia had a good image with the Janata
government, partly through connections in the Hindu nationalist party in the
ruling coalition, the Jana Sangh, predecessor of the Bharatiya Janata Party.
The Scindia family, one of the great Maratha ruling families and hereditary
maharajas of Gwalior in central India, had had a business relationship with the
Wadias through an investment company that gave them indirectly a minor share
holding in Bombay Dyeing. Madhavrao Scindia, the cricket-playing scion of the
family had entered parliament with the Jana Sangh before crossing to Congress,
where he later flourished as a minister. But as the months wore on in 1979,
nothing happened with Bombay Dyeing's license, which normally followed about
six months after the letter of intent. Then the Janata government fell, and new
elections were called.
Not long before the vote, Wadia
received an invitation to come to New Delhi late in 1979 to meet Indira Gandhi
and her son Sanjay. He arrived in the capital with some presentation copies of
Bombay Dyeing's new corporate history, marking its centenary year, which he
felt might be of interest particularly as Gandhi's late husband Firoze Gandhi
had also been a Parsi. Wadia was directed first to meet Sanjay Gandhi, who made
a blunt demand for a political donation. Wadia demurred. ''s sorry, we just
don't do that,' he said. 'None of us - the Tatas, the Mahindras, us --
give money to political parties.
We do not have black income. It's just not something we do.' On being shown in
to Mrs. Indira Gandhi, and having presented the company history, Wadia broke
the subject directly. He knew the reason he had been summoned, but really it
was not the way his company operated. He talked on, and then noticed Indira was
doodling on papers on her desk, looking away. Wadia took his leave, and
received a curt nod from Indira Gandhi.
Two or three months after the
Congress win in early January 1980, Wadia again received a call to New Delhi
from Sanjay Gandhi. Having endured imprisonment and sustained invective for his
Emergency excesses during the Janata period, Sanjay was now even more firmly
ensconced as Indira's Crown Prince. From being a wielder of authority delegated
to him by his mother he had now become her partner in power,' wrote the
commentator Inder Malhotra. '...At this time Sanjay's power was at its zenith
and practically irresistible. Ministers and top civil servants vied with one
another to do his bidding, however arbitrary Those having qualms about this
soon found themselves in trouble; politicians were sidelined and
"recalcitrant" bureaucrats were summarily removed from their
positions, humiliated and often kept waiting for months for alternate, usually
inconsequential, postings.'
'You lied,' Sanjay greeted Wadia.
'Tata and Mahindra have paid.' This was almost certainly a bluff. Mahindra,
another big Parsi company, which made Jeeps and machinery, and Tata were
unlikely to risk their reputations by illicit payments, certainly from their
central managements. But many years later, sources close to the Congress Party
insisted that some contributions had indeed gone to Indira Gandhi from the Tata
group's flagship, the Tata Iron &- Steel Co then under one of the most
powerful 'barons' in the loosely held Tata empire, Russi Mody. It was clear
that Wadia would get his licence only one way. A few months later, however,
Sanjay Gandhi was abruptly removed from the scene. Sanjay had been accustomed
to venting his energy by taking up a light aircraft for acrobatics over New
Delhi, using a plane imported duty-free by a Hindu guru, Dhirendra Brahmachari,
another controversial addition to Indira's inner circle. On the morning of 23
June 1980, the plane crashed into a wooded area in New Delhi, killing Sanjay
instantly.
The state funeral was marked by
excesses of sycophancy, though expressions of relief were voiced in many
quarters all over India. Indira allowed a posthumous personality cult to be
constructed around her late son-but then realised the beneficiary of this would
be Sanjay's widow Maneka, whom Indira detested. This speeded up the political
induction of Indira's eldest son Rajiv, who had been working as a pilot with
Indian Airlines and keeping out of public attention as much as he could. Rajiv
had strong misgivings about entering politics, and his Italian-born wife Sonia
opposed it, though she and Indira got on well. But at the end of 1980, Rajiv
left his airline job and adopted the uniform of politics, the Indian-style
kurta-pyjama suit, to become his mother's principal secretary. In June 1981,
Rajiv was elected to parliament from his brother's constituency and made a
General Secretary of the Congress Party at the end of the year. It was to Rajiv
Gandhi that Wadia turned for help to unblock his licence, some months after
Sanjay's death. Rajiv was sympathetic to his complaint. If injustice has been
done to you, I will see that justice is done,'s he promised.
Some time later, they met again
and Rajiv said he was meeting extraordinary resistance to his inquiries, in
particular from Indira's private secretary R. C. Dhawan and from the Congress
Member of Parliament (later Home Minister) R C. Sethi. But Rajiv's efforts
eventually succeeded, and in June 1981 Bombay Dyeing received its licence for
the DMT plant-two and a half years after the letter of intent. Wadia still met
obstacles. Bombay Dyeing bought a DMT plant second-hand from an American
company, Hercofna, and had it dismantled and shipped to India in two
consignments at the end of 1981. When the shipments arrived in Bombay, the
company could not get them cleared by Customs for nearly four weeks. Bombay's
Collector of Customs, S. Srinivasan, then ordered a rare 100 per cent
inspection of all contents. On leaving the Customs service some years later,
Srinivasan was retained as an adviser by Reliance.
Dhirubhai continued to enjoy
beneficial policy changes throughout the rest of Indira's second prime
ministership, thanks to the influence of friends like Finance Minister Pranab
Mukherjee and Indira's secretary R. K. Dhawan. After the raising of duty on
polyester yarn just after his Patalganga plant became operational, licences for
expansion came promptly after lodgment of applications. In three months, August
to October 1984, Reliance was given letters of intent for a 75 000 tonne a year
purified teraphtbalic acid (PTA) plant at Patalganga, plus a 450,00 tonne a
year polyester staple fibre plant, and a 40,000 tonne a year monoethylene
glycol plant. In addition, the fait accompli of its 25 125 tonne polyester
filament yarn plant was retrospectively endorsed by raising the permitted
capacity from 12 000 tonnes. Small wonder that the magazine Sunday (also of the
Ananda Bazar Patrika group) reported the Reliance bonanza under the headline
'Pranab Mukherjee's Slogan: Only Vimal.'
The Reliance move into PTA
production gave a big clue to the source of Bombay Dyeing's problems, as it
showed Dhirubhai was also moving up the petrochemical stream to establish
himself as a rival feedstock supplier to the fast-growing polyester industry At
that stage, no one else was making PTA. According to background notes
circulated in 1985 by Reliance, Dhirubhai had already begun switching his
Patalganga yarn plant over to PTA feedstock and had completed the conversion
during the first quarter of 1984. At that point, the Petroleum Ministry and the
Industry Ministry had been notified, and Reliance cleared to import its
requirements of PTA. Out of the 13 polyester units then in production, four
others also began to use PTA for part of their feedstock requirements.
As we have noted, PTA was a
substitute feedstock for DMT in the production of polyester. Both are usually
made from the chemical paraxylene, which in turn is produced by cracking the
flammable liquid hydrocarbon naphtha, found in natural gas and petroleum
liquids. Each feedstock had its advantages and disadvantages. DMT had been in
use longer, and needed less expensive containment vessels and piping in the
plant, but in the polyester process it produced the toxic alcohol methanol as a
by-product, for which a recovery system was needed. I-TA, first made by ICI in
1949 and by Du Pont in 1953, required a more sophisticated purification
process, corrosion-resistant equipment and more stringent control of catalyst
mixing, but in polyester production gave a better yield to the paraxylene and
MEG inputs. In practice, most polyester fibre plants were able to use either
DMT or PTA with minor adjustments that could be made within a few months.
The licensing delays added to the
cost of Bombay Dyeing's DMT plant, and it took Wadia more than three years to
get it reconstructed and operational at Patalganga. But when it started
production in April 1985 it was still a low-cost entry into a product that
became the mainstay of Bombay Dyeing's sound profitability through to the late
1990s. Up until then, the only domestic supplier of DMT was government- owned
Indian Petrochemicals, which made 30 000 tonnes a year against an estimated
demand of 80 000 tonnes of DMT/PTA by Indian polyester producers in 1984. By
the end of 1985, polyester output was expected to jump to about 150 000 tonnes,
requiring 160 000 tonnes of either DMT or PTA.
From April 1985 Bombay Dyeing
would be well-placed to capture this market, in competition with Indian
Petrochemicals and with the other government-owned producer, Bongaigaon
Refinery &- Petrochemicals, which began its 45 000 tonne a year production
in July 1985. But if Reliance started using PTA and managed to persuade many
other polyester producers to do the same, the new DMT capacity risked
redundancy. As Wadia got his plant into operation in 1985, he encountered a
sustained stream of press commentary describing his second- hand DMT plant as
'junk's and DMT itself as an obsolete feedstock that would soon give way to the
more modern PTA. Many of these comments appeared under the by-lines of those
journalists who later became known as core members of the Reliance 'Dirty
Dozen's in the press.
Dhirubhai, as we have seen, was
then in his most triumphant phase in the eyes of his investor public. But his
political support had been drastically undercut, though it was not to become
evident until later in 1985, when the struggle for supremacy in the polyester
industry became a more evenly balanced, tooth- and-nail fight. The cause was
another violent death in the Gandhi family. At the beginning of June 1984,
Indira Gandhi had ordered the Indian Army into the Golden Temple in Amritsar,
the holiest temple of the Sikh religion, to clear out the Sikh fundamentalist
Bhindranwale - a monster she herself had helped create by promoting him as a
rival to the Akali Dal, a Sikh party which consistently outpolled Congress in
the Punjab. The battle raged for several days, and eventually the army used
tanks and artillery to subdue Bhindranwale's well fortified rebels. The Golden
Temple itself was damaged, and important adjoining buildings destroyed. Sikhs
felt their holiest shrine had been defied by violence. On the morning of 31
October 1985, Indira walked into her garden and was shot at close range by two
Sikhs in her bodyguard.
Her surviving son Rajiv was sworn
in as prime minister later the same day by the President, Giani Zail Singh, and
confirmed by the Congress Party soon after Indira's funeral. Elections were due
early in 1985 on the expiry of Indira's five-year mandate in any case; Rajiv
brought them forward to early December, and received the benefit of a massive
sympathy wave, lifting the Congress share of the vote to 49.1 per cent (from
42.3 per cent in December 1979) and winning an unprecedented 401 seats (soon
boosted to 415 in by-elections) out of the 545 in the Lok Sabha.
Despite
his affection for his mother, Rajiv had been distant long enough from Congress
circles to pick up the deep resentment on the part of many Indians at the
pervasive corruption she had engendered. But for the sympathy vote, Congress might
even have lost the elections, had its diverse opponents worked together. As an
aviator and enthusiastic computer buff with many friends working in North
America and Europe, Rajiv was also aware of how new technology was helping to
sweep aside regulatory regimes and empower individuals elsewhere in the world.
He decided India and its politics needed to be opened up. But an element of
hubris quickly crept in as well: Rajiv soon came to believe that the sympathy
vote was actually enthusiasm for himself and his barely understood policies.
Among the
first casualties were key friends of Dhirubhai. Rajiv sacked R. K. Dhawan from
the prime minister's office within hours of his appointment. And in his first
cabinet he replaced Pranab Mukherjee as finance minister with V P Singh, a
choice that was eventually to bring down the heavens on both Dhirubhai and then
Rajiv himself. Vishwanath Pratap Singh was to become one of India's most
controversial politicians. He inspired enormous trust and hope in some sections
of society, intense hatred as an opportunist and class traitor in others, and
ultimately a lot of disappointment and disillusionment.
His childhood shaped him as the
loner he became in politics. At the age of five, he was given by his natural
parents in adoption to the childless Raja of Manda, one of the small
principalities in Uttar Pradesh. He grew up amusing himself in the raja's ram
shackle palace, and spent long spells in boarding schools. The raja was an
alcoholic, despondent man dying slowly of tuberculosis whom Singh was allowed
to see for five minutes a day, sitting at a distance to avoid infection. At
school when he was nine, Singh was approached by another boy who gave him an
ice-cream. 'You don't know me, but I am your elder brother/s the boy said. And
don't tell anyone at home that you met me, or else they'll move you to another
school.' Singh passed into the care of a guardian at the age of 11 when the
raja died, and some years later was taken back, much against his own will, by
his natural parents. He studied law and later physics with an eye to joining
India's atomic energy research centre in Bombay, but settled on politics at the
age of 38 when he won a Congress ticket to stand for the Uttar Pradesh state
assembly.
In the Emergency he stood by Indira
and Sanjay, and on Indira's return was installed as UP's chief minister. He was
efficient and honest, but attracted most notice by giving police informal
powers of summary justice to deal with the banditry sweeping the state. About
2000 alleged criminals died in encounters with police. It was a sample of the
ruthlessness Singh could show. But it was counterposed with a diffident streak
to his character. A dabbler in painting and poetry, Singh often withdrew into
himself. At critical moments, he would hesitate to commit himself. His most
heroic roles were forced upon him.
As Rajiv's finance minister,
Singh applied a carrot and stick approach to taxation. In his first budget, at
the end of February 1985 for the year starting 1 April, Singh slashed income
tax rates and wealth tax, and abolished death duty. Industrial licensing laws
were also relaxed and investment approvals streamlined. This new wave of reform
sparked a stock market boom.
But
business circles were less happy from mid-year when Singh began applying his
second budget promise. The counterpart of lower tax rates, he had warned, would
be stricter enforcement. The agencies under the Ministry of Finance that police
the economic laws began raids and inspections against some of India's
best-known business houses for allegedly evading excise, concealing income, or
keeping funds offshore. The targets included the Tata group's Voltas Ltd, the
tea from Brooke Bond, the shoemaker Bata, the liquor magnate Vijay Mallya,
diamond dealers, and manufacturers of textiles, motor tyres and cigarettes.
Orkay Silk Mills, the other polyester maker at Patalganga, was assessed as
owing Rs 105 million in evaded excise and fines. Its owner, Kapal Mehra, was
personally fined Rs 5 million. Among those arrested for alleged foreign
exchange violations were the paper and chemicals tycoon Lalit Mohan Thapar, and
the 82-year-old machinery entrepreneur Shantanu Kirloskar. No one felt safe
from Singh's inspectors.
Rajiv's new
broom was also sweeping closer to Dhirubhai. As his DMT plant moved closer to
production, Nusli Wadia had been lobbying hard for greater protection against
imports of DMT and PTA. In particular, he argued that trade policy should
support the big investment in domestic DMT capacity by Bombay Dyeing and the
two state producers. Mowing a switch to PTA meant a loss of foreign exchange on
imports that could be substituted domestically.
A secret level note circulated by
the head of the Petroleum Ministry, G. V Ramakrishna, on 16 May 1985 to Rajiv's
economic adviser, Montek Singh Ahluwalia, and the Finance Secretary, S.
Venkataramanan, discussed Bombay Dyeing's plea for greater protection for DMT
At that time, both PTA and DMT attracted a customs duty of 100 per cent plus an
auxiliary duty of 40 per cent. PTA could be imported on the open general list
(without licence) while DMT was on the 'limited permissible list's meaning that
imports needed prior government permission after verification to see that
domestic competitors were not damaged. Bombay Dyeing asked for PTA to be
shifted also to the limited permissible category and for basic customs duty on
both to be lifted to 150 per cent.
Ramakrishna said his ministry had
examined the request and was recommending that the first measure be adopted
that PTA be removed from the freely importable list. But in view of this and
other comparative cost considerations, the ministry did not see any need to
increase import duty on PTA and DMT Thus, as Dhirubhai was holding his open-air
shareholders' meeting in Bombay on 20 May 1985, the government was moving
towards a decision that would have a drastic effect on Reliance's production,
and possibly force it to use DMT from Nusli Wadia's DMT plant. On 29 May, the
government announced that PTA was placed on the controlled import list with immediate
effect.
Dhirubhai was not worried. For a
90-day grace period from 29 May, the government said it would allow those PTA
imports for which irrevocable letters of credit had been opened against from
contracts by 29 May. It emerged that, by the time of the notification on that
date, Reliance had opened such letters of credit for 114 000 tonnes of PTA -
more than enough to supply its existing and planned polyester capacity through
to the opening of its own PTA plant expected at the end of 1986. Moreover, the
letters of credit had been opened in a burst of frenetic activity with several
banks over 27 to 29 May, up to a few hours before the import policy change was
announced. One revolving credit from Canara Bank for 2000 tonnes of PTA a month
up to 30 June 1985 had been enhanced on 29 May itself to pay for 12 000 tonnes,
and the shipment date extended to 30 June 1986. Letters of credit were taken
out also with the foreign banks Societe General, Banque Indo Suez and Standard
Chartered Bank on contracts signed some months earlier, for a further 42 000
tonnes.
On 27 May, Reliance had got an
entirely new contract for 50 000 tonnes of PTA registered with the Petroleum
Ministry in New Delhi, and covered the same day by letters of credit from
Standard Chartered Bank, Societe General and the State Bank of India at their
Bombay offices. The Exchange Control Manual for banks in India required
importers to submit original copies of registered contracts before letters of
credit could be opened. Getting this all done during office hours in one day
between New Delhi and Bombay seemed a miracle of logistics.
The government was unhappy to
learn that its policy change to protect the domestic DMT industry had been so
stunningly thwarted. It was even angrier as it learnt the details of the
three-day Reliance rush to open letters of credit, suggesting the possibility
that the pending policy change had been leaked to the company.
Authorities
told Reliance that the 90-day grace period would be enforced: A the 114 000
tonnes of PTA would have to be landed by 30 September.
Some 14 000 tonnes having
arrived, Reliance took the government to court about the remaining 100 000
tonnes, arguing that the cut-off date was arbitrary and in violation of the
implicit three-year guarantee of stability in import policies prior to 29 May.
It also argued that it had switched over to M, and that to go back to DMT as a
feedstock would require crores of rupees (one crore = 10 million rupees) plus
new equipment and take several months.
A single judge in the Bombay High
Court awarded Reliance a stay on the government's decision, and authorised the
company to import 5000 tonnes which were already available for shipment. For
the remaining 95 000 tonnes, the company should approach the government for a
supplementary licence - on which the government should decide by 31 October,
failing which Reliance could revert to the court for further interim relief.
The government appealed against
this order to a more senior bench of two judges in the High Court. While waiting
a hearing, the import duty on DMT and PTA was raised a further 50 percentage
points to a total 190 per cent. This did not deter Dhirubhai, as international
market prices of the two feed stocks were falling rapidly. In court on 28
October, the government argued against the clearance of the 5000 tonnes
permitted by the lower court, and for removal of the 31 October deadline for
the remaining 95,000 tonnes. The bench dismissed the appeal, but agreed to stay
clearance of the 5000 tonnes-the shipment was due in Bombay the next day--for
seven days to allow the government to appeal to the Supreme Court.
This the government did. On 4
November, the Supreme Court decided to allow Reliance to clear the 5000 tonnes
of PTA but not to use it pending settlement. The government was given three
weeks to make its case and Reliance a week after that to respond, with the High
Court to make a final decision within December.
In
the background of the litigation, Reliance kept feeding the press with accounts
of the allegedly unacceptable quality of Bombay Dyeing's DMT, made at its
'secondhand plant'. A small polyester producer called Swadeshi Polytex had
told the Industry Ministry's Director-General of Technical Development about
defects in a 68-tonne DMT shipment from Bombay Dyeing: sacks supposed to
contain DMT pellets were 20 to 80 percent powder, black particles were found in
the pellets, bits of thread, metal and wood were found in the bags, and so on.
The picture painted was of Bombay Dyeing pumping out filth from a wheezing,
obsolete plant, and angling for massive protection so it could jack up prices
to struggling yarn makers. The lobbying and propaganda war became frenetic in
early November. Reliance issued press notes which played up the cost and
difficulty of switching polyester plants back from PTA to DMT it was like
modifying a diesel engine to run on petrol. The modification would involve huge
expenditure and take nine to 12 months. Another note put the investment at Rs
58.6 million (then about US$4.6 million) and the time at 12 to 15 months. If
Reliance could not get its PTA, work would stop, with huge numbers of workers
laid off. On 2 November, another polyester producer J. K. Synthetics actually
announced it was suspending production at its plant in Iota because it was
unable to get an import licence for PTA.
The private
war got dirtier. According to the Bombay tabloid Blitz, two campaign briefs
were circulated by the Reliance office in New Delhi among MPs, officials and
others. Orkay was accused of pledging the same stock with banks several times
to get loans, issuing bogus bills, claiming tax rebates on non-existent
production, and under-invoicing imports of polyester chips to evade duty. With
his earlier excise evasion case still being beard, Orkay Silk Mills' Mehra was
arrested on 1 November 1985 on another charge. He had allegedly evaded Rs 15
million in duties on polyester chip imports in 1982 and 1983, by
under-invoicing the imports from C. Itoh in Japan, according to voluminous
documentary evidence collected by the Directorate of Revenue Intelligence from
Japan a few days earlier. Mehra had bought the material 7.5 per cent below the
regular price: evidence of under- invoicing according to the policers, just a
trade discount according to Mehra.
Mehra's counsel, Ram Jethmalani,
said a rival tycoon had instigated the raids to sabotage a share issue
financing Orkay's expansion. Later it was noted that Dhirubhai had been in
Japan not long before, visiting among others C. Itoh & Co, which had been
accustomed to rivinz Reliance a 20 per cent discount on polyester yarn sales.
Whatever the case, Mehra spent 15 days in jail before obtaining bailmissing
the Diwali festivities and for years was contesting claims for evaded excise
and duty and personal fines. The other target of the Reliance briefs was Bombay
Dyeing. It had been getting import policy on PTA and DMT changed to help it out
of the total mess created by its decision to buy a DMT plant originally built
in 1953. The 1977 price of Rs 300 million had ballooned to nearly Rs 1 billion
by the time it was reassembled. What else can be expected from a junk [sic]? ,
the Reliance note said.
Wadia also came under personal
attack: a story put out by the news agency United News of India quoted official
sources alleging Wadia and his wife were involved in a fraudulent deal to sell
land belonging to a Parsi trust of which they were trustees.
But Dhirubhai was now fighting on
two new fronts, as well as the legal battle for his PTA imports. On 26 October,
newspapers had begun reporting that the Central Bureau of Investigation-New
Delhi's highest criminal investigation body which deals principally with
corruption cases-had begun inquiries into the possible leak of the decision to
put PTA on the restricted import list in May. A few days later, Finance
Minister V P Singh denied that he had ordered any inquiry, but newspapers
reported moves at official level in concerned ministries including Finance for
an investigation.
For its part, Reliance said it
was not aware of being under investigation, and put out lengthy written
explanations as to why its import contracts in May had coincidentally preceded
the policy change. The 50,000 tonne PTA contract approved by the Petroleum
Ministry on 27 May had been submitted to it on 14 May. The quantities it sought
to import were not in excess of its own use over the 18 months until its own
PTA plant opened, nor could Reliance conceivably hope to evade the September
duty hike. Reliance was a victim of 'mischievous propaganda's the allegations
were based on tailored facts and twisted information circulated by vested
interests too obvious to name'.
On 29 October, however, Reliance
took another blow which showed conclusively that the Finance Ministry was no
longer a friend. On that day, the Assistant Collector of Central Excise at
Kalyan, covering Patalganga, presented the company with a show cause notice
claiming Reliance had evaded a total of Rs 272.34 million (then about US$21.8
million) in excise on polyester production since October 1982 by underreporting
production and misdeclaring waste. Backed by nine pages of annexure giving the
details of the polyester manufacturing process, the notice invited Reliance to
argue why it should not be forced to pay the Rs 272.34 million, have its
factory confiscated, and pay an additional penalty for evasion. It was the
biggest excise evasion charge in Indian corporate history and, even discounting
the ambit nature of the Assistant Collector's proposed penalty, a big threat to
the profit line in the Reliance results.
The company affected not to be
worried. A press release on 15 November described the show-cause notice as
routine and noted that similar notices had been issued to other manufacturers
in the Thane area, including Sandoz, Orkay, Voltas, and Indian Explosives. It
was all part of a drive to raise revenue. The claim against Reliance was based
on theoretical calculations and assumed technical information, the company
said. 'The notice was issued in the normal course of business and the company
would soon be fling a reply and expected no liability to arise out of the
show-cause.s But Dhirubhai was sweating. On 26 November it was revealed that a
compromise on the PTA imports was being worked out. The government would allow
actual users of PTA to import their own requirements for six months ahead, but
would not allow existing users of DMT to switch over and import PTA. Mean-
while, the Bureau of Industrial Costs and Prices would commence a study of DMT
costs, to help regulate prices so that domestic DMT had a cost advantage over
imported PTA. The condition for Reliance getting import licences, it was
suggested, was to drop its High Court action. It could hardly argue. By this
stage, too much corporate blood had been spilt for the dispute to be papered
over and forgotten like so many controversies before. Kapal Mehra had been
jailed and humiliated. Nusli Wadia, despite the tariff and quota protection
given to domestic DMT producers, had been forced to close his new plant for
months because of the feedstock glut that Dhirubhai had engineered by the PTA
imports he had managed to get through, and by the constant denigration of his
product. Dhirubhai had meanwhile lost his key lieutenant in charge of public
relations and government contacts. On 30 August, his nephew and Reliance
director Rasikbhai Meswani had died suddenly. It took some years for other
publicists and lobbyists to take his place. As 1985 drew to a close, Dhirubhai
was being openly written against as a monster threatening Indian democracy.
Blitz observed:
If the allegations against
Dhirubhai Ambani and Reliance are proved, whether in the matter of evasion or
in the alleged fraud of letters of credit opened with two foreign and three
Indian banks for the import of PTA, then the conclusion becomes inescapable
that, since 1969, a single industrialist had been literally dictating the
government's textile and import policies and manoeuvring. import rules to will
his rivals and maintain his lead in the market The challenge to State Power
lies in the accumulated wealth and economic clout in the hands of an individual
who is neither an elected representative nor accountable to the people, who
could manipulate Cabinet ministers as wed as party chiefs. Economic power goes
hand in hand with its political counterpart, resulting in manipulating
politicians and ministers's right to the top of the top. AN this and more has
put a new regime seeking to cleanse the Augean stables of the corporate sector
in an extremely vulnerable position for its daring to challenge one of the
biggest industrial empires with a Rs 27 crore show- cause notice. One can only
wish Finance Minister V P Singh good luck with the danda [stick] now that the
carrot has been spumed. Though he had limited contact with V P Singh - confined
to direct industrial concerns Nusli Wadia had kept up his ties with Rajiv
Gandhi and can be expected to have voiced similar concerns to those of Blitz
about the impunity with which Reliance had operated.
At that point Rajiv was still
freed with zeal to cleanse the Augean stables as well. When Congress Party
delegates gathered in Bombay at the end of December to mark the centenary of
the party's founding, Rajiv delivered a stinging attack on its corruption. On
the backs of ordinary party workers rode the 'brokers of power and influence,
who dispense patronage to convert a mass movement into a feudal oligarchy.
Rajiv attacked the legions of tax-dodgers in Indian companies, and the
government servants who do not uphold the law, who shield the guilty, tax
collectors who do not collect taxes but connive with those who cheat the state.
But industrial empires built on excessive protection, social irresponsibility,
import orientation and corruption might not last long. The Great Polyester War
had been lifted out of the factories of Patalganga and from the Pydhonie yarn
market to the national arena.
THE
PAPER TIGER
It was at this stage that the
Polyester War was joined by an entirely new set of combatants. It became a
life-and-death struggle for company and the critical test of Rajiv Gandhi's efforts
to clean up the Indian Government. Dhirubhai survived. Rajiv failed, and lost
power as a result. The new element was Seth (Master) Ramnath Goenka the
legendary Indian newspaper tycoon. From a Marwari trading background in
Calcutta, Goenka had moved to the southern city of Madras in the 1920s-
according to some accounts, at the instigation of his own family, as even they
found him too hard to work with-and begun building up the chain of
English-language newspapers put under a common Indian Express masthead in the
1950s. By 1985, the Express had India's biggest newspaper circulation, 670000,
from 12 regional editions.
Inclined to the Jana Sangh and
critical of Congress, though never committed either way, Goenka was happiest in
an opposition role, exposing cant and corruption. Like most Marwaris, Goenka
was a strict vegetarian, but he did not shrink from drawing blood in print. In
the 1950s, he had employed Indira's husband Firoze Gandhi and encouraged his
exposure of the Mundhra scandal. The Express had been one of the few newspapers
to resist the censorship imposed by Indira during the Emergency all kinds of
pressures including a move to demolish its New Delhi buildings for alleged
building code violations. Ultimately, Indira had baulked at closing him down-some
say because Goenka threatened to publish private papers of her late husband
about their unhappy marriage.
In late 1985, Goenka was 81, and
his health was starting to fall. But mentally he was still alert and combative.
From his sparsely furnished penthouse on the 25th floor of Express Towers in
Bombay, Goenka intervened daily in editorial decisions on the Express, hiring
and firing editors with great frequency. He was far from reclusive, receiving a
daily stream of visitors anxious to keep in his good books, and flying
frequently to New Delhi where the Express had its own guesthouse. Dhirubhai had
been introduced to Goenka in the mid-1960s by Murli Deora, the yarn trader who
was moving up in the city's Congress Party circles and later to become a member
of parliament. Goenka had noted Dhirubhai as someone of promise, and thereafter
the young Gujarati businessman made regular visits. Goenka was regarded as a
family friend, addressed as 'appuji'(Grandfather) by the Ambani children. The
Express frequently reported the controversies involving Reliance, but when
protests were made Goenka seems to have placated Dhirubhai by explaining his
target was the Congress government.
Nusli Wadia also became a close
friend and, as with the childless J. R. D. Tata, became something of a son to
the old Marwari. (Goenka's only son had died at an early age, depriving him of
his only heir bearing the Goenka name.) Together with his wife, Wadia had got
into a routine of having lunch or dinner at least once a month with Goenka. On
one such occasion, around October 1985, Goenka asked Wadia how his business was
going. Wadia made a noncommittal reply, but Maureen Wadia intervened and
related the smear campaign against Bombay Dyeing in the press, including the
Express group's own newspapers.
Goenka said little. But the next
morning he arrived suddenly at Bombay Dyeing's head office, Neville House
across town in Board Estate, and walked into Wadia's book-lined corner office
unannounced. Goenka waved a file of press cuttings that were obviously planted
information. The same morning his business newspaper, the
Financial Express, had carried
both an anti-Bombay Dyeing story and an editorial on the same subject. Goenka
promised to crack down on the Reliance-sourced reports, both in the Express
newspapers and in the national wire service run by the Press Trust of India, of
which he was currently chairman.
But on 31 October, the Press
Trust put out a story based on a press statement by the Reliance public
relations officer, Kirti Ambani, about the reports a few days earlier that
Reliance was under CBI investigation over the PTA contracts in May. PTI quoted
verbatim Kirti Ambani's statement that 'Our enquiries reveal that there is no
such CBI probe into the matter and that the whole issue is being motivated by a
large, private, textile company which also happens to he manufacturers of DMT
Our enquiries further reveal that this party is not in a position to dispose of
its DMT and carry large stocks of about 5000 tonnes of DMT The basic problem seems
to be the quality of the said DMT's Goenka was outraged, especially when
finding that Reliance had directly approached a PTI desk editor to run the
press release against Goenka's explicit orders. Goenka ordered a retraction and
apology. On 1 November, the PTI issued it: 'The Press Trust of India circulated
yesterday a report based on a press release by Reliance Textile Industries Ltd,
containing allegations against a reputable Bombay-based textile company.
We did not verify the veracity of
the allegations before issuing the report. We regret if the publication of the
said report has caused any damage to the reputation of the party concerned.'
The old press baron took the issue up with Dhirubhai at their next meeting.
According to two former confidants of Goenka, Dhirubhai admitted he used his
influence to get a favourable press. 'I have one gold chappal [slipper], and
one silver chappal,' he said, breezily. 'Depending who it is, I strike him with
the gold chappal, or with the silver chappal.' (Another widely repeated version
has Dhirubhai remarking that 'Everyone has his price. 'He has denied saying
this.)'s It was probably the most damaging blunder and misjudgement Dhirubhai
made in his life. Goenka was outraged. He was already embarrassed enough by the
case with which Dhirubhai got his version of events into the Express. The
implication he drew from the 'old chappal, silver chappal's remark was that
Dhirubhai saw no one, perhaps even Goenka himself, as immune to his offers. It
was just a matter of price. Goenka resolved to expose Dhirubhai, using all the
resources and contacts at his disposal.
Alarmed at the unfavourable turn
of government attitude and press coverage in November, Dhirubhai meanwhile made
a desperate effort to restore himself to Goenka's favour, and to head off
Wadia's successful-looking campaign to have use of domestic DMT forced on the
polyester manufacturers. One morning in December he telephoned Goenka and asked
him to arrange an urgent meeting with Wadia in Goenka's presence so they could
settle their disputes in an amicable way. Goenka called Wadia, who was
reluctant. The old man persisted, and called back in the afternoon to tell
Wadia a meeting had been fixed in the Express penthouse for that evening. Left
with little choice without causing offence, Wadia swallowed his misgivings and
agreed to attend. The three sat around a low table. According to one account,
Dhirubhai did almost all the talking during the 45-rninute meeting, proposing
that Reliance and Bombay Dyeing carve up the polyester feedstock market between
them, or alternatively that Reliance help its rival to place its DMT Goenka
presided, taking off his sandals and resting his feet on the table. For long
stretches of his monologue, Dhirubhai caressed the old man's feet.
At the close, Dhirubhai invited
Wadia to the wedding of his second daughter, Nina, a few days later, and then
suddenly embraced the startled Bombay Dyeing chairman.
'So now we are friends?', he
asked. Wadia, highly embarrassed and still suspicious, mumbled a vague assent.
Dhirubhai walked towards the elevator, and then just as suddenly turned and
prostrated himself on the door facing Goenka. Then he left. After the elevator
door closed, Wadia turned to Goenka and said: "l bet you that before the
lift reaches the ground floor, he'll already be plotting where next to stick
the knife into me.' Goenka reached over and gently slapped Wadia on the cheek:
a tacit admonition not to be too cynical.
The next day, Dhirubhai
telephoned Wadia at his Ballard Estate office and announced he was personally
bringing an invitation to Nina's wedding. Wadia told him there was no need, and
after much persuasion Dhirubhai had the card brought over by an executive soon
afterwards. On the day of the wedding, a Reliance manager arrived several hours
ahead to escort the guest. Wadia sent him away, and went by himself. The
reception
was in the Cooperage Football
Ground, scene of the Reliance share- holders meetings.
Mukesh Ambani was waiting to
escort Wadia in, and offered to take him to the head of the line of guests
waiting to greet the newly married couple and their parents on a podium. Wadia
refused, and the two waited in the queue for about 20 minutes making awkward
conversation. When he reached the stage, Wadia found a crowd of press photographers
waiting to capture the two warring textile magnates together- the point of the
exercise clearly being to dispel the atmosphere of dispute surrounding
Reliance.
Anil Ambani was deputised by
Dhirubhai to escort Wadia out to his car, but was sent back by Wadia at the
gate. Within a few days, hostilities had broken out again, and Goenka decided
to press on with his investigation. The person he chose to find out the secrets
of the Ambanis was not one of his famous editors, nor one of his reporters, nor
even someone from the business milieu of Bombay, but a young South Indian
accountant from Madras whose name had not previously appeared in print except
at the bottom of audited accounts. Swaminathan Gurumurthy, then 36, was the
product of a Brahmin family in a small rural village 160 kilometres south of
Madras. Educated initially in his local school, and then at the Vivekananda
College in Madras, Gurumurthy had hoped to enter law school but found his way
blocked by his upper-caste back- ground. The state of Tamil Nadu had been swept
many years earlier by political movements which instilled the notion that the
Hindu hierarchy-- with Brahmins at the top-was a relic of an ancient conquest
of southern India's original peoples, the Dravidians, by light-skinned Aryans
from the north. To redress centuries of discrimination, the majority of places
in universities and state offices were reserved for lower-caste candidates.
Gurumurthy had turned instead to
accountancy, qualifying as a chartered accountant in 1972 and joining a local
auditing firm which used to keep the books of Goenka's companies registered in
Madras. He met Goenka himself in 1975, and made a big impression. Goenka
offered him a job, which Gurumurthy declined, and then promised his business if
Gurumurthy went out on his own. In 1976, Gurumurthy set up a partnership, Guru
& Varadan, which enjoyed substantial billings from Goenka's corporate
empire, a labyrinth of companies acquired over the years and controlled through
a trust.
The young accountant held some
smouldering feelings that made him an ideal crusader against an erring
capitalist. In Tamil Nadu, his caste had been subject to constant ridicule and
demonisation. He personally had suffered a loss of opportunity as a result of
the state's sociopolitical upheavals, despite coming from a family of modest
means in a remote town. The good was being thrown out with the bad.
As a youth, he had found a
political movement that for him and many thousands like him across India seemed
to provide a way for India to save its soul. The Rashtriya Swayamsevak Sangh
(RSS [the National Volunteers Order]) had been founded in the 1920s by a Hindu
revivalist in the central city of Nagpur, and expanded across the country to
encompass millions of members, many from upper castes who felt threatened by
change. The RSS view was that Indians had been left with a defeatist mentality
by their centuries of rule by Muslim and European invaders. The foreign rulers
had gone, but they had left behind elites indoctrinated in their outlook and
manners. Ordinary Indians had been made apologetic about the injustices that
seemed part of their own Hindu culture, and inclined to believe they could not
win against the world's martial races'.
By counter-indoctrination, from
childhood through to manhood, the RSS hoped to create gradually a confident new
Indian. Sessions at RSS lodges taught boys the glories of India's past, mixing
legend with fact, while members of A ages put on a simple uniform of khaki
shorts and white shirt for early morning drill with lathis (wooden staves) to
build up their spirit. To counter the valid criticisms of the Hindu order,
meanwhile, the RSS tried reform from within through voluntary social work to
eradicate evils such as untouchability and caste prejudice, which it insisted
were historical accretions on a just culture.
The movement is often ridiculed
as a collection of small-town reactionaries playing boy-scout games, retreating
to a vague battle instead of pushing for power, hiding behind the political
parties it spawned (the Jana Sangh, and later the Bharatiya Janata Party). A
less benign view, particularly after the murder of Mahatma Gandhi by a former
RSS member in 1949 and after the 1992 demolition of the Aloha mosque by members
of affiliated groups, sees it as a sinister quasi-fascist force. But its
reputation for discipline and lack of corruption has also made the RSS
political family seem the natural successor by default to the failed Congress
and communist alternatives-at least until the BJP started getting tainted by
state-level power in the 1990s.
In its economic ideas the RSS
family has been nationalist, but suspicious of big capital whatever its
origins. The big company threatened the small shopkeeper and trader
communities, a repository of traditional virtues. And more recently,
multinationals with their universal products and their marketing science seemed
to be imposing a western popular culture and lifestyle wherever they set up. 'I
regard communism and capitalism as two sides of the same coin,' Gurumurthy told
an interviewer some years afterwards. Both regard human beings as economic
creatures. The only difference between them is whether ownership of wealth
should be public or private, and whether there should be profit or not. While
communism will have a Chernobyl at any cost, capitalism will have it only if it
demands high profit.' In case, Gurumurthy was opposed to the monopoly power
Reliance had developed. 'I would have rather had 100 Ambanis than just one, 'he
put it.
Still, it is ironic that Dhirubhai
and Gurumurthy ended up on opposite sides. In the mid-1990s, Gurumurthy was the
leading light of the Swadeshi Jargon Munch, a BJP- affiliate which actively
opposed the entry of multinational consumer brands like Coca- Cola and
McDonald's. Dhirubhai was often projected as the new, fully Indian entrepreneur
struggling against a business establishment left by the British, such as the
Parsi companies, and later as a home-grown businessman fully in command of the
latest technology and financial techniques: at last, the authentic Indian
corporate warrior.
Dhirubhai was of course closely
identified with Congress by 1985, though he tried to maintain ties to
opposition parties too. What set both Goenka and Gurumurthy against Reliance
was their sense of excessive power, of business drive exceeding its proper
limits, and of personal arrogance on the part of Dhirubhai himself. '...while
other businessmen had some sense of guilt and shame about their wrongdoings,
Ambani saw himself as an achiever against the law, the system,' Gurumurthy
noted later.
Gurumurthy's background in the
RSS also helped immunise him against some of the cultural differences of
business practices. The Hindu revivalists were happy enough to work through the
modern political and economic institutions left by the British. They were a
movement of rule-followers, not rule- breakers. They wanted order, not anarchy.
India was weak because its politicians could not make sensible laws and stick
to them in the face of temptations put up by private interests. The rise of
manipulators like Dhirubhai was not a result of Indians breaking out of their
mental bonds, but a symptom of their weakness.
Personally, Gurumurthy had few
chinks in his armour. He had got to work with important clients because of his
own ability. Back in Madras he lived in a traditional extended family
house-hold, with everyone sitting on the floor at meals and eating with their
hands. He dressed simply, usually with an open-necked shirt, and stayed in the
Express guesthouse when in New Delhi or in a simply furnished room in the
penthouse in Bombay. Periodically, Gurumurthy would make pilgrimages to Hindu
temples and holy sites around India, reappearing with saffron or vermilion
tilak daubs on the forehead. He had both a strong sense of probity and a
detailed knowledge of corporate accounting and law. He was an inspired choice
for Goenka.
The question, in November 1985,
was where to start. By that stage, the published information on Reliance made
up a substantial file--much of it adulatory profiles repeating the same
anecdotes. Gurumurthy decided to work from the two cases where Reliance's
secrets seemed to have come close to the surface: the High Court petition by
Reliance to enforce the PTA import contracts financed just before 29 May that year,
and the 1983 controversy over the purchase of Reliance shares by the Isle of
Man companies.
In the Indian Express
organisation, Gurumurthy had direct contact with the chairman and the
newspaper's considerable resources within India itself. He found also that some
of opponents in industrial and trade conflicts also kept information about
Reliance. Notable among them was a Sindhi textile trader, Jamnadas Moorjani,
who worked from a modest office in a back street of Bombay's Kalbadevi district
but whose knowledge of markets and judgment was respected all over town. As
president of the All-India Crimpers' Association from 1978 to 1982, Moorjani
had led the campaign by the independent polyester texturisers against the duty
hike on yarn in November 1982.
Though he found a pervading
fearfulness about discussing Reliance, Gurumurthy also built up contacts with
bureaucrats, bank officials and even Reliance employees who were uneasy about
some of the company's transactions. When it came to pursuing inquiries overseas,
the little-travelled Gurumurthy relied initially on names suggested by Wadia,
drawing on business contacts kept by Bombay Dyeing and associated companies.
The initial contact was a firm of solicitors, Lee Lane Smith, in London's
Lincoln's Inn Fields, who undertook a legal search of the mysterious shelf
companies with names like Crocodile and Fiasco in the Isle of Man. In
mid-December, the solicitors engaged a private detective agency, King's
Investigation Bureau, to help them trace the ultimate owners.
By then, at Reliance, the
atmosphere was becoming one of a seige as the Finance Ministry's tax
enforcement agencies and the Central Bureau of Investigation pursued their
inquiries into the PTA letters of credit and the excise evasion charge. In
February 1986, the years of living on adrenalin took their toll on Dhirubhai.
He suffered a sudden stroke that left him partly paralysed down his right side
and required immediate attention in an American hospital. For some weeks, the
running of the company was left to the two boys, then aged 29 and 27
respectively.
Critics were also shaken, by a
sudden, still unexplained attack on Jamnadas Moorjani. Sensing a more
sympathetic government in New Delhi, the crimpers had renewed their agitation
for the Rs 15 000 a tonne anti-dumping duty to be lifted. One evening in
February, a gang of men attacked the unassuming Moorjani as he left his
Kalbadevi office and walked to his car. He was slashed with long knives, with
one arm nearly severed, but recovered quickly in hospital. Years later Moorjani
pointed out that nothing linked the attack with the clash of interests between
the crimpers and the polyester spinners, but at the time the possibility of
such a linkage was the subject of great speculation in Bombay. In this vitiated
atmosphere, the Indian Empress launched its expose of Reliance with a
misleadingly theoretical-looking piece on the merits of allowing conversion of
the unconvertible security, carrying the modest by-line Gurumurthy'.
If the main rule prohibits
something, get a sub-rule added which permits it. The main rule will no doubt
exist in the book but the book alone. Business thrives on such rules. Touts
make their fortunes, politicians enhance their power and bureaucrats their
importance. Rule of law at once becomes sub-rule of law and subrule eventually
becomes Subversive rule. Let us get down to specifics.
It was not the way a practised
journalist would have opened, but Gurumurthy set out a powerful argument
against the practice that had become a hallmark for Dhirubhai - raising debt by
offering attractive interest rates and then converting it to cheap equity, by
the innovative path of converting supposedly non- convertible debentures into
shares.
This risked destroying the whole
principle behind the distinction between convertibles and nonconvertibles,
reflected in the lower premium and higher interest rate on nonconvertibles,
Gurumurthy pointed out. No one would bother with convertible issues if it were
allowed as a general practice. 'There is yet another mischief,'s Gurumurthy
noted. 'Those corporate managements which deal in their own securities can
abuse this licence by buying these nonconvertible debentures at a lower price
and thereafter announcing conversion. There were allegations of this abuse in
the only case of conversion of the nonconvertible in recent stock market
history'. Gurumurthy also pointed to a risk of unforeseen foreign exchange
outflows, a keen preoccupation of India's economic managers at that time. The
scheme of repatriable investment by non-resident Indians in the sharemarket put
no limit on the proportion of nonconvertible debenture issues that could be
taken up by NRIS. But NRI investment was limited to a maximum 40 per cent of
convertible issues, in some circumstances to a maximum of Rs 4 million, so that
the outflow from capital appreciation of the underlying shares was limited. If
conversion of nonconvertibles were allowed, NRIs could take up the whole of an
issue, convert to shares, and take proceeds of a sale out of the country.
Getting to Reliance by the final
stages of his article, Gurumurthy applied this to the company's F series of
nonconvertible debentures made in June 1985. Out of the Rs 2.7 billion
subscribed in the private placement, Rs 1.08 billion or 40 per cent had come from
overseas Indians or companies they controlled. Had the issue been convertible
from the start, the NRIs could have subscribed only Rs 4 million under the
current rules. But Reliance was now holding out the expectation of conversion
of the issue, which would be a clear distortion of the NRI investment rules.
(Reliance's advertisements for the F Series had mentioned that the conversion
of a previous series had given investors a return of 180 per cent in eight
months, including interest: the nonconvertible part of the debentures had been
converted at Rs 71.43 a share, when the market price was Rs 122 a share.)For
example, if Reliance were allowed to issue just one share for each Rs 100
debenture, the NRI investor would gain a share worth Rs 300 at the then market
price. For their Rs 1.08 billion investment, the NRIs would be entitled to
repatriate Rs 3.24 billion. 'That the subrule has the potentiality to destroy
the main rule is obvious and yet the sub-rule exists,' Gurumurthy said in his
final flourish.
It
was introduced into the guidelines when different ministers and a different
system of governance obtained. Whatever anyone may say of the present finance
minister [V P Singh, no one disputes his bona fides and honesty of purpose. He
has no use for such sub-rules. Will the government, particularly the finance
minister, act to prevent examples of this kind becoming model practice?
Investments based on such questionable methods will become a menace. The
government must therefore act to prevent this prejudicial tendency from
becoming a part of the system. A measure of avoidance is better than compulsive
surgery later.
A week later,
Gurumurthy returned to the attack. He began in the philosophical style that
became his hallmark:
Truth reveals itself, though
often belatedly. This admirably suits the politician in power. The interregnum
between truth and its revelation is generally a period of manipulation. In this
interregnum alibis and half-truths rule, finally, unless someone is alert,
truth gets confined to the archives. Result: alibis masquerade as truth.
Gurumurthy recalled the grilling
of the former finance minister Pranab Mukherjee in 1983 over the non-resident
Indian investment in Reliance, and his defence that while black money could be
involved this want reason enough to MI a scheme bringing in much-needed foreign
exchange. The figures, Gurumurthy wrote, showed that the NRI share investment
scheme had brought in less than one per cent of the Rs 139 billion invested by
NRIs in various deposit and investment schemes since 1981.The Rs 225 million
invested by the 11 Isle of Man companies in 1982, augmented by a further Rs 6
million for a rights issue of debentures, had grown into a share portfolio
worth a repatriable Rs 1 billion. And if Reliance gave its standard bonus issue
in 1986 and were allowed to convert the nonconvertible part of its October 1984
E Series debentures, the holding would grow to some 5.2 million shares worth Rs
1.67 billion. If the 11 companies had taken up their allocation of the June
1985 F Series, and conversion was allowed, the holding would grow to 26.8
million shares, worth Rs 8.58 billion. Then equivalent to some US$650 million,
this repatriable amount was equal to 15 per cent of India's foreign exchange
reserves at the time.
This form of investment was a
dangerous game for India, Gurumurthy argued. With the sharemarket index
doubling in the year past, it meant the country could have to return twice as
much foreign exchange as it gained, when - if it had needed to-the government
could have borrowed at a small margin over the London interbank rate. Nor was
the scheme very honest: 'It appears to be tailor-made for motivated investment
not altogether in the national interest.' The arguments in these two articles
were well made, and stirred up a subject that smelled from the start. But the
scenario of capital fight that Gurumurthy depicted was contradicted by one of
the implicit assumptions made by the critics of Mukherjee. If Dhirubhai was the
ultimate owner of the Isle of Man companies, how could he sell off their
Reliance shares without depressing his own share price?
A week later, however, Gurumurthy
moved into new allegations. 'Smuggling in Projects' was the headline on the
first of a two-part story. 'Coastal smuggling is a traditional offence,'s he
wrote. A more sophisticated form of smuggling thrives in the capital. It is a
comparatively open affair. Five-star hotels and expensive guesthouses are its
citadels. The commodity in traffic is however different-it is licences, quotas,
permits and other largesse's by Government's Business controlled important
government decisions through their lobbying operations in New Delhi. This was
how a project had been smuggled from the government sector to a private
company.
In 1980-81, the Petroleum Ministry
had been working on plans for a petrochemicals refinery at Mathura, which
included a 150 000 tonne a year purified terephthalic acid plant. In March
1981, Reliance had submitted its licence application for a PTA plant the same
size. To overcome the Petroleum Ministry's resistance, its Secretary was
transferred in July 1983. In October 1984, Reliance got its preliminary
approval for a 75 000 tonne plant. The proposed PTA plant at Mathura was cut
back to 75 000 tonnes, and had been stalled in any case by lack of government
funds.
Thanks to the help of Finance
Minister Mukherjee, Reliance looked like having 100 per cent of India's PTA
production and 34 per cent of the country's combined DMT and PTA output. Its
control of other feedstocks, by-products and end-products in the polyester
chain ranged from 38.6 per cent up to 62.5 per cent, according to Gurumurthy.
India's anti-monopoly law defined a dominant undertaking as one with more than
24 per cent of national installed capacity, but none of Reliance's applications
had been referred to the Monopolies and Restrictive Trade Practices Commission.
Raising the example of the
pre-World War 11 industrial, trading and banking combines in Japan called the
zaibatsu, Gurumurthy warned that India too risked having its government
controlled from the boardrooms of industry's . Powerful as the critique was,
Gurumurthy was working up to then from published knowledge. On 15 May 1986, he
began reporting from the results of his own investigations, in a three- part
series entitled 'Reliance Loan Maha mela meaning a fair or bazaar, and 'loan
mela' referring to the notorious practice of Congress politicians handing out
loans from government to their constituents in carnival-like ceremonies. The
Reliance loan mela was not a case of giving a few hundred rupees to a poor
family to buy a buffalo or irrigation pump, said Gurumurthy. 'It has to do with
crores of rupees smuggled from banks in an ingenious and brazen scheme to
divert public funds to private ends.' It began with the Rs 843 million E series
of debentures (in October 1984) and the Rs 2.7 billion F series issue (in June
1985). After each issue, the main branches of the big Indian banks received
requests for loans from numerous small unknown companies, pledging Reliance
shares and debentures as security. In June 1985, for example, the Punjab
National Bank had received nine near-identical requests from nine small
companies with names like Patience Holdings & Trading and Inspirations
Investments & Trading for Rs 9 million each, with each offering to pledge
90 000 Reliance shares as security.
Gurumurthy's investigations found
that the registered addresses of such companies were often those of Reliance
offices, its associates or employees. Many put up Reliance shares as
collateral, in some cases the same debentures for which they were seeking the
loan to buy. In some instances, the loan was facilitated by a personal
guarantee from Nathubhai Ambani, younger brother. The Ambani family investment
vehicle Mac Investments had been lent Rs 6.64 million in October 1984 by the
European Asian Bank-the same bank that had lent to three of the Isle of Man
companies through its Colombo branch in 1982. The same day Mac's subsidiary
Real Investments also got the same amount from the same bank. Around that time
another Mac subsidiary, Pam Investment & Trading Co got Rs 5 million from
Bank Indo-Suez and another subsidiary, Nikhil Investment, got Rs 5 million from
the Bank of Credit and Commerce International. A few banks (among them Punjab
National Bank and the State Bank of India) had turned down the applications.
Most did not: the article listed 16 banks as giving a total Rs 1.018 billion in
loans, among them many of the state-owned banks. In some cases, middle managers
of government banks had ignored specific board directives and authorised loans
on specious ground of urgency. Some had been rewarded with promotions.
None of the banks had obtained
the Reserve Bank of India's clearance for loans above Rs 500 000 against
shares, as required by central bank guidelines. And to enhance security of
loans, the borrowers had also been able to get Reliance to deposit large
amounts of the public subscriptions to the debenture issues with the lending
banks away of recycling the public's money back to the management. 'This entire
operation,' said Gurumurthy, 'making in dozens of companies holding what are
essentially the management share holdings of Reliance, was a planned affair,
tied up intimately with the Ambanis and Reliance, for the purpose of cornering
more than Rs 100 crore [one billion] to invest in the two Reliance debenture
issues.' The operation was known to the Reserve Bank, whose inspectors had
noted that the possibility of a common link in the management of these
companies with Reliance Industries cannot be ruled out'. As the stockmarket
boomed in 1985, the central bank had sent a circular to commercial banks urging
caution in lending against shares, and to see that bank advances were not used
for speculative or other anti-social purposes. It told banks that 'The main
point of emphasis is that in granting advances against shares, banks should be
more concerned with what the advances are for, rather than what the advances
are against'.
Gurumurthy asked what point there
could be in, say, Mac Investments borrowing Rs 1.5 million from Canara Bank at
18 per cent interest to buy debentures carrying 13.5 per cent interest. The
borrower must have known that the capital appreciation of the Reliance shares
obtained from conversion of the nonconvertible portion of the debentures would
yield a profit of some 400 per cent. The Ambani management would also have
consolidated its hold on Reliance by borrowing to buy its own company's shares
- expressly forbidden by the Reserve Bank. Reliance had already started talks
with the Ministry of Finance to have the E and F series fully converted.
The company's
shares had already started booming in expectation. 'f this is not speculation
then what is?', asked Gurumurthy.
The accountant-turned-journalist
also took aim at another carefully nurtured Reliance claim: that it did not
rely on funding from government banks but on direct borrowings and investment
from the public. This had been a condition put by the government on the
licences for the new PTA plant and other units in 1984, so as not to strain the
resources of the banks. Among others, the industry minister, Narain Dutt
Tiwari, had recently praised Reliance for raising Rs 3.5 billion on its own.
'But would all these gentlemen have said had they known that more than Rs 1
billion of this actually came from banks in one of the most elaborate tricks
played on the system? Or is it just possible that some in authority actually
knew and chose to turn a blind eye to the facts?' Gurumurthy had not done so
well in his overseas inquiries. The lawyers and private eyes engaged in London
were laboriously searching company records in tax havens to trace ownership of
the non-resident investors in Reliance, but results were slow in coming. A
letter from the London contacts on 16 April enclosed a fresh report from King's
Investigation Bureau with the comment that it was very feeble'.
King's had been asked to look
into nearly 120 companies ostensibly owned by nonresident Indians which had
invested either directly into Reliance shares, as in the 1982 case, or by
subscription to the Reliance E and F series debentures. Possibly with the help
of concerned banking officials, Gurumurthy had also obtained lists of NRI
companies which had borrowed from the Bank of Oman and certain other banks to
buy into the Reliance issues.
The nationalised Bank of Baroda
had played a big role in financing the issue. Mostly from its London office,
the government bank had advanced a total US$33.5 million to NRI companies and
individuals, apparently nominated by Reliance, to help them to subscribe to the
F series debentures. This was about 40 per cent of the Rs 1.08 billion
investment made by NRI sources. The loans had similar terms: two percentage
points over the London interbank rate or 10 per cent a year, while the return
from interest was 11 per cent after tax. The investors were clearly after the
capital gain from eventual conversion to equity.
The detectives had exhaustive
searches made on the names in the Channel Islands as well as the Isle of Man,
but most turned up negative. In the Isle of Man they found that 10 of the 11
controversial companies from 1982 had undergone a sudden change of ownership
and directors in August 1985. The two most provocative names had also been
changed to something more innocuous: Crocodile Investments had become Asian
Multi- Growth Investments, and Fiasco Investments had become Asian Investments.
In the case of the 11th corn any, Tricot Investments, 1 p it was not possible
to establish non-resident Indian ownership at all.
With the 10 companies, the
various Shahs and Damanis of Leicester, Berlin, Djibouti and New York had
suddenly transferred their 55 to 80 per cent shareholdings in August 1985 to
newly formed holding companies in the British Virgin Islands with names
matching those of the Isle of Man companies they now owned. Inquiries in
Leicester found the Shahs had not received any noticeable jump in their wealth
from the sale of control over equity, by then worth over Rs 1 billion or US$80
million. Indeed, family members professed the same degree of ignorance as they
had in 1983. By then, Krishna Kant Shah- old Junagadh schoolmate - was too ill
to meet anyone (and died in May 1986).
The New York investors, Praful
and Nalini Shah, turned out to be a middle-class young couple mostly living off
Praful's average-size salary as clerk in a city law firm. They had bought their
modest home in the suburbs for US$49 000 with a $34 000 mortgage and drove an
11 -year-old Dodge. They had not apparently come into any recent wealth either,
but any connection they had with Dhirubhai was not discovered.
As of August 1984, the British
Virgin Islands had had a company code designed for the discreet investor.
Called the International Business Companies Ordinance, it allowed companies to
issue shares to an unnamed bearer who was allowed to vote at company meetings.
Companies could issue non-voting shares, so that technically an NRI could own
60 per cent of the capital to comply with the Indian rules but have no voting
rights at all. And it could have faceless shareholders through trusts,
corporate bodies and the like. Directors and shareholders could even
participate in meetings by telephone.
Including these companies,
Gurumurthy's inquiries found that a total of 32 companies registered in the
Isle of Man or the Channel Islands had subscribed a total Rs 141 million to the
F series debentures. The 10 British Virgin Islands companies had subscribed Rs
50 million. And some 41 companies in the United Arab Emirates had been lent an
average Rs 1 million each by the Bank of Baroda to subscribe.
Out of the new names in the
British tax havens, the searches found that new directors had been appointed
over August and September 1985, just after the F series issue. Many had an
Indian resident of Dubai, Homi Ratan Colah, as their new director wielding
majority control. Others had people of Indian names listed as residents of
Nigeria.
The Dubai companies had some
fanciful names taken from various ancient Sanskrit scriptures: 10 from the
Vigneshwara Ashtotra, and 12 from the Sandhya Mantra. Several others took names
from the avatars of Lord Shiva and other divinities. Reliance's Middle East
co-ordinator old colleague from Besse & Co in Aden, Bharat Kumar Shah,
subscribed Rs 35 million in the names of himself and his family, and in the first
week of September 1985 had sent a list of borrowers including himself to the
Bank of Oman.
Through a firm of Panamanian
lawyers with an office in London, the investigators had also done a search in
Panama on more than 100 company names matching those on the list of Reliance
investors. They found some of he names, registered on the same day in July
1985. Listed among company officers were two members of an Indian firm of
chartered accountants in Dubai which had done work for Reliance. But the London
investigators reported back to Bombay that their local agents had not been able
to get information out of the Panama lawyers who had incorporated the
companies. 'Our agents have been advised that this is a most delicate matter,
and should not be pursued further,' they said.
It was unsatisfactory--and
tantalizing, given that the trail seemed to lead through the tax havens and
corporate hideouts of the globe back towards Bombay. The leads in Panama and
Dubai were not enough to build a story on. But it was enough for Gurumurthy to
resume the chase abandoned by the Indian press in January 1984- when, he
claimed, the Ananda Bazar Patrika group had been warned off by the withdrawal
of all Reliance advertising.
In a four-part article published
over 11-14 June-under the heading 'Reliance, crocodiles & fiascos - he went
through the story of the Isle of Man companies once again, emphasising the
series of coincidences that pointed to a single manipulator close to the action
in Bombay. Given the secrecy rules applying in the British Virgin Islands, how
was the Reserve Bank of India to verify that the companies had 60 per cent
control by non-resident Indians, as required by the Indian rules? Had the
central bank even been informed of the changed control in 1985?Gurumurthy also
highlighted the way in which changes in the investment rules had been timely
for the investments by the Isle of Man companies. Between late March and August
1982, during two bear attacks against Reliance, some 1.872 million shares in
the company.-nearly 10 per cent of the then issued capital-had been bought by
brokers on behalf of unnamed NRI investors. The investment rules had been
relaxed first on 14 April 1982, just after the first bear attack, to give
repatriation rights to NRIs and extend investment freedom to companies,
partnerships and trusts with 60 per cent NRI ownership. Then on 20 August, just
after the second attack, the rules were further relaxed to remove the Rs 1 00
000 (face value) ceiling for any one NRI investor. Instead, each NRI investor could
hold up to one per cent of the paid-up capital of the company. Instead of
having to distribute the 1.872 million Rs 10 shares among 187 owners, the
requirement was now just 10 separate shareholders. Only on 9 August 1982,
Gurumurthy pointed out, had the various Shahs and Damanis acquired their 60 per
cent-plus control of the 10 Isle of Man companies.
The amendments to the investment
rules had clearly been tailor-made. In Gurumurthy's 12 articles over three
months, the Indian Express had fired a devastating broadside at some of weakest
defences. It had been an expensive lesson for having got on the wrong side of
the old Marwari newspaper baron sitting at the top of Express Towers.
UNDER
SIEGE
So far, it had been just
words-wounding as they were to S Dhirubhai and Reliance. But within three
months, the Indian Express campaign led to action. Late on the night of 10 June
1986, the Ministry of Finance in New Delhi issued a formal notification that
the political affairs committee of Rajiv Gandhi's cabinet, comprising the prime
minister and his most senior ministers, had decided to ban the conversion of
nonconvertible debentures into shares.
The timing of the cabinet
decision could not have been more pointed. It had been widely known that the
board of Reliance had been called to meet the next day, 11 June, specifically
to decide to recommend conversion of the E and F series debentures at the
annual shareholders meeting two weeks later. On 4 June, a meeting of finance
officials had given in principle's approval for conversion, and the Reliance
share price had jumped to a high of Rs 392. Once approved by the shareholders
meeting, the company would have applied for formal permission to the Ministry
of Finance.
The government's decision meant
the company had lost a chance to extinguish Rs 3.23 billion in debt, and make a
core spending boost to its reserves and net worth, while cutting about Rs 480
million in annual interest. The debenture holders had lost the chance of a
quick 200 per cent gain on their original investment. Even before trading
opened in the Bombay Stock Exchange on 11 June, Dalal Street was crowded with
investors off-loading their Reliance debentures in kerb transactions.
The E Series debentures had been
trading around Rs 222.50 and the F Series at about Rs 210 up to then. They
crashed within a few hours to around Rs 110. Dhirubhai met his other directors
late in the afternoon, and adjourned to consider other proposals to put to
shareholders.
More bad news was coming in. On
17 June, Finance Minister Singh presided over an open house hearing of claims
and counter-claims about the Rs 15 000 a tonne antidumping duty that had been
applied on polyester yarn back in November 1982. Anil Ambani represented
Reliance. Jamnadas Moorjani attended for the All-India Crimpers' Association to
oppose the levy. The next day, Singh abolished the duty and yarn prices dropped
20 per cent immediately. The same month, the authorities placed a Rs 3000 a
tonne extra duty on imports of PTA to help the domestic manufacturers of the
alternative feedstock DMT. Dhirubhai was embattled on several other fronts.
Just as the newspapers reported the ban on conversion of nonconvertibles,
Gurumurthy began his series on the Isle of Man and other NRI investors. Four
months earlier, on 18 March 1986, the minister of commerce, E Shiv Shankar, had
confirmed to parliament that the Central Bureau of Investigation was looking
into the alleged leak of the May 1985 policy change on PTA imports.
At the start of June, Finance
Minister V P Singh had ordered the Reserve Bank of India to seek the facts of
the Reliance loan mela'. In addition, both Reliance and Bombay Dyeing were
getting drawn into complicated litigation launched by small shareholders who
seemed to have ample legal resources at their disposal. The same complaints
were also being taken to ministers, the Company Law Board and the heads of
financial institutions by backbench MPs suddenly seized of the urgency of the
accounting intricacies involved.
The case against Reliance had
been taken to the Supreme Court by one Om Prakash Arora, a medical practitioner
in New Delhi who-according to his letterhead-offered cult treatment for
baffling diseases affecting the head, skin, sex life, nerves and stomach, and
who lived by the motto that 'life is not a problem to be solved but a mystery
to be lived' . He alleged that Reliance was cheating on the interest paid to
holders of F Series debentures.
Nusli Wadia, for his part, had to
divert attention to a case taken, inconveniently, to the Calcutta High Court by
one Kamal Singh Bhansall, who owned five Bombay Dyeing shares. He alleged wrong
entries in the company's accounts for 1984-85 and obtained a court injunction
against distribution of dividends-just two days before Wadia was due to hold
his annual shareholders meeting. Bhansall's shares were worth about Rs 2600 but
he had been able to engage one of India's most costly firms of solicitors and a
team of advocates whose combined fees for the case would have been 100 times
that amount.
Dhirubhai's response to the
crisis was typically flamboyant and combative. On 26 June, he held his meeting
with shareholders as scheduled. The Cooperage Football Ground had been replaced
as too small a venue. Instead, some 30 000 investors flocked to the Cross
Maidan, a large central park in Bombay, and sat under canvas awnings. The small
investors were anxious for their annual theatre. They wanted to see how
Dhirubhai was shaping up, after his stroke in February and the onslaught by the
Indian Express. They expected Dhirubhai to come up, once again, with the
unexpected and get around the conversion ban.
Dhirubhai did not disappoint,
though his speech was obviously a physical strain for him to deliver. Reliance
would soon come out with a new, fully convertible debenture issue on a rights
basis to existing share and debenture holders, and would convene an
extraordinary general meeting to approve it. The company would try again to win
permission to convert the E and F Series. Reliance was meanwhile selling 42 per
cent more in the first five months of 1986 than it had in the same months of
1985, and sales might cross the Rs 10 billion mark for the full year. The
company was drawing up plans for a further Rs 20 billion investment in new and
existing products, including plastics at the proposed petrochemical plant at
Hazira in Gujarat.
As for the propaganda against the
company, this was a result of success which had created jealousy. Nonetheless
some 320000 new shareholders had recently joined the Reliance 'family',
swelling the ownership spread to 1.8 million. The company operated fully within
the law. The management did not own a single F Series debenture.
The non-resident investors
numbered 11 000 and were spread across 55 countries. Anywhere else but India,
this achievement would be honoured. But the news continued to get worse for
Dhirubhai. Pleas to Goenka by Mukesh and then Dhirubhai himself had brought a
temporary truce in the Express campaign. But this peace was accidentally broken
by the Reliance camp when a pro-Congress magazine called Onlooker ran an attack
on Wadia, despite last- minute efforts by Dhirubhai's friend, the MP Murli
Deora, to have it canned.' In any case, other publications were taking up the
attack on Reliance. On 5 July, the tabloid Blitz took an existing scandal a lot
further. Understatement was not a hallmark of its editor, Russy Karanjia. The
frontpage splash began: the meteoric rise of the
Reliance
group of companies to the pinnacle of monopoly power was fuelled by a series of
swindles of a magnitude unparalleled in the annals of corporate fraud in this
country, incontrovertible evidence in the possession of Blitz reveals...'s What
the newspaper possessed actually related to one trans- action, an enhancement
of one of the letters of credit for the import of PTA carried out in May 1985.
A branch in Bombay of the Canara Bank, owned by the government, had increased
the finance provided in the letter by US$6.93 million (to US$8.32 million) in a
handwritten amendment dated 29 May 1985-the same day that the import policy was
changed. As well as the amendment, Blitz had a copy of a letter by a Reliance
finance manager dated 31 May to the Canara Bank branch. It complained that in
the bank's communication to the M supplier (the British chemicals giant ICI)
'he fact the above LC has been enhanced on 28.05.85 has not been brought out
clearly ... You are aware the effective date of enhancement of the above LC is
one of the important factors which now you may communicate to the beneficiary
stating that the LC has been enhanced on 28.05.85's .
The company was worried that a
letter of credit dated the same day as the policy change would be disallowed.
The branch manager obliged by sending a telex to ICI to this effect on 1 June.
In a follow-up article, Blitz reproduced correspondence from Reliance to
ministers and senior government officials in which the company insisted A
letters of credit were taken out before 29 May-assertions Blitz described as
lie's and cooling the government's .
The bank manager's action could
be put down to a willingness to correct a simple clerical error that could
disadvantage his client, if indeed the transaction had been made on 28 May. But
it had already drawn rebukes from the Canara Bank's own inspectors at head
office-who asked what were the 'important factors's and a request from the
central bank for the discrepancies in dates to be cleared up. And as the Blitz
report came just after Gurumurthy's account of the loan mela in which several
Bombay branches of the Canara Bank had figured, against their board's initial
wishes-the possibility of a more serious forgery was more credible.
The Reserve Bank of India had
meanwhile reported to the Ministry of Finance at the beginning of July on its
preliminary inquiry into the loan mela. It found that nine banks had given
advances totalling Rs 592.8 million in India during 1985 to companies
apparently associated with Reliance, against security of Reliance shares and
debentures. The loan accounts totalled 187, given to 63 companies. Reliance had
placed money with the nine banks, totalling Rs 919 million, as deposits, not
collateral. Several of the borrowing companies had been established very
recently, and in some cases with a capital of only Rs 1000 or Rs 10 000 though
they had borrowed amounts as great as Rs 9.5 million. The purpose of the loans
was generally stated as working capital or purchase of shares'. In all cases,
the security offered was shares or debentures of Reliance, held either in the
name of the borrowing company or that of another company connected with
Reliance. The banks had not worried about repayment capacity of the companies,
or looked into the end use of the funds.
The loans had not broken every
rule. RBI directives required that shares pledged against loans of more than Rs
50 000 be transferred to the lending bank's name. This had been complied with,
generally. The loans had been repayable within 30 months, in some cases 12
months, and thus were not long-term loans (five years and more) which required
RBI approval. But by granting large advances to Reliance- companies, possibly
to help strengthen the controlling interest, the banks had not adhered to the
spirit of the RBI guidelines- that loans be given to assist productive
activity. On 14 July, Finance Minister Singh presented the interim report to
the lower house of parliament and the Reserve Bank's governor, R. N. Malhotra,
appointed one of his two deputy governors, C. Rangarajan, and three other
central bank and Finance Ministry officials to make a full inquiry On 22 July,
Singh spoke in the parliament's upper house, and assured MPs that the loans
would be recalled if the Rangarajan committee found they had been given in
violation of rules and were not being put to proper use.
The remark caused new pandemonium
in Dalal Street. The price of Reliance shares tumbled from Rs 366 to a low of
RS 312, before closing at Rs 317. The Bombay Stock Exchange had earlier doubled
the margin-the up-front payment ahead of settlement-on buyers of Reliance
shares, from Rs 40 to Rs 80 because it was aware of heavy buying by the
company's own support system. This limited Dhirubhai's ability to stem the days
rout. But things went so badly, with Reliance dragging down the whole market,
that at the close of the day the exchange also put a similar margin on sales,
putting shackles on the bears as well. Reliance also came under attack in
parliament when the central bank's interim report was debated on 31 July. A
dozen leaders of opposition parties (including communists, regional groups and
the BJP) signed a letter urging a thorough probe into Reliance. A scrutiny of
this industrial monopoly by the press has unfolded massive and ingenious
schemes and methods adopted by the company in gross contempt of public policies
and statutory laws formulated by successive governments.' Another
parliamentarian, A. G. Kulkarni, belonging to the Congress splinter group led
by the Maharashtra state strongman Sharad Pawar, pointed to a deputy governor
of the Reserve Bank itself being involved in the collusion. The Prime Minister,
Rajiv Gandhi, assured the MPs that the affairs of Reliance would be
'scrutinized on merits' and action taken according to law after inquiry. The
price of Reliance shares continued to fall, hitting Rs 274 in Bombay on 4
August. To slow the crash, the Bombay Stock Exchange raised the daily margin on
sales to Rs 100, and in addition banned new sales in Reliance except for
immediate delivery The script recovered to Rs 290 after the decision. Goenka's
Financial Express criticised the ban on forward sales. The assumption underlying
the ban is that forward selling is tending to bring down the prices of the
scrip below the realistic levels,' it said in a commentary 'But the truth is
that Reliance's scrip is in the process of shedding a part of its unrealistic
and artificial prices.' If the exchange was going to halt forward sales for a
while, the newspaper said, it should stop forward purchases as Well.
Gurumurthy then weighed in with
yet another sensational allegation, which kept the share price failing:
Reliance was a company that had smuggled in a Rs 1 billion industrial plant.
'He know of watches, radio recorders, videos, popular consumer durables,
sneaking into India. Then there are those who try and slip gold biscuits
[ingots] and narcotics past the Customs' he began. 'But we had not, so far,
come across those who smuggle in large factories . .''
In late 1985 and early 1986,
Gurumurthy said, Reliance had imported the components of its new 45 000 tonne a
year polyester staple fibre plant in consignments by sea through Bombay and by
air through the Bombay air cargo terminal. Dispersed among the same containers
were the components of a second plant, able to make 25000 tonnes a year of
polyester flament yarn. -par This had been the third case of smuggling in
yarn-making capacity by Reliance, he said.
In its original yarn operation
set up in 1982, Reliance had actually imported a 25 000 tonne a year plant
under the guise of its licensed 1 0 000 tonne plant. The endorsement scheme of
Pranab Mukherjee had allowed Reliance to legitimise this in 1984.
At the same time it had been
allowed to import balancing equipment to match the capacities of the
polycondensation units (which make the polyester) and the spinning lines (which
extrude it into yarn). The Rs 183.8 million worth of balancing equipment the
company had been licensed to import in early 1985 was actually an additional
yarn plant capable of making 20 000 tonnes a year. Together with the newly
smuggled third plant, Reliance now had a yarn capacity of 70 000 tonnes at
Patalganga, as against its licence for 25 125 tonnes.
Each of the second and third
plants consisted of a polycondensation unit and four spinning lines. Bought
new, each would cost about Rs 2 billion, and second-hand, about half that.
doesn't the enforcement branch want to know where Reliance got the foreign
exchange to pay for these?' , asked Gurumurthy, ... or will they hide behind
the principle of jurisprudence that was propounded by former finance minister
Mr. Pranab Mukherjee on 16 November 1983 in the case of Reliance when he
asserted that "Of under-invoicing took place, enforcement has already
failed, and we could do nothing about it later' In a follow-up article, the
Express connected the smuggled yarn capacity with a change in policy announced
on 3 July 1986 by the minister of industry, Narain Dutt Tiwari, whom the
newspaper had described as an 'unabashed Reliance admirer'. Tiwari said
polyester producers were now free to switch production between staple fibre
(spun from cut lengths of yarn) and flament yarn. Reliance would now be able to
churn out more of the high-priced flament yarn without attracting notice. The
policy applied to manufacturers with a polycondensation capacity of 30 000
tonnes and a flament yarn capacity of 1 5 000 tonnes-another apparently tailor-made
criterion which only Reliance then fitted.
Tiwari, who remained throughout a
political career extending into the late 1990s a staunch nostalgist for Indira
Gandhi, had also tried without success to wrest control of the office of
Controller of Capital Issues in July, arguing that it fitted better with the
Department of Company Affairs, which was under his portfolio, than with
Finance. This might have rescued the con version of the E and F Series
debentures for Dhirubhai. In addition, the Industry Ministry cleared an
application by Reliance to expand its PTA plant's capacity from 75 000 tonnes
to 1 00 000 tonnes, while sitting on an application from Bombay Dyeing to
expand its DMT capacity.
But otherwise, Dhirubhai's
friends in the government and Congress Party were ducking for cover. Pranab
Mukherjee had- been miserably sidelined by Rajiv Gandhi. At the party's
December 1985 centenary conference, Rajiv had snubbed him by calling a lunch
break during Mukherjee's speech defending Indira's economic policies. Then, in
April 1986, Rajiv had summarily expelled Mukherjee from the party after
newspapers began reporting a revolt by Indira loyalists against his leadership.
As well as the Indian Express,
Dhirubhai also faced attack from another influential publisher, R. V Pandit,
whose monthly magazine Imprint carried an extensive account of the Reliance
controversies in July 1986. Pandit had worked in Hong Kong for the publisher
Adriaan Zecha (later a hotelier) before returning to set up his own magazine
and music firm in Bombay, initially with investment from the Wadia family. He
made no secret of that, nor that he was a close family friend (and a godfather
of
Nusli Wadia's
children). Pandit brought out no new facts, but shaped the existing accusations
into a powerful polemic against Dhirubhai.
Otherwise the business press
retained its admiration for Dhirubhai, while listing the charges brought by the
Express. After the loan mela articles, the magazine Business India wrote that
'erious as these allegations are, the candid reaction in most corporate circles
was a 'Hats off to Ambani gutsy genius in circumventing the complicated and
often suffocating web of corporate laws and regulations that plague Indian
business's .
The magazine quoted unnamed
merchant bankers and executives praising Dhirubhai's financial wizardry and
guts and 'intricate jugglery of high finance'. The simplicity of his schemes
bordered on genius: the man was 'unabashedly a go-getter' .The Business India
writers, Mukkaram Bhagat and Dilip Cherian, concluded that it was 'he
commercial banks, much more than Reliance itself, which have been caught on a
sticky wicket. For a long time to come, the rights and wrongs of the so-called
"loan mela" will be hotly debated. What is really new in the Reliance
affair is the scale and the masterly skill with which Ambani had the banks
failing over each other, only to reveal the hollowness of an over-regulated
system. One friend in the press who defended Reliance was the editor of The
Times of India, Girilal Jain. Almost alone, the Times had attacked the decision
to ban conversion of nonconvertibles, in an editorial headlined 'Not Credible'
on 18 June. If the decision had been taken to prevent speculation, it asked,
why had the authorities not acted when the price of the debentures started
rising six months earlier? My had Reliance been led to believe conversion was
in prospect, as late as the 4 June officials's meeting which had given
in-principle approval? But Jain was embarrassed when rival newspapers reported
that he himself had subscribed to 3000 of the Rs 100 F Series of Reliance in
July 1985, and that he had been given a loan by the Bank of Credit and Commerce
International for the purchase. The loan was confirmed in a letter to the
Reserve Bank of India from the BCCI's Bombay branch on 23 June 1986. Reliance I
denied the company had arranged the finance for Jain; its deposits with BCCI
later in 1985 had been in the normal course of business.
Dhirubhai decided to take his
defence directly to the public, in a series of 15 full- page advertisements
taken out at the end of July in newspapers across India, including the Indian
Express. A Concern for Truth's one was headed: 'Then our Chairman told 30000
investors at our recently held annual general meeting in Bornbay that not a
single F series debenture was either directly or indirectly held by his family,
it drew the curtain on yet another controversy ...'Why would it have been
necessary to prop up the issue, when it was oversubscribed by Rs 1.3 billion,
which had to be returned? Only Rs 160 million had come from corporate investors
in any case. And far from increasing control, the promoters had been reducing
their holdings. 'My sheer hard work and innovativeness [sic], Reliance had
reached the top without any rupee borrowings from banks or financial
institutions, directly or indirectly, for capital expenditure of the new
projects. Under the heading 'An Allegiance to Ethics' the company explained
that 'The ethics of business's were ground rules that should never be violated
if a company was to grow, and these were enshrined in the Reliance boardroom.
But that does not stop us from being innovative and forward thinking. That does
not prevent us from taking the normal business risk as well as, the abnormal
one sometimes to ensure that our investors get the best return on their money.
This year we have paid out Rs 25.75 crores [257.5 million] in dividends. The
highest in Indian corporate history. This does not come from sitting back and
complaining about the inadequacies of the market or the system. It comes from a
dynamic perception of the role of corporate enterprise: as a catalyst that
helps move the nation ahead. But never at the cost of ethics. And this is a
fact that everyone who interacts with Reliance will testify to.
We value growth but with dignity.
We pursue profits but with integrity. ...Under A Matter of Style. The
advertisements extolled the company's search for excellence while under A Feel
for Tomorrow's they claimed Reliance was among the few companies planning for growth
in the years ahead. An Obsession for Technology's said the company's plants had
been acclaimed by the World Bank and others as the most modern: 'To wonder we
chose FTA.' And so on, to the finale, An Occasion for Thanks', emphasising that
1.8 million investors had shares in Reliance. The Indian Express began
attacking the Reliance assertions even before they ended, in particular the
claim in A Concern for Truth's that not a single F Series debenture had been
held by the Ambanis in any way. Under the headline 'The advertisement that
tells a lie's the Express pointed to the bank loans made, for the purpose of
buying F series script, to companies like Shangrila, Vimal and Mac Investments
in which various Ambanis and Meswanis were listed as shareholders. The Reliance
advertisement could only be true 'If the money was borrowed for one purpose but
was used for quite another's where then did the money go?
The answer was to come two months
later, when the central bank's Rangarajan committee gave its final report on
the loan mela. It found that the 43 companies linked with Reliance had borrowed
Rs 599.8 million from banks in India during 1985. These loans had not been used
for buying F Series debentures after all. However, significant portion of the
bank loans had been utilized to sustain the purchases of shares made earlier by
substituting credit raised elsewhere by bank credit'. On 30 June 1985, before
the loans, the companies had a combined liability on account of share purchases
of Rs 380 million. Six months later the liabilities had been reduced to Rs 5
million. The loans had been secure and profitable for the banks, but were not
justified in the light of their end use, which the banks had not bothered to
check.
Reliance immediately claimed it
had been cleared of all charges made by the press over the loan mela. The
amount involved was not the claimed Rs 1.0 1 8 billion, and the loans had not
been used to prop up the F Series issue or make speculative gains from it. The
banks had complied with the guidelines on taking shares as securities,
including transfer of ownership.
The Indian Express said
Rangarajan had not looked at the loans given outside India by the banks. The
Bank of India, the Bank of Oman and Canara Bank had given Rs 440 million to
persons outside India as nominated by Reliance, and only for the acquisition of
the F Series. Add this to the loans given in India and the original figure for
the loan rnela was exceeded. In addition, the loans appeared to be in breach of
lending rules, since banks in India could lend only against securities already
in existence. The report had actually brought out a more serious misdemeanour
than the one originally reported: the loans had been used for sustaining the
sharemarket. And the borrowing companies had misrepresented to the banks the
purpose of the loans. Dhirubhai had already tried to counter the Indian Express
campaign by direct rebuttal.
On 8 August 1986, his chief New
Delhi lobbyist, the Reliance vice-president V Balasubramanian, sent a reply of
more than 60 pages to the Express, assembling many of the points already made
by the company and elaborating on several of the disputed subjects. For six
months now your daily and sister publications have been carrying a relentless,
campaign of corporate character-assassination against Reliance Industries Ltd,'
he began.
Each one of the stories in the
series, and the campaign as a whole, has been false in fact and malicious in
intent ... At every stage in this corporate witch-hunting campaign, the
[Express] has brazenly violated every journalistic norm and its own professed
creed of fair play and truthful reporting by lending its columns to our
adversaries and rivals whose political and business interests we have refused
to serve and of which your non-journalist pen-pusher is a self-admitted
volunteer member ... The campaign has sought to destabilise Reliance by under-
mining its investors' confidence, creating distrust in public mind [sic], and
sowing seeds of suspicion in the minds of decision makers about Reliance. The witch-hunting
campaign has been aimed at creating a psychological environment of hostility
against Reliance, and an ambience among decision-makers and parliamentarians
that can subserve [sic] the interests of the business rivals of Reliance and
other vested interests. The next immediate target of your campaign will
obviously be to sabotage our most prestigious PTA project, which is introducing
the most advanced and latest third generation technology in its area of
operations and which on completion will save the national exchequer an outgo of
Rs 800 million a year by way of total import substitution ...Some of the
rebuttals were valid enough. The nonresident share acquisitions were unlikely
to turn into a foreign exchange drain, as few such investments were liquidated
and, if they were, capital gains tax of 50 per cent or 65 per cent would apply,
and then the investors would suffer from a less favourable exchange rate due to
the rupee's constant depreciation over the years.
Certain other points were
disingenuous: Balasubramanian said that conversion of debentures would lower
the foreign exchange outgoings, as much less would be paid in dividends than in
interest. He did not discuss sale of the shares after conversion. As for the
ownership of the offshore companies, non-resident Indian control had been
verified to the central bank's satisfaction. As for the August 1982 lifting of
the Rs 100 000 investment limit, it is well known that the intimation of
removal of monetary ceiling was sent to the [Reserve Bank] by the Finance
Ministry nearly six weeks prior ... If Reliance had benefited from various
industrial policies, it was because its performance had been better or it had
done its homework well beforehand. Other companies not mentioned by the Express
had also received licences for products in competition with Reliance. Licences
were given under several ministers, not one particular person (an obvious
reference to Mukherjee).
The figures on the company's
monopoly power were much lower than those in the Express series. Instead of 18
to 62.5 per cent of national licensed capacity, Reliance's licensed capacity
ranged from 7.5 to 34.84 per cent. The letter did not go into Reliance's
capacities as a proportion of national installed capacity, which might have
been closer to the Express figures.
On the allegation of smuggling in
a new polyester flament yarn plant along with its declared polyester fibre
plant, Balasubramanian called this absurd and [a] fgment of imagination of the
writer's , which trespassed the limits of decency. Equipment was imported
against a list attached to the relevant capital goods licences, and the
contents verified by Customs. '..What the writer is alleging is incompetence of
the government authorities who scrutinised the import and cleared [it],'he
said. It was a well-known fact that the output of synthetic fibre plants could
be much higher than licensed capacity, depending on efficiency and the
denierage (thickness) of the yarn. No company would smuggle in a plant because
it would lose the benefit of depreciation, investment allowances and other
deductions against income. Reliance Industries Ltd belongs to 18 lakh [1.8
million] investors and no management would be foolish enough to inject funds of
the magnitude of Rs 100 crores [1 billion] for bringing in a plant, the benefit
of which has to be shared with the investors, the government, and the consumers
of the end product. Balasubramanian's letter was just more ammunition for
Gurumurthy, who responded on 19 August under the headline 'The answers that
answer nothing'. Setting out his original charges in one column, he listed the
Reliance replies against them alongside, and in a third column his comments on
the replies. Against many of the accusations, he noted, Reliance had made no
response at all. In others it had been selective in what it addressed. Where
his articles were attacked, Gurumurthy stood by his major points. Three weeks
later he was back on the attack. In a three-part article over 9-11 September,
he alleged that with the connivance of officials in technical departments the
new PTA plant at Patalganga included plants for producing the feedstocks
directly required without seeking separate licences for them. Instead of using
the petroleum derivative paraxylene as feedstock, Reliance would start with the
next product up the petroleum chain, napththa. There is no way of producing M
from napththa without first producing paraxylene,' Gurumurthy noted. It is like
saying that a bicycle is made from iron ore. As well as a paraxylene line,
Reliance was installing its own plant to extract benzene, another napththa
derivative used to make the detergent ingredient LAB, which the company was
also producing at Patalganga. To secure the naptha it needed, Reliance was
lobbying to have output dedicated from the government-owned Bharat
Petrochemicals Ltd refinery in Bombay and sent to Patalganga through the
refinery's pipeline. Bharat Petrochemicals' own plans to make paraxylene should
be dropped because of environmental concerns, Reliance had suggested in a letter
to the Department of Petrochemicals.
In addition, the PTA plant
included a 25 000 kilowatt power plant, which Reliance was later to explain as
a lift included within the overall plant cost by the British suppliers of the
PTA plant, the engineers John Brown Ltd, even though the generator was of
German manufacture.
By that time, Gurumurthy's report
on the smuggled yarn capacity at Patalganga had led to an official inquiry On
20 August a team of six officials and engineers from relevant ministries
arrived at the Reliance factory to see exactly what machinery was installed.
They looked around, and asked some questions to which answers were demanded by
the next afternoon. According to a report on the mission by its leader M. S.
Grover to the Ministry of Industry on 10 September, Reliance either did not
give the information timely or the information given was inadequate' .Reliance
executives were disputing that any precise tonnage could be assigned to a given
plant. With constant meterage (length of fibre produced) almost any tonnage
could be produced by varying the denierage (thickness) of the flament, it
maintained. In its applications for licences, Reliance had made certain
denierage specifications.
At no stage had the government
told it of any policy decision that the controlling factor was the tonnage. The
officials met Reliance representatives a second time at the Customs House in
Bombay on 22 August. The answers were still not satisfactory, and several other
follow-up meetings were held in New Delhi, leading to a presentation by
Reliance on 1 September. The officials were still unsatisfied: Reliance refused
to give precise specifications of equipment because it was proprietary
knowledge.
The committee asked Reliance at
least to explain how the capacity of the PTA unit's air compressor-a component
that gave a clue to the overall plant capacity-was nearby 50 per cent greater
than needed for the licensed plant, and how the polyester flament yarn plant
came to have 12 spinning lines instead of the eight cleared for import. On the
first
point, the officials appeared to
have been left uncertain. On the second, Reliance said the four extra spinning
units were made from disassembled parts shipped with the four second-hand
spinning lines brought in as part of the balancing equipment in 1984.In their
conclusions, the officials knocked down the denierage arguments about capacity,
and homed in on the one fact that was obvious to the eye. Instead of the eight
spinning lines that Reliance was cleared to import, its factory was operating
12 lines.
Nowhere in any of the
documentation produced by Reliance could any reference be found to this
additional capacity. As for the complete flament yarn plant, the inspectors
rated its capacity at between 55 000 and 63 000 tonnes a yea,-more than double
the licensed output of 25 125 tonnes.
The report, crammed with numbers
and dry engineering detail, was passed to the Customs Service, which then
looked back through the records of equipment imports by Reliance. It was to
lead four months later to Bombay Customs, so often apathetic to Dhirubhai in
the past, handing Reliance a show- cause notice alleging the company had
smuggled in spinning machines and undeclared industrial capacity worth Rs 1.145
billion. The Customs put the duty evaded at Rs 1.196 billion, and invited
Reliance to ask why this should not be levied. In addition, the company faced
the possibility of fines up to five times that amount and confiscation of the
smuggled goods, while individual executives could be prosecuted for smuggling.
If
huge steel structures that occupied 20000 square feet of factory space could be
smuggled into India, what could not? Gurumurthy was to ask. Why not guns? Tanks
and missiles even? Compare the case with which it was accomplished with the
torment of someone landing in India with a few saris in his bag for his
pestering wife, unable to make up his mind on whether to move towards the green
channel or the red channel,' he wrote.
With this homely touch, Gurumurthy rounded off what
must rank among the most powerful examples of investigative journalism
anywhere. For the time being, at least, Gurumurthy had certainly closed the
green channels for Dhirubhai Ambani.
SLEUTHS
To see Bhure Lal on his evening
walk around New Delhi's Lodhi Gardens was to know at once a man not easily
diverted from his objective. Military-style moustache always neat, eyes
narrowed on some distant point ahead, arms swinging, Bhure Lal attacked his
exercise routine with the intensity of a soldier on a desperate forced march to
lift a siege. Friends among the senior bureaucrats who favoured the Lodhi
circuit struggled to keep up with his blistering pace.
The military bearing was no
affectation. Bhure Lal had joined the Indian Army on a short-term officer's
commission soon after the Chinese attack along the eastern borders in 1962, and
saw action against Pakistan in the 1965 war. He retired from military service
with the rank of captain in 1970 when he won a place through examination in the
elite Indian Administrative Service. After several district posts in Uttar
Pradesh, he became a secretary to V P Singh when he was the state's chief
minister. At the end of March 1985, just after Singh as Rajiv's finance
minister had declared his war on the black economy, Bhure Lal was made Director
of Enforcement in the Ministry of Finance, responsible for finding
transgressions of India's highly detailed and restrictive exchange control
laws. By early 1986 he too had joined the attack on Dhirubhai.
The Director of Enforcement
enjoyed wide discretionary powers about whom he investigated, and was allowed
to operate with minimal circulation of reports outside his own office to avoid
compromising arrests and search raids. In addition, Bhure Lal had the
confidence of his immediate superior, the Revenue Secretary in the Ministry of
Finance, Vinod Pande, who in turn was a confidant of V P Singh himself. It was
a closed circle that frustrated Dhirubhai's network of sympathetic officials
within the Finance Ministry, among whom many fellow bureaucrats and politicians
placed the able and ambitious head of the ministry, the Finance Secretary, S.
Venkataramanan.
Bhure Lal made his first foray
overseas to pick up Dhirubhai's hidden financial trails in May 1986. He went to
London to look into the ownership of the Isle of Man companies, but found a
baffling wall of secrecy in the tax havens. He travelled to Leicester in an
attempt to persuade the Shahs to talk, but arrived a few days after the family
head, Krishna Kant Shah, had died. His attempt to prosecute the Kirloskar group
over its alleged front company in Germany had also failed because the suspect
company's financial statements could not be sequestered.
The Enforcement Directorate also
raided the Bank of Credit and Commerce International in Bombay, and brought charges
against its local general manager and five other staff under the special law
against smuggling of currency, which went by the acronym COFEPOSA. Bhure Lal
met the head of the BCCI's Asian operations, Swalch Naqvi, and offered to go
soft on the bank's staff provided it. supplied A details of Dhirubhai's
suspected transactions to fund the purchase of Reliance shares by the offshore
companies.
Naqvi agreed, but reneged once
back in London and asserted that as a Luxembourg- domiciled bank the BCCI was
not bound by Indian law. The BCCI was shut down by the Bank of England and
other western central banks in 1991 and allegations that it was a major
money-laundering operation for drug traffickers.
To clinch a prosecution under the
Foreign Exchange Regulation Act, the enforcers needed to produce evidence of
the overseas record of a havala transfer. Bhure Lal became convinced that his
intelligence agency would have to tap non-official sources to obtain the breaks
it needed to build a case. But the private investigation agencies he found in
London were too expensive for his office to hire out of its discretionary
funds. Requesting a special budget would have blown the cover completely on his
inquiries.
India's own embassies in foreign
capitals were worse than useless. In a later note on his 1986 inquiries, Bhure
Lal complained that any information given to Indian missions was usually passed
on to the suspect. When the Enforcement Directorate had sought information from
the Indian Embassy in Washington about suspected secret commissions paid by the
American grain trading giant Louis Dreyfus Corp to the New Delhi industrialist
Lalit Thapar's Balarpur Industries, the embassy had telexed a vigorous
complaint back to the Ministry of External Affairs.
The enforcer discussed his
dilemma in September with his superior, Revenue Secretary Vinod Pande, who in
turn raised the problems during his frequent meetings with V P Singh. The
finance minister gave his clearance to the proposal to use foreign
investigating agents, on condition that any payments be made after receipt of
evidence. The choice of the agents and other operational matters were left to
the Director of Enforcement.
It was left to Gurumurthy to
point Bhure Lal towards the help he needed. The two had met first in July, in
the coffee shop of New Delhi's Janpath Hotel. Thereafter through the second
half of 1986 they had had informal meetings when Gurumurthy was in the capital,
in the Taj Mahal hotel's coffee shop, in Nehru Park and then at the Indian
Express guesthouse.
Gurumurthy had also been in
London in May, on a separate visit. With Goenka's resources behind him, he had
not been deterred by the expense of British sleuths. But the inquiries by
King's had come to an impenetrable wall of secrecy in Panama and Dubai. His
attention was turning to the United States where initial inquiries had not
unearthed much evidence.
Parallel with his published
articles, Gurumurthy had circulated a stream of detailed position papers to
concerned officials and politicians about the various allegations against
Reliance. In some cases, these papers made recommendations for corrective
action - some of which were taken up, as with the banning of conversion of
nonconvertible debentures---or for further investigation.
Nusli Wadia had also kept up his
contact with Rajiv Gandhi about Reliance. The two got on well: they were of
similar age, each had a Parsi parent, and both were considerably more
cosmopolitan than their everyday cohorts. Early in 1986, the prime minister
agreed that Reliance should be targeted. As a picture emerged more fully of
Dhirubhai's operations, Rajiv also agreed that the case of the smuggled
factories, and the disguised payments that must have been made for them through
illegal havala channels, were the most vulnerable points on which Dhirubhai
could be nailed. Rajiv wanted to hear first-hand from Gurumurthy the full
story. Accordingly, arrangements were made through Wadia for a series of
meetings over a week around the end of August, just before the prime minister
was to travel to Harare, the Zimbabwe capital, for a gathering of Commonwealth
heads of government. In the event, Rajiv did not attend the meetings and had
the veteran Congress politician and Gandhi family loyalist Mohammed Yunus speak
to Gurumurthy instead.
In late September Nusli Wadia was
also making inquiries while on a visit to New York. The American-based Praful
Shah, who had been listed as a shareholder in some of the Isle of Man
companies, remained a mystery. Seeking a way of pressuring Shah to talk, Wadia
consulted a New York accountancy firm called Kronish, Lieb, Weiner &
Heliman to see if Shah had been breaking any American laws. A partner advised
that an American resident such as Shah would have had to declare any income
derived from the investment in his name, whether or not it was distributed to
him, and that the sale of his shares would be a taxable event.
In October, Gurumurthy made a
second trip to London, where he was given the name of an up-and-coming private
investigation agency based on the outskirts of Washington, the Fairfax Group.
The agency had been founded in 1983 by a former government anti-fraud
investigator named Michael Hershman, then 41, who had worked with the US Senate
inquiry into the Watergate scandal and had been deputy auditor-general with the
US Government's Agency for International Development, visiting India several
times on AID business. The Madras accountant went on to Washington, and spoke
to Fairfax on behalf of Goenka.
By then, Gurumurthy had published
his articles on the smuggled flament yarn capacity, and it had become clear
that the counter-parties to any secret payments by Reliance would have been
either the suppliers of the equipment, principally Du Pont, or the American
firm that arranged the purchase and the shipment of second-hand plant, Chemtex
Fibers Inc. Hershman pointed out that he would need an authority from the
Indian Government to get the companies to divulge material they would otherwise
classify as commercial in confidence.
Hershman was about to make a
visit to Korea, where the government had retained Fairfax to advise on security
for the 1988 Olympics in Seoul. Gurumurthy asked him to extend his trip to
India, which he did, arriving in New Delhi early on 15 November and checking
into the Oberoi Hotel. Over the three days of his stay, Hershman was introduced
by Gurumurthy to Bhure Lal, and reached agreement to work for the Government of
India in return for a contingency payment of 20 per cent of any moneys
recovered-a reward in line with standard payments to informers by the
Enforcement Directorate, though the amounts involved were potentially huge in
the Reliance case.
The
three subjects for investigation were Du Pont and Chemtex, regarding the
supposedly smuggled yarn plant, and the Bank of Credit and Commerce International
about the financing of the non-resident investments in Reliance.
On the BCCI,
Hershman started making inquiries in London during a stopover on his way back
to Washington, and was soon made to realise he was - on dangerous ground. A
tough-looking young Sikh knocked on the door of his hotel room, and warned him
against asking questions about BCCI.
It was not until 21 December that
Bhure Lal arrived in New York to get down to work with Hershman, who came to
his hotel along with his vice-president at Fairfax, Gordon McKay. On 22
December they went in to see Joseph D. Bruno, head of the Criminal
Investigation Department in the Internal Revenue Ser- vice. Bhure Lal sought
from Bruno whatever help could be provided to trap certain well-known operators
of the Indian havala trade providing dollars in the United States in return for
rupee payments in India which Bruno agreed would be illegal in the US if they
exceeded US$ 10 000 and had not been cleared under American foreign exchange
laws. Bhure Lal asked for help on the Dreyfus case, involving the alleged US$3
million commissions on supplies of cooking oil to India's State Trading Corp
over 1982-86. And he followed up on the same lines as Gurumurthy and Wadia in
the Reliance puzzles.
Bhure Lal detailed the
involvement of the New York legal clerk Praful Shah in the Isle of Man
companies, supplying the company names and the amount of dividends and interest
on debentures that should have accrued to him from Reliance. This income had
not been declared to US tax authorities, Bhure Lal said. Praful Shah did not
have the resources for the investments put in his name, and had claimed to the
nominee of Krishna Kant Shah in Britain, who had died in May 1986. But nor was
K. K. Shah rich enough, and he had not declared his investments to the UK tax
service. The real investor was suspected to be an Indian who siphoned off funds
in a clandestine manner and got them recycled through the Shahs, thereby
evading payment of taxes in India. Praful Shah re-fused to disclose his source
of funds, and Bruno was urged to investigate.
The Indian official then
mentioned the role of BCCI, through its London operations, in the Isle of Man
investments, citing the names of senior BCCI executives including Swaleh Naqvi,
and a Mr Abidi (probably referring to the BCCI's founder, Agha Hasan Abed!).
The BCCI had provided much of the funding to ten of the Isle of Man companies
over 1982-83, along with the European Asian Bank in three cases, channeling the
loans through the company facilitators in the island tax haven. The loans had
been repaid in New York on 14 June 1985 by credits to the two banks. Who had
made the payments? and how? Who had stood guarantee against the loans by the
two banks?
Along with Gordon Mckay and a
lawyer from a Delaware law firm named J. E. Liguori, Bhure Lal went on to the
Du Pont headquarters at Wilmington to tackle the chemicals giant. The trio were
met by a director, E D. Oyler, and a legal adviser, Geoffrey Gamble, and handed
over a sheet of 15 questions about payments for the purchase of plants and
technology by Reliance, and a list of 25 offshore companies including many
registered in the Isle of Man to see if these had been party to any
transactions.
A week later, on 30 December,
Gamble called Bhure Lal and handed over Du Point's reply to the questionnaire.
Bhure Lal was deeply disappointed in the answers, which he felt had flicked the
ball on to Chemtex and given Du Pont itself some escape clauses. To the best of
our information and belief at this time, the capacities of the plants are as
indicated in the contracts which were approved by the Indian Govt,' the
document said.. To the best of our information and belief, no second-hand
equipment has been sold directly by Du Pont to Reliance from Canada, the United
States or anywhere else. Was any other equipment procured by Chemtex? To the
best of our information and belief, no.' Did Reliance pay amounts to Du Point
prior to approval from the Government of India other than from India and were
those payments adjusted by Du Pont after receiving money from India after
approval?-'No.' Did Du Point have any business relations in India with [25
names of Isle of Man and other investment companies]?-No reply was attached.
Bhure Lal had found most of the
people he wanted to meet in Chemtex to be out of town over the Christmas-New
Year period. He got through to an assistant legal counsel, who suggested he
call the company offices on 2 January, Bhure Lal's last day in his authorised
tour, already extended once. He rang, and found the office closed.
After returning to New Delhi on 3
January 1987, Bhure Lal continued to correspond with Du Pont by telex and
letter, with Fairfax acting as his agents in Washington. He reported verbally
to Revenue Secretary Vinod Pande, who was busy with budget preparations and did
not want to hear details. On 29 January, the Du Pont lawyer Gamble gave five
more documents to McKay. Bhure Lal was again disappointed: the papers concerned
agreements made in 1981 for the original polyester yarn plant at Patalganga,
not the additions made over the following five years. On 11 February, he wrote
again to Gamble with eight further questions.
The enforcer had meanwhile met an
executive vice-president of Chemtex, Jullo J. Martincz, who had come out to
India around 21 January -to avoid dealing with the Fairfax agents, Bhure Lal
suspected. Martinez promised full cooperation, but his reply sent on 2 February
failed to satisfy Bhure Lal, who wrote back: As I told to you over phone, I was
disappointed with your inadequate response and cannot help feeling that your
letter conceals a distinct unwillingness to come out with correct facts, your
assurance of cooperation notwithstanding. Bhure Lal enclosed a six-page list of
queries about the equipment supplied by Chemtex to Reliance from Du Pont's Hamm
Uentrop Plant in West Germany. He wanted details of payment, copies of
documents such as invoices, certificates about the condition of the machinery,
and a detailed list of items. How was it, he asked, that the three spinning
units originally supplied by Chemtex (for a nominated 10 000 tonnes a year of
polyester flament yarn) had resulted in actual production of 18 000 tonnes,
when the additional nine units gave only a further 1 5 000 tonnes in installed
capacity and 6000 tonnes in actual capacity?
By that stage, government
engineers had confirmed the presence at Patalganga of machinery imported
without licence. The Ministry of Industry had accepted the Reliance explanation
that four of its spinning units had been split into eight units to suit layout
requirements' but the Finance Ministry had not been convinced. After further
inspections at Patalganga in December, the Customs Directorate issued its
show-cause notice on 10 February 1987 charging Reliance with smuggling and
under-invoicing plant worth Rs 1.14 billion and evading duty of some Rs 1.2
billion. Who had paid for the smuggled machinery and how?, Bhure Lal wondered.
In addition, who had paid Du Pont the royalties due for extra polycondensation
capacity and spinning lines which amounted to something between US$6 million
and US$12 million?
Du Pont and Chemtex could not be
forced to answer, unless Fairfax found some breach of American law in the
transactions. But they might find themselves blacklisted in the world's second
most populous country, where levels of textiles and chemicals consumption were
extremely low. Indians were quick to take offence at any implied disparagement
of their sovereignty by foreign multinationals, and the disaster at the Union
Carbide plant in Bhopal, where thousands of Indian residents had been killed or
maimed by a toxic gas leak in 1984, had hardly helped the image of American
chemical companies.
While the law enforcers were
closing in on his foreign transactions, Dhirubhai was under increasing pressure
on the home front. The successive accusations in the Express and the mounting
load of show-cause notices against Reliance had allowed the bear operators in
the Bombay sharemarket to get the upper hand for the first time in several
years. Led by the veteran broker Manubhai Maneklal, the bears pushed down the
Reliance share price from its peak of nearly Rs 400 towards Rs 200 at several
moments during the year.
In spite of the defiant message
given in June by Dhirubhai before his assembled share-holders at the Cross
Maidan, the company was undergoing its first profit squeeze since it went
public in 1977. The ban on conversion of its E and F Series of debentures had
swollen its interest bill, and the removal of the anti-dumping duty on
polyester yarn and additional duty on PTA imports had sharply cut the profit
margins on its products.
Dhirubhai
desperately needed more cash in the company. An attempt to float a new finance
and leasing affiliate, Reliance Capital &- Finance Trust Co, at a
substantial premium had been rejected by the Controller of Capital Issues. He
had proposed that Reliance Capital &- Finance Trust, incorporated in March
1986, he listed at a Rs 25 premium on its Rs 10 shares-a virtually unheard-of
privilege for a company with no track record of trading, let alone profits. The
issue would have raised Rs 1.25 billion in equity which, given the leasing
nature of its business, Dhirubhai would have been able to gear ten times by
issuing high-interest debt instruments to the public. The proposed premium was
rejected in August, and Reliance Capital was to remain unlisted until April
1990, when its shares were offered at par. The answer was the Reliance G Series
of fully convertible debentures opening on 29 November 1986. In June, the
directors had proposed an issue of 20 million debentures of Rs 200 each to
existing share and debenture holders. This would bring in Rs 4 billion, and
with a 25 per cent retention of any excess subscriptions a total of Rs 5
billion-making it India's biggest ever issue at that time. Each debenture would
he convertible into one Reliance share on 30 June 1987, earning 13.5 per cent
interest until then.
Within a
little more than six months from a successful issue, Reliance would once again
transform debt into massive new capital.
By the time the extraordinary
general meeting that was needed to approve the issue convened on 28 August, the
premium on conversion had been pared down in the light of the less favourable
market. The company now proposed an issue of 32 million debentures at Rs 125
each. Reliance would raise the same total but would have to dilute its share
base a lot more. The share-holders accepted Dhirubhai's forecast of increased
profits for 1986. Half a dozen of their fellows criticised the sustained
vilification of the company among them a former deputy governor of the Reserve
Bank of India, R. K. Hazarl, and one Bharat Shah, identified to reporters as a
non-resident investor from West Asia but in fact Dhirubhai's own Middle East
Coordinator who had figured in the F Series bank loans.
Dhirubhai could still run a good
meeting. But the question was: did the Ambani magic still work in New Delhi and
in the market?
The answer to the first part was
no: on 27 October the Controller of Capital Issues eventually cleared the
issue, but only on condition that each debenture would convert to two shares.
In other words, the premium on the basic Rs 10 share had been brought down from
Rs 190 to Rs 62.5. Even then, it was going to be a tricky issue to market.
Income tax authorities raided sharebrokers in mid-November, causing a brief
shutdown
at the Bombay
exchange, and locking up large volumes of share certificates for inspection.
Several other big issues were also planned for December, in a market where the
bears were dominant.
Dhirubhai decided to go in
quickly and boldly. At a press conference on 11 November he admitted the
polyester market was bad. 'But as far as Reliance is concerned, there would be
no adverse impact on the company's profitability, which will be higher than
last year,' he said.
On 19 November, Reliance began
another series of bold advertisements in the press across India. 'That can
Reliance give you for Rs 145 that nobody else will?' , it began.
As you probably know, a Rs 10
Reliance share today is worth Rs 225 in the open market. So nobody will sell
you a Reliance share for less. Excepting Reliance. That's what this
advertisement is all about. Another profitable opportunity from Reliance. A
convertible share issue which offers you not one, but two Reliance shares for an
unbelievable price of Rs 145 after conversion ...'The series went on under the
headline 'hat can you say about Reliance if ...' with a different facet of the
company picked up in each: that it was the third largest in the private sector,
now diversifying into petrochemicals; that in nine years its sales had
multiplied nine times, its assets 42 times and its profits 24 times; and so on.
Another ad showed a husband and wife wondering whether to buy a new
refrigerator or invest in the Reliance bonds. Why not do both? was the message:
take the profit on sale of the shares after conversion and then buy the fridge.
Directed by Dhirubhai, and
executed by a dozen leading stockbrokers--chief among them Nimesh Kampani of J.
M. Financial &- Investment Consultancy Services, and Vallabh Bhansall of
Enam Financial Consultants-Reliance had some 15 000 of its retail outlets,
wholesalers and suppliers set up as collection centres for subscription forms,
some of them formally appointed as sub-brokers. Scooter-rickshaws fitted with
loud- speakers cruised the streets of Bombay and other cities, sparking the
issue. In Ahmedabad, Reliance had subscription forms scattered from a
helicopter over the suburbs. The big American stockbrokers Merrill Lynch were
engaged to market the debentures to non-resident Indians worldwide.
On 26 November, three days before
the issue opened, the Indian Express began a counter-campaign. Under the
cross-heading Reliance G series debentures which promised yet another
multi-part criticism, the main headline called the Reliance advertisements A
disinformation campaign to sell bonds'. The glib lines were typically enticing
to Reliance share and debenture holders. 'But the Reliance family member- its
shareholder-is torn between the tempting promises from Reliance and his own
experience of the recent past. He knows that he must think along practical
lines, and distinguish the myth from the reality. He now suspects that the
tailor-made situations of the past, in which Reliance jumped the queue with
impunity and flourished through its stage management of the government, are
over. Just look at the refusal of permission to convert the F series bonds, or
the removal of the Rs 15 000 a tonne dumping duty on polyester yarn. The impact
of these decisions on Reliance's finances had not been told to shareholders.
The company had gone into disinformation instead. On 27 June 1986, it had
claimed that its working results for the first five months of 1986 were better
than for the same period a year earlier. Yet the obligatory disclosures in the
prospectus for the G Series showed a vastly different picture: profit for the
first six months had been Rs 225.6 million as against Rs 630 million for the
first half of 1985 and Rs 610 million in January-June 1984. The second half of
the year would be even worse. Even the claimed first-half profit was suspect,
as the company had counted discounts given to its wholesalers in the form of
credit notes as part of sales figures. The days of super profits are over,'
said the Express, and Reliance must behave like any other company standing in
the queue. Political clout is no longer a credit. An attempt was made to
silence the newspaper. Later, on 26 November, one Abdul Rehman Hussein Malkani,
who said he and his family owned Reliance shares and debentures worth Rs 4
million, petitioned the Bombay High Court to restrain the Express from
publishing further articles on the G Series issue. Assisted by leading
advocates, Malkani claimed the first article contained distorted and incorrect
information-the first-half profits given for 1985 and 1984 were actually the
full-year figures- causing damage to Reliance and its shareholders. Justice N.
K Parekh obliged with an interim injunction.
The Express and its editors
immediately applied for a lifting of the gag order. Led by the redoubtable
senior advocate Ram Jethmalani - later to enter parliament's upper house
against Congress-the Express undertook to correct immediately any factual
errors such as the profit figures (included by oversight), and would publish
any refutation of reasonable length given by Reliance within two days of
receipt. The articles were justified and fair comment on matters of public
importance. Malkani's counsel argued that the lawsuit was based not on
defamation but on the tort of injurious falsehood affecting the property rights
of his client-though indeed the Express could hardly claim fair comment based
upon incorrect allegations of fact. Reliance, which had joined the case, argued
it was a matter of defamation.
On 28 November, Justice Parekh
lifted his order. Malkani's attack on the grounds of injurious falsehood had
undercut his case for restraint on publication. 1-lakh said that the public's
right to know the truth is paramount and outhalances the plaintiff's [Malkani'l
right to protect his property rights.'Any harm caused by further publication
could be righted by monetary compensation, if proven. But the undertakings
given by the newspaper provided the opportunity for any wrong to be set right
forthwith.
The next morning, the Express
resumed its series, adding a correction to its first article without comment or
apology. (In fact, the figures were still wrong: the net profit in 1985 had
been Rs 713 million.) Reliance's business success came not from its factories
but from its political clout in New Delhi. Its shareholders had come to believe
there was nothing the company's lobbyists could not achieve. The help given by
New Delhi had scared away the bears. The reasons for the run-up in the Reliance
share price to Rs 393 in June 1986 had been exposed by the Rangarajan report
into the loan mela: speculative pressure had been generated by Reliance itself.
The share price was now on its
way down to reality. Knowing that the flow, of funds for Reliance's price
support had been cut, stockbrokers close to Reliance had begun to borrow badla
(carry- over) funds even at interest rates over 36 per cent in order to
postpone deliveries. The company had tried to give the impression that it was
back in favour-by virtue of the approval of the G Series, and a meeting between
Dhirubhai and Rajiv Gandhi in October-but these were formalities. The issue was
always going to be cleared, to fund the new projects licensed over 1984-85. The
price was the real issue.
The Express also pointed to some
novel features in the G Series. Unlike those in the earlier issues, the rights
of existing shareholders to subscribe could be renounced. This was probably
because the management's front companies, already having to pay back their loan
mela borrowings, would be hard pressed to take up their rights. It was curious
that the subscriptions reserved for the public would open on 4 December and
close on 24 December, but the rights issue would stay open for 45 days.
Reliance could thus get the public moneys in, and sell the rights of the front
companies later when it would not matter if a drop in the share price resulted.
Inevitably, it seemed, the market price of the debentures would tumble.
A separate article in the Express
claimed that, while millions of subscription forms were being made available
through Vimal textile showrooms and other outlets, copies of the prospectus
were in very short supply. Investors were not being given the detailed
information they needed for an informed decision.
Then it was Reliance's turn to be
hit by a barrage of litigation. In the southern city of Hyderabad, on 2
December, the Andhra Pradesh High Court made an order halting the G Series
offer to the public, on a lawsuit fled by one P Murali Krishna, a local holder
of F Series debentures. Murali Krishna said the Controller of Capital Issues
had erred in removing the rights to the G Series which Reliance had originally
proposed be attached to existing debentures as well as to shares. It was not
clear what the issue was for, or what was a fair value of the underlying
Reliance shares, which had been fluctuating wildly. The existing debenture
holders had already suffered enough: the new issue was a fraud on the public.
In Bombay, Ajit Jayantilal Modi
and two other Reliance shareholders argued in the Bombay High Court before the
same Justice Parekh that the G Series issue, as it was eventually approved by
the government, did not have the valid approval of Reliance shareholders-since
it was greatly amended from the proposal put to the 28 August extraordinary
meeting. In addition, the prospectus and advertising contained false
information. And in a city civil court in Bombay, a sharebroker named Arunkumar
Jajoo obtained a stay order on the G Series, over alleged violations in the way
Reliance had given prospectuses and subscription forms to brokers and set their
commissions.
On 3 December, Reliance obtained
an order from the Supreme Court in New Delhi which nullified the Andhra Pradesh
court's stay on the issue, giving the company more time to argue its case in
the lower court. In Bombay, Justice Parekh declined to give the three
petitioners there any interim restraint order, and adjourned their case for two
weeks. (Two days later, on 5 December, the three shareholders dropped their
lawsuit.) The civil court meanwhile lifted its stay on the issue. It had been a
busy couple of days for the legal profession.
As the public part of the issue
opened on 4 December, the Indian Express carried Reliance's reply to its
articles on its front page. The letter, written by the New Delhi- based
vice-president, V Balasubramanian, made much of the mistaken figures in the
first article and disputed the basis of the conjectured absence of real profits
in 1986. It was part of a motivated and malicious mudslinging campaign's to damage
the G Series issue. The newspaper ran its own commentary alongside, attacking
the company's response as 'Not enlightening'. The Reliance share price
continued to fall, as word spread of the seriousness of the customs and excise
evasion inquiries, touching a low point of Rs 179 on 25 December.
On 5 December, the Central Excise
and Gold (Control) Appellate Tribunal dismissed an appeal by Reliance against
the show-cause of October 1985 alleging evasion of Rs 273 million in excise.
The case could go on to adjudication.
But the share price then began to
climb upwards, partly as a result of a bold plan executed by a young recruit to
the Reliance finance section. Anand Jain, then 29, had been a schoolmate of
Mukesh Ambani before qualifying as an accountant. He joined Reliance at the
beginning of December 1986, when Dhirubhai was persuaded to let him take over
management of the sharemarket operations from his old colleague Chandrawadan
(Nama's Choksi). Jain managed to get hold of confidential Bombay Stock Exchange
records giving the reported positions of Bombay's big stockbrokers in Reliance
shares.
In many cases, these were at wide
variance with the positions Reliance knew to be the case from its own registry
Jain threatened to expose the brokers, bringing down heavy penalties on their
heads, unless they immediately squared their positions by taking delivery of
Reliance shares. The rout ended, and many of the bears suffered ruinous losses.
Jain, who later went on to head the Reliance Capital & Finance Trust arm of
the group, had won his spurs. He soon became a replacement for Dhirubhai's late
nephew Rasikbhai Meswani as the company's chief troubleshooter and dealmaker,
the inside track to getting transactions and orders from Reliance. By the mid-
1990s, he was being referred to around Bombay as the third son in the Ambani
circle.
By
early February 1987, the G Series issue could also be claimed a dazzling
success. The block of debentures reserved for the public, worth Rs 1.32
billion, won subscription applications of Rs 4.94 billion in total. The Rs 880
million reserved for non-resident Indians had Rs 1.5 billion offered. Together
with the Rs 1.6 billion subscribed by shareholders and Rs 200 million by staff,
the total money subscribed came to Rs 8.24 billion.
Dhirubhai thus
had Rs 3.24 billion more than the Rs 5 billion he could keep. Even with a rapid
refund scheme for unsuccessful applications, he could keep the money to play
with for at least two months.
In addition, to ease the pressure
on the Reliance share price, the company's share registry, Reliance Consultancy
Services, sat on the rush of share transfer applications lodged just before the
29 November cut-off date for the G Series rights attached to shares. According
to stock exchange rules, ownership transfers were to be made within one month
of delivery, but by late February 1987 investors and brokers were screaming
that some 3 million shares were still in limbo. By keeping these out of the
market, the company created a scarcity of floating shares that helped keep the
price rising from the late-December nadir.
The financial pressure was off,
temporarily. Reliance had the funds to complete its PTA and LAB plants, which
were way behind schedule (the polyester staple fibre plant had opened six
months late, in July 1986), and to refurbish its image of technological
prowess. And Dhirubhai could still claim that the small investors believed in
him, in their millions. Reliance now claimed the largest shareholder base of
any company in the world: 2.8 million.
But the fight against the bears
in the stockmarket over 1986 to stop a freefall of his share price had drained
his personal reserves, the parallel fund that had sustained the Ambani magic.
Huge amounts had been spent on counter-publicity to the Indian Express and efforts
to block his political critics. One senior broker close to Dhirubhai at that
time estimated that Dhirubhai had lost about Rs 5 billion by early 1987, not
including the fall in value of his shareholding.
Dhirubhai would also have known
by then that the Indian Express had been right in its forecast of a drastic
profit decline for Reliance, its first since listing. In fact his forecast of a
profit rise for 1986, made less than two months before the financial year
closed, in retrospect looked puzzling. The annual results for 1986 that were
published in April 1986 showed net profit had dropped to a mere Rs 141.7
million, lower even than the first half profit the G Series prospectus had
reported, and an 80 per cent fall from the 1985 profit.
And then there was the
unshakeable enforcer Bhure Lal, eyes fixed ahead, who had quickly dismissed an
attempt at a conciliation by Mukesh Ambani at a meeting granted during the
year. By January 1987, Dhirubhai would have been hearing back from his contacts
in Du Point and Chemtex, and the dilemma his deals had put them in. The Customs
Service was about to issue its show-cause notice on the allegedly smuggled yarn
plant in February Dhirubhai had some more financial breathing space, but he was
still in a closing trap.
LETTING LOOSE A SCORPION
Dhirubhai Ambani needed something
more. He needed to unlock the doors in New Delhi that had suddenly become
closed to him in 1985.The master key was obviously Rajiv Gandhi-but how to win
over a young man who clearly regarded Dhirubhai as the epitome of everything
that had been wrong with the Licence Raj and the Congress Party?
Although he had grown up in the
household of prime ministers, Rajiv had been born without the ruthlessness that
distinguished Indira and her other son Sanjay. Rajiv was interested in
technology and nature, a keen amateur photographer and home computer buff, but
seemed to lack the mental drive to push himself to higher achievement. He had
failed to complete his degree in mechanical engineering at Cambridge. And until
he was drafted into the party by Indira after Sanjay's death, he had been
supremely happy flying the second-echelon turboprop aircraft in the Indian
Airlines domestic feet.
Even after five years in the
prime ministership, he left some acquaintances, like the industrialist Rahul
Bajaj, with the feeling of a personality not fully matured, not hardened into
adulthood. Capable of great affection and enthusiasm, he tended to let a rush
of emotion push his judgements - as in the quickly reached 1settlements'of deep-rooted
ethnic and communal disputes in Punjab and Assam, settlements that soon became
meaningless in the absence of the follow-up measures only a skilled politician
could deliver, or in sometimes grandiose and adventurist foreign policy
initiatives.
Not too deep down, Rajiv was
prone to panic. When his initiatives went awry, as they tended to do among the
deeply cynical and entrenched vested interests of his complex country, he would
sometimes overcorrect his well-meant impulses by shabby manoeuvres or hurtful
shows of a petulant temper. Rajiv had expelled the more egregious members of
his mother's inner circle, but only to install his own favourites. Later known
as the coterie they formed a barrier between the prime minister and his party,
between Rajiv and reality. In the flattery and sycophancy that had built up
around the Nehru-Gandhi dynasty, there were few to play the role of the court
fools who accompanied the Roman emperors at their triumphs and whispered in
their cars: 'Thou art mortal. Within a few months of his Bombay speech in
December 1985 about the Congress powerbrokers and corrupting business links,
Rajiv was starting to have second thoughts.
The speech had been mocked within
the party as the thoughts of a greenhorn. The tax and foreign exchange raids
launched by V P Singh from April 1985 had brought constant complaints from big
business. Few had resulted in completed prosecutions, but the arrests, searches
and seizures--all immediately publicized were humiliating punishment in
themselves for moneybags used to getting nosy officials called off with a quick
call to New Delhi.
By April 1986, the press was
reporting an imminent revolt by Indira Gandhi loyalists. Pranab Mukherjee gave
an interview defending his record, and was promptly expelled on 27 April.
Around mid-year, Arun Nehru - Rajiv's first cousin and internal security
minister-who was also regarded as close to Dhirubhai, became estranged from the
prime minister. He was dropped from his ministry in October. In June, the
commentator M. V Kamath was writing that Rajiv's honeymoon was over, because of
the Bombay speech and raids on industrialists.
The Times of India's editor,
Girilal Jain, was quoted as saying that big businessmen could no longer meet
the prime minister. On 6 August, Rajiv was bailed up about the raids at a
meeting with the Calcutta Chambers of Commerce, and admitted within hearing of
journalists that they may have gone too far.
In late August or early
September, Rajiv opted out of the meetings arranged with Gurumurthy In October
he met Dhirubhai for their first direct and private meeting since becoming
prime minister. But it is still not clear at what stage Rajiv might have begun
to perceive Dhirubhai as an Ay. After A, the nascent revolt in the Congress
Party had featured politicians identified with the Ambanis.
There remains a wonderful story,
still widely told in Bombay and New Delhi that in their first meeting Dhirubhai
bluntly told Rajiv he was holding a huge amount of funds on behalf of Rajiv's
late mother and-wanted to know what to do with the money. This is almost
certainly apocryphal, though it became part of India's political folklore
because it fitted with Dhirubhai's reputation for both brazenness and keen
judgement of character. More likely, Dhirubhai used the meeting to outline his
big plans for industrial expansion.
The rapprochement seems to have
been assisted meanwhile by Dhirubhai's implanting the perception that his
enemies were traitors to Rajiv as well. In particular, Dhirubhai would have
picked on the suspicion felt by V P Singh towards Amitabh Bachchan, the
megastar of the Bombay cinema who had been drafted into Rajiv's winning
Congress slate at the end of 1984. The Bachchan family had been close to the
Nehrus back in their common home town of Allahabad, a modern-day administrative
centre at the ancient pilgrimage site where the Yamuna River fows into the
Ganges. Amitabh and Rajiv had grown up together. Elected from Mahabad, Bachchan
was seen by Singh as a potential threat to his own power base in the surrounding
state of Uttar Pradesh. In late 1986, Singh's staff were said to be alleging
privately, without ever producing the slightest evidence to support it, that
Bachchan, and his businessman brother Ajitabh who had taken up residence in
Switzerland, had huge wealth hidden in Swiss bank accounts.
According to a later report, it
had been through Amitabh Bachchan that the October 1986 meeting between
Dhirubhai and Rajiv had been arranged.
On 2 December 1986, during a
debate in Parliament's upper house, a minister disclosed that the Central
Bureau of Investigation-which comes under the prime minister's control, through
a junior minister-had started an inquiry into whether Gurumurthy was being
given unauthorised access to secret government papers. A leak from the Industry
Ministry's Directorate-General of Technical Development (DGTD), the apparent
basis for Gurumurthy's articles in August about the 'smuggled' Reliance plants,
was indicated as the specifc focus. The DGTD was encouraged to make a formal
complaint, which it did on 11 December-adding, either bravely or for the
record, that the favours purported to have been shown to Messrs Reliance
Industries Ltd by the officials of this office may also be investigated into .
On 21 December, the CBI raided Gurumurthy's office in Madras and took away a
number of documents.
The Enforcement Director Bhure
Lal, who set off on his visit to the United States later in December, is
understood to have suspected he was being shadowed from India by an agent of
Reliance. Within days of Bhure Lal's visit, a person who identified himself as
an inquiry agent retained by Bhure Lal appeared in Bern, the Swiss capital, and
began making inquiries about Ajitabh Bachchan. The Indian Embassy and possibly
Bachchan himself became aware of this. The Embassy queried New Delhi and
Bachchan may have contacted his brother.
Rajiv Gandhi was taking a New
Year holiday with his family in the Andaman and Nicobar Islands, India's
south-eastern territory in the warm tropical waters at the northern entrance to
the Malacca Strait. Amitabh Bachchan joined the Gandhis for part of the
holiday, something that was publicised accidentally when the Indian airliner
carrying Bachchan was diverted to the Burmese capital Rangoon because of
technical problems.
The Gandhis returned to New Delhi
in mid-January 1987. New Delhi was in one of its periodic military flaps about
Pakistan. Earlier in the winter, India itself had conducted army manoeuvres on
its western border, but these had now concluded. Yet Pakistan had just moved tank
formations to forward areas. Rajiv called his cabinet together to assess the
threat. On the evening of 23 January, he abruptly asked V P Singh to leave the
finance portfolio and take charge of defence. Rajiv had been holding the
portfolio himself, but the situation now required a senior cabinet minister
overseeing defence full-time. Singh could hardly refuse, and the transfer was
made and announced the next day.
Bhure Lal had reported on his
American visit to his immediate superiors in the Finance Ministry, and was to
file a written Tour Report later in February which included the results of his
follow-up correspondence with Du Point and Chemtex. Soon after Singh was
transferred, the prime minister's office asked to see all the Enforcement
Directorate's records regarding the Fairfax inquiry, and Bhure Lal briefed the
Cabinet Secretary, B. G. Deshmukh, about it on 28 January.
Around that time, his
departmental head, the Finance Secretary S. Venkitaramanan, also pressed the
Enforcement Director two or three times to reveal the subjects of his
inquiries, explaining that if the ministry was going to be put in hot water he
should be forewarned. Bhure Lal demurred. The word was already out in the press
that Bhure Lal had engaged an American private eye and that his targets
included several big Indian companies and superstar politicians Later, rumours
in New Delhi suggested a private eye had found evidence of Rs 6.5 billion in a
Swiss bank account in the name of a company called Maeny Adol Brothers (perhaps
a Lewis Carroll- distortion of Matinee Idol Brothers', allegedly owned by the
Bachchans and unnamed Italians' with Indian links.
No
evidence of any such company or bank deposit was ever produced, but combined
with the appearance of the self-proclaimed investigator in Switzerland, the
rumours added to the heat under the prime minister's friends.
The
government's legal machinery was meanwhile working against Reliance on the
customs and excise evasion questions. Dhirubhai was not yet out of the soup.
But V P Singh was uneasy. On 9 March he asked for Bhure Lal's file on Fairfax
to be sent across to him at Defence in South Block, and annotated in a margin
that he had approved the engagement of a foreign detective.
Around
10 or 11 March, copies of two sensational letters were shown to Rajiv, most
likely through one of the senior bureaucrats in his office, Gopi Arora. The
letters were to have dire consequences for Rajiv Gandhi. How they reached the
prime minister's office has never been revealed. Both were apparently written
on the letterhead of the Fairfax Group. The first, dated 20 November 1986,
said:
Dear Mr.
Gurumurthy,
Dr Harris
apprised me of his useful meeting in New Delhi last week with Mr R. Goenka, Mr
N. Wadia, Mr V Pande, Mr B. Lal and yourself. Now that the group has been
retained to assist the Government of India we hope to expedite end result.
We received only US$300 000
arranged by Mr. N. Wadia. As considerable efforts have already been made and
expenditure incurred, it is advisable Mr. Goenka arranges during his
forthcoming visit to Geneva an additional US$200 000. We shall refund both
amounts on receipt from the Government of India to E Briner, Attorney, 31,
Cheminchapeau-Rogue, 1231, Conches, Geneva.
We
shall apprise Mr. Goenka in Geneva about the progress made on source of funds
for purchase of Swiss properties of Mr. Bachchan. We shall contact Mr. Goenka
at Casa Trola, CH-6922, Morcote (Ticini), during his visit.
Yours sincerely,
(sd)
G. A. Mekay
The second
letter carried no date:
Dear Mr. Gurumurthy,
Please send me the following details to continue our
investigations:
(i)
The
details of rice exports by the Government of India to the Soviet Union;
(ii)
Documents
relating to the non-resident status of Mr Ajitabh Bachchan from the records of
the Reserve Bank of India. When Mr Bhure Lal visits here next time, we'll make
his stay pleasant.
Yours sincerely,
(sd) G. A.
McKay
The treachery of V P Singh and
other friends like Nusli Wadia seemed confirmed. Financed by Wadia and his
mother's old foe Goenka, the conspiracy was aimed at striking down Rajiv
through his old friend, Bachchan. The details seemed to corroborate the plot:
the Swiss attorney Briner was an old friend of Goenka's who had visited him in
Bombay a year or so before. Casa Trola, the address where Goenka was to -be
contacted, was meant to be that of Nusli Wadia's retired father. (But the
composer of the letter had got it wrong: the name of the house, Casa Fiola, was
actually misspelled, and it was not close to Geneva but on the Italian-Swiss
border.)
A panic-seized Rajiv handed the
letters to the Central Bureau of Investigation, who immediately assigned the
case to the team already investigating the apparent leak of the
Directorate-General of Technical Development report to Gurumurthy. According to
the complaint fled by the DGTD, the relevant file on Reliance had indeed
disappeared for two weeks in July 1986, reappearing on a certain desk on 25
July, and Gurumurthy had appeared to have drawn upon it for his August articles
on the smuggled plant.
But the CBI's two investigating
officers, Yashvant Malhotra and Radhakrishna Nair, were reluctant to prosecute
under the Official Secrets Act, originally passed by the British in 1923 to
protect the Raj against embarrassment by nationalists and only slightly
modified in 1949. How could it be used against an Indian journalist who had
exposed in a newspaper the activities of a commercial enterprise? It was hardly
the kind of offence listed in the Act: 'Passing surreptitiously information or
official code or pass-word or any sketch, plan, model, article, note or
document which is likely to assist, directly or indirectly an enemy ...'If
Gurumurthy was to be penalised for his methods, they argued, Reliance should
also be investigated for the apparent offences he had revealed.
The airfax letters seemed to give
the CBI's director, Mohan Katre, the national security grounds that were so far
lacking for an Official Secrets Act prosecution. The bureau's full resources
were thrown into the job.
All files on the Reliance
investigation were collected from the Enforcement Directorate. At 10.30 pm on
11 March, Bhure Lal was called at his home: he was being transferred to run the
Finance Ministry section handling currency and coinage, one of the Ministry's
most routine tasks, and was to hand over charge of the directorate the
following morning. At the same time, the Enforcement Directorate itself was
removed from the responsibility of the Revenue Secretary, Vinod Pande, and put
under the Finance Ministry's Department of Economic Affairs, which came
directly under the Finance Secretary, S. Venkitaramanan.
On 12 March, arrest and search
warrants were sent by air to Madras and Bombay. At 1.30 am that night, a CBI
team arrived at Gurumurthy's house, put him under arrest on charges of criminal
conspiracy and breaches of the Official Secrets Act, and seized car-loads of
documents. In Bombay the agency arrested the partner in Gurumurthy's
accountancy firm, A. N. Janakiraman.
Later on 13 March, the CBI turned
up and ransacked the Indian Express guesthouse, where Goenka happened to be
staying. Wadia and the controversial Hindu God man Chandraswami (to be indicted
ten years later on charges of swindling a businessman of an attempted bribe in
1986) were calling, separately, on Goenka. Both were allowed to leave after
being searched. As the CBI detectives went through his papers, Goenka had a
telephone call. It was Dhirubhai, offering to help out in any way he could.
Goenka slammed down the receiver.
At this point, the letters and
their existence were not public knowledge. The waters were muddied even further
by the splash in the Indian Express on the morning of 13 March of a highly
critical letter written to the prime minister by the President of India, Giani
Zail Singh. The elderly Sikh president, who regarded himself as India's senior
statesman, had been trying to assert himself over the young Gandhi heir. Zail
Singh had refused his assent to one government bill on postal services earlier
in 1987; he accused Rajiv of not consulting him on the Punjab, where insurgency
was getting worse. He now rebuked Rajiv for undermining the President's high
office, and warned he would not just be a 'spectator' to this process. That the
Express should get hold of his letter was not surprising: Gurumurthy had
drafted it, and Goenka's close adviser S. Mulgoakar had improved the English.
In their search of the newspaper's New Delhi guesthouse, the CBI found a copy
of the draft, with the corrections.
Brought to New Delhi, Gurumurthy
was put through nearly 48 hours of straight questioning, most of it about the
supposed targeting of the Bachchans. Meanwhile, the CBI issued a press notice
that reliable information had been received on 11 March that Gurumurthy and
others had been in contact with certain foreign detective agencies and had
passed on sensitive information from government files. Incriminating evidence
had been seized during the searches. Through friends who brought in food and
clothes, Gurumurthy was able to pass out the word to Goenka that the government
had possession of certain letters.
The bureau produced Gurumurthy
before Delhi's chief magistrate on 17 March, listed four charges under the
Official Secrets Act, and sought an extension of custody. The CBI mentioned for
the first time that it possessed a letter stating that Gurumurthy had made
payments to Fairfax.
Represented by advocates Ram
Jethmalani and Arun Jaitley, Gurumurthy admitted contact with Fairfax but
pointed out that the investigators had been hired by Bhure Lal. In his bail
application, the Express writer said that as a journalist he was not bound to
disclose how he got access to the contents of government files, and that a lot
of relevant information had been obtained by persons working for Reliance
itself a company powerful enough to have in its possession extracts from
government files relevant to its pending demands and conduct of industry' For
its part, the CBI was not carrying on either an
intelligent or an honest
investigation's , and was allowing itself to be used as an instrument of
blackmail and harassment. In the course of his address, Jethmalani repeated the
rumour about the Bachchans being involved with well-connected Italians in the
Swiss company 'acny Adol' getting the rumour in print under court privilege for
the first time.
When, on 20 March, the Calcutta
newspaper The Statesman published the first of the controversial 'airfax'
letters, Gurumurthy's allies and the public were able to see what was
happening. Goenka was able to point out that he was out of the country at an
international press meeting when the alleged meeting of conspirators took place
in New Delhi. Nuances of the English used in the letter-in particular the
erratic use of the definite article-showed an Indian rather than American hand.
The Fairfax head, Michael Hershman, and his deputy, McKay, said the letter was
a forgery, using a transferred letterhead from his company. It would have been
stupid and unprofessional to. put such material on paper, they said.
The evidence backing the CBI case
was looking shaky, and Gurumurthy was released on ball on 23 March after ten
days confinement. Somewhat prematurely, as it turned out, he declared that the
press could trust the judiciary to help when the executive arm of government
ran amok.
On 31 March, a parliamentary
debate broke out on the affair. The junior minister helping Rajiv run the
Finance Ministry since V P Singh's exit, Brahm Dutt, had returned from a
mysterious week-long trip to Italy in February, denying speculation that he had
crossed by land into Switzerland. Dutt told parliament that Fairfax had merely
been informers for the Indian Government, provoking Singh to stand up and share
responsibility for hiring the agency. Hershman told reporters he had been
engaged by Bhure Lal, and had a letter to show it.
Dutt also revealed what seemed to
be new evidence of the conspiracy. A computer printout from the register of the
Oberoi Hotel in New Delhi showed that Hershman had been booked into the hotel
under the name Harris in November 1986 by Bombay Dyeing, and that Nusli Wadia
had been staying in the same hotel during his visit.
A claque of ministers and MPs
from the Congress Party then began a concerted attack on V P Singh in
parliament. The former finance minister had endangered the national security of
India by encouraging a foreign agency, one probably linked to the US Central
Intelligence Agency, to obtain damaging material on prominent Indians.
Sensitive material had been passed to Fairfax which could be used by CIA
operatives to blackmail and embarrass India.
The clamour, which went on for
five days, was led by the former foreign minister and reputed beau of Indira
Gandhi, Dinesh Singh, who went to sit by Amitabh Bachchan when he finished his
own speech. The choice of Dinesh Singh, another member of India's minor
royalty, seemed designed to counter any backlash from V P Singh's own Thakur
caste. The beleaguered defence minister walked up to Dinesh Singh. You've
thrust a knife into my body,' he said to him in Hindi. 'What else could I have
done?' replied Dinesh Singh, with a shrug.
That Rajiv Gandhi had
countenanced, possibly encouraged, the attack was obvious to V P Singh-a
suspicion not allayed when Rajiv asked his colleagues to stop and proposed a
commission of inquiry under two Supreme Court judges to look into A aspects of
the Fairfax affair. (VP Singh was correct: Dinesh Singh later confirmed that he
had been instructed by Rajiv.)
The terms of the commission given
to the panel-justices M. P Thakkar and S. Natarajan - on 6 April also confirmed
that Rajiv was interested in only one side of the case. The two judges were
ordered to report within three months on the circumstances under which Fairfax
had been engaged, for what purpose, under whose authority, on what terms and
conditions, whether the agency was competent for the task, whether any payment
had been authorised or made, what information had been received by the
government from Fairfax, what information the government had made available to
Fairfax, and whether the security of India had been prejudiced.
The appointment came under strong
attack as a diversion from a parliamentary inquiry, where all political aspects
could have been investigated, and from the CBI's failing attempt to prosecute
Gurumurthy under the Official Secrets Act. 'The decision is as muddled as the
original fiasco which the probe intends to resolve,' wrote the advocate Ram
Jethmalani in the Indian Express the next day. 'The decision is lacking in
political honesty, is clearly calculated to subvert the due process of justice
and intended only to make the judiciary a sharer in the government's amazing
follies. In an observation that was later to get him into trouble, Ram
Jethmalani also wrote that the CBI's counsel had admitted in Gurumurthy's bail
hearing that the two Fairfax letters had been shown to Gurumurthy during his
interrogation.
But Rajiv's move was given
credence from a weighty analyst. 7'e Times of India editorialised that the
commission's appointment was an 'impeccable move's . In several signed articles
over April and May, the grand old newspaper's editor, Girlial Jain, urged
readers to keep an open mind about the possibility of the CIA or other sinister
interests being involved in the Fairfax affair, possibly to collect material
for later use against India, and he asked whether the Fairfax Group was not
semipolitical in characters . Jain had not been an admirer of Rajiv before,
but it will be remembered that he had invested heavily in Reliance debentures
in 1985, with the help of a BCCI loan.
V
P Singh decided to test Rajiv's support. The material employed was a coded
telegram to the Defence Ministry from the Indian Ambassador in West Germany,
sent around the beginning of March. In 1983, the Indian Navy had ordered two
submarines from the German builder Howaidswerke Deutsche Werft (HDW). These
were delivered in 1985, and negotiations were under way on a second pair, to be
built under licence in Bombay's naval dockyard. The Germans had agreed to a 10
per cent price cut, but the ambassador informed New Delhi they were unwilling
to give a further cut because they were still bound by contract to pay a 7.5
per cent commission to the Indian agent who had originally clinched the order.
Rajiv's
government had loudly banned use of agents in all defence deals in October
1985, so it was a good test case. Singh had already asked the Finance
Ministry's two economic intelligence arms to report on the involvement of
agents in the arms trade.
On 9 April, Singh asked his
Ministry's Secretary, S. K. Bhatnagar, to conduct a full investigation of the
HDW case, and then issued a press release about it. He sent the case file
through normal channels around to Rajiv's office at the other end of the North
Block of the Lutyens & Baker-designed Secretariat Building, annotating the
names of the London-based Hinduja brothers (part of the Hindu diaspora from the
province of Sindh included in Pakistan), whom Bhatnagar understood to be the
agents-though they later denied involvement. The file arrived on Rajiv's desk
after newspapers published Singh's disclosure on 10 April.
Predictably enough, his move
created a renewed furore against Singh within Congress, where the vested
interests saw him as letting the side down, betraying his own team. To those in
the know it was also an embarrassment to the Gandhi family. negotiations had
begun with HDW in 1980 when Sanjay Gandhi was ascendant. The reaction from
Rajiv's office was cool. Singh went to see the prime minister on 12 April, and
did not get the support he was angling to draw out. Later that day he resigned
from the cabinet.
Events pushed Rajiv and Singh
further apart. Four days after Singh resigned, a reporter named Magnus Nilsson
reported on Swedish Radio that the giant Swedish armaments firm Bofors had paid
a large commission to agents in the US$1.2 billion purchase of Bofors artillery
by the Indian Army. The Bofors deal had been signed in March 1986, six months
after the ban on the use of middlemen.
Rajiv fumbled his response,
giving contradictory statements in parliament. He issued a scornful denial on
17 April, and on 20 April said the Swedish Prime Minister, Olaf Paime, had
confirmed that no middlemen had been used. His claque of Congress supporters
stepped up their campaign against VP Singh, who spoke out in his own defence.
Within a couple of weeks, Singh was touring the country explaining that his
efforts to attack the black economy had, been subverted by the very people he
was targeting. Rajiv refused his suggestion to call a Congress parliamentary
meeting to discuss the Fairfax, HDW and Bofors issues. On 2 June, the Swedish
Government's Audit Bureau confirmed that an even bigger amount of money than
that reported by Swedish Radio had been paid to agents.
The atmosphere became even more
feverish. Since March, there had been speculation that the disgruntled
president, Giani Zail Singh, was thinking of dismissing Rajiv and appointing
another prime minister, under hitherto untested reserve powers of his office.
The Swedish audit report, contradicting Rajiv's assurances to parliament, could
he a ground for his dismissal. On 17 June, a state election in Haryana,
adjacent to New Delhi, saw Congress almost wiped out there by a farmer caste
politician, Devi Lal, who had derided the Bofors deal in his campaign speeches.
Zail Singh backed down when he
was bluntly informed by Arun Shourie, recently restored as editor of the Indian
Express, that he would get no support from Ramnath Goenka. The old press baron
had realised that Rajiv's replacement as Congress leader could just as easily
be Arun Nehru-perceived as Dhirubhai Arnbani's man-as V P Singh. The president
then scouted for support from Congress dissidents and opposition parties for
him to nominate for a second term as president, running against the official
Congress candidate, when his term ended in July. The president is elected by
MPs from the central parliament and state assemblies by secret ballot, so this
provided a risk-free path for Congress to ditch Rajiv, who would have been
obliged to resign if his candidate were defeated.
But the support promised was
patchy and equivocal: the old Sikh backed down, and retired quietly in July.
Rajiv was beleaguered by further evidence of the trail of payments from Bofors
pointing closer to his own circle, but he was firmly in charge of Congress. The
party would sink or survive with him. In July, it expelled V P Singh.
The dumped politician was wryly
stoic in a verse penned around this time:
I have been cut into pieces.
But my value remains the same;
I was a solid coin
Now I have become small change's
Singh's wan mood did not last
long. In September, he launched the Jan Morcha (People's Movement) against the
government, in which group ironically enough, he was joined by, Arun Nehru.
The Thakkar-Natarajan inquiry
into the engagement of Fair- fax meanwhile ground on, showing a wooden
adherence to its narrow terms of reference and firmly closing off avenues that
might allow the erstwhile investigators of Reliance to open up the substance of
their charges. The original three-month term was extended twice, first to
October and then to December. The first four months of hearings were held in
secret, and it was only when open hearings began on 14 August that some of the
evidence produced by the government began to emerge and the bent of the CBI, as
the commission's investigating agency, became apparent.
Only the Bombay Dyeing chairman
Nusli Wadia, Dhirubhai Ambani's industry rival, was declared, under the law
governing commissions of inquiry, a person likely to be prejudicially affected
by the inquiry . In theory, this protected him against selfincrimination and
enabled him to call and cross-examine witnesses; in practice the right was
refused by the judges. Throughout the inquiry, the two judges came under attack
in the press for refusing to state what the rules of evidence were. whether
beyond all reasonable doubt , as in criminal cases, or 'eight of probability'
as in civil suits. Wadia was refused access to all papers put before the
commission. In one instance, a judge took evidence without notice at his own
residence.
Evidence and questions were
swapped between the commission and the CBI. Wadia's declared status before the
commission gave him no protection against action by the
CBI on evidence that was
presented to the two judges. On 31 July, a senior CBI officer few to Bombay and
organised the arrest of Wadia for checking into a hotel as an Indian national.
In India, foreigners are required by law to pay their hotel bills in foreign
exchange, often at a higher effective tariff than Indian guests. As a British
citizen, Wadia would have been obliged to do this on his travels within India.
He maintained he always did so but that a hotel clerk might have assumed he was
Indian when completing a register. Wadia was detained seven hours before being
granted bail, close to midnight.
Two things were clear: the CBI
was using evidence collected in the course of its Fairfax investigation; and
no case was too petty for the senior echelons of India's premier
anti-corruption agency when a political enemy of the government (as Wadia had
rapidly become) was involved. On a complaint by Wadia's counsel Ram Jethmalani,
Justice Thakkar said the commission had not asked the CBI to harass Wadia. They
were acting on their own.
Jethmalani himself faced a
contempt of court complaint in a New Delhi magistrate's court, brought in May
by the CBI which insisted it had not shown the two airfax letters to Gurumurthy
during his interrogation. The existence even of the letters was now in
question. The commission refused a request by Wadia for them to be produced.
'We do not know whether they exist or not,' Thakkar said, arguing that they
were no longer relevant.
On 1 September, the day after the
Indian parliament rose from its monsoon sitting, some 400 officials under the
Finance Ministry's Director of Revenue Intelligence, B. V Kumar, raided the
eleven printing centres of the Indian Express around India. They seized
documents, inspected printing machinery and took away several employees for
questioning. Later, the agency charged the Express with evading Rs 3.3 million
in customs duty by misdeclaring the speed of a printing press it had imported,
of owing Rs 27.5 million in back taxes and of violating foreign exchange laws
by making payments abroad in cash. Many of the tax offences alleged against the
Express were already under dispute. It was noted that the leader of the raids,
B. V Kumar, had been in the customs office in Ahmedabad previously. No one in
the Indian press saw the raids as anything but a blunt warning by Rajiv to the
Express, by then leading the criticism over the Bofors scandal.
From the Fairfax office outside
Washington, Hershman had given interviews to Indian journalists, contradicting
several claims made by the government. He insisted he had been engaged by Bhure
Lal, had been promised payment on a contingency basis, and had not taken any
money from either Gurumurthy or Wadia. The government formally ended his
engagement on 27 May, after V P Singh had mischievously asked whether India's
national security was still being compromised.
To a questionnaire from the
Thakkar-Natarajan Commission, Hershman asked to be satisfied first what the
purpose of the commission was, given that all the facts about his engagement
were known to the government; what action had been taken about the forgery on
Fairfax stationery, and what action had been taken on information provided by
Fairfax in the course of its inquiries. The two judges replied that these
questions were beyond their scope. 'The commission hopes that you will be good
enough to realise that instead of co-operating with the commission and furnishing
the information, you are virtually reversing the roles' they complained.
Hershman refused to co-operate, and became a critic thereafter of a cover-up
implicit in the commission's role. The former Enforcement chief, Bhure Lai, had
been called in for extended and gruelling interrogation by the CBI on two
occasions in late March, and then was called to give evidence by the
commission. The Revenue Secretary, Vinod Pande, was also called. He had met
Wadia several times, always in his office, first around the end of 1985 to
discuss duty revision on PTA and DMT, then to discuss an excise raid on Wadia's
company Formica India in November 1986. But he had also met Dhirubhai and
Mukesh Ambani four or five times over 1986.Pande himself had also been moved in
mid-May. In the bureaucratic equivalent of being put out to grass, he was put
in charge of the Department of Rural Development.His replacement as Revenue
Secretary was Nitish Sen Gupta, the former Controller of Capital Issues in the
early 1980s during Dhirubhai's golden run in the sharemarkets. Evidence given
by all the suspected conspirators was mutually corroborating, though Bhure Lal
was left quite isolated in his decision to hire Fairfax. Clearance to hire a
foreign detective on contingency had only been given in general terms by his
superiors.
The CBI wanted to prove that
Wadia and possibly Goenka had been fmding Fairfax secretly and allowing Bhure
Lal to think he had hired it on contingency. But it could not rely now on the
discredited airfax letters.
The CBI needed some other
clinching evidence. The CBI and the counsel assisting the commission, the
Additional Solicitor-General G. Ramaswamy, concentrated on the hotel
arrangements for Hershman in New Delhi. But these seemed to point only to the
possibility of a second forgery. A computer printout from the Oberoi Hotel
showed Hershman had been booked in by Bombay Dyeing. But this computer entry
had been created the day after Hershman's arrival: the hotel's management
admitted that the detail could have been given by someone telephoning in. From
Washington, Hershman said he had not met Wadia at any time, and had paid his
own hotel bill with his credit card and had the sheet to prove it. Ramaswamy
went into a detailed study of Wadia's bill, including his laundry account and
food charges, in an effort to show he was paying for more than one person.
Wadia, it turned out, had his wife with him and his father was visiting from
Switzerland. The hunt for treason had turned into a farce.
At the end of August, just before
the raids on the Indian Express, Ramaswamy was angrily urging the judges not to
take it lying down, when a magazine questioned whether, rather than getting at
the truth of the Fairfax affair, the end result of the Commission of Inquiry
would be a frame-up of Nusli Wadia.
In the outcome, when the
Thakkar-Natarajan report was handed to the government on 30 November and
published on 9 December 1987, it did what Rajiv had obviously wanted it to do.
It censured V P Singh for exposing India to security risks by allowing Bhure
Lal to engage a US detective agency which employed some former CIA officers.
The report concluded that Wadia
had played an active role in the engagement of Hershman by Bhure Lai, and had
sponsored Hershman's stay at the Oberoi Hotel where he himself was also
staying. Bhure Lal and the Government of India had been used as instruments to
serve the purposes of Wadia, who had an nimus against Reliance through business
rivalry But there was no evidence that Bhure Lal knew about Wadia's interest and
role. It was inconceivable that Fairfax would ever have agreed to work on the
system of rewards for information.
V P Singh declared the report 'is
monument of injustice'. Rajiv Gandhi said it completely exonerated his
government and had identified those who had joined hands with foreign agents in
a conspiracy to weaken the country. The origins of the forged Fairfax letters
were never investigated nor was the identity of the detective who had appeared
in Switzerland and started inquiries about the Bachchans. Together they showed
the workings of a bold and unconventional mind, the existence of an impressive
intelligence network, and an uncanny grasp of human weakness.
The future the letters set off
caused a fatal split in Rajiv Gandhi's government, which just over two years
earlier had won a record majority in parliament and seemed able to achieve a
transformation of India's economy. By the end of 1987, Rajiv Gandhi was a
discredited leader heading for electoral defeat.
Possibly, his government's decay
would have happened anyway after the revelations in Sweden about Bofors. The
trail of commissions was eventually shown to lead through Swiss bank accounts
to at least one family friend, an Italian company representative in New Delhi.
But perhaps Rajiv might have faced up to this scandal if he had kept his head
about the alleged Bachchan aspect and continued to ally himself with those
trying to nail down Reliance, thus possibly keeping their support.
The Bofors scandal made
unbridgeable a rift that had already occurred. On top of corruption later came
all the other issues of Indian politics: religion, caste, region, language,
control of water resources, wealth disparities and so on. It has been
overlooked that the split that eventually brought Rajiv Gandhi down can be
traced back to the commercial rivalry between Reliance Industries and Bombay
Dyeing over control of the Indian market for the polyester feedstocks purified
terephthalic acid and dimethyl terephthalate. The remark of the former minister
that 'The course of Indian politics is decided by the price of DMT'(see Chapter
7) seems all too true, at least for this tumultuous period.
The end result of the
Thakkar-Natarajan Commission was, predictably, worthless. Even if Wadia had
made secret payments to Fairfax, possibly breaking the foreign exchange law
(though as a foreign citizen he was entitled personally to keep funds over-
seas), only by a long stretch of the imagination could India's security have
been considered at risk.
The exercise was called a
'cover-up' and a giant 'red herring'. Beyond the end benefit, there was nothing
to connect Dhirubhai to the Fairfax letters. But those of his old friends who
knew him from the early days might have thought perhaps of a different phrase:
Bichu chordya -Letting loose a scorpion.
BUSINESS
AS USUAL
Dhirubhai Ambani was back in
favour. His enemies and critics Dhad been exiled from their positions of
economic control. If the prime minister did not regard Dhirubhai as a friend
and ally, at least he perceived Dhirubhai's enemies as his own enemies. And as
the Bofors scandal became more and more embarrassing, with Ram Jethmalani and
Gurumurthy trumpeting each new revelation, Rajiv Gandhi was suddenly feeling
very threatened.
But Dhirubhai was in a tight
position financially. At the end of April 1987, two weeks after V P Singh's
resignation, he announced Reliance's poor results for the calendar year 1986.
The profit was barely enough to cover a dividend of 25 per cent on the Rs 10
par value of the share, cut in half from the 50 per cent declared in 1985, and
even that was denounced as a product of accounting jugglery. Several
commentators recalled Dhirubhai's forecast of improved profits in November just
before the G Series debenture issue and asked how, in the eleventh month of the
company's financial year, he could possibly have been unaware of the likely
result. The polyester staple fibre plant had been completed six months behind
schedule, and the PTA plant was a year overdue. Diminished cash flow was the
reason for the delays but the company's reputation for mastery of technology
was defeated. The customs and excise evasion cases and the CBI's criminal
investigations were still alive.
After the 1986 results, the
collapse in the Reliance share price brought down the whole market, until the
government nudged the Unit Trust of India and other institutions into a market
support operation. The sharemarket boom set off by Rajiv's 1985 initiative in
economic liberalisation had ended. This was particularly grim news for
Dhirubhai. As well as restoring high profits to Reliance, he also faced the
task of rebuilding the estimated Rs 5 billion of his private funds lost in
defending his empire in 1986.
Rajiv's government did all it
could do to help, with Narain Dutt Tiwari a sympathetic listener as minister of
commerce and for some months also finance minister. On 7 May 1987, just after
the Reliance results, it announced a string of changes in the import regime for
polyester and its inputs, ostensibly to help the whole domestic industry cope with
what was portrayed as a weakening market. Polyester staple fibre, of which
Reliance was about to become the biggest Indian manufacturer, was taken off the
open general list for imports-meaning any textile weaver could import it-and
canalized through the State Trading Corp, a government agency that usually kept
the import tap closed. The specific duty of Rs 3000 a tonne put on imports of
PTA and DMT in 1986 after lobbying by Wadia's Bombay Dyeing was removed. As DMT
imports were also canalised and effectively stopped 'his benefited PTA users-
chiefly Reliance which was still a few months off getting its own PTA plant
into production. Extra allocations of foreign exchange were cleared for the PTA
plant and the catalysts it used. Patalganga's PSF capacity, larger than the
licensed 45 000 tonnes, was legitimised by a endorsement.
The duty on N-paraffin's, the
petroleum feedstock used to make the detergent ingredient LAB, was cut by 75
per cent. Reliance was the only LAB manufacturer in India that needed to import
this input, as the others were all integrated into local refineries which made
it. A new scheme of export incentives on polyester yarn and fibre exports
handed out some cash rebates, excise concessions and replenishments, tights for
imports.
The Finance Ministry also gave
prompt clearances for steps to improve the company's cash balance. Within ten
days of an application by Reliance, the Controller of Capital Issues cleared a
rights issue of new shares to existing shareholders that raised Rs 1.98 billion.
The government-run insurance companies, banks and investment funds became more
interested in working capital loans, subscription to debentures, and
sale--lease-back arrangements on equipment.
The Controller of Capital Issues
also cleared a proposal to '(bring forward) the conversion of the G Series
debentures by six months, to 31 July 1987, taking Rs 5 billion off the
company's debt. This was barely five months after the debentures had been
allocated among the subscribers. Many had not even received their certificates.
Now they were being hurried into
conversion. Reliance issued a notice on 6 July calling an extraordinary general
meeting of share-holders on 8 August to approve the early conversion. On 1
August, it sent a circular letter to the debenture holders stating that if they
opted for early conversion they need not send any communication. If they had
not sent an attached form by 25 August, they would be deemed to have opted for
conversion. According to litigants, who managed to delay but not stop the
conversion later in the year, the 1 August circular reached many debenture
holders only on 20 August-too late to be sure of sending their objection to
conversion.
The litigants, who included some
trade unionists representing Reliance workers at Naroda, claimed that many
investors might have wanted to hold on to their debentures for the full year,
and earn their 13.5 per cent interest. Big financial institutions had been
already informed mid-year by Reliance that profits and dividends for 1987 would
stay low, and that easing of the company's interest burden was vital. With the
connivance of the government and its public financial arms, the litigants were
saying, the small investor was being exploited so that Reliance could save some
Rs 330 million in interest.
Debenture holders were also to
discover that their bonds had been issued in units of ten, which meant the
two-for-one shares they received on conversion were in lots of 20-not regarded
as marketable lots in the stockmarket where the normal basic parcel was 50
shares. This meant delays while Reliance Consultancy Services, the group's
share registry, carried out the splitting, and consolidation of share
certificates into lots of 50. The newly created shares were not, in any case,
listed in the various stock exchanges until February 1988, meaning that for
some six months after conversion the shares were not tradeable and could not
add to any selling pressure on the price.
Despite all the help the
government provided, Reliance was indeed still facing a dismal year. To stave
off announcing a loss, it resorted to a desperate accounting move. The period
of its accounts was to be shifted from the calendar year to the April- March
fiscal year used by the government, meaning the 1987 year would actually have
15 months and end on March 1988. But by March, according to later analysis,
Reliance was still showing a profit of only some Rs 130 million, even less than
the 1986 result.
On 28 April 1988, Reliance
announced it would extend its year by another three months, not of course
because of its lack of profits so far, but on the novel ground of synchronizing
the commissioning of the PTA and LAB plants with the accounting year. By that
stage, more favourable breaks had been given by the government in its budget
for the year starting April 1988. The excise on yarn and fabrics was lowered:
Reliance had been among several producers that had raised prices ahead of the
budget speech and then announced that they were cutting prices to pass on the
benefits of the excise cut to consumers. A week after the budget speech, as an
afterthought, the import duty on the polyester input MEG was cut sharply.
When
the figures for the 18-month-long year were announced in November, Reliance
announced another record' result, of Rs 807.7 million net profit on Rs 17.7
billion in sales. Together with an interim dividend of 30 per cent, the final
dividend of 25 percent (of Rs 10) brought the shareholder's reward to Rs 5.5 on
each share. It was certainly the company's largest profit yet, but when annualised
it was still down on the Rs 713.4 million profit declared in 1985. It had been
helped by more creative accountancy, notably the capitalising of the entire
interest cost of the PTA and LAB plants and a new basis of provision for
depreciation, which had added some Rs 245.4 million to the bottom line. By the
financial ratios such as return on capital, which investment analysts used to
gauge a company's efficiency and relative profitability, Reliance had shown
less than spectacular results.
The justification
for Reliance's hunger for money was the industry vision Dhirubhai could conjure
up for his shareholders. At his annual general meeting in June the venue was an
enclosed suburban hall rather than under the blue sky of the Cooperage Football
Ground or the Cross Maidan. But Dhirubhai still looked up from the financial
mires to a future of massive silver cracking towers, distilling columns and
chemical containment spheres on the barren coastline of his childhood.
The company had been allocated
280 hectares of land at a new industrial zone called Hazira, on the banks of
the Tapti River, across from the ancient textile trading port of Surat where
the East India Company had set up its first trading factories. Reliance planned
to move into petrochemicals, making high-density polyethylene, polyvinyl
chloride and caustic soda-the ingredients for the plastics revolution that had
reached households in Southeast Asia but not yet India, where sugar or cement
was still shipped in jute sacks, women hauled water from their pumps or tanks
in brass or steel urns, shopkeepers expected customers to bring their own
containers for milk or rice, and farmers lugged steel irrigation pipes across
their fields or just gouged crude channels in the earth. All the plants listed
for construction at Hazira had been cited as proposed activities by Reliance
when it garnered subscriptions to its G Series debentures in November 1986, and
the acquisition of land at Hazira had been reported to Reliance shareholders in
June 1987, along with the dismal 1986 results.
The site remained a swamp, as
Dhirubhai tried to muster cash and credit to start building his dream. At the
end of May 1988, Reliance had applied to the Controller of Capital Issues for
permission to make yet another massive debenture issue to finance its Hazira
project, this time though a newly created subsidiary called Reliance
Petrochemicals Ltd.
The fully convertible debentures
would be priced at Rs 200 each, and bring one Rs 10 share in the new company
immediately on issue, with the remainder being converted to more shares in two
stages over the next three to seven years. The issue would raise Rs 5.934
billion towards an investment estimated at some Rs 25 billion by the time it
was completed in 1994.
The issue was cleared early in
July 1988 and opened for subscription at the end of August, even though, as the
Indian Express pointed out, Reliance Petrochemicals did not appear to have yet
obtained the industrial licences it needed for the project. It was also the
first case of a new company with no assets against its name being allowed to
issue fully convertible debentures, which was against the policy laid down by
the Finance Ministry controllers up to then. The Express also questioned
whether Reliance was raising money a second time, through the subsidiary, for
the same projects the G Series debentures were supposed to fund. This time
Reliance had a more sympathetic car in the Supreme Court. On 25 August, the
court barred the Express from publishing anything on the validity or legality
of the approvals got by Reliance Petrochemicals in connection with the issue.
The order was lifted on 23 September after the issue closed. By then, Dhirubhai
had 2.3 million new investors in his empire, among them of course many of the
existing 1.8 million shareholders in the parent company.
The petrochemicals plant would
make Reliance only the second producer of high- density polyethylene in India,
and its biggest producer of PVC. But Dhirubhai's ambitions were racing even
further ahead. In October that year, the economic affairs committee of Rajiv's
cabinet approved his proposal to build a gas cracker-a plant that breaks down
the components of natural gas into different petroleum gases- alongside the
petrochemicals plant at Hazira. It would produce 320 000 tonnes a year of
ethylene, 160 000 tonnes of propene, and 50 000 tonnes of butadiene. The
feedstock would come from the nearby South Bassein natural gas field being
developed by the government's Oil and Natural Gas Commission.
This was another big project,
using proprietary technology of the world's petroleum and engineering giants.
How was Dhirubhai to finance this when the big petrochemicals plant had just
been put off the parent company's own rather stretched accounts? Dhirubhai
already had his eye on one of the jewels in the Indian corporate world, which
he felt a friendly government had put in reach. The Bombay engineering firm of
Larsen & Tourbo, founded by two Danish engineers in 1938, had become one of
India's biggest listed companies by 1987, with assets of Rs 9 billion, annual
sales of Rs 5.8 million, and gross profit of Rs 820 million. It was building
all kinds of factories, making offshore platforms for the new oil and gas
discoveries in the Bombay High, and fabricating high-performance equipment for
India's nuclear power, space and defence programmes. It was something of a
strategic national asset.
As far as ownership went, the
Danes had retired from the scene. The firm's shares were widely dispersed, but
the government's financial institutions held a combined 42 per cent which
decided the fate of its management. It had made some ill-timed diversifications
into shipping and cement, but was a conservatively run company with an
impressive range of technical expertise. Mile regarded widely as sleepy and not
giving its potential performance, it was still making a return on net worth
that was twice that of Reliance in the bad days of 1986--87. It was immensely
rich in internal cash reserves and borrowing power. A tempting takeover target
and the Dubai-based Chhabria brothers had already started nibbling in the
market in 1987. But without the support of the institutions, no raid could
succeed.
In May 1988, the Bank of Baroda,
one of the score of nationalised commercial banks, decided to get into investment
banking and to set up a subsidiary called Bank of Baroda Fiscal Services, soon
abbreviated to BoB Fiscal. Two months later it asked the Unit Trust of India
and the Life Insurance Corporation (LIC), two of the biggest institutional
investors in the sharemarket, to help it start a portfolio by selling it
baskets of shares. Oddly, 63 per cent of the basket from LIC and 46 per cent of
the basket from UTI (by value) were Larsen & Turbo shares, bought for a
total Rs 270 million on 3 August. BoB Fiscal sold these shares two days later
for Rs 300 million to V B. Desai & Co, a firm of sharebrokers who did a lot
of work for Reliance. Later in August, BoB Fiscal repeated the same exercise
with the General Insurance Corporation (GIG), taking delivery of Larsen & Turbo
shares for some Rs 141 million, about 55 per cent of the basket from GIG. These
were also sold to V B. Desai &- Go, two months later. The brokers then
transferred the two lots of shares, amounting to 8 per cent of Larsen &
Tourbo's equity, to the Reliance offshoot Trishna Investments. Reliance
suddenly emerged in October as the biggest non-institutional shareholder in the
blue-chip firm. Meanwhile, the Company Law Board, not until then the most
vigorous regulator of corporate misdemeanours, had been activated by a minor
scandal in the Larsen & Turbo management over the use of a company-owned
apartment. The financial institutions agreed it was time for a new broom. On 11
October 1988, Mukesh Ambani and the Reliance director M. L. Bhakta joined the Larsen
& Turbo board by invitation.
Dhirubhai proclaimed the new
alliance's merger of the professional skills of Larsen & Turbo and the
entrepreneurial skills of Reliance. It meant greater risk-taking ability for
Larsen & Turbo, he told journalists. Reliance kept on buying Larsen &
Turbo shares in the market, helped by a share price that had fallen on news of
their effective takeover. It had built up a stake of about 20 per cent by early
in 1989, when Dhirubhai was invited in as chairman and Anil Ambani also appointed
to the board.
Just what Dhirubhai had in mind
about greater risk-taking came soon afterwards. In March 1989, Larsen &
Turbo raised Rs 800 million for working capital in a convertible debenture
issue and then put Rs 760 million into Reliance shares to cement the
relationship. It was paying over 12 per cent interest to the debenture holders,
and earning about 2.5 per cent in dividends on the shares.
In September 1989, Dhirubhai
announced some other measures to tighten the alliance. Larsen & Turbo's
shipping division would acquire two new ethylene carriers, which could be used
to deliver feedstocks to the Reliance Petrochemicals plants at Hazira and
Larsen & Turbo would be given the job of building the new Rs 5.1 billion
natural gas cracker that would eventually give an in-house supply of ethylene
and other feed-stocks.
The downside was that Larsen
& Turbo itself would be financing the order it had just won. It would raise
Rs 8.2 billion (Rs 9.43 billion with retained oversubscriptions) through a
mega- issue of debentures. Out of this, Rs 6.35 billion would be given to
Reliance as supplier's credit for the natural gas cracker that Larsen &
Turbo would build for Dhirubhai's company at Hazira.
Dhirubhai
explained that the deal with Reliance would give the engineering firm access to
gas-cracking technology which it could apply to projects all round the world.
Around this time, Dhirubhai was also talking up some grand infrastructure
projects in which Larsen & Turbo could take a lead: an undersea tunnel linking
crowded inner Bombay with the open land across its wide harbour; a long dam
across the Gulf of Cambay gradually collecting fresh water behind it; a
superhighway linking Bombay, Delhi and Agra. It was time for Larsen & Turbo
to think big.
As he was with Reliance, in December 1988, Dhirubhai
announced he was applying for permission to build a 6 million tonne a year oil
refinery at Bharuch in Gujarat.
Until then, oil refining had been
reserved for government owned or controlled companies. His chances of approval
were slim (and his application was turned down six months later) but Dhirubhai
declared that, sooner or later, New Delhi would realize it could not finance
all of India's burgeoning refining needs. Other diversifying projects put up
around this time included sponge-iron, power generation, television tubes, and
pharmaceuticals, none of which made much progress.
But bankers and accountants
looked at the potential down side. The supplier's credit would be given to
Reliance at 15 per cent interest, a margin of 2.5 percentage points above the
rate Larsen & Turbo would be paying investors. But this was a puny return
on funds that could be used to expand Larsen & Turbo itself. And the amount
of supplier's credit, to one company and one project, was equivalent to some 55
per cent of Larsen & Turbo's total assets. It was a massive exposure for
the company to a single risk.
Gurumurthy cried 'plunder' in the
Indian Express, as the Ambani takeover progressed. The helpfulness of
Dhirubhai's friends in the financial institutions, notably the chairman of the
Unit Trust of India, Manohar Pherwani, was noted. Gurumurthy recalled that the
chairman of the Bank of Baroda, Premjit Singh, had also helped Reliance out in
the past by providing US$25 million in loans for overseas Indians to subscribe
to its F Series debentures in 1985. An enterprising and evidently plausible
reporter on the Express, Maneck Davar, made a trip to southern Gujarat, where
he found the sons and daughter-in-law of the bank chairman running a polyester
yarn texturising company set up in October 1986. It took partially oriented
yarn from the Reliance plant at Patalganga and then sent the crimped yarn back
to Reliance, earning an estimated profit of Rs 5.5 million a year. Davar
inquired whether he too could send yarn for texturising: he was told the firm
worked only for Reliance.
No one in the government wanted
to know. Dhirubhai had meanwhile moved further up in his scale of living. In
November 1988, the entire Ambani clan had moved away from the Usha Kiran building
where he and his brothers owned fats. The new family home was a 17-storey
apartment building called Sea Wind off Cuffe Parade in the historic area of
Colaba, close to the business heart of Bombay. An Ambani company had bought the
building in its entirety, and the family spread out through its upper floors.
The first five floors were devoted to car parking, the sixth and seventh to a
gymnasium and swimming pool, and several other floors to guestrooms.
Dhirubhai was also on the way to
satisfying an urge to counter the Indian Express in print, and perhaps to
attain the indefinable status of the media baron. Dhirubhai had talked for some
years of getting into the media business, and already had a successful
advertising agency, Mudra Communications, which was ranked ffth in India by
annual advertising billings. This helped pressure editors, as we have seen, but
Dhirubhai wanted an editorial voice of his own.
He had looked at several
newspapers that came on the market, and had earlier bought a controlling interest
in the pro-Congress newspaper, the Patriot, which had made vitriolic attacks on
Nusli Wadia in response to the Express campaigns. At the end of 1988, his
son-in-law Raj Salgaocar bought the Bombay weekly newspaper Commerce.
Financially ailing, it had passed through five owners in recent years including
Kapal Mehra of Orkay Silk Mills, but had a useful business and economic
research bureau. Prompted by Salgaocar and Anil Ambani, Dhirubhai agreed to
transform Commerce into a mainstream daily business newspaper, to be modelled
on the Financial Times of London. As editor he hired Prem Shankar Jha, a former
editor of The Hindu, son of a former foreign secretary and government
economist, and a noted writer himself on India's political economy in the academic
world. Jha hired nearly 60 of India's best journalists, paying salaries that
set a new benchmark for Indian newspapers. But partly due to a foul-up in
ordering printing equipment, the new Observer of Business and Politics was not
to launch until December 1989 when, as we shall see, it was already too late to
turn the political tide even if Dhirubhai's hired pens had been able. His
problems with the law were being pushed aside. The director of the CBI, Mohan
Katre, had not been keen on investigating the allegations raised by the Indian
Express.
Early in 1987, the
anti-corruption agency's additional director, Radhakrishna Nair, had
recommended prosecution over the backdating of the letters of credit for the
PTA imports in May 1985, but Katre had effectively sent the file on a
bureaucratic wild goose chase by referring it to the Finance Secretary, S.
Venkitaramanan, who in turn referred it to the Law Ministry. On 25 November
1988, the junior finance minister Eduardo Faleiro told parliament that the
CBI's report had been examined in consultation with the RBI and no further
action is contemplated for the matters.
In 1987, Katre had been a
prominent guest in the VIP box at the World Series cricket tournament,
sponsored that year by Reliance. The venue for the New Delhi games was a
stadium at a convenient walking distance from the office complex housing
India's security and intelligence agencies. Nair volunteered for early
retirement in 1988.
By launching a High Court action,
Reliance had stalled the 1985 show-cause action started by the Assistant
Collector at Kalyan for alleged evasion of Rs 270 million in excise on its
polyester yarn production. There was still the show-cause notice issued in
February 1987 over the alleged smuggling of Rs 1.14 billion worth of yarn
equipment and evasion of Rs 1.2 billion in duty. Reliance had tried to get
Bombay High Court and the Customs appellate tribunal to quash this notice also,
but without success. It was due for hearing in April 1988 before the Bombay
Collector of Customs, Sukumair Mukhopadyay, regarded as an upright official
immune to political and other pressures.
The scheduled hearing on 25 April
had to be called off when Mukhopadyay was summoned to New Delhi for a meeting
of western India Collectors of Customs, convened with little notice by the
junior finance minister in charge of revenue, Ajit Panja. The hearing was
relisted for 5 May. On 4 May, Mukhopadyay was transferred to a new position,
and the case postponed again. The new Bombay Collector, K. Viswanathan, took his
time to familiarise himself with the case. Nearly eight months later, on 31
January 1989, he announced his decision to drop the smuggling charges against
Reliance. 'There is no direct evidence, documentary or otherwise, of
undervaluation,' he ruled, 'the charge of undervaluation is based on a capacity
which is founded purely on theoretical calculations and calculating them by
misreading the relevant data of the documents of contract ... Reliance
Industries Ltd had not exceeded their licensed or the designed capacity and the
capacity of the plant imported by them is neither in excess of the contract nor
is the import contrary to the import licence. The battle with Nusil Wadia's
Bombay Dyeing had moved upstream in the petroleum product chain from PTA and
DMT to their common input paraxylene. Once again with funds to spare, Reliance
was getting its long-delayed PTA plant into operation over 1988 and achieved
commercial production in the last quarter of the year. The PTA plant, as we
have seen, included its own paraxylene- producing unit which used naphtha as
feed- stock. Bombay Dyeing's DMT plant continued to use paraxylene, which it
needed to import for lack of domestic supply.
In March 1988, the government
raised the customs duty on paraxylene from 85 per cent to 120 per cent, even
though world market price for the feedstock had recently moved up from around
US$400 a tonne to US$685. At this stage, Reliance was still using imported PTA
on which duty had been cut ten months earlier. Bombay Dyeing was the only Indian
importer of paraxylene, and now received a double hit from the world price and
the duty hike.
Reliance also received another
benefit for its Patalganga paraxylene plant. In July 1988, the Finance Ministry
granted it the status of a refinery, ahead of some 20 other naphtha-based
industries also seeking the same ruling, including National Peroxide,
associated with Bombay Dyeing. The status meant that Reliance could get its
naphtha from domestic refineries at the confessional price of Rs 30 000 a tonne
instead of Rs 100 000. The decision had been opposed by two members of the
Central Board of Excise and Customs, B. R. Reddy and Jyotirmoy Datta, who
pointed to the massive subsidy it implied through loss of excise, but they were
overruled.
On 1 March 1989, the government
cut the duty back to 90 per cent, but transferred paraxylene imports from the
open general list to the canalised category, with the government- owned Indian
Petrochemicals Ltd as the importing agency. In effect, this meant that Bombay
Dyeing's independent sourcing of the vital feedstock was throttled back. The
official in charge of petrochemicals called a meeting of paraxylene users,
including Bombay Dyeing and Reliance, to ask if there were any surplus
supplies. A week or so later, Reliance notified the government it had about 40
000 tonnes to spare and that there was no need for imports.
If this indicated that Reliance
indeed had greater capacity at Patalganga than authorised, the excess was
quickly legitimised: in March the minimum economic size for PTA plants under
the industrial licensing system was raised from 100 000 tonnes a year to 150
000 tonnes, and in June to 200 000 tonnes. The minimum size for DMT units
remained at 60 000 tonnes.
Wadia remonstrated with the
government over the next three months, taking his complaint to the Cabinet
Secretary, B. D. Deshmukh. Reliance had effectively taken over the profitable
paraxylene business & Com the government's own Bharat Refineries, using its
naphtha. Meanwhile Indian Petrochemicals was keeping Bombay Dyeing on a
hand-to-mouth supply line for its paraxylene; the company ran out of the vital
feedstock twice in this period. Reliance was asking the equivalent of the
landed cost of imports, about Rs 28 000 a tonne, for its surplus. Bombay Dyeing
estimated its cost of manufacture was between Rs 10 000 and 11 000 a tonne.
With domestic excise and sales tax a combined 19 per cent, this suggested a
profit of Rs 1 1 400 to 12 400 a tonne. Wadia argued that paraxylene should be
made available to all DMT and PTA producers at the same price, as set by the
Bureau of Industrial Costs and Prices. This would be about Rs 7000 a tonne
lower than the Reliance price.
Over this period, street protests
and court actions against the government's treatment of Reliance made little
progress, though they kept the allegations against the company alive. In
October 1988, the farmers' group Shetkari Sanghatana, which had been
campaigning for three years against artificial textiles on behalf of cotton
growers, announced it would blockade the Reliance factory at Patalganga. But
the movement's leader, Sharad Joshi, was persuaded to drop his plan. In
December 1988, two allied activists, journalist Anil Gote and medical doctor
Pandurang Ranjaram Kinare, employed lawyers Shanti Bushan and Mahesh Jethmalani
to sue the government and others over the CBI's failure to prosecute on the
evidence it was alleged to have assembled against Reliance. By contrast, the
CBI had shown extraordinary zeal in prosecuting trivial offences by those who had
exposed alleged legalities by Reliance.
Bombay Dyeing's lobbying got it
nowhere. Dhirubhai was counted as a major backer of Congress for the general
elections due at the end of 1989. Rajiv was turning back the clock in an effort
to recapture the dynastic magic. In early March, his mother's former political
manager, R. K Dhawan, returned to the prime minister's office as an officer on
special duty. Rajiv had set aside his 'preppy disdain' for the silly haired
Punjabi babu [clerk]'s and returned to Indira's style of functioning.'
Dhirubhai had his own contact back in court.
By November 1989, Indian
Petrochemicals cut off the supply of imported paraxylene altogether, while the
government dropped excise on domestic supplies. Nusli Wadia was compelled to
buy 4000 tonnes from Reliance, paying Rs 22 000 a tonne, which still left
Dhirubhai a fat profit margin on his sale. By that time Dhirubhai had many
other worries, but he must have savoured this humiliation for Wadia at the end
of this second phase of the Great Polyester War.
MURDER MEDLEY
Since March
1987, the tables had been turned against Nusli S Wadia and the Indian Express,
who were both beleaguered on many fronts.
Ramnath Goenka's health was
failing and the old Marwari newspaper baron was spending long spells in
hospital. But he was continuing the fight, even though the Indian Express was
facing its worst period since Indira's Emergency. By the end of 1988, over 230
prosecutions had been launched against the group, by agencies in charge of
company law, customs, income tax, foreign exchange, and import quotas.
Government advertising was withdrawn, and banks directed to refuse credit. In
Bangalore, the Express had continual trouble with its communications lines.
Staff were harassed by goondas (muscle men). A previous ally in exposing
Reliance, the tabloid Blitz had switched sides by mid- 1987, when it captioned
a picture of Express Towers as the 'House of Forgers' and called its editor,
Arun Shourie, the Ace of Liars'. By late 1989 the group was on the brink of collapse,
Shourie later revealed.
From how high up the pressure
started is indicated in the memoirs of the senior civil servant Madhav Godbole.
As Finance Secretary for the state of Maharashtra over 1986-89, Godhole was
instrumental in denying requests by Reliance for additional concessions in
state sales tax on production at Patalganga---one- request being for sales tax
breaks on production in excess of licensed capacity. Godbole recounts direct
requests in person by Dhirubhai and Mukesh Ambani, lobbying on Reliance's
behalf by the Marathi-language writer Bal Samant and by Congress MP Murli
Deora, a string of invitations to music concerts at Dhirubhai's home, and a
call from the Reliance public relations department asking if Godbole and his
wife would be interested in some shares from the directors' allotment in a
current Reliance issue. Godbole refused all requests and offers.
In April 1989, anonymous
telephone threats to his home late at night caused Godbole to obtain police
protection. Finally, the state's chief minister, Sharad Pawar, called Godbole
in and told him of 's lot of pressure from 7 Race Course Road' the prime
minister's official residence in New Delhi.
After his arrest by the CBI in
August 1987 for a wrong entry in a hotel ledger, Nusli Wadia encountered many
other challenges apart from his intense battle over paraxylene. He and his
companies were scrutinised for any possible violations of the Companies Act,
the foreign exchange regulations, and customs and excise regimes. Income tax
inspectors revisited his tax returns for the previous thirteen years.
In the early hours of 12 July
1989, Wadia arrived back at Bombay's Santa Cruz airport from an overseas trip.
Immigration officials served him with a deportation order, which said the
Government of India had declared him an undesirable alien. Wadia had just over
24 hours to leave the country of his birth, where he had spent most of his
life, and where his family had a continuous record of business for over 300
years.
He began an urgent legal appeal, and
got a court to stay the expulsion order. But the message was clear: if Wadia
did not buckle under to Ambani's industrial supremacy and pay his price, all
mechanisms of the state could be manipulated to make his position in India
untenable. His former friend Rajiv Gandhi had completely switched sides.
But just as the opposing forces
seemed to have backed Wadia into a tight corner, the most bizarre episode in
Bombay's textile Mahabharata began--one that was soon to cover the Ambanis and
Reliance with great embarrassment, and bring a collection of characters from
Bombay's violent underworld briefly on to the centre stage of Indian commerce.
A week after his arrival back in
Bombay, Wadia was told that his life was in danger in his home city. The chief
minister, Sharad Pawar, telephoned Wadia at his home fronting the Arabian Sea
at Prabhadevi waterfront. Without giving details, he warned the textile tycoon
of a conspiracy to assassinate him. A squad of police commandos arrived soon
after to mount a 24-hour guard on Wadia's home. Two cars packed with armed
police were assigned to escort Wadia's limousine around the city.
Pawar was an old friend of Wadia,
and no friend to Dhirubhai. He had parted company with Ambani's principal
political investment, Indira Gandhi, in the late 1970s and had run a rebel
Congress Party in his own state. Brought back into the main- stream Congress
only recently by Rajiv Gandhi and installed as chief minister, he remained an
ambitious and independent- minded satrav whom Gandhi's loyalists regarded with
great suspicion. Prominent among these loyalists in Maharashtra was the former
city mayor and the Congress MP for South Bombay, Murli Deora, an old yarn
market colleague of Dhirubhai. By then Pawar was feeling some heat himself from
Reliance for failure to overrule Godbole on sales tax and for other holdups in
state government clearances. Pawar believed Reliance was stirring up certain
land scandals being levelled against him by party dissidents.
Even so, Wadia suspected the
security scare was a ruse to keep him under guard and keep his activities
closely monitored. The next day, he gave the guards the slip and vanished for
several hours. On his return, Pawar was again on the telephone and rebuked
Wadia, warning him the threat was serious.
Wadia continued to be tied up
with his appeal against the deportation order. On 26 July, he applied to the
Bombay High Court to be recognised as an Indian citizen. On 28 July, he faced
no less than the Additional Solicitor-General of India, G. R. Ramaswamy, who
spent an entire day in court opposing his application. In addition, the CBI
director Mohan Katre came down from New Delhi and spent the day watching the
proceedings, a highly unusual level of interest given that the case was not one
involving his agency. As the CBI is the only agency which can investigate
judges, his presence may have been intended to intimidate the bench. Ramaswamy
argued that Wadia had never been an Indian citizen, and even if he had, his
application for British passports in 1964 and 1984 had automatically
extinguished any claim to Indian nationality.
But on the evening of 1 August, a
sensational development suddenly put Reliance in the dock. Detectives of
Bombay's Criminal Investigation Department arrested Kirti Vrijlal Ambani, a general
manager of Reliance in charge of public relations and customs and excise
matters, and charged him before a magistrate with conspiracy to murder Nusli
Wadia. Also arrested and charged as chief co-conspirator was a strange
companion for the Reliance executive: one Mun Waghji Babaria, already widely
known around Bombay as a small-time popular music band leader playing under the
name Prince Babaria & His Orchestra's. Then 40, Babaria had frequently
organised entertainment evenings that brought Bombay's milieux of business,
cinema, and crime together. Favouring black sequinned suits, see-through black
shirts and a gold medallion as stage costume, Prince played the drums in his
band, while playback singers and dancers pumped out hits from Hindi movies.
Figures such as the actor Sayeed
Jaffrey, the reputed kingpin of gold and electronics smuggling in Bombay, and
several senior businessmen are among those figured in Babaria's photo-album of
musical parties. Two years earlier, Babaria had taken his musical troupe to
Dubai, to provide the night's entertainment at the birthday party of Dawood
Ibrahim, the preeminent don of the Bombay underworld, later to be accused as
mastermind of the bombings that rocked the city in March 1993, killing nearly
300 people. Circle of acquaintances was Kirti Ambani, then 47. A long-time
Reliance employee, he was originally named Kirti Shah but became so devoted to
the Reliance founder that he had changed his own name to Ambani. Babaria had
called occasionally at 1Grti Ambani's office. At a party for Babaria's young
son in 1987, Kirti had been a chief guest-his presence recorded on video and
camera.
The character of each of the two
accused immediately threw a degree of implausibility over the alleged
assassination plot: Kirti Ambani, a middle- management company man with an
engineering degree, fond of playing chess, with wife and children in the
suburbs; Prince Babaria, a sentimental and pudgy figure of middling talent,
desperately proud of his pretty wife Hema and their two children, and living,
as it turned out, in a police barracks at Bhendi Bazar-where his forebears had
made a living for six generations as police informers.
Bombay business circles were
incredulous enough that a Reliance employee would even think of taking out
Wadia. Life was and is cheap in Bombay. right through the 1980s and 1990s
leading businessmen in the construction and transport industries have been
victims of contract killings carried out for amounts less than two thousand
dollars. But the Ambanis constantly expanding ambitions seemed to place them on
a level of corporate behaviour well above this vicious jungle. Their chosen
weapons were the robust publicity offensive, the judicious stimulus to
bureaucrats and politicians, and an unfailing ability to interest big and small
investors in their schemes.
In compiling evidence on the
alleged conspiracy against Wadia, the police also revisited earlier cases-such
as the bashings and attacks met in the past by the son of Orkay Silk Mills
chairman, Kapal Mehra, Jamnadas Moorjaani of the Crimpers' Association, and
embroidery exporter Bipin Kapadia. Statements were taken from Moorjaani and
Kapadia. Wadia also recalled a threat from terrorists' which had forced him to
withdraw his two sons from their boarding school in the Himalayas at Kasaull in
1987. Nothing but the coincidence that all had at some time or other been in
commercial rivalry to Reliance was established.
The police case, as eventually
presented to court in October 1990, was that Kirti Ambani was deeply involved in
the Reliance fight with Wadia's Bombay Dyeing Ltd for monopoly control of
paraxylene. By limiting access to cheap imports, Reliance was trying to force
Bombay Dyeing to buy Reliance's surplus paraxylene, on which the price was 280
per cent above the production cost. The two companies were in a hectic campaign
over July-September 1988.After his job as Reliance press spokesman had been
largely taken over by Anil Ambani
and hired journalists in 1987,
Kirti Ambani's duties continued to be liaison with customs and excise
officials. The police presented one example of such a contact, a former customs
inspector named Umed Singh Sarraiya, who in 1974-78 had handled the customs
bond placed by Reliance. Sarralya had frequently visited the old Reliance
offices at Court House and had been introduced to Kirti Ambani by Dhirubhai's
nephew Rasikbhai Meswani, then in charge of customs matters. Sarraiya had
continued social meetings with Kirti until 1989, at each other's home, or at
small hotels and restaurants around Bombay, with Kirti usually picking up the
tab. Other customs officer's sometimes joined them. Sarraiya also admitted to
police that he had been demoted for graft in the early 1980s, having been
caught taking money from a passenger while on duty at Bombay's Santa Cruz
airport.
The police alleged that, in
November 1988, the bandmaster Babaria had contacted a criminal called Ivan Leo
Sequeira, alias Shanoo, whom he had known for a year or so through a mutual
friend who played the Hawaiian guitar. Sequeira, then 29, had been convicted of
a murder ten years earlier but acquitted on appeal in 1984. In 1988 he was
again facing charges of shooting someone, and was on ball.
Babaria had a proposition. A big
industrialist was to be attacked and died. 'He told me that we would be getting
much money in that case,' Sequeira later confessed in a sworn statement before
a magistrate. Babaria later revealed the target was Nusli Wadia, but did not
immediately reveal who was paying, saying only that he was a big man.
On 13 December 1988, Babaria and
Sequeira went to the Ritz Hotel in Bombay's Churchgate area to meet Kirti. The
Ritz is a small hotel close to the Nariman Point business district, and was
frequently used by Reliance and many other companies for middle-level meetings.
Kirti had booked a room on the Reliance account, and was generous with company
hospitality at the lunchtime meeting, as ten bottles of beer and various snacks
were consumed by the three.
Sequeira, introduced as Shakil,
said Kirti had then discussed the plan to attack Wadia. Kirti gave him
newspaper cuttings with photographs of Wadia, as well as Wadia's address and
telephone numbers. Sequeira left the meeting and waited downstairs. Babaria
came down and Sequeira said he was interested in the job but wanted an advance.
Babaria said Kirti had agreed to
pay 50 lakhs'(Rs 5 million, then worth about US$300 000) for a successful job.
The next day Sequeira rang Babaria and was told Kirti had agreed to pay Rs 500
000 in advance. The two met the same afternoon at the Shalimar Restaurant near
Babaria's home at Bhendi Bazar. Babaria went outside to a lane and came back
with a plastic bag containing Rs 150 000 in cash, which he gave to Sequeira.
The police collected evidence of substantial cash withdrawals from Reliance bank
accounts around this period, advances made to company employees, adjustment of
bad debts, and internal cash transfers. All these tend to suggest of [sic]
possible manoeuvring of accounts for dubious expenditure,' the indictment said.
Thereafter, Sequeira dodged
Babaria's increasingly anxious phone calls inquiring about plans for an attack.
After several weeks, Babaria went to Sequeira's house and told him Kirti was
inquiring about progress. At a second meeting, on 21 February 1989, at the
Ramada Inn Palmgrove at seaside Juhu, the three sat drinking by the swimming
pool on Kirti's Reliance expense account and again discussed plans for the
killing. Sequeira pressed for more of the promised advance, and was duly passed
another Rs 150 000 via Babaria at the Shalimar restaurant the next day.
As more weeks went by without
action, Babaria came under more pressure from Kirti Ambani. Sequeira said he
was evading Babaria's calls to a neighbour's telephone, and instructing his
family to tell callers he was not at home. In April, Babaria engaged another
criminal named Ramesh Dhanji Jagothia to help carry out the attack. Jagothia
was later to surrender to police two pistols made in local workshops, along
with ammunition. Babaria also contracted a mechanic named Salim Mustaq Ahmed to
steal a car and drive it in an ambush of Wadia's limousine, at an agreed price
of Rs 50 000.
Together with Jagothia, Babaria
went to Sequeira's home later in April and managed to find him. Babaria pressed
Sequeira to get in touch with Kirti, and the next day Sequeira telephoned the
Reliance general manager at his office.
'He was very upset,' Sequeira
said in his sworn statement. 'He told me he was taken to task by his boss. I
told him that I would return the advance money. But he told me that he was not
interested in getting back the money. But he was interested in getting the job
done. In May, Babaria and Sequeira met a very unhappy Kirti Ambani at the Sea
Rock Hotel. 'He told me that he was suspecting our intention,' said Sequeira.
'He was upset. He was about to cry He was saying he was unable to face his
bosses. I assured him that the nature of the work was serious and if anything
goes wrong each one would come in trouble. He was not very happy by hearing all
this. After this meeting, Babaria pressed Sequeira once or twice, but-according
to Sequeira - came to realise that he was not really interested in the job,
which Sequeira admitted himself.
'Then Babaria approached me with
the offer I thought that it was a good opportunity to me to make good money,'
he said. 'But when I came to know that the person involved is an industrialist
and a prominent figure I realised that it was too dangerous and I decided to
back out. However I was knowing that the persons who wanted us to do the job
were also connected with industries and it was possible for me to knock out as
much money as I can by dodging them. With this idea I knocked from them the sum
of three lakh rupees. In a later interview, Babaria freely admitted to his role
in organising the murder conspiracy, and said that his assembled hit- squad had
actually tracked Wadia at three locations with a view to carrying out an
attack.
On one occasion they followed
Wadia to a bungalow at Khandala, a resort in the Western Ghat Mountains inland
from Bombay. 'He wanted to kill him but were two hours late so the operation
failed,' Babaria said. On the other attempts, the gang tried to catch Wadia
outside his home at Prabhadevi, and again outside the Breach Candy Hospital
where Wadia had gone to visit the ailing Ramnath Goenka.
Babaria claimed that the advance
actually paid to him by Kirti Ambani totaled Rs 1.3 Million, suggesting that if
Sequeira had played his cards better he could have squeezed even more money
than his Rs 300 000. This tends to accord with the sudden flush of money
enjoyed by Babaria at the end of 1988 and early 1989, when he lavished his wife
Hema with gold jewellery bought at top jewellers in the Opera House district of
Bombay, bought two old cars and a new sound system for his band, and had a priority
telephone installation at his small house in the Bhendi Bazar Police Lines.
The plot came unstuck in
mid-July, however, when one of the gang talked about it while drinking in a
bar, and was overheard by a police informant. The gang member was taken in for
questioning, and revealed the details. As the gang was rounded up, the
sensational identity of the alleged target and client of the gang got attention
from Bombay's senior most detective, the joint Police Commissioner (Crime),
Arvin Inamdar. Babaria's new telephone line allowed the police to collect more
evidence against Kirti Ambani, by tapping calls between the alleged
conspirators. On 22 July they recorded Babaria calling Kirti, and mentioning
details of the murder plan. Babaria asked Kirti if he knew whether Wadia was in
town. Kirti replied that Wadia was in Bombay because his appeal against the
visa decision was fixed for 24 July. Kirti asked about the execution of the
plan. According to the police court papers, Kirti said he was 'ed up with only
assurances, dates and no results'. The people chosen for the job were not
capable and his account should be settled- that is, the advance returned.
Two days later, Kirti is quoted
saying that neither he nor his boss was interested in the work any longer'.
Babaria had been dodging him for nine months, and Kirti had found out from his
own sources that nothing had been done to execute the plan. Babaria pressed to
be allowed to continue, but Kirti again asked for the money back and told
Babaria to get Sequeira to ring him.
Soon after, Sequeira agreed to
turn approver, or state witness, and co-operated in an attempted telephone
entrapment of Kirti Ambani. Sequeira rang to ask Kirti if he wanted his Rs 300
000 back. Kirti evaded a clear rely, but the police said it was clearly
established that Kirti knew Sequeira (under an alias) and that the money had
been paid to him.
When the full implications of the
plot became apparent, the detective chief Inamdar briefed Bombay's Police
Commissioner, Vasant Saraf. In turn, Saraf took Inamdar and his case file up to
Chief Minister Sharad Pawar, who carefully read through all the evidence.
Having ordered the special protection for Wadia, he told the police to examine
every finding with extreme care. On 31 July, Pawar rang the office of Prime
Minister Rajiv Gandhi in New Delhi, and briefed the Cabinet Secretary, B. G.
Deshmukh. Pawar said arrests were imminent. Kirti Ambani and Prince Babaria
were picked up the following evening and charged.
Pawar's message had raised the
alarm bells in Gandhi's office. As it was clear the Bombay police were too far
advanced for their investigations to be called off, Gandhi's advisers turned
their efforts to damage control by getting the highly politicised Central
Bureau of Investigation (CBI) on to the case.
Later reports said that Pawar
himself had suggested to Deshmukh then that, in view of the political
sensitivity and interstate aspects of the case, it should be taken over by the
central government. Other reports said that Pawar had succumbed to strong
pressure from Gandhi's office to make the request. Pawar later insisted it was
his own suggestion. Even before the arrests, the Director of the CBI, Mohan
Katre, had suddenly arrived in Bombay on I August and started pressing the
local detectives for details of the case. On 4 August, the central government
issued a notification transferring the case to the CBI.
To the league of Ambani critics,
this meant the murder case was destined for the same process of suppression by
partisan investigation as the Gurumurthy allegations two years earlier. An
action was mounted in the Bombay High Court, in the name of one Professor
Ramdas Kishoredas Amin, opposing the transfer to the CBI, and asking for
measures to prevent vital evidence being interfered with or deliberately lost.
The High Court gave an interim stay order and placed all the records and
cassette-tapes of telephone intercepts under the court's own custody.
The CBI
The central government appealed
to the Supreme Court of India, fielding the senior- most members of its
Attorney-General's office, backed by hired senior advocates.
The bench of three judges decided
on August 16 to modify the High Court order, allowing the CBI access to the
sequestered records and tapes provided that true copies were kept under seal.
The case was left with the CBI, but the chief investigating officer of the
Bombay Police was to be associated with further investigation. Around the same
time, the enterprising reporter Maneck Davar of the Indian Express, who later
exposed a link between Reliance and the Bank of Baroda chairman (see Chapter
12) found evidence that tended to confirm suspicions that CBI director Mohan
Katre was indeed one of Dhirubhai's people'. Davar had heard that Katre's only
son Umesh Katre had some sort of business relationship with Reliance through a
company called Saras Chemicals and Detergents Ltd. Posing as a small
industrialist, Davar placed an order for three tonnes of the detergent
ingredient LAB. The transcripts of Davar's telephone conversations with Katre
junior make it clear that he and Saras were commission agents for Reliance
chemical products, so closely related to Reliance that they were able to
promise gate passes and receipts directly from Reliance to avoid extra sales
tax for the purchasers.
Davar found that the younger
Katre was earning Rs 5.4 million a year from his Reliance connection, enough to
buy an apartment in Bombay at which the CBI director himself stayed when
visiting the city, as well as a Mercedes-Benz car which was then a rare luxury
in India.
Director's response was that he
had no knowledge of his son's business activities. Arun Shourie commented in
the Indian Express: 's it possible-and that in an Indian household- that you,
the only son, should suddenly start making Rs 5.4 million a year and your
father should not know? Especially if, as is the case in this instance, you
have no particular qualifications other than being the son of the Director of
the CBI to bag such a lucrative agency? Shourie recalled a famous court
judgement against a state chief minister, Pratap Singh Kairon, making it the
duty of senior public officials to investigate rumours or signs that their
children were extracting benefits or being given benefits by virtue of their
parent's position. The law against corruption fitted Katre to the dot, Shourie
said.
As well as recalling Katre's
intervention to have the Express critic Gurumurthy arrested under the Official
Secrets Act in 1987, Shourie listed five investigations that had been buried by
the CBI under Katre's direction. The alleged gift of Rs 250 million power plant
by a foreign supplier; over-invoicing of raw material imports for PTA
production; the surreptitious addition of a paraxylene plant to the Reliance
complex at Patalganga without an industrial licence; clandestine royalty
payments for chemical processes; and the antedating of letters of credit in
1985 to obtain Rs 1 billion worth of foreign exchange.
Katre had not only been assisting
Reliance directly, he had been hounding Wadia as well. 'hen was the last time
you heard of the Director of the CBI sitting at the hearings of a case--even a
case as important as say the assassination of Mrs. Gandhi or the trials of the
worst terrorists? , wrote Shourie. 'But Katre has spent hours and hours
personally sitting through, and in a most conspicuous place where the judge
could see him, the day-to-day hearings on the case about Nusli Wadia's
passport, a case in which the CBI is not even a party! ...Should the agency
[the CBI] in the control of and under the direction of this man be handed the
responsibility of investigating the conspiracy to murder the man he has been
using that very agency to hound-a conspiracy in which is implicated a senior
executive of the very business house in whose interest he has been hounding the
intended victim of the conspiracy? Wadia himself gave no sign of knowing
anything about the conspiracy until after the arrests on 1 August. When a
reporter rang him for comment about the case, Wadia initially started talking
about his visa case. But when interviewed by the Bombay Police soon after, he
certainly gave credence to the plot. In the last eight to ten years there have
been certain incidents in the course of our business and that of Reliance
Industries,' he said. 'I feel that these incidents could have motivated 1Grti
Ambani, an employee of Reliance Industries, to consider me an enemy. The Bombay
Dyeing chairman went through some of the disputes over chemical imports, the
harassment he had faced, and the difficulties caused to Reliance by the Indian
Express exposures in 1986-87. 'I am led to believe that it is the impression in
the minds of those who manage Reliance Industries that I was associated and
involved in the preparation of those articles against them. The articles had
led to numerous inquiries and the government's refusal to let Reliance turn its
nonconvertible debentures into convertibles, and had been seen as the cause of
Dhirubhai Ambani's stroke.
'It is thus apparent ... that
those who hold animus against me made one attempt after another to harass me
and harm my business interest,' Wadia said. 'Despite all these efforts they
have not succeeded in destroying or harming the business with which I am
involved and which is professionally managed. This could perhaps have led to
frustration in the minds of those wishing to do me harm and made them think of
using other methods. In a later clarification to a CBI superintendent in
December 1989, Wadia admitted that he had been involved with the Indian Express
as a friend of Ramnath Goenka, its owner:
'Mr. Goenka and I both shared the
same perception that the Ambanis and RIL, their company, had subverted and
manipulated the government to such an extent that they were able to have their
way in virtually every field through assistance from the government being
directed entirely in their favour. This was possible as they had a large number
of powerful supporters both among the bureaucrats and politicians in power ...
The Indian Express in a series of articles exposed many of the wrong doings of RIL
and the favours that were granted out of turn to it. I through my association
with the Indian Express helped and was indirectly involved in some aspects of
the publication of these articles. I was also associated with Mr. Gurumurthy
who was the author of the said articles. Mukesh Ambani, when interviewed by the
CBI on 1 June 1990, was at pains to play down the rivalry with Wadia, and the
effect of the misinformation conveyed by the Express. He did not blame the
Express articles for his father's paralytic attack in 1986, which he said was a
hereditary illness. Kirti Ambani had come directly under Mukesh Ambani, but had
no authority to spend large sums of money. About Kirti Ambani's alleged
involvement in a case of this type, we came to know through his arrest,' Mukesh
said. 'In fact it is hard to believe that we needed or need any retrogative
[sic] step for our survival, as a few times back, we were supposed to be close
to power. In the immediate aftermath of the arrests, the response of Reliance
had been to cast suspicion on a counter-conspiracy against the Ambanis
themselves and to play up the rivalry angle. As the case is subjudice, we have
been advised not to comment on the charges levelled against [Kirti Ambani],' a
company press release said on 1 August.
'But [we] would like to state
that this appears to be a deliberate frame-up aimed at embarrassing and
maligning our organisation at a point of time when one of the group companies
is going in for the largest public issue in corporate history It is a matter of
great regret that an innocent employee of the company is being dragged into
such an unseemly controversy resulting from business rivalry Reliance
executives had spread the idea that the conspiracy had been cooked up by Wadia,
Pawar and the Indian Express group with the simultaneous objectives of nobbling
the debenture issues for the Reliance Petrochemicals plant at Hazira, getting
Wadia out of his difficulties with visas and raw material supplies, and (for
Chief Minister Pawar) striking a damaging blow at Rajiv Gandhi.
They pointed out that Pawar's
state government had appointed as prosecuting counsel the senior advocate
Phiroz Vakil, who had earlier represented Wadia and Gurumurthy in the
Thakkar-Natarajan inquiry into the Fairfax case. (It was not mentioned that
Vakil had also appeared against Pawar in another case.) Had they researched the
background of Babaria, they might also have pointed out his descent from a long
line of police narks. An anonymous note was circulated among press people in
Ahmedabad, alleging a history of mental illness in Kirti Ambani's family.
Against a general skepticism that
murder was part of the Ambani repertoire-and a belief that, if it had been, the
plotting would have been more competent-this frame- up theory found plenty of
takers. India is a society inclined to look for the conspiracy behind the
conspiracy. Sharad Pawar had been in a squeeze within the Maharashtra branch of
the Congress Party. Dhirubhai controlled about one-third of the Congress
members of the state assembly and was able to turn on the pressure. Just before
the arrests, Pawar had been making overtures to Dhirubhai. At the height of the
crisis, Pawar managed to get a call through to Dhirubhai just before midnight
one evening. The next day, Dhirubhai was telling his associates that the
problem had been solved- possibly referring to Pawar's decision to call in the
CBI.
But could the incongruous
elements of the murder conspiracy have possibly been set up? An alternative
theory was that the plot might have been a case of a follower being more loyal
than the king that Kirti had acted out of an excess of loyalty. The large sums
of money paid to Babaria, surely far beyond the personal resources of a middle
manager, would then have to be explained.
The revelations about the CBI
director Katre's connection with Reliance led the opposition Janata Dal to call
for his immediate prosecution for corruption over this venal nexus. But on 27
August, the Home Ministry declared its full confidence in Katre after hearing
his response, which was undisclosed, to Maneck Dayar's report. The press
allegations were motivated and calculated to tarnish the image of the office he
holds', a Ministry spokesman said.
The CBI continued to give every
appearance of an active investigation, but a fatal flaw had been introduced by
the CBI into the prosecution case. The body of evidence amassed by the police
against Kirti Ambani and Babaria was highly circumstantial, drawing on hotel
records and bank transactions that backed the alleged sequence of meetings
between the conspirators and the transfer of money to the proposed hit team,
and on the telephone taps made at a late stage when Kirti Ambani was highly
reluctant to take the plot further. Was Kirti the instigator of the plot, or
had Babaria trapped him into it?
The crucial additional evidence
was the confession of Sequeira, the hit man who had turned government witness.
Without his testimony, the plot looked highly improbable and amateur, with
Babaria hardly convincing as a hard man of the underworld. Under Katre, the CBI
arrested and charged Sequeira as Plotter No. 3-a step which invalidated his
earlier testimony to the Bombay Police and completely destroyed any prospect of
his testifying in court to implicate the others.
After the initial appearance of
Kirti and Babaria in August 1989, the case disappeared from public view. Soon
after the CBI took over, both the accused were allowed bail. Babaria says Kirti
Ambani arranged half of the Rs 50 000 he posted. The other characters like
Sequeira also got bail, and sank back into the Bombay underworld.
Kirti Ambani was transferred to
an obscure position in Reliance Industries and has not appeared in the press
since. Babaria continued to live in the police barracks at Bhendi Bazar, but
could no longer travel to big-time engagements in Dubai because authorities
would not restore his passport. He continued to scrape together a living by
organising evenings of Bollywood musical hits, often to collect funds for a
charity called the Young Social Group, of which Babaria himself was president.
A pamphlet produced for one such evening in 1996 said: Prince Babaria, lately
the most controversial international figure for his connection with big
industrialists and others, has gained a lot of publicity in the press and TV,
locally and internationally. Yet Prince is "The Man of Music and
Entertainment" and will always remain loyal to it. In 1992, Babaria tested
his renown by running as an independent candidate for the Kalbadevi
constituency in the Maharashtra state assembly, but failed to garner a
significant vote. Babaria says Dhirubhai donated Rs 200 000 to his campaign
funds.
The conspiracy case has been
neither withdrawn nor proceeded with, but remains in judicial limbo. The
backlog of many thousands of cases in the Indian court system is a convenient
place to bury politicised scandals. Whether the Kirti Ambani episode was a
murder conspiracy or a frame-up was never put to judicial test.
A POLITICAL DELUGE
In the second quarter of the
year, India aches for the monsoon rains to arrive. The summer has built up into
unbearable heat, driving all living things into shade from mid-morning to late
afternoon, bleaching the landscape. The ancient rages (songs) liken the searing
heaviness to the yearning of the cowherd maidens for the divine youth Krishna.
Eventually, the burning landmass
of India sends up a giant thermal, pulling in cloud laden winds from far out in
the Indian Ocean. The monsoon works its way up the west coast and across into
the Bay of Bengal, the rain front anxiously charted in the weather maps. But
for Dhirubhai, the monsoon of 1989 was less a relief than a forerunner of the
political deluges to come.
On 24 July, the monsoon brought
cloudbursts to the Western Ghats and coastal hinterland of Bombay. The valleys around
Patalganga became channels for the immense runoff; the new industrial zone
built right by a river bank was soon under two metres of water. The Reliance
factory had no protective food walls, nor any food insurance. Its
much-inspected machinery was immersed in mud and water for days. It was
disaster that threatened the very solvency of Dhirubhai's company, which had
just struggled back to real profitability after three years of financial
jugglery.
It was a crisis that brought back
some of the old Ambani magic, recalling the fast assembly of the original
polyester yarn plant. Mukesh Ambani once again assumed direct charge on the
spot. Under the direction of its engineers, Reliance brought in an army of
contract workers to disassemble the machinery, clean and oil each part, and
then put the whole thing together again. The plant was back in operation after
one month, a triumph of Indian labour intensity under expert direction. But
even this brought its controversy. the Indian Express reported that Reliance was
seeking Rs 2.25 billion in concessional loans from the government financial
institutions, to finance yet another covert expansion under the guise of
rehabilitation. By September, the Syndicate Bank was organising an emergency
consortium loan of a more modest Rs 850 million.
Another food was undercutting the
Congress government. V P Singh's decision not to form a new party but to try to
unify existing parties, was paying off. In October 1988, the splinters of the
old Janata coalition began moving back together, with the merger of the Janata
Party and the Lok Dal into the Janata Dal. A month later, the Janata Dal formed
an alliance with regional parties from Assam, Andhra Pradesh and Tamil Nadu,
called the National Front. As Rajiv neared the end of his five-year term, the
National Front formed working relationships with the Left parties and, less
trustingly, with the other main force opposing Congress, the Bharatiya Janata
Party" (BJP)-the Hindu nationalist party which had taken the old Jana
Sangh elements back out of Janata. The elections on 22 and 24 November 1989 saw
Rajiv's Congress crash from its 415 seats of 1984 to only 192 seats in the
545-member Lok Sabha (lower house).
It was still the largest party,
as the National Front had gained only 144 seats. But with support from the
BJP's 86 members and the Left's 52, and with Rajiv relinquishing any claim to
try to form a government, the National Front was invited to do so. After five
days in which a leadership challenge from the veteran Janata leader Chandrashekhar
was diffused, V P Singh was sworn in as prime minister.
Though he could not avert the
storm, Dhirubhai had taken some steps to protect himself. In July 1989, the
Indian sharemarkets saw massive selling of Reliance shares by investment
companies controlled by non-resident Indians. They were getting their funds
back into foreign currency non-resident accounts, a necessary step towards
repatriation and a protection against both a sharemarket fall and a currency
collapse. If these were the Reliance-owned companies, it did not necessarily
mean that Dhirubhai was selling out his own stock. Reports at the time said two
sets of brokers appeared to be working on behalf of Reliance, one set to sell
and the other to take delivery It was a sound precaution: over the two months
to the election, the Reliance share price lost a third of its value, against a
slight rise in the overall sharemarket. All other Ambani-related stocks
(Reliance Petrochemicals, Larsen & Tourbo, and various debentures) also
fell. The institutions that had once rushed to help prop up his share prices
now held back, anticipating a change of government. The investors who had
converted their G Series debentures at Rs 72.5 now had a stock worth Rs 70.
With some glee, the Indian Express reported that Reliance, who straddled the
industrial arena like a colossus during the Congress (1) regime, is now facing
a winter of despair." The new government saw all of Dhirubhai's old
opponents back in power. Singh brought back the former Revenue Secretary, Vinod
Pande, from rural affairs to be his new Cabinet Secretary The former
Enforcement Director, Bhure Lal, was put on the prime minister's staff as a
special officer. The new finance minister was the proponent of public sector
investment, Madhu Dandavate, who had also been a leading critic of the Ambani
style.
Those seen as friends of
Dhirubhai were now on the outer. The new government soon transferred the
officials it saw as Dhirubhai's protectors in the Finance Ministry, including
the Finance Secretary, S. Venkitaramanan, the Revenue Secretary Nitish Sen
Gupta, and the chairman of the Central Board of Direct Taxes, A. S. Thind. The
CBI director, Mohan Katre, was retired and the agency set to work on tracking
the Bofors and other scandals that had surfaced under the previous government.
The Unit Trust of India's chairman, Manohar Pherwani, and the Bank of Baroda's
chairman, Premjit Singh, were shifted early in 1990.
The various cases against
Reliance were revived. On 12 December, the Central Board of Excise and Customs
through its member K P Anand issued a fresh order accusing the Bombay Collector
of Customs, IC Viswanathan, of inconsistent reasoning and grave errors of
judgement in his decision to drop the charge of smuggling in the extra
polyester yarn plant. Reliance had illicitly imported four spinning lines, and
deserved severe penal action' . Viswanathan was transferred on 2 January 1990.
The new Collector in Bombay, A. M. Sinha, took the case up again before the
Customs, Excise and Gold Appellate Tribunal early in February. This time the
former Additional Solicitor-General, G.Ramaswamy, who had tried to nail Wadia
in the Thakkar- Natarajan inquiry, was back in private practice (while a lawyer
who had appeared for the Indian Express, Arun Jaitley, was now in Ramaswamy's
old role). Ramaswamy now pleaded for Reliance, seeking a delay in the customs
appeal because it was personally inconvenient for him to appear before the
summer vacation, and claimed that as one member of the tribunal had been his
junior in court, the panel should be reconstituted. The lawyer for the Customs,
Kapil Sibal, was having none of this. Ramaswamy said the pressure for an early
hearing was part of a political vendetta against Reliance.
Another minor customs scandal was
later unearthed. Investigators in the Central Customs and Excise Board found
that in November 1982, when Reliance was assessed as owing Rs 312.8 million in
duty and a court action had failed, the then Collector of Customs in Bombay, B.
V Kumar, had allowed the company to pay in 138 installments over the next two
years, resulting in an implicit interest cost to the government of Rs 30.3
million.
Kumar was shifted in January 1990
from the Central Board of Customs and Excise. In May 1990, the Bombay Customs
revisited the Reliance plant at Patalganga at less than a day's notice, and
took detailed notes on machinery in the new purified teraphthalic acid plant.
On 11 May, it issued a new show-cause notice of some 170 pages, alleging that
Reliance had imported a PTA plant with a capacity of 190 000 tonnes, against
its licensed capacity of 75 000 tonnes a year. The captive paraxylene plant,
declared to
have a capacity of 5 1 000
tonnes, could actually turn out about 400 000 tonnes a year, according to the
Customs evaluation. The under-declaration at the time of import was put at Rs
1. 74 billion, and the duty evaded over Rs 2 billion. The response from
Reliance spokesmen was that the charges were part of the same vendetta,
promoted by Nusli Wadia. The machinery was all covered by licences, and the
excess capacity was authorised under the government's endorsement Scheme.
From January 1990, the new
government had also been scrutinising the tariff protection given to Reliance.
Officials from the Ministries of Finance, Textiles, and Petrochemicals had been
studying the import duties on polyester fibres and their inputs, with a view to
sharp cuts. According to the press reports, the government saw lower tariffs as
the simplest way to cut Reliance down to size: it could be carried out almost
instantly with few avenues of legal appeal, and would be politically saleable
as a move to cut cloth prices.4 On 25 February, the government enforced a 25
per cent cut in the price of FTA.
But it was in the new corporate
alliance with Larsen & Tourbo that the Singh government managed to hit
Dhirubhai the hardest. The financial institutions, which still had a combined
37 per cent holding as against the Ambanis'20 per cent, were instructed to
remove Dhirubhai from the firm's chairmanship. In early April 1990 the Life
Insurance Corporation took the first steps towards calling an extraordinary
general meeting of shareholders to have all the Reliance nominees removed from
the board. On 19 April, Dhirubhai bowed to the pressure and resigned, on
condition that the three other Reliance men stayed on the board. A career
manager with various public-sector enterprises and banks, D. N. Ghosh, replaced
him as chairman. Ghosh's first action was to get Larsen & Tourbo to sell
off the Reliance shares on which the firm had spent Rs 760 million a year
earlier. The sale, at an opportune moment later in the year, actually made the
firm a Rs 170 million profit. The second action was to reduce the limit on
supplier's credit to Reliance to Rs 2 billion-and that only to cover work being
done by Larsen & Turbo itself. The proceeds of the Rs 8.2 billion debenture
issue, successfully floated in October 1989, were diverted to Larsen &
Turbo's own expansion in cement and machinery manufacturing.
The prize had been snatched away.
Dhirubhai was left with a huge gap in his financing for his gas cracker at
Hazira, for which costs had escalated from the original Rs 7.2 billion to about
Rs 8.46 billion. The Indian financial institutions were talking about bridging
finance, but insisting that Dhirubhai first tie up his technical agreements for
the plant and get the land transferred from the Gujarat state government. They
were also humming and hawing about the special funding for the food clean-up
and repairs at Patalganga. The Reliance share price sank even lower, to levels
not seen since the company's early days, hitting a low of Rs 50 in March.
Dhirubhai's new newspaper,
launched as the Observer of Business and Politics in December 1989, was not the
influential voice that his son Anil and son-in-law Raj Salgaocar had expected.
Dhirubhai had taken more direct control himself, as it became clear that the
new government was going onto the attack against Reliance. He began to have
suspicions about the paper's editor, Prem Shankar Jha, who had been keeping
company with Ram Jethmalani, daughter of Dhirubhai's old legal and political
foe Ram Jethmalani. Two trusted journalists, R. & Mishra and B. S. Unniyal,
were appointed as deputies. Jha himself had been approached by V P Singh in
February 1990 to become the prime minister's media adviser, but had asked for
six months to make a decision.
He returned from a trip to
Kashmir late in March to find that two senior writers had resigned over
Unniyal's policies. Jha warned Dhirubhai that some 50 of the original 58
journalists were also close to quitting. But within two weeks, Jha himself had
decided to quit and told Dhirubhai he was joining Singh's office. 'It was the
only time I have ever seen him silenced,' Jha remembers.
The mood at Reliance became ever
more defensive. For the public record, Dhirubhai and other figures put a brave
face on things. But the tone of the company's anonymous briefings to
journalists became one of hurt pride, of a wrongly persecuted victim.
Dhirubhai and his boys had
recognised that the names Reliance and Ambani required some image work. Kirti
Ambani had been hustled out of his public relations role after the murder
conspiracy scandal the previous year. The corporate affairs side of the company
was greatly expanded, with the recruitment of skilled publicity managers in
both Bombay and New Delhi.
In the capital, the
vice-president handling government relations, V Balusubramanian, was now
working overtime cultivating politicians in the ruling coalition and the
parties backing it from the outside. As in 1979, when Dhirubhai helped Indira
Gandhi bring down the Janata government, he was now probing for weaknesses and
susceptibilities.
Both Dhirubhai and key figures in
the V P Singh government saw it as a desperate fight to the death. 'There was
hardly a day when we did not spend several hours pondering how we might bring
down V P Singh,' recalled one senior Reliance executive, about
1990. And I suppose that in his
office there were people who spent as much time plotting how to do the same to US.'
The government was soon failing
apart by itself, in any case. Singh's deputy prime minister, Devi Lal, had
unilaterally announced a write-off by the nationalised banks of their small
loans to farmers, a step that eroded the capital base of many banks to zero.
Lal's son, put in charge of Haryana, was proving a thuggish embarrassment. Thus
compromised by his own deputy, the prime minister had tried to pick up the
economic liberalisation he had begun under Rajiv Gandhi in 1985, through a
drastic shift in the government's investment priorities in the new five-year
plan starting in April 1990. The weighting would shift from public- sector
industry to agriculture and rural development, where the growth and employment
response was greatest. Controls on private investment, domestic and foreign,
would be relaxed. The tax system would be simplified and the tax rates eased to
win greater compliance.
To help win support for reforms
from the many defenders of state-directed industrial investment in the
government, the economic adviser in the prime minister's office, Montek Singh
Ahluwalia, circulated a paper at Singh's request in June which pointed out that
India's rising domestic fiscal deficits and increased dependence on foreign
borrowings were taking it towards an external payments crisis. India needed
sharp remedial measures-including cuts in public-sector spending, a rupee
devaluation, and recourse to restructuring loans from the International
Monetary Fund and the World Bank.
The debate was a political
free-kick for the dull elephant who had been pushed out of the herd,
Chandrasekhar" who still thought he was the rightful leader of Janata Dal.
A former 'young Turk' of the
Congress Party who had made his exit many years before Singh, Chandrasekhar was
the ultimate Indian politico. From a similar upper- caste background to Singh',
but from the mafia-ridden coal-mining district of Dhanbad in Bihar,
Chandrasekhar was a man of deals and electoral trade-offs behind a conventional
mantle of Nehruvian socialism. With gusto, he attacked the proposals of Singh
and Ahluwalia as a sell-out of Nehru's heritage and the enslavement of India to
foreign capital. Singh backed down and the resulting statement of policy did
nothing to slow India's drift closer to insolvency.
In early August, the prime
minister finally steeled himself to sack his deputy Devi Lai. Then, in the
pivotal decision of his prime ministership, Singh abruptly announced that, with
immediate effect, 27 per cent of jobs and places in the central government,
public-sector enterprises, and colleges would be reserved for candidates from
the 'backward classes'(comprising mostly members of the Hindu lower castes).
This fulfilled an election promise by the Janata Dal to implement a report
commissioned by the previous Janata government in 1979 from a former chief
minister of Bihar, B. P Mandal. It was potentially good electoral politics, as
the lower castes were some 51 per cent of the Hindu population. The other
parties kept silent, knowing that Singh had beaten them to the biggest of all
vote banks'.
But the children of the upper
castes and of the well-off had no such inhibitions. The Mandal policy
intensified their night- mare of finding jobs after graduating, as 22 per cent
of places were already reserved for the former Untouchables and the tribal
population. Students staged anguished protests in New Delhi streets, provoking
a brutal police reaction that saw several shot by volleys of rife free.
Agitation and confrontations spread across northern India (southern India already
had even greater lower- caste reservation policies at state level). In
September, students began immolating themselves. Over two months, some 260
people died, either in protest suicides or from police fire. By then, also, the
BJP had resumed its own appeal to the hearts of Hindu Indians, through a cult
built around the warrior-divinity Ram of the Ramayana epic. The BJP, and other
groups spawned by the Rashtriya Swayamsevak Sangh, asserted that Ram was a
historical character, and that a
small mosque built by a general of the Muslim emperor Babar in 1532 in the
northern town of Ayodhya had displaced a temple marking Ram's actual
birthplace. The ideal of Ram was supposed to cut across caste
barriers-attributed to a later distortion of true Hinduism-and to dispel
residual defeatism among Hindus after their centuries of foreign conquest and
colonisation. In September the BJP began a countrywide march on Ayodhya to
press for the mosque's replacement with a new Ram temple. Murderous violence
broke out between Hindus and Muslims through the next two months. Singh had not
prepared India for his new Mandal policy, and failed to justify it after wards.
He looked remote and indifferent to the bloodshed in the streets. His timing
looked opportunistic, designed to steal Devi Lal's thunder. Many of the New
Delhi journalists were themselves of upper-caste, privileged back- grounds, and
took strongly partisan attitudes against V P Singh. The Mandal reservations and
the widening gulf with the BJP put Singh on opposing sides to key figures in
his earlier attack on Reliance.
Gurumurthy had become a close
adviser to the BJP leader, Lal Krishna Advani, while Arun Shourie, the editor
of the Indian Express, was vehemently opposed to the new reservations.
As the Singh
government was weakened, Dhirubhai's fortunes revived. The turn could even be
plotted on a graph of the Reliance share price, which began rising steadily
from July 1990. The government was distracted by its numerous splits and
battles.
The customs cases had been successfully
bogged down by petitions seeking a stay of proceedings in the Delhi High Court.
It was clear that further legal appeals could delay a final judgement for a
decade or more. Aides like Vinod Pande, who pressed V P Singh to make a
concerted effort to expose and tame Reliance while he had the chance, found the
prime minister abstracted and diffident. Dhirubhai had also won over a crucial
supporter of the government, the Marxist chief minister of West Bengal, Jyoti
Basu, by announcing plans for a big new polyester factory in his state under a
newly created subsidiary called Reliance Bengal.
Although it was obliged to report
mounting contingent liabilities over its customs and excise cases, Reliance was
climbing back shakily from its setback of 1986 and 1987 as the Indian economy
raced into high growth under pressure of big government deficit spending and
raised imports financed by borrowing. After the 18-month years of 1987-88,
Reliance had had a nine-month year for 1988-89 (July-March) in which net profit
of Rs 793.7 million was reported. In September 1990, Dhirubhai convened
shareholders at a Bombay auditorium for his annual meeting. The profit for the
12 months of 1989-90 (April-March) was Rs 905 million, a drop of nearly 15 per
cent in annualised terms, but due to the provision of Rs 440 million for the
food damage at Patalganga.
The meeting
saw Dhirubhai paint his big pictures again. But for the first time, he faced
hostile interjectors and heckling. Shareholders complaining about the recent
lack of bonus share issues, and shouting charges of financial wrongdoing by the
management, pressed towards the podium, which was soon full of security guards
ringing the directors. The pandemonium forced an adjournment.
In September, as it became more
obvious that Singh was losing support, Chandrasekhar began mustering support
for a revolt within Janata Dal, and making overtures to Rajiv Gandhi's Congress
Party. By early October, nearly 30 of the party's MPs were listed as
disaffected in newspaper reports. On 23 October, the Janata Dal state
government in Bihar stopped the BJP leader Advani's own march on Ayodhya, and
the BJP immediately withdrew support from V P Singh's government. The BJP
continued to send thousands of devotees into Ayodhya, culminating over 30 October-2
November in a suicidal assault against Uttar Pradesh armed police ordered to
defend the mosque by the state's Janata Dal chief minister, Malaya Singh Adam.
While all this was happening,
Chandrasekhar and Rajiv Gandhi continued their efforts to split Janata Dal away
from Singh. Dhirubhai was among four leading industrialists who financed their
campaign, in which the going rate for a defection was said to be Rs 4.5
million. On 7 November, 55 of the party's MPs, or about one-third of its
parliamentary membership, voted against the government. After a day of stormy
debate, Singh resigned and three days later Chandrasekhar was sworn, in as head
of a minority government supported from the outside by Congress. Reliance
shares leapt to their highest point in more than two years, to Rs 240.
When Dhirubhai reconvened his
adjourned shareholders meeting on 13 November, this time at the Wankhede
Stadium where international cricket tests are held in Bombay, the more friendly
political environment seemed reflected in his less defensive mood.
The critics were still there,
asking for a bonus, but Dhirubhai said their rights to debenture issues had
been a kind of bonus. To questions about use of corporate funds in toppling the
V P Singh government, Dhirubhai said such reports were conjecture. The new
political setup had emerged without the Ambani hand, he said.
First half results showed that
Reliance was on the way to displacing Tata Iron and Steel as India's most
profitable company in 1990-91. To help build its new gas cracker, which would
continue the growth, Reliance was now proposing two new bond issues, raising Rs
4.56 billion in convertibles and a further Rs 1.14 billion in nonconvertibles.
This would replace the lost supplier's credit from Larsen &L Turbo.The new
Prime Minister, Chandrasekhar, had gained a poisoned chalice, however. By
allowing the Ram devotees to under- take token work on their new temple at
Ayodhya, he put off the final confrontation (which was to take place in
December 1992, when massed zealots demolished the mosque), and the communal
violence gradually tapered off. But the postponement of the economic reforms he
had so opportunistically engineered in mid-year now rebounded against him. The
New York credit rating agencies had lowered their rating of Indian sovereign
debt in August. Iraq's invasion of Kuwait sharply pushed up India's oil import
bill, while some three million Indian workers had to be evacuated from the Gulf
at government expense and their remittance income was then lost. Singh had approached
the IMF for an emergency loan in October. In December, Chandrasekhar took up
the request and gained US$1.8 billion in emergency credit, on condition that
New Delhi took steps to cut its deficit and deregulate the economy. Always the
pragmatist, Chandrasekhar swallowed the medicine that he had said would enslave
India. His finance minister, Yashwant Sinha, began drawing up a budget for
1991-92 (April- March) which had to include cuts in consumer subsidies and
reduced public-sector investment.
Rajiv by then was alarmed, both
at the appearance of competence Chandrasekhar was showing and at being seen
supporting unpopular measures. He feared Chandrasekhar would take any political
credit that was going, and palm off the blame on to Congress. He decided it was
time to make his own move for power. At the end of February 1991, Rajiv forced
Chandrasekhar to postpone the budget for three months and to introduce a
temporary finance bill which made only minor fiscal adjustments. On 6 March,
Rajiv forced Chandrasekhar to resign. The President appointed Chandrasekhar as
caretaker prime minister and set fresh national elections for late May.
The
deferment of the budget caused the IMF to stall any further external financing
until after the elections. Non-resident Indians began withdrawing their
government- guaranteed foreign currency deposits with the Indian banks, a
capital fight that was to take out a billion dollars by June. With foreign
reserves below US$1 billion, less than two week's import cover, the caretaker government
authorised the Reserve Bank of India to apply emergency measures, which it did
in March by virtually halting imports and sharply raising interest rates to
around 20 per cent. The economy shuddered into recession.
Meanwhile the
initial optimism about Reliance's prospects under the Chandrasekhar government
had been dissipating as Chandrasekhar showed little urgency in reversing the
policy changes made by V P Singh.
Dhirubhai's friends had begun to
move back into positions of economic and financial control. The former finance
secretary, S. Venkitaramanan, was made Governor of the Reserve Bank of India as
a matter of priority, replacing R. N. Malhotra. Several accounts say that
Dhirubhai's lobbying was decisive. In November 1990, even before Chandrasekhar
was sworn in, Dhirubhai had told one diplomatic visitor: 'r Malhotra will be
replaced shortly and the new RBI governor will be Mr. S. Venkitaramanan.
'Dhirubhai indicated that it was his recommendations. In March 1991,
Venkitaramanan had in turn appointed the former Unit Trust of India chairman,
Manohar Pherwani, as the chairman and managing director of the central bank's
housing refinance subsidiary, the National Housing Bank.
But Larsen &- Turbo had
remained outside Dhirubhai's control, even though in January a junior minister
assisting Chandrasekhar, Kamal Murarka, had observed that Larsen & Turbo
was Ambani's company's. Reliance was holding back its new debenture issues
because it saw a weak reception in the market, though ostensibly delays in approvals
were cited. With cost overruns in the Reliance Petrochen-iicals plant at
Hazira, let alone the future gas cracker, it still badly needed the supplier's
credit. To rub in the loss, Larsen & Turbo's chairman, D. N. Ghosh, had
started the new year by writing to Dhirubhai pointing out that Reliance was
late in paying Rs 1 billion on bills for work done by Larsen & Turbo.
Mukesh Ambani lamely replied nearly a month later, claiming that Larsen &
Turbo itself was behind schedule in some work.
On 15 February, Ghosh had
resigned at the request of the government. But the resulting uproar in the
newspapers- Gurumurthy wrote under the headline 's & T under hijack again'
had caused the financial institutions to delay a board meeting to appoint a
successor. Before Reliance could overcome this hesitation, the government had
fallen and the appointment had come under the rules banning a caretaker
administration from making major appointments. The plum had stayed just out of
reach.
Chandrasekhar and his ministers
had been proving unruly clients in any case. The Reliance political lobbyists
in New Delhi faced constant demands for cash to keep the government's small
band of MPs from defecting again. As the minority government became shakier in
February, the scramble for funds became even more desperate. Eventually, the
Reliance political team were getting almost daily demands for large bundles of
cash from Chandrashekhar's office and his key political managers such as the
law minister, Subramaniam Swamy. The dependence on one capitalist was a
particular irony in the case of Chandrasekhar: as one of the socialist Young
Turks in the Congress Party of the late 1960s, he had led the attacks on the
industrial licences awarded to the Birlas that had caused the 1969 Hazare
inquiryWhile the economy slowed down, the politicians fanned out for an
election held, unusually, in the hottest months of the year. The results from
the first of three days of voting, on 20 May, showed that Rajiv Gandhi would
not have achieved the same comeback as his mother had done in 1980. Congress
would have slid back even further from the 1989 result of 192 seats, to perhaps
160 seats out of 544 in parliament's lower house. It would still have been the
biggest party, and Rajiv would have tried to govern with the support of smiler
parfes while an enhanced BJP waited to topple him.
But that was not to be. On 21 May
199 1, as Rajiv campaigned in Tamil Nadu for the next round of voting, he was
killed by a suicide bomber. That created a sympathy wave in the later stages
that gave Congress an increased tally of 226 seats, and Rajiv left a well-planned
strategy for economic reform that applied the measures advocated since 1990.
Whether
Rajiv might have changed his business friends yet again is something that will
never be known. The Bofors scandal was still very much alive, and he would have
spent his second term keeping a lid on it. But a tantalising indication that he
might have changed his view of Dhirubhai comes from an account of a meeting
between Rajiv and Nusli Wadia in early May 1991, about three weeks before
Rajiv's death. Wadia had a call from Rajiv early in the week, asking for a
meeting. Wadia was busy preparing for an important business trip overseas the
following Saturday, but Rajiv insisted. So, after completing his work, Wadia
few up to Delhi on the Friday evening, arriving at Rajiv's heavily guarded
bungalow on janpath about 11 pm. It was their first meeting since the Fairfax
affair, and both men were edgy. Rajiv opened up by complaining about the Indian
Express sniping which continued against him. Wadia exploded. This was nothing compared
to what Gurumurthy and he had suffered: arrest, harassment by the bureaucracy,
constant inspections, his passport and visa problems, and finally the murder
conspiracy. Wadia asked Rajiv why he had refused to see him when the forged
Fairfax letters were announced. Raiiv said he was not aware of any approach.
Wadia said he must have known. It was general knowledge that Rajiv's secretary,
V George, to whom he had spoken, always took in requests for meetings for Rajiv
to tick or cross off. Rajiv explained that once the Thakkar-Natarajan inquiry
was appointed he was committed to a course of action. He also reminded Wadia
about the detective asking questions in Switzerland. Wadia pointed out that
this was part of the whole forgery plan. Did Rajiv appreciate, he asked, that
his panicky decision based on the forgeries-this one avoid-able thing-had
started the whole confrontation that ultimately brought the downfall of his
government?
The conversation went on past
midnight. Refreshments, coffee and soft drinks and sweets were sent in as the
two men talked on into the small hours. Wadia must have abandoned plans to find
a hotel room. Finally the napping aides in the hallway heard a furry of voices.
It was about 5.30 and the first light was coming through the tall neem trees
and bougainvillea in the garden. Rajiv and Wadia came out into the portico and stood
waiting while Wadia's driver was roused. Before Wadia turned to get into his
car, he and Rajiv shook hands. It was evident that they parted as friends once
again. Wadia went straight to the airport and took an early morning fight back
to Bombay. That evening he few out of Bombay to Europe. He was still abroad
three weeks later when he heard that Rajiv had been assassinated.
UNDER THE REFORMS
After the shock of Rajiv Gandhi's
murder, the Congress Party, chose an elder as its new leader. P V Narasimha Rio
had been in the top circles of power for much of a long career in politics. He
had handled the Ministries of Home Affairs and External Affairs with great
skill under Indira and Rajiv, and his intelligence and erudition (in nine Asian
and European languages) were undoubted. But after an undistinguished stint as
chief minister in his home state of Andhra Pradesh had been judged lacking in
the charisma needed for the prime ministership.
In 1991 he was already 70 and was
preparing to retire from parliament when the party installed him as a stopgap
chief. But those who expected an early leadership fight within Congress or an
early return to the polls had reckoned without Narasimha Rao's rejuvenated
taste for power or his gift for intrigue, which was Kautilya (the 3rd century
BC Indian Machiavelli's applied in a modern setting. From his minority starting
point in parliament, Narasimha Rao steadily built up a Congress majority by
attracting defectors from opposition parties, and managed to serve out his full
five- year term.
For the first two years at least,
Narasimha Rao provided the political umbrella under which the long-delayed
economic reforms could he introduced. India in 1991 and 1992 illustrated
perfectly the adage that 'ad times make good policies . To carry them out,
Narasimha Rao installed as finance minister the career government economist
Manmohan Singh, who had reached the bureaucratic pinnacles of the ministry as
Finance Secretary and then central bank governor in the 1980s. The
Cambridge-educated Singh had spent much of his earlier career helping to
construct the edifice of government planned investment. But then a spell making
a comparative study of the world's less-developed economics for the South
Commission, a body representing many developing nations, had crystallised some
doubts and begun a Pauline conversion in him towards market-based allocation of
resources. Singh was soon backed by the elevation of Montek Singh Ahluwalia,
(the economist who wrote the 1990 reform paper) as Finance Secretary The two
Sikhs, almost invariably in austere grey-blue turbans, became the public face
of reform.
Within a few days of the
government taking office at the end of June 1991, Singh devalued the rupee by
20 per cent to encourage prompt repatriation of export earnings.
In the deferred budget for
1991-92 (April-March), delivered at the end of July, he abolished licensing in
most industries, raised fertiliser prices to cut subsidies, warned that
loss-making government enterprises would not be supported indefinitely, and
relaxed controls on foreign investment. The second budget, at the end of
February 1992 for the 1992-93 year, carried forward the policies and pointed
towards an Indian economy opened to global trade and investment flows by the
end of the decade or even sooner.
The rupee was made largely
convertible on the current account, meaning its exchange rate was to be set
increasingly by the market, and more import items were transferred to the open
list. Import tariffs, which had once ranged up beyond 300 per cent, were to be
no more than 110 per cent and much lower for capital goods. Foreign companies
were welcomed into the petroleum sector from the wellhead to the petrol pump.
The policing and pricing of new share and debenture issues by the Controller of
Capital Issues was abolished, with vetting for fraud taken up by the new
Securities
and Exchange Board of India. Indian companies were permitted to issue
convertible securities overseas, such as Eurobonds, and foreign portfolio funds
were to be allowed to buy and sell shares directly in Indian markets. We must
not remain permanent captives of a fear of the East India Company, as if
nothing has changed in the last 300 years,' Singh declared in his 1992 Budget
speech. 'India as a nation is capable of dealing with foreign investors on its
own terms. Indian industry has also come of age, and is now ready to enter a
phase where it can both compete with foreign investment and also co-operate
with it. The first test of how helpful the new government would be to Reliance
came less than a month later. On 26 July, the company's subsidiary Trishna
Investments had used its substantial shareholding in Larsen & Turbo-then
about 18 per cent even after it had returned the 7 per cent stake acquired
through Bank of Baroda Fiscal to quell criticism in 1989-to requisition an
extraordinary general meeting of shareholders a month later.
The meeting
was to vote on two motions: that Mukesh Ambani be made the company's managing
director, and that Dhirubhai be reinducted to the board.
The prize was another shot at the
blue-chip's cash. The funds from Larsen & Turbo's 1989 debenture issue had
not yet been deployed, because of a court action and then a need to get
government clearance for a change from the originally proposed use.
Dhirubhai
was still desperately short of funding to complete the petrochemical complex at
Hazira and move on to the new gas cracker. The financial institutions were
frowning on a revival of the supplier's credit plans, and in May 1991 Dhirubhai
had let it be known that he was expanding Reliance's own new debenture issue
from Rs 5. 7 billion to Rs 9 billion. But he had still not gone to market with
it. Larsen & Turbo was still dangling for the taking.
'With friends in the government's
commented one newspaper writer, they [the Ambanis] are unlikely to have
problems." Others were not so sure. 'Times are such that no bureaucrat
will openly come out or do something which is perceived to be blatantly
pro-Ambani,'noted Business India.
Dhirubhai indeed had many friends
in the government or in the Congress leadership, including old Indira or Rajiv
loyalists such as R. K. Dhawan and Satish Sharma. But Narasimha Rao was too
cautious and in too precarious a political position to give direct favours, and
the Finance Ministry now had the strict Manmohan Singh in charge.
In a drive reminiscent of his old
debenture placement campaigns, Dhirubhai began canvassing Larsen & Turbo
shareholders to give Trishna their proxies to vote at the meeting. The takeover
in 1988 had given Reliance two vital footholds, which the Singh government had
not dislodged. A former assistant company secretary at Reliance had been
installed as Larsen & Turbo's secretary, and Reliance Consultancy Services
had been made the company's share registry in place of a Tata Group firm. It
meant that Reliance had no trouble in getting all details of the shareholders.
Over the month before the 10.30 am meeting on Monday, 26 August, about 200
agents for Reliance collected some 107 000 proxies. By the weekend before the
meeting, Dhirubhai and his team
were convinced they had Larsen
& Turbo in the bag and were already celebrating.
Mukesh had resigned as executive
director of Reliance, ready to take over as vicechairman and managing director
of Larsen & Turbo.
The renewed takeover attempt was
a trumpet call to the Ambani critics of five years earlier. The Indian Express,
Nusli Wadia and Ram Jethmalani A made &antic attempts to convince ministers
and officials that it would be improper to let this corporate jewel
fall to the Ambanis. A new press
war broke out, with each side going to the extent of questioning the other's
patriotism. In the Express, the Bombay publisher R. V Pandit pointed out that
Larsen & Turbo carried out vital defence work, seeming to suggest that the
Ambanis could not be trusted with national secrets. Dhirubhai's Observer of
Business and Politics recalled that Wadia was the grandson of Jinnah, founder
of Pakistan.
Until the last minute, the
government was disinclined to give any particular instruction to the financial
institutions on how to vote their huge shareholdings. Jethmalani had failed to
get a court injunction halting the meeting, and was to fail again at an
application to a judge at his residence on the Sunday morning.
However the Ambani critics had
been collecting testimony from some Larsen & Turbo shareholders that their
names had been taken as proxies by Trishna without their consent. By the end of
the last week, they were alleging forgery of proxies on a massive scale (a
formal legal complaint, fled in September at a Bombay magistrate's court by one
Madan Gopal Jajoo, was to allege that about 84 000 of the 107 000 proxies were
forged). Wadia contacted the then Janata Dal MP George Fernandes on the
Saturday afternoon, and got him to table a faxed message about the alleged
forgeries in parliament just before it adjourned.
The opponents of the takeover
managed to get through several messages to Narasimha Rao's senior staff, who
appeared startled by the warnings that the government could be seen as party to
a forgery in a case that might be heading to court. The pressure worked. The
Cabinet Secretary came back with the response that the institutions would
maintain the status quo at Larsen &- Tourbo.
It
was then a matter of seeing that the instruction got through to the
institutions in time. On Sunday morning calls to the chairman of the Life Insurance
Corporation found he knew nothing about the decision. The cabinet office was
then prompted and it assigned an officer to the job in a special control room
to circulate the decision to the chairmen of the institutions. At 8.30 on the
Monday morning, two hours before the meeting, the LIC chairman spoke to Mukesh
Ambani and told him as gently as possible that unless the motions were
withdrawn the institutions would vote against them.
Shareholders
were already packing into the Birla Matashri Auditorium, close to the downtown
Churchgate suburban rail terminus. It was too late to call off the meeting.
The Larsen & Turbo directors,
including Mukesh and Anil Ambani, appeared on the podium, and pandemonium
erupted. Unaware of the Government's decision, agitated shareholders rushed the
microphones set up in the aisles and freed off volleys of questions and
accusations. There was cheering and jeering by rival factions. The directors
were shouted down as they tried to speak. Eventually they gave up and retreated
behind the back curtain to exit the auditorium through a stage door. A swarm of
shareholders surged onto the surrendered stage.
The shouting continued for half
an hour, but it was all over. Dhirubhai had suffered what he later told close
confidants was his greatest defeat. The government institutions went on to
appoint a seasoned Larsen & Turbo executive as the new chairman. A Supreme
Court ruling in May 1992 cleared the way for conversion of the 1989 debentures,
diluting the Reliance stake down to about 8 per cent, the company's original
entry level.
The alleged forgery of proxies
was never fully investigated. Bombay police prepared to raid the go down where
Reliance had stored the proxy forms, but were called off by the Maharashtra
chief minister's office half an hour before they moved in.
Within Reliance, the failure was
a sobering lesson that times were changing for Indian business. The government
could no longer so obviously play favourites if it wanted to entice foreign
investment. The value of licences had gone. Tariffs and excise duties were
still high, but the trend would be to lower and uniform rates. Financial
markets and institutions would have their transactions and performance
scrutinised in public.
The level playing field was the
motto of the times. The transformation had just begun, but this was the way it
would be, sooner or later. The implications for industries like Reliance was
that their production would have to attain world- competitive cost levels by
the time the economy was fully opened. His expansionary vision had put
Dhirubhai in a good position. Whether by smuggling capacity or not, his
polyester and petrochemical plants were the largest in the private sector and
had the best economics of scale. By getting in early with his petroleum projects,
he could keep his capital costs down and be ready for the time when the sector
was deregulated and prices were brought down to world market levels.
Dhirubhai and his sons astutely
portrayed themselves as part of the new India, raw spirited capitalists
champing to have the bridles of failed Nehruvian socialism taken off.
The
foreign investment funds had, already had their eye on Reliance since the boom
of 1985. In September 1986, the business magazine Forbes, which refers to
itself as the 'capitalist's tool' , ran a four-page profile of Dhirubhai which
described him as a mixture of Ted Turner [the founder of the cable TV network
CNNI and Horatio Alger [the 19th century American inspirational novelist whose
writings put the notion of success through hard work]'s . It shrugged off the
controversies raging around him at that time. Since then, many more business
journalists have profiled Dhirubhai for the world's press, and have usually
taken his word that he has been dynamic and his rivals 'complacent .
The investment
fund managers who flocked to Bombay from Hong Kong, Singapore and London from
the end of 1991 were also inclined to overlook the 'colourful past.
'Someone who can smuggle in a
whole factory clearly has something going for him,' one Kleinwort Benson
researcher remarked at the tiMC.3 Imbued with the notion of emerging markets
forgetting that Bombay's stock exchange, set up in 1875, was among the world's
most established-the fund managers had reached India after selling their
clients on the business ventures of Thai and Indonesian generals, Chinese
People's Liberation Army units and East Asian dynasties newly listed on new
stock exchanges. India was a cinch by comparison. Soon research reports were
piling up, pointing to India's large middle class and its hidden savings, the
basic soundness of its British-style legal and corporate institutions, the sHI
of its top administrators and managers, and the political safety valves in its
complex but democratic political system.
Even before the first foreign
portfolio funds were authorised to invest from mid- 1992, the Indian
sharemarkets had enjoyed a spectacular boom and crash on the euphoria generated
by the reforms. The unprecedented bull run in Bombay saw the market's
capitalisation (the total value of shares in the 6000 listed companies) rise
from Rs 756 billion in March 1991 to Rs 2764 billion in March 1992.
The source of the funds puzzled
Finance Minister Singh and many of his officials, given that the central bank
was still applying a tight liquidity squeeze, with interest rates around 20 per
cent, as part of its attack on the external payments crisis. Then it was
discovered that bank reserves were being turned into speculative cash. To help
finance the huge government deficit, commercial banks were obliged at that time
to keep a total 54.5 per cent of their deposits in government securities and
cash. To make more profit from this compulsory investment, the banks traded and
swapped their holdings of bonds issued by the treasury or government corporations
in search of higher yields.
Changes in interest rates would
raise or lower the market value of bonds carrying rates fixed at earlier times.
The deregulation of interest rates on bonds early in 1991 allowed public-sector
enterprises to offer much higher rates on new issues, so the market value of
their existing bonds fell sharply.
At the end of 1991, banks were
more keenly trading their securities in search of higher yields. Banks were the
only parties authorised by the Reserve Bank of India to trade in gilts
(government securities), but several brokers had established themselves as
trusted middlemen for particular bank treasury departments. The RBI was
ill-equipped to control this growing market. Its register of who owned which
gilts at any time was through handwritten entries in Dickensian ledger books at
its old building in Bombay, and new ownership notes were posted out to banks.
To speed up their transactions, the banks and brokers developed their own
informal system outside the central bank's aegis through the use of chits
called 'banker's receipts' or Rs which were simply certificates issued by the
banks themselves indicating that they owned the securities being sold.
At the end of April 1992, it was
revealed that many of the BRs were not backed by securities at all. And the
brokers, among them a young Gujarati named Harshad Mehta who had earned the
sobriquet 'The Big Bull' from his aggressive sharemarket purchases, had been
diverting the huge settlement cheques passing through their hands, on the way from
bank to bank, into their own accounts. While on such unauthorised loan's, the
funds were put into the sharemarket. An article in The Times of India by a
young business reporter, Sucheta Dalal, brought the circus to a stop on 23
April. Several Indian and foreign banks were left short of some US$1.4 billion
worth of securities in their vaults. The sharemarket collapsed, inquiries and
prosecutions launched and the new Securities and Exchange Board of India (SEBI)
had a perfect excuse to bring Bombay's clubbish stock broking fraternity to
account. By late 1993, the market bounced back as international investors
discovered the 'India story' en masse and prices climbed to a new record in
September 1994.
The 1991-92 boom helped Dhirubhai
quickly overcome his Larsen & Turbo disappointment.. In August, the
Controller of Capital Issues (the post was abolished six months later) cleared
the expansion of the Reliance debenture issue, from the previous Rs 5.7 billion
to Rs 8.583 billion, plus the right to retain 15 per cent over subscription. At
a total Rs 9.87 billion it exceeded any previous issue in India. Split into
three series of bonds-one convertible, one convertible with detachable warrants
to buy shares, and another straight nonconvertible-it was more complicated than
any of the previous issues, but was successfully put to the market over
November and December. In April 1992, Reliance also rolled over its F Series
debentures from 1985 for another seven years, offering investors a warrant to
buy a Reliance share with the renewed debentures.
Dhirubhai had actually fared
rather better under V P Singh's prime ministership and its aftermath than he
had under Singh's tenure in the finance portfolio. Reliance's results for
1990-91 (April~March) showed a tough year, but sales had grown 13 per cent to
Rs 2 1.05 billion and net profit 39 per cent to Rs 1.25 billion. The dividends
were still a (for Reliance) low 30 per cent of the basic Rs 10 share, and a
bonus issue was out of the question. The new year, 1991-92, had started out
with little growth in sales or profit, given the brakes on the economy. But
Dhirubhai asked his shareholders, at their annual meeting in October 1991, to
look at Reliance's massive projected expansion now that licensing had been
removed on nearly all the company's products. This meant that the existing
Patalganga plant would be further expanded to international size and its
supplies of naphtha and kerosene would soon come by pipeline from the Bharat
Petrochemicals refinery at Chembur, whose own plans for downstream expansion
had been virtually pre-empted by Reliance. The new petrochemicals complex was
coming up by the Tapti River at Hazira, on the former tidal fat reclaimed by
use of a massive Dutch dredger and extensive piling. Its monoethylene glycol
plant came into production late in 1991, and its polyvinyl chloride and
high-density polyethylene plants were expected on stream during 1992. But the
cost had blown out some 70 percent from the original Rs 10 billion because of
the rupee's devaluation and the failure of government authorities to chip in
their share of the power plant and jetties. Financially, the subsidiary
Reliance Petrochemicals was struggling.
At this point, Dhirubhai decided
to merge the petrochemicals arm back into the parent company. The shareholders
of Reliance Petrochemicals approved the move at a meeting, in August 1991, held
at Hazira where not too many of the 2.4 million stockholders could have turned
up. The meeting also allowed the early conversion of the remaining portions of the
company's big debenture issue and the issue of fresh shares to the Reliance
parent company at par in payment of a loan from it. The merger was announced as
a decision by both boards on 28 February 1992, and made effective from 1 March.
Three of Bombay's leading
chartered accountancy firms recommended a swap of 10 Reliance Petrochemicals
shares for one Reliance share. It meant that Reliance acquired the massive
assets of the subsidiary at a discounted price, and from 199293 was able to
add its growing production stream to its own sales or keep them inhouse at
cost for use at Patalganga. The depreciation benefits of the subsidiary's
investment were transferred to Reliance, where they were a shield against
corporate income tax for several years. Reliance's profits indeed showed a
strong leap the next year. The 1991-92 year had finished strongly, showing a 30
per cent rise in profits to Rs 1.63 billion. The merged group nearly doubled
profit in 1992-93, to Rs 3.21 billion. Reliance shares had risen high again, so
few of the subsidiary's old shareholders were complaining.
In December 1993, Dhirubhai
announced that a duplicate of Patalganga would be added to Hazira in a second
polyester-PTA complex. Another 350 000 tonnes a year of PTA plus 120 000 tonnes
of polyester yarn, 120 000 tonnes of polyester staple fibre and 80 000 tonnes
of the bottle-making plastic PET would be ready in two years. In September
1993, he had also entered a joint venture with ICI, Terene Fibres India, to
take over ICI's 30 000 tonne a year polyester fibre plant at Thane, outside
Bombay. The three polyester works would make Reliance the fourth biggest
producer in the world (after Germany's Hoechst, America's Du Pont and Taiwan's
Nanya), and the only one with production integrated from naphtha down to
fabrics.
The integration was to move even
further back upstream . In February 1994, Narasimha Rao's cabinet decided to
award three oil and gas discoveries in the Arabian Sea to a consortium
involving Reliance with the Houston-based Enron 011 & Gas Corp and the
government's own Oil & Natural Gas Corp, which had discovered and
delineated the fields but did not have the funds to develop them. Two of the
fields, Mukta and Panna, contained an estimated 265 million barrels of oil, and
the third, Mid and South Tapti, some 67 billion cubic metres of gas. Cost of
development was put at Rs 38 billion (then about US$1.25 billion) of which
Reliance was responsible for 30 per cent. Enron would be the operator
initially, but would transfer the role after five years to Reliance.
The results for 1993-94 showed
Reliance had edged past the Tata Iron & Steel Co, founded in the first
decade of the century, to become India's largest company measured by annual
sales, operating profit, net profit, net worth and assets. Its 2.4 million
shareholders were the most widely spread equity base of any industrial company
in the world.
Dhirubhai's return to stockmarket
leadership was marked by a resumption of the journalistic accolades cut off in
1986. The magazine BusinessIndia put him on its cover as its Businessman of the
Year for 1993.With no business background to speak of, Ambani has emerged as a
symbol of the New Indian Dream and his success has rewritten the conventional
code that only the rich can get richer,' it said. Dhirubhai had set the example
for a host of industrial clones: 'The last decade saw the rise of an altogether
different entrepreneurial breed on the industrial scene; one that was impatient
to get ahead, willing to take risks and wend its way through the regulatory
maze, displaying an entrepreneurial zeal that somehow seems to have evaporated
in the more established business houses.' Mile it galled some that he seemed to
have crossed A limits in influencing politicians, Dhirubhai's supporters said
he didn't do anything different from others. The business environment compelled
it, and it was no use singling out any one person. Anil Ambani was quoted as
saying: 'perhaps my father's only fault has been that he thought too big and
clearly ahead of his time. But even as it was coming back into a single image,
Reliance was creating new windows on the screen.
In the main picture was the gas
cracker at Hazira, consuming much of the parent company's financial resources.
It was running years behind schedule (it eventually came on stream in the
1996-97 year, some three years late), but this had been due to 18 months of
delays in getting the final licence issued after the November 1988 letter of
intent from the government. Then it had been decided in 1992 to expand its capacity
to 750 000 tonnes a year of ethylene (from 400 000 tonnes).
Because of this burden, any other
new projects would have to be started off the Reliance books. In 1992, Reliance
came out with two new subsidiaries. Two of its associated investment companies
had been transformed into Reliance Polypropylene Ltd and Reliance Polyethylene
Ltd to build new plants making those products within the Hazira complex. The
need for separate companies was explained by the equity involvement of the
Japanese trading house Itochu (the former C. Itoh & Co) which was to put in
US$50 million for a 15 per cent stake in each firm, making it the biggest
investment planned by a Japanese firm in India at that point. The issue of
equity shares and optionally full convertible debentures in November 1992 was
wildly oversubscribed: the share issues by around 100 times in each case and
the debentures by three to four times. All in all, about 10.5 million investors
offered Rs 34.43 billion. Dhirubhai was able to keep Rs 3.25 billion for each
company, and the rest was a 15 per cent loan until it was refunded by mid-March
1993.
Even before they were born, the
Reliance twins' were the cause of controversy. The Securities and Exchange
Board of India had noted that their shares were being ramped on the Bombay
Stock Exchange, and insisted that the prospectuses carried the warning: 'The
current market price of the shares is not a true indication of the actual worth
of the shares as the current market price is only as a result of circular and
thin trading among a smaller number of interested parties.' But SEBI found this
had occurred before it issued its new stockmarket regulations. The problem was
shuffled over to the Bombay exchange, which identified the brokers involved but
did not press penalties. The twins later became problem children.
Dhirubhai had also begun setting
up a new company to carry out his biggest dream, building a full-scale oil
refinery. In 1992, he had gained clearance from the Foreign Investment
Promotion Board attached to the prime minister's office for Itochu to take 26
per cent of the 9 million tonne a year refinery. In August 1993, he announced
that Reliance Petroleum would make its inaugural capital raising, through an
even more complex issue called a triple option partially convertible debenture.
Subscribers were offered debentures with a face value of Rs 60. Of this, Rs 20
was to be converted into equity shares at par, one on allotment and one after
18 months. The Rs 40 balance, nonconvertible, would he paid back doubled in
three annual installments from the sixth year (equivalent to an effective 14.35
per cent annual interest). Two attached warrants for shares could he sold on
the market, or exercised for Rs 20 each. Or investors could get their money
back on the Rs 40 nonconvertible portion after 46 to 48 months and receive two
shares from the warrants at Rs 20 each.
If Dhirubhai had previously made
the nonconvertible convertible, the new issue was surpassing. Investors would
get equity shares immediately in a business which did not yet exist and which
was years away from earnings, and would have nonconvertible debentures which
would not earn any returns until the sixth year. It was extremely cheap money
until then, almost free.
But when put to the market in
November 1993, it raised the targeted Rs 21.72 billion from institutional
investors and the public, and was oversubscribed three times. Reliance itself
put in Rs 5.773 billion, taking the total proceeds to Rs 27.493 billion or
close to US$1 billion at that time. Itochu was no longer in the picture and not
mentioned in the prospectus. The absence was not really explained. Together
with another partly convertible debenture issue to Indian institutions along
with overseas supplier's credits, lease finance and some overseas borrowings,
the issue was to fund the refinery's cost of Rs 51.42 billion by its planned
completion in three years time, that is, late 1996.
Dhirubhai now
had 2.6 million shareholders in Reliance Petroleum as members of his 'family's
.
Almost immediately, the project
met delays on the ground, as disputes were reported with landowners on the site
at Moti Khadvi, about 25 kilometres outside Jamnagar on the west side of the
Saurashtra peninsula. Court actions were to continue until May 1996 when the
company established its hold over some 2240 acres. But by the time Dhirubhai
arrived on 23 January 1995 for the bhumi puja or ritual groundbreaking prayers
involving the cracking of a coconut and the chanting of Vedic scriptures by a
Hindu pundit, the size of the refinery had expanded in his plans to 15 million
tonnes a year, with another petrochemicals complex alongside making 1.4 million
tonnes a year of paraxylene and other downstream products and including a third
FTA plant of 350 000 tonnes.
The cost of the refinery was now
put at Rs 86.94 billion, and the petrochemicals works were another Rs 45
billion. However, the completion date had slipped two years, to late 1998 or
1999, which would be just before the returns on the nonconvertible part of the
debentures were due. Would Reliance Petroleum then disappear back into the
parent company, many investors wondered, in another many-for-one share swap?
Would there be more delays and more expansions?
The new investors, especially the
foreign portfolio funds, had by then learnt that Dhirubhai was capable of
constant surprises. Reliance was moving in so many directions simultaneously
that it was hard to put the whole sum together. Probably only Dhirubhai,
his two sons and a few others had
the whole equation in their head. The cachet with the new foreign investment
funds had been turned into cheap finance raised in London, Luxembourg and New
York. Despite the mayhem in the Bombay capital markets in May 1992, Reliance
had then been the first Indian company to float Global Depository Receipts
(Gars), a convertible bond priced in US dollars but initially priced in a
linkage with the Reliance share price in India. It had been a Herculean effort
of share price support against the background of the securities scam, and once
the issue closed on 1 8 May Reliance had to offload the shares it had bought on
market onto the books of friendly Indian institutions, mutual funds and
merchant banks which had been convinced that helping India's first GDR issue
was a patriotic duty. Within two months the GDRs were trading at a 25 per cent
discount to the issue price.
When India's financial image
recovered the next year, Reliance was back with a US$140 million
Euro-convertible bond issue in November 1993 managed by Morgan Stanley, whose
investment guru Barton Biggs rated Reliance scrip one of the best buys in Asia.
Many other investment advisers
then saw Reliance, the most liquid security in the sharemarket, as a surrogate
for the entire Indian market or the quintessential India story's .
Anil Ambani, the more outgoing of
the two sons, became the public face of Reliance in the numerous road shows
held in world investment centres from then on. In February 1994, the company
made the biggest GDR issue yet, of US$300 million, after some delays in permission
from the Ministry of Finance which had noted that the proceeds of the previous
Euro-issues had not yet been completely used for the designated purpose and
that Reliance seemed to have money to play the sharemarket.
The
foreign enthusiasm was dashed considerably at the end of 1994, however, when
Reliance carried out two manoeuvres which many investors felt had broken
assurances.
On 22 October,
Reliance announced it was placing 24.5 million shares with Indian financial
institutions to raise a total Rs 9.43 billion to fund its oilfield
developments. It emerged that the Unit Trust of India had put in Rs 7.73
billion, the rest coming from the Life Insurance Corp and the General Insurance
Corp. A five-year lock-in applied, meaning that the institutions could not sell
the stock for that time.
Just over two weeks later,
Reliance announced it was merging the twins ' Reliance Polypropylene and
Reliance Polyethylene into itself, in a share swap set by two accountancy firms
that seemed quite generous to the shareholders of the two subsidiaries, which
were still a year away from production.
The foreign investment fund
managers were livid. Early in October, Reliance had staged a road show in Hong
Kong to present its first-half results to market analysts. The Reliance financial
manager Alok Agarwal had been repeatedly asked whether the company had any
plans to raise equity capital in the near future. Agarwal and other company
executives had left everyone with the impression that there were no plans to do
so. Now, within a month, Reliance had made two moves which involved the issue
of about 99 million new Reliance shares, expanding the share base by over 30
per cent.
The foreign funds had by then
lifted their combined shareholdings to 13 per cent of previous total equity, on
the expectation of very strong growth in earnings per share, a widely used
yardstick of the profitability of a share. Their analysis was now way out of
touch. Profits would be spread over a much greater number of shares, so
earnings-per-share would be much lower. To complaints that Reliance had given
no hint of such a dilution of equity, the company rather lamely said it had not
specifically ruled it out.
Some fund managers in Bombay
threatened a revolt, telling Reliance they would vote their shares against the
merger at the extraordinary general meeting called to approve it on 6 December
1994. They produced evidence of heavy buying in shares of the twins before the
announcement. Both Reliance Polypropylene and Reliance Polyethylene were
trading at around Rs 40 early in June 1994, but climbed steadily to peak at Rs
105 and Rs 92.5 respectively on 8 November when the announcement was made. For
those in the know about the swap-ratio, it would have been either a cheap entry
into Reliance
itself-since its shares were
trading at more than Rs 400 by October-November-or a chance for some
insider-trading profits.
One investor that was not
complaining, oddly, was the Unit Trust of India. It was unclear whether its top
officials had been told of the twins' impending merger, even though it was
announced only two weeks after the private placement and had an immediate
unfavourable impact on the Reliance share price. If the merger plan had not
been foreshadowed, the Unit Trust might have been able to argue that a material
event had not been disclosed and seek redress for its unit holders. If it had
been told, the performance of its managers was open to question.
No
one was arguing with the logic of consolidating the twins into the parent
company at some stage. It added sales, assets and profits while eliminating the
sales tax that would apply to transactions between separate companies. But this
should have happened closer to the time the twins' plants came on stream. As
the London investment group Crosby Securities noted in a company report in
1996, 'The surprise equity dilutions ... had cast a shadow of doubt on the
treatment of minority shareholders '. The effect was a fall in the Reliance
share price, and an even sharper tumble in the price of its GDRs listed in
Luxembourg.
The investment bankers did not ostracise Reliance
for very long. The angry fund managers in Bombay were called by their head
offices in Hong Kong and London and told not to make a fuss at the 6 December
shareholders meeting.
There were still some fat fees to
be earned from managing new capital issues and borrowings, though Reliance had
burnt bridges with many equity investors in Europe. But there was still the
debt market, and the whole new world of the American debt and equity markets to
tap into.
In 1995, Reliance made some more
new capital-raising firsts for Indian companies. In July it raised US$150
million in a seven-year syndicated bullet loan in Europe, meaning that it was
repayable in one lump at the end of the term. In October of that year, it placed
US$150 million worth of 10-year bonds at 1.9 percentage points over the US
Treasury 10-year rate with American institutions, having gained a favourable
credit rating from the National Association of Insurance Companies. By mid-
1996, it had gained an investment grade rating by one of the two big New York
rating agencies, Moody', though not from the other, Standard & Poor'. It
put through US$200 million in bonds
with the help
of Merrill Lynch, half for 20 years and half for 30 years. Reliance Petroleum meanwhile
raised US$260 million for the Jamnagar refinery through two bond and GDR issues
in the first half of 1996.
The retreat of the Indian
Government from its monopolising of many infrastructure sectors had opened up
numerous opportunities. Dhirubhai had often used the old- fashioned adatye
'tick to your knitting's to keep his executives looking at associated activity
(his first industrial activity had actually been the knitting machines at
Naroda). The sons were keen to try something new. If tenders were won, that's
where Reliance
would go. Many projects were
proposed by the mid-1990s, including a software technology park near Hyderabad,
a small transport aircraft with Hindustan Aeronautics Ltd in Bangalore,
diamond mining with South
Africa's De Beers Corp in Madhya Pradesh, a toilway from Bombay to Pune. The
firmest steps, however, were in power and telecommunications.
Reliance gained approvals for
three mid-size power plants in Patalganga, Jamnagar and Delhi. It also won the
licence to operate a basic telephone service in Gujarat, in partnership with
the American utility Nynex, called Reliance Telecom, for a licence fee of Rs
33.96 billion payable over 15 years. The only competitor would be the
cashstrapped and trade union-bound government telephone service and two private
cellular services. In addition, Reliance Telecom won licences to run cellular
services in the states of Madhya Pradesh, Orissa, Bihar, West Bengal, Assam and
Himachal Pradesh and in the northeastern hill states for modest total licence fees
of Rs 3.37 billion over ten years.
The telephone licences covered
nearly one-third of India's population, but (aside from Gujarat) were in some
of its poorest regions.
In addition, Dhirubhai also
appeared to be gearing up for more corporate power- play. Over the course of
1995-96 (to March), the Reliance shareholding in Larsen & Turbo jumped from
5.96 per cent to 8.73 per cent, while its holding in the cash-cow Bombay &
Suburban Electric Supply Co moved up slightly to above 6 per cent. The neglected
subsidiary Reliance Capital & Finance Trust was also charged up with
sizable capital through rights issues and private placements and renamed simply
Reliance Capital, under the 'third son' nand Jain. In 1995-96 it declared a
profit of Rs 1.109 billion, and had a net worth of about Rs 10 billion.
Around the end of 1993, most of
Dhirubhai's old Aden colleagues remaining in service were eased out into
retirement. Mukesh and Anil felt these men no longer had the drive necessary to
push Reliance's huge expansion forward, but some were a little bitter that they
could not stay on. The Gujarati favour of the company was further diluted by
the recruitment of more managers and technical staff from other parts of India.
The family also formalised a split of assets that saw Dhirubhai's two brothers
Ramnikbhai and Nathubhai give up their remaining executive roles in Reliance
and concentrate on their own personal businesses outside. Though both remained
on the board, it was made clear that their children were not in the line of
succession to run the company though the two sons of Dhirubhai's nephew and
close associate, Rasikbhai Meswani, who had died in 1985, were taken on as
executive directors once they finished their education.
The reorganisation was an effort
to prevent two of the failings that hit many Indian companies once they pass
from the control of the founding entrepreneur. The companies are often run as
highly personalised fiefdoms by the original patriarch, who holds
most of the decision-making
powers and delegates little to managers, mixes personal and corporate finances,
and requires a high level of sycophancy from employees. When the empire passes
on to two or more pampered sons, frictions are almost inevitable, and usually
the only solution is a split of assets and businesses. In some cases this is
relatively amicable, as with the children and grandchildren of G. D. Birla. In
others it is bitter, as with the Modi brothers and cousins, and requires
intervention by the big banks and financial institutions that may have
investments or loans with the group. The result is a plethora of groups holding
the same family name, distinguished by the initials of the particular owner.
The other failing is a consequence of continuing this personalised
leadership---a lack of professionalism throughout the organisation and weak
systems of financial and operational control.
In a diverse conglomerate like
the original Birla or Modi groups, a split can be beneficial. In a highly
integrated company like Reliance it could be disastrous. To all appearances,
Dhirubhai's succession plan looked free of immediate trouble. The two sons had
never shown any sign of dispute or dissatisfaction with their positions at
Reliance. The older son Mukesh's elevation to vice-chairman, after Ramnikbhai Ambani,
Dhirubhai's older brother, stepped down as joint managing director, indicated
that he would take charge eventually. As Dhirubhai slowed down in his sixties,
and attended the office for a shorter working day, Mukesh assumed more and more
of the major decisions, though
Dhirubhai retained the ultimate
say. Reserved, and deceptively mild in appearance, Mukesh was regarded as
highly determined and even ruthless by acquaintances, as well as being a
talented engineer and manager. Anil was more the public face of Reliance,
talking to the press and investors.
Either individually or put
together, however, the two sons seemed unlikely to display all the attributes
of Dhirubhai, especially s genius for forging personal relationships at A
levels and, perhaps, his boldness of vision. That this was a question mark over
Reliance was recognised by an attempt to show the wide range of professional
skills in the company's expanding workforce. But the Ambanis seemed caught in a
dilemma.
Formalising the company's process
of formulating new policies and strategies or taking running decisions could
rob it of its ability to move fast and grab opportunities. Reliance could end
up like the slow-moving committee-driven corporate bureaucracies it often
derided.
As Dhirubhai moved closer to
realising his dream of an integrated petroleum empire and of handing on a
modern corporation, however, events took a turn that made Bombay wonder whether
the Ambanis and Reliance had changed at all in essence from the buccaneering
days of the early 1980s. Suppressed scandals came to the surface, including a
dispute that seemed to question Dhirubhai's most often professed loyalty. To
the millions of shareholders in his Reliance family who had put their savings
into the security of Reliance shares.
HOUSEKEEPING SECRETS
On 29 November 1995, the Bombay
Stock Exchange faced perhaps the biggest challenge to its existence in its
scandal and crisis-ridden 120 years. A letter arrived that day from Reliance
Industries, signed by a junior executive on behalf of its board. Recalling that
Reliance had been first listed on the Exchange in November 1977, the letter
said:
'We regret to state that we are
constrained to terminate the said listing. The six- page letter went on to
blast the Exchange for singling out Reliance for based and prejudiced action'
and accused some of its board members of being part of a cartel of 'ears' that
had been hammering down the company's share price, to the detriment of its
millions of investors. It was now moving to the new National Stock Exchange, a
computerised rival set up by the government as an alternative to the score of
unruly, casino-like city exchanges.
Reliance at that time had a
weighting of about 10 per cent in the Bombay Exchange's most commonly used
index of price movements, the 30-share Sensitive Index or Sensex. The most
liquid of the 6500 listed stocks, it typically accounted for almost 30 per cent
of the daily trading volumes. Dealing in Reliance shares was bread-and- butter
for Bombay's brokers. The company and its founder Dhirubhai had been credited
for much of the explosion in share ownership among the Indian public since the
1970s.
Now Dhirubhai was taking his bat
and ball, and moving to another pitch.As if to rub it in, a massive upsurge in
trading volume simultaneously hit the National Stock Exchange, where Reliance
had just been listed. If Reliance were allowed to move, the Bombay Exchange
suddenly faced obsolescence.
But whatever the jitters among
its broker members, Dhirubhai was wrong if he thought the Exchange's executive
board would be quickly cowed. Its president, Kamal Iabra, immediately likened
Reliance to a 'fugitive from justice' feeling to another jurisdiction.
Dhirubhai
had been in and out of many scrapes before. His alleged misdeeds and
manipulations had filled the front pages of newspapers and taken up many hours
of parliamentary debate, just as his industrial and financial acumen had
preoccupied the glossy business magazines. The dispute that had led to his
attempt to delist his stock was undoubtedly the most hurtful and damaging of
all. It struck at the very heartof his
repeated
claim that, whatever else he might have done, he had always looked after his
shareholders.
At issue was whether Reliance had
knowingly issued more than one copy of each share and deliberately mixed up
records of share ownership. If such suspicions were true, it meant that
Reliance had been giving worthless paper to investors, or giving them shares
owned by someone else. It could be fraud. It would threaten the most basic trust
underpinning India's capital markets.
The dispute blew up in the latter
half of 1996, but the constituent chemicals had been mixed nearly a decade
earlier and the fuse smouldering for three years. Dhirubhai and Reliance had
been involved with several of the major players in the money market
manipulations that had collapsed in the 1992 Bombay securities trading scandal.
According to brokers and bankers
involved, the practice began in 1984-85 when the portfolios of several
public-sector banks were churned over on behalf of Congress Party fund-raisers
for Raiiv Gandhi's election, raising Rs 4 billion. 'he brokers who did the
transaction got the confidence and started doing it on a big scale,' one banker
recalled.'
The Reserve Bank was aware that
bankers' receipts, or BRs, were being issued without the backing of actual
securities, but did little about it. For ten years until 1992, the RBI's deputy
governor supervising banking operations was Amitava Ghosh, later criticised in
a Joint Parliamentary Committee report on the seam as having taken a casual
approach to his role. Dhirubhai is widely credited with having swung Ghosh's
unusual second five-year term as deputy governor.
The entry of public-sector
enterprises (PSES) in the late 1980s stepped up the unofficial market's tempo.
Approvals for borrowings given by the Ministry of Finance to the enterprises
were valid for a year, so the enterprises would make their bond issues before
the approvals lapsed, even if the investment programmes for which the funds
were intended were delayed. Few of the bonds would be marketed to the public:
nearly A were sold in bulk to the banks who needed such government-backed
securities for their reserves. The banks would be stuck with low-interest paper
and the enterprises with surplus cash. Both parties had a need to beat the
interest rate on the bonds.
Enter the portfolio management
scheme, whereby the enterprises (and private- sector companies) would lend
their spare cash to the banks which would make high- yield investments on their
behalf. The transfer was not a deposit (in which case the banks would have had
to put 54.5 per cent into their reserves), and no return could be guaranteed.
The risk would be on the enterprise, not the bank.
That was the theory, anyway. In
practice, the banks competed for PSE funds by giving an indicative return. The
PSEs wrote the placement down as a deposit in their own books. If the banks
made more than the indicated return, they kept it. The risk stayed with the
owner of the money. In practice, the banks were not equipped to make high
return speculative investments, usually in the sharemarkets, and developed
informal relationships with brokers. But because the banks were not allowed to
lend money to brokers, a subterfuge was needed. The cover was a fake securities
transaction, whereby the broker obtained an unbacked BR from a compliant bank
to give in return for the funds. The transaction would usually take the form of
a ready-forward or 'purchase option (repo)'deal, whereby there would be an
agreement to sell back the security after a certain time. The repo deals became
a substitute for interest-bearing loans, to avoid interest rate controls,
reserve requirements and withholding tax on interest. It was a market in which
inside information on interest rate changes, dividends paid by the Unit Trust
of India and so on could be turned to money by fencing the less informed.
Dhirubhai, according to the same
sources, became interested in the money market in the late 1980s and played it
to recover some of the funds lost in the desperate 198687 defence of the
Reliance share price. He had built Reliance's fundraising operations to such a
level that one analyst likened them to a virtual banking business parallel to
and almost as important as the polyester business.2 It is hard to believe that
the opportunities in the repo market would be unknown to him or unused. But
transactions would have been put through brokers such as Hiten Dalal, a former
V D. Desai & Co employee who had started on his own in 1989. And even then,
the brokers were themselves officially not there in the dealings between banks.
The best known figures in the
1992 repo boom, Harshad Mehta and his brothers, had been caught in the crushing
of bear brokers engineered by the third son Anand Jain at the end of 1986. They
had escaped lightly after pulling a family connection-one of the brothers was
married to a daughter of the vice-chairman of the Industrial Credit &
Investment Corp of India, a major lender to Reliance. The father-in-law had
interceded with Reliance auditor D. N. Chaturvedi. Chastened, the Mehtas stayed
clear of Reliance and turned to the money market. In 1990, they correctly
judged it time to return to equities and by 1991 had built up a huge reputation
in the sharemarket, where even rumours of their interest were enough to send a
stock rocketing upwards. Around November 1991, the Mehtas put in a call to Anil
Ambani to break the ice. Their first meeting discussed the 1986 affair; it was
agreed to let bygones be bygones. They started meeting frequently. The Ambanis
were concerned about their share price, which was hovering between Rs 130 and
Rs 170 despite the efforts of legendary market movers like stockbroker Nimesh
Shah. They wanted to be first in India with a Euro-issue and to sell it at a
high price
The Mehtas found that Reliance
was still seen in the market as a seller of its own shares. Every time the
price rose Rs 20 or so, its brokers would start booking profits. The Mehtas
agreed to start pushing up the share price, on condition that Reliance itself
stopped selling. The intervention worked. From Rs 127 at the start of 1992, the
Reliance share price rose to Rs 241 at the end of February and Rs 455 at the
end of March. That was against a background of wild bullishness in the
market-the Sensex rose from 1915 at the end of December to a peak of 4467 on 22
April 1992-but the ramping of Reliance was a substantial cause in itself.
Harshad Mehta became a celebrity.
The press speculated about his source of funds, gave respectful attention to his
novel theories about valuing stocks, and wrote without envy about his
ostentatious wealth. He and his brothers lived in a huge apartment on the
Arabian Sea at Worli, with some 27 foreign and locally made cars in the garage.
Harshad was declared India's biggest
income taxpayer. He was also dubbed 'The Big Bull' title once given to Manohar
Pherwani in his days heading the Unit Trust of India. Mehta's fellow Gujaratis
came to regard him as a second Dhirubhai. He had come from a similar
unprivileged background (his father a shopkeeper, and his commerce degree a
bare pass from a low-status college). A thrusting young bull was shouldering
aside the old bull.
It caused some pique at Reliance
that a mere broker was achieving such glory, and even presuming to correct
Dhirubhai on his investment strategy. The Mehtas were buying up debentures that
Reliance was selling, particularly those of the struggling Reliance
Petrochemicals and Larsen & Turbo. The Reliance Petrochemicals debentures
were a good buy, ultimately providing a very cheap entry to shares in Reliance
itself after conversion and then the merger. In December 1991, the Mehtas had
also virtually taken over part of the triple debenture issue by Reliance, by
placing a massive order and asking the company to stay out of the field itself.
A small incident may have helped
convince the Ambanis that Harshad Mehta was getting too big for his boots.
Harshad and Anil Ambani had ridden down together in the elevator at Maker
Chambers IV, the building housing the Reliance head office in Bombay's Nariman
Point, and stood together on the steps while their cars were hailed. Harshad's
arrived first, a gleaming new Toyota Lexus, at that time the only one in India.
Anil looked at it in admiration and made some complimentary remark. Harshad
promptly handed over the keys and told Anil: 'Take it, it's yours.' Anil
refused, but the gesture may have left him feeling patronised.
A net was closing in on the
Mehtas in any case. The central bank's governor, S. Venkitaramanan, had been
trying again to goad his deputy governor, Ghosh, into cracking down on the BR
trading between banks. He was also intrigued by Harshad Mehta's apparently
inexhaustible source of funds. An income tax raid on Mehta in February had
failed to crack the secret because the Mehtas kept their data on encoded
computer disks. Venkitaramanan had not quite put his suspicions together and
made the mental link, but he was getting closer. In March, he asked the State
Bank of India to look at Harshad Mehta's account. The bank reported huge inward
and outward flows of money.
Over April, the State Bank began
pressing Mehta to reconcile the huge shortage, Rs 6.2 billion, in his business
with it. He sought to roll over the obligation, and on 24 April brought in
cheques to settle his dues. But by then the scam was out. On 23 April, The
Times of India had reported a Rs 5 billion shortfall in the State Bank's
treasury on account of transactions with a broker called 'The Big Bull's. The
music stopped, and ten leading banks were left with a Rs 40 billion gap in
their books.
It soon emerged that Harshad
Mehta had paid his dues with funds provided by a fully-owned subsidiary of the
central bank itself, the National Housing Bank. Venkitaramanan, after his own
appointment by the Chandrasekhar government, had brought back the former Unit
Trust of India chairman Pherwani as the Housing Bank's chairman and managing
director. Still wildly ambitious, Pherwani had thrown the bank into the thick
of the repo-based securities trades. When Harshad Mehta was put in a squeeze by
the State Bank, the Housing Bank had obliged him with cheques made out to ANZ
Grindlays Bank. Mehta had banked these into his own account with ANZ Grindlays,
and then paid the State Bank of India. (The Australian-British bank was later
pulled up for breach of banking rules and forced to return Rs 5.06 billion to
the Housing Bank pending arbitration on its defence that crediting cheques to
brokers accounts had been established practice. After four years of hearings
and deliberation, the arbitrators returned the money to ANZ Grindlays.)
According to sources close to the
Mehtas, Dhirubhai had been the first person Harshad Mehta had contacted when
put on the spot by the State Bank. Dhirubhai had told him:
'Don't call anybody, I'll look after
the matter.' According to an account by the financial journalist R. C. Murthy,
Pherwani had agreed to bail out Mehta at a meeting with Harshad Mehta and in
industrial tycoon.
One acquaintance confirms that
Pherwani said Dhirubhai had been the person who interceded for Mehta was forced
to do,' Pherwani told this person. However the Meta linked sources deny that a
joint meeting took place between Pherwani, Dhirubhai and Mehta.
The Mehtas later came to assert
privately that Reliance had been the cause of their downfall, bringing them to
the attention of the tax authorities, Venkitaramanan and then the press. The
whole securities scam was an exercise to eliminate us, but like putting ink on
a blotting paper it could not be contained,' a source close to the Mehta
brothers claims.
It is hard to believe this, given
that Reliance was still more than two weeks away from its GDR issue when the
scam blew open on 23 April 1992, and that Harshad Mehta had been a key operator
jacking up the Reliance share price. Nor does it reconcile with the pressure
put on Pherwani to pull Harshad out of the soup. Pherwani had been the fall guy
for Dhirubhai once before, losing his Unit Trust of India job over the Larsen
& Turbo affair. Now he faced complete disgrace. Harshad was unable to pull
off the big securities deal he promised Pherwani, whereby a government
corporation would have parked the funds through him with the Housing Bank.
Pherwani resigned on 9 May. In the early hours of 21 May, family members found
him dead at his Bombay home. The journalist Murthy got a phone call and rushed
to the house about 8 am. Pherwani's body looked blue', he remembers. It was
cremated at 11.30 am the same day, with the face covered instead of left open
in the normal Hindu way. The death was ascribed vaguely to a heart attack.
Murthy and many others believe Pherwani committed suicide.
The opening up of the securities
scam led to investigations by the Reserve Bank of India, the Central Bureau of
Investigation and finally the Joint Parliamentary Committee. Senior bankers
were sacked, several brokers and bankers arrested (including Harshad Mehta) and
a special court set up to try those charged. Three ministers ultimately lost
their posts for improper financial dealings. The blame was widely spread among
financial system regulators, including the Reserve Bank governor,
Venkitaramanan.
The links between Reliance and
Harshad Mehta or other brokers were never made explicit throughout the entire
investigation, though the favours shown to Reliance by several banks were
criticised in the parliamentary committee's report. It noted how funds put by
the Oil & Natural Gas Corp in portfolio management schemes with two banks
had been channelled through brokers into Reliance shares; how Reliance had
recruited the ONGC chairman immediately on his retirement; and how some banks
had given large amounts of credit to Reliance and its associated front
companies through bill discounting. In a general note on the overall scam, it
said: 'There is some evidence of collusion of big industrial houses playing an
important role. The Congress majority in the committee, who included
Dhirubhai's old friend Murli Deora, prevented the probe going any further than
that. A note by the opposition minority pointed out that there were still gaps
in the investigation, and that the CBI had made many lapses (its chief
investigator, K. Madhavan, had resigned in protest during the inquiries). A
second note by three Left MPs pointed out that the Reliance name had surfaced
more often that those of other industrial houses, but this must still be only
the tip of the iceberg . One MP who was in the committee recalls: 'here was
always a lurking suspicion that big interests were behind the scam, but there
was no trace. It was one reason why we put all the evidence in the
parliamentary library instead of having it destroyed, which is the usual
practice. There was some resistance to this.' Many of the committee members
also had their doubts about the central bank governor, Venkitaramanan.
In the 1980s, as head of the
Ministry of Finance, he had been openly accused in the press of belonging to a
pro-Reliance clique of officials, and was distrusted because of this by his
then minister, V P Singh. His appointment as Reserve Bank governor was
generally seen in Bombay as a favour called by Dhirubhai during
Chandrashekhar's brief prime ministership. It emerged also that
Venkitaramanan's son was linked in a business venture in Madras with
Dhirubhai's son-in-law, Shyam Kothari. Venkitaramanan had been India's man of the
hour in March-June 1991, handling the external payments crisis when New Delhi
was paralysed by political crisis. A year later, the opposition MPs wondered,
was he helping to cover up aspects of a scandal that pressured his own friend
and head of a central bank subsidiary, Pherwani, to the point of suicide?
The Reliance GDR issue was
successfully put to the market over 11 - 18 May, despite the financial mayhem
breaking out back in Bombay. Fortunately for Reliance, the CBI did not move in
to arrest Harshad Mehta and his brother Ashwin until well after the issue
closed, on 4 June.
Dhirubhai's connections with the
scam had been buried and, as he might have said to his old friends in the yarn
market, a first-class fountain had been built on top. Or so it seemed.
Since his stroke in February
1986, Dhirubhai had been careful to keep up his exercise and worked hard to
bring back full dexterity to his right side. He employed a well-qualifed young
physiotherapist with a Bombay suburban practice, RaM Vasa, who soon became a
regular visitor to the Ambani household at Usha Kiran and then Sea Winds.
As well as paying her her normal
fees, Dhirubhai rewarded Vasa with allocations of Reliance shares. In January
1994, Ram and her husband Agenda decided to cash some of their paper wealth,
and sold 26 650 Reliance shares through a broker, R. D. Choosey. In turn,
Choosey delivered the share certificates and the signed transfer forms to
broker V K. Jain who had bought and paid for them on behalf of a company named
Opera Investments.
In April, the Vases wrote to the
Reliance's share registry, Reliance Consultancy Services (RCS), notifying the
loss of certificates for 33 809 shares and asking for duplicate certificates.
Among the distinctive numbers they listed were the shares sold in January In
June, the broker V K. Jain brought the shares along to RCS to register the
transfer of ownership to his client. The registry rejected the transfer form
because, it said, the signatures did not tally with those on its record. In
August, the same registry issued new share certificates to the Vases, who later
sold them to
Merrill Lynch. Jain had meanwhile
complained of a bad delivery to the Bombay Stock Exchange, which had begun an
inquiry.
Over a year later, in September
1995, the Exchange began asking Reliance about the Vasa case. In early October
it began recovery of the claim against the Vasa's broker, R.D. Choksey. In
their meetings with the Exchange's board, the Reliance representatives headed
by Anand Jain were surprised at the hostility of the questions. We are
Reliance,' Anand Jain told the Exchange's president, Kamal Kabra, according to
one board member's account of the meeting. 'Don't ask this kind of question to
us. 'Behave yourself,' Kabra is claimed to have said. 'You are Reliance in Maker
Chambers IV but in this chamber you are just one of 6800 listed companies.
Anand Jain offered to settle the outstanding claim immediately, putting down a
pay order for Rs 10.8 million, on condition that the investigation and penalty
action be halted.
The Exchange's board met and
considered the action. On the face of it the persons at fault were Rahall Vasa
and her husband. So why should Reliance step in? The board decided that money
was not enough. On 16 October, the Exchange sent a show- cause notice to
Reliance. Neither Reliance nor its registry, RCS, had raised any queries with
the Vasas, or told Opera Investments about the issue of duplicates for the
shares it had presented. It had not fled any complaint with the police, or told
the Exchange of any steps to enforce an indemnity given by the Vasas when they
applied for the duplicates, or, despite the obvious frauds , started any legal
proceedings. Reliance was thus guilty of gross negligence, if not an
accomplice.
Almost at the same time, another
timebomb blew up. One of the financial houses deeply involved in the 1992
securities trading scandal had been a fast-growing and politically
well-connected firm called Fairgrowth Financial Services Ltd. It was caught up
in a mass of claims before the special court set up to handle the scam cases,
presided over by Justice S. N. Variava. One claim that Fairgrowth was pursuing
concerned a parcel of 1.5 million Reliance shares it had bought through a
broker named Pallav Sheth in February 1992, and then sent for transfer to RCS.
In March that year, Sheth had arrived back with Ajit Ambani, brother of
Reliance's company secretary Vinod Ambani (no relation to Dhirubhai) and urged
Fairgrowth to withdraw the transfer. They undertook to sell the shares in the
market. It was the last Fairgrowth saw of the shares or its money. In 1993,
Fairgrowth obtained a court order for Sheth to repay it Rs 515 million in
monthly installments. Sheth defaulted after one payment.
In October 1995, Fairgrowth began
trying to trace the funds on a second front. It filed a petition in the special
scam court asking Justice Variava to compel Reliance and RCS to tell it where
the shares went. News of the two cases, Fairgrowth and Rajul Vasa, became the
talk of the markets. Rumours that duplicate shares were in circulation caused a
sharp fall in the price of Reliance shares in Bombay and of its GDRs in London.
Reliance read a plot into the
cast of characters ranged against it. Two of the most vocal Bombay Stock
Exchange directors against it were M. G. Damani and Rajendra Bhantia. Damani
was an old Exchange bear. Bhantia was a friend of Nusli Wadia, and had been
connected to FairGrowth previously. The Fairgrowth lawyer, Mahesh jethmalani,
son and legal partner of Ram Jethmalani, had defended Wadia in the Fairfax
affair and appeared against Reliance in the court battles of the 1980s. The old
fighting instincts were roused.
On 30 October,
a letter arrived from Reliance at the desk of the Securities and Exchange Board
of India's chairman, D. R. Mehta:
We regret to bring to your kind
notice that over the past few weeks a systematic and well orchestrated campaign
has been conducted by a cartel of bear operators against us, Reliance
Industries Ltd, with a view to blemishing our fair reputation as India's No 1 private
sector company, bringing down the market price of our share and thus our market
capitalisation, and causing in the process huge losses and untold anxiety to
our 2.4 million strong family of small and institutional investors.
The letter went on to say that
the Vasa case had been blown up out of A proportion, that the Bombay Exchange's
board deliberations had been leaked to the press in a systematic, distorted
way, and that the Fairgrowth issue had been falsely linked with the duplicates
case. It was necessary to track down gan evil coterie' of brokers and
operators, and to provide reassurance to millions of small investors in the
grip of a fear psychosis .The Bombay Exchange continued to hold firm. After
another combative meeting with Reliance representatives on 14 November, its
board met immediately afterwards and decided to penalise the company with a
three-day suspension of trading in its shares, starting on 16 November. The
news was in the next morning's paper before the formal notice arrived at Reliance
late in the afternoon, too late to take out a High Court restraining order
before the suspension came into effect. Dhirubhai had to endure the
humiliation.
On the day the suspension
started, the special seam court dealt a second blow. Justice Variava froze the
transfer of the shares sought by Fairgrowth and demanded that Reliance tell him
where they now were even if you [Reliance] have to place 30 people on
the job for 24 hours . The Bombay
Exchange declared the 1.5 million shares bad delivery. On 27 November, this
puzzle became a second scandal. The Unit Trust of India announced that it had
bought a lot of 2.4 million Reliance shares in December 1991 and sent them for
transfer to RCS. They had discovered in early 1995, after queries by tax
inspectors, that the share certificates sent back by RCS in their name covered
shares with different distinctive numbers. Out of them, they now found that 870
000 came from the batch of 1.5 million sold to Fairgrowth and declared frozen
by the court.
Reliance quickly explained that
certain investors had delivered the original lot of shares to the Unit Trust of
India, and then had taken them back and replaced them with different shares. As
the sellers were the same, and the shares equal in all respects, RCS had processed
the transfer and given UTI the second batch of shares. It was a highly
unsatisfactory explanation. UTI had not been consulted, and was left with 870
000 shares- perhaps more-on which Fairgrowth was asserting a lien. Had RCS been
as casual about ownership in other cases? Who were these operators who could
withdraw shares from the registry after selling them?
The market was reeling under the
shocks to its confidence. On the same day, Reliance had applied to the National
Stock Exchange (NSE) to list its shares, along with those of three quoted
subsidiaries. The NSE was a brand-new, fully computerised exchange set up by
the Ministry of Finance in the hope it would be both a warning and an example
to the old city exchanges, whose broker-members had fought hard against reforms
aimed at giving investors more protection. The NSE was only too pleased that
the biggest chip of A in the old exchanges wanted to be put on its screens. On
29 November, it put the Reliance group up for trading. That afternoon, Reliance
delivered its bombshell letter seeking delisting from the Bombay Exchange.
Once the Bombay Exchange made it
clear it would refuse permission to delist, on the grounds that Reliance was
hardly a defunct or bankrupted company with no remaining activity in its shares,
the ball was in the court of the government, which could overrule the Exchange.
After initially welcoming Reliance's interest in its new baby, the NSE, the
Ministry of Finance had woken up to the implications of Exchange president
Kamal Kabra's fugitive from justice's remark. On 1 December, the Securities and
Exchange Board's chairman D. R. Mehta was called in by the Finance Secretary,
Montek Singh Ahluwalia, and asked to seek a compromise.
Over the following days,
delegations of venerable stockmarket leaders including retired Bombay Exchange
presidents called on the warring parties, pouring wise words on the aggravated
feelings of the Ambanis on one hand and the Exchange's young bloods on the
other. A drumbeat of press commentary accompanied the standoff.
The company is not owned by the
Ambanis alone,' declared the Economic Times. 'if the ego of the Ambanis really
got so battered, perhaps the solution is to ask Ms Vasa to give it some
therapy.'
Dhirubhai's own newspaper, the
Observer of Business and Politics, rallied the defence: 'While much of Indian
business has grown on family wealth, Reliance climbed to the top of the pyramid
because of its unique chemistry with the ordinary investor but became a soft
target for a gaggle of bear players ... Reliance therefore is entirely
justified in seeking delisting from a den of bears. A huge advertising
campaign, reminiscent of the 1986 series, declared: 'The world can wait. Our
shareholders can'. Behind the self-righteous claims, both sides were looking
for a way for Reliance to back off. It was found in a letter from the Exchange
on 4 December, rejecting the request to delist and asking Reliance to withdraw
it. The company did so, claiming it had made its point. In a letter on 5
December, it said the decision to seek deleting from the Exchange had been
painful but the company had been overwhelmed by the spontaneous out-pouring of
support from thousands of investors. The substantive issues raised by Reliance
on capital market reform and the charges it had raised had been well
recognised. The letter added:
Keeping alive the hope that stock
exchanges and other regulatory authorities in the country will accept our
comments in a constructive perspective, and will sincerely endeavour to
implement over a period of time the broader issues in investor protection
brought to the fore by us, our board of directors has met and decided to accede
to your request that this matter not be pursued, even though we are advised
there exist in law sufficient grounds to do so.
It was a climb down. Reliance was
soon back on the defensive. The Unit Trust angle to the Fair growth affair had
opened up a whole new avenue of investigation for both regulators and the
press. The Unit Trust said it had learnt that the sellers of the 2.4 million shares
had been Reliance group companies, and press inquiries found that some of the
switched shares were still with small investment companies run by the Reliance
company secretary, Vinod Ambani, with Amitabh Jhunjhunwala, the chief executive
of Reliance Capital, also involved.
The switched shares had now been
replaced by a third lot sent over to the Unit Trust by the Reliance registry,
RCS. Why? Was it an attempt to get the scam-tainted shares out of circulation?
Could they be duplicates also? Could the 1.5 million shares sold to Fair-growth
be the same lot of 1.5 million that, according to the reports on the 1992 scam,
were bought and sold in a Rs 600 million repo deal involving Citibank, ANZ
Grindlays and the brokers Hiten Daial and Harshad Mehta in mid-April 1992?
Then
there was the mysterious Raju Vasa case. The original buyer of her shares,
Opera Investments, turned out to be another Reliance front company. Its broker,
V K. Jain, was a brother of Reliance Capital's Anand Jain and had been active
in the Larsen & Turbo proxy battle. What was behind this strange affair in
which all parties to the transactions seemed to be linked? The controversy was
taken up in parliament, where all the politicians were readying for the
national elections that had to be held by rnid-1996. As was the case in the
last days of the Rajiv Gandhi government, corruption charges were piling up
around Narasimha Rao's administration. Already several ministers had resigned
over a large-scale havala (Illegal foreign exchange) scandal. The award of
telephone licences to a small company from the home state of the communications
minister was a talking point. By mid-December, the Reliance share-switching and
duplicate share cases were also preoccupying MPs. Passage of government
legislation stopped for ten days.
In a letter to
Prime Minister Narasimha Rao on 14 December 1995, a group of 27 MPs said that
Reliance had not explained itself, so only deductions could be made:
One reason could be that Reliance
investment companies have, as a very unfortunate market practice, been issuing
duplicate shares to he used as collateral for finance. It is a foolproof system
and won's come apart even if the duplicate shares are traded in the market.
This is because the registrar which will do the transfer is a Reliance company.
It will merely do a switch with another lot of genuine shares.
Mukesh Ambani had been in New
Delhi meeting MPs and assuring them that shareswitching was common practice.
He explained that liquidity and tax minimisation were the reasons behind the
switch. Reliance had two groups of satellite companies. One group was
investment companies with large lots of shares who never sold. If they did
sell, the capital gains tax would be huge. But they lent them to share trading
companies in the second group who used them for initial liquidity in deals.
Later the trading firms would replace them with newly acquired shares on which
the capital gains would be slight.
The Ministry of Finance had asked
the Unit Trust of India to check its experiences with 20 other big companies.
It had found the share-switching practice not to be common at all. The
Bharatiya Janata Party finance spokesman Jaswant Singh also produced two
examples of Reliance shares, sold in 1989 by the Syndicate Bank, where shares
of the same distinctive numbers appeared in two certificates. Mukesh's
explanation was not wholly convincing.
On 20 December, the finance
minister, Manmohan Singh, ordered a joint inquiry by the Securities and
Exchange Board and the Department of Company Affairs, which had overlapping
jurisdiction in applying company law. Singh asked all financial institutions to
verify that their share portfolios did not contain switched or fake shares. The
Income Tax Department would also continue inquiries it had started in 1992 into
the tax evasion aspects of the scam. The Securities Board had already started
inquiries on its own initiative, and gave an interim report in mid-January
1996.
According to this report the
seven custodians of shares for India's investment institutions held between
them 138.9 million Reliance shares, about 30 per cent of the company's paid-up
capital. Out of these, 6.73 million had been switched-that is, the share
certificates received back from RCS after transfers bore different distinctive
numbers or transferor's names from those lodged. RCS itself found some more
shares held directly, taking the total of switched shares to 7.03 million (4.7
million with the Unit Trust). Except for a very few shares, all the switches
had taken place between March and October 1992. None were detected by the
custodians. Those of the original shares not transferred remained with the
original owners, who were trade associates of Reliance.
The Securities Board
investigators had found RCS less than helpful. According to their letter sent
to the RCS chief executive in March 1996, the registry had given two differing
versions of the Unit Trust share switch to the Board in December and thus
neither could be trusted. RCS had reported corruption of its database and a
loss of audit trail because of a conversion of computer systems ... but the
fact that corruption of data is predominant in select folios of the parties
involved in switching makes the explanation of RCS untenable,' the Securities
Board letter said. The records were a shambles, in effect, and much of them in
the switching cases seemed to have been faked.
But perhaps the best insight into
the Reliance back-shop operations came from reports filed by the Deputy
Commissioner of Income Tax in Bombay, G. S. Singh, whose officials had been
looking at the Reliance front companies since June 1994. According to a report
entitled 'piercing the Corporate Veil's , the taxmen had found 206 companies
run by the Reliance company secretary Vinod Ambani from a Reliance office in
Nariman Point. During 1991-92, Reliance had paid Rs 313 million to these
companies in various fees, enabling Reliance to reduce its tax liability and
the companies to settle their own losses or to make investments in Reliance
shares and debentures in order to maintain management control.
In the tax assessment year
1993-94 (covering activity in the previous year, 199293), certain group
companies had received nearly Rs 600 million from Reliance via Reliance Capital
to buy rights attached to partially paid shares the affiliates owned in the
twins, Reliance Polypropylene and Reliance Polyethylene. Each of the original
shares in the twins had rights to no fewer than 40 new shares attached. The
group companies had acquired the shares in the twins mostly in May 1992, at Rs 17.50
a share, soon after they were renamed on 19 May 1992. The rights could be
exercised in the public issue at the end of 1992. The cut-off date for owning
the rights, announced in the issue documents later in the year, was 6 June. It
was a nicely timed investment by the 37 group companies. Reliance had later
paid the companies Rs 39 for each right-that is, for a Rs 17.50 investment, the
companies had received Rs 1540. An investment of Rs 644.6 million in the
twinstly paid shares shows up in the Reliance accounts on 31 March 1993,
accounting for the rights purchase plus fees to Reliance Capital. Those looking
for insider trading before the twins' merger two years later had overlooked
this earlier example of funds being taken out of Reliance.
The tax officers persevered, and
focused on one example of the 206 front companies, Avshesh Mercantile Ltd, to
give a detailed picture of sharemarket activities. Their account supported the
explanation given by Mukesh Ambani to the MPs. The report by Deputy
Commissioner Singh, dated 29 March 1996, traced another sale of Reliance shares
to the Unit Trust, this time a lot of 3 million sold on 22 May 1992-four days
after the. first GDR issue closed-by 13 group companies known as Group A. On
that day, none of the 13 firms owned any Reliance shares. The shares delivered
to the Unit Trust had been borrowed from 14 other group companies, known as
Group B. When the Trust sent them for transfer, the shares were switched for
shares bought from Dhyan Investment & Trading, then a wholly owned
subsidiary of Reliance Capital, and the originals returned to Group B.
Mahendra Doshi, the broker in the
sale, said he had dealt with Anand Jain and Manoj Modi of Reliance Capital for
the delivery of the shares. He knew nothing about the sellers; Jain had told
him the company names to which contract notes and bills were to be issued. The
shares had been handed over by another Reliance Capital executive, Tushar
Sarda, and the proceeds handed to him. Six months earlier, Doshi had carried
out a similar sale to the Unit Trust of 2.2 million shares. Jain had initially
denied knowledge of the 13 Group A companies, then admitted to being involved
in the sale.
According to correspondence
produced by RCS, the 14 Group B companies had requested the registry to inform
them of any transfers lodged by third parties for their shares, because the
shares were placed from time to time as collateral, on condition
that they not be transferred in
the name of the creditor unless approved by them. The tax inspectors said this
was not supported by evidence, and the letters were found to be fabricated. The
sales were real, and the income from them should be taxed. The swapping of
shares was a systematic evasion of capital gains tax, by substituting the newly
bought shares of Group A for the older and more cheaply acquired holdings of
Group B. Not a single case of switching for sellers outside the group was
found.
The tax-reduction explanation
made some sense, but did not ft with everything that Reliance was saying. It
had pointed out that the switching had been confined to the period
March-October 1992, yet Mukesh Ambani had said it was a common practice. If it
had made good tax sense in 1992, and had been legal, why not continue it?
Some business analysts tended to
believe that the share- switching occurred as a part of the cover-up of
Dhirubhai's close involvement with brokers in the 1992 scam. They speculated
that shares handled by brokers such as Harshad Mehta and Hiten Dalal were
hurriedly dumped on friendly institutions such as the Unit Trust and the Canara
Bank funds as the scam broke in April 1992.
Others veered to the explanation
put up by the 27 May in parliament, alleging systematic pledging of duplicates
of shares owned by the Ambanis and other management investors, which would be
switched if they were ever sent for ownership transfer in the
company-controlled registry and would never be in marketable lots. The central
bank inquiry into the 1986 loan mela tends to contradict this latter
allegation: it found that all the Reliance shares pledged by the group
companies had been transferred to the names of the lending banks. But that was
1986. And if the banks had attempted to transfer the shares to a third party,
the Reliance registry could still have intervened.
At least one former fund manager,
admittedly no friend of Reliance, recalls a case in 1989 where a bank sold him
shares pledged by Reliance. The company raised hell with the bank to get the
shares taken back and exchanged for others.
As the bedraggled Narasimha Rao
government neared the end of its term, some other controversies came back to
haunt Dhirubhai and Reliance. In January 1996, the government fled an appeal in
the Supreme Court against the ruling by the Customs, Excise and Gold Appellate
Tribunal that had upheld the controversial 1989 decision of the former Bombay
Collector of Customs, K. Viswanathan, to drop the charges of evading duty on
the smuggled polyester yarn plant at Patalganga (though the tribunal had said
that duty should be reassessed on the four extra spinning lines that had
appeared out of parts'. The petitions filed by Reliance in 1990 had delayed the
tribunal hearing by three years.
Later that month, a team of CBI
officials few to Bombay and suddenly revived the case against Dhirubhai and
others of backdating the letters of credit for the PTA imports in May 1985.
Dhirubhai was ordered to appear in a magistrates court, but his lawyers
successfully argued through the rest of the year against the need for a
personal appearance. The case was a warning shot by Narasimha Rao. Reliance had
been falling behind in the campaign funding it had promised the Congress Party,
apparently seeing no point in pouring further money into a lost cause. The
company was also suspected within Congress of stirring up the telephone licence
scandal in order to distract attention from its own problems.
In 1995, a young police officer
with the Central Bureau of Investigation in Bombay, Y P Singh, had begun
digging into the private placement with the Unit Trust of India and the two
government insurance giants in 1994. His request to see the papers on the
placement caused panic at the Trust. The highly unfavourable placement had been
forced on the institutions by senior figures in the Narasimha Rao government,
he concluded. After careful study of the laws governing institutional
investments, he drew up a report listing some 20 illegalities, including
conspiracy and fraud, and recommending charges against a string of senior
officials.
After picking up signs of
discontent among Oil & Natural Gas Commission engineers during a visit to a
Bombay High oil platform, Singh also began looking into the award of the
Arabian Sea oil and gas fields to the Reliance-Enron-ONGC consortium in 1994.
The bidding had been extremely
bitter, with rival groups accusing Reliance of inside knowledge of tender
evaluation criteria that were kept unclear for others. Singh found that the new
owners had come into the fields with little compensation to ONGC for its past
costs of exploration and preliminary development. The new operators had also
been given a highly unusual bonus on the oil price guaranteed by the
government.
Singh asked his superiors at the
CBI for permission to start a preliminary inquiry. Instead, in March 1996, he
was abruptly transferred back to the Maharashtra State Police, after being
accused of mishandling another case. Singh lodged an appeal with an
administrative tribunal. However, two other authorities-the Planning Commission
member G. V Ramakrishna (a former Petroleum Secretary and Securities Board
chairman) and the Comptroller & Auditor-General's office-took up similar
criticism of the oilfield contracts. In October 1996, the private secretary of
Satish Sharma, the petroleum minister at the time the con- tracts were awarded,
told the CBI that Reliance had paid Sharma Rs 40 million between June 1993 and
February 1994 (and that two other companies involved in bidding had also made
payments.) Reliance denied the allegations. If Dhirubhai had rubbed Narasimha
Rao the wrong way, his relationships with the opposition parties were also
ambivalent. Sections of the Janata Dal and Left continued to regard him as
anathema, yet he had successfully cultivated many of their leaders at state
level. In the Hindu nationalist camp, he paid court to senior BJP leaders such
as L. K. Advani and Atal Bihari Vajpayee. But a section of the party's MPs such
as Jaswant Singh had been Ambani critics for more than a decade, and his old
nemesis S. Gurumurthy of the Indian Express campaigns, had become a close legal
adviser to Advani.
Their hostility was often
neutralised in party forums by a claque of Ambani supporters, such as the BJP
secretary-general Pramod Mahajan, who once defended Dhirubhai as 'not someone
who sleeps with you then refuses to recognise you in the morning's . The
metaphor cannot have been to the taste of the RSS-trained cadres of the party.
Within the BJP leadership,
Dhirubhai became distrusted for the split he helped engineer in the party's
Gujarat branch soon after it took power in the March 1995 state elections.
Dhirubhai backed a lower-caste BJP leader called Shankersinh Waghla in disputes
with the newly elected chief minister, Keshubhai Patel. In September 1995, the
two openly split, and Dhirubhai few Waghela's faction of state MPs to the central
Indian resort of Khajuraho, famed for its erotic temple carvings, to keep them
together. Around this time, Vajpayee was appalled to find Dhirubhai on the
telephone, putting forward a solution to the Gujarat crisis: Waghla should be
made deputy chief minister. Highly embarrassed, Vajpayee refused. A year later,
Waghela ousted Patel's faction and formed a government with Congress backing.
It is not clear whether Dhirubhai had any intention to destabilise the BJP
nationally or just install a cooperative state government to help his
industrial plans.
Having gathered damning material
on the share-switching cases, and little on the supposed fear conspiracy
against Reliance, the Securities Board and the Department of Company Affairs
shuffled responsibility for prosecution between them, and eventually the
decision fell into the limbo caused by the calling of elections for early May
1996. The elections produced a three-way hung verdict, with the BJP having
narrowly the largest number of seats. It decided to form a government, knowing
it was unlikely to pick up support. Vajpayee was sworn in as prime minister,
with Jaswant Singh as finance minister and Ram Jethmalani as law minister-a
combination unpromising for Dhirubhai. India's first BJP government lasted only
two weeks-but long enough for Jaswant Singh to order a show-cause notice to be
issued to Reliance for breaches of the Companies Act. Jethmalani passed up on
endorsement of Singh's order, saying he had made too many appearances for and
against Reliance, and it passed to the next government to implement.
Dhirubhai had plenty of friends
in the 13-party coalition which took over, including the new prime minister, H.
D. Deve Gowda, who few back to Bangalore to resign his job as Karnataka state
chief minister in Dhirubhai's executive jet. Jaswant Singh's decision resulted
in 29 charges being laid against Dhirubhai, other executives and his companies
in a Bombay magistrate's court. One of the charges was a serious one,
mentioning intent to defraud's .In October, the entire duplicate share and
switching issue was wrapped up by a government decision to allow Reliance to
1compound'the charges-a process whereby a company simply pays a set fine for
technical breaches and avoids a prosecution in court. Reliance had argued that
the offences had been inadvertent, due to pressure of work on the registry. No
loss had been caused to shareholders, no gain to the company. The magistrate,
A. M. Thipsay, agreed that intent to defraud had not been substantiated.
The total penalty came to Rs
6.396 million, while the registry, RCS, was suspended from operations for six
months from April 1997.The penalty was 'very light', judged the Economic
Times...if Reliance says it will clean up its act and actually set standards
for securities transactions by joining the depositary [an independent,
computerised share registry], it is because long-term self interests dictate
so. A group depending heavily on international markets for resources has to be
seen to have some basic corporate hygiene.' It was 'tap on the wrist', agreed
the Business Standard. The issue had ended with a whimper, the paper said. 'The
case called for a lifting of the corporate veil, and judging whether the entire
episode was more than a result of clerical error. It had been close, a crisis
almost ranking with the 1980s Polyester Mahabharata, but once again's Dhirubhai
had come through.
PANDAVA OR KAURAVA
Reliance emerged from the
duplicate share and share-switching crisis without substantial penalty. The
compounding of the various charges reduced the scandal to a series of admitted
technical offences against the Companies Act. The delay in the six-month
suspension of its share registry allowed Reliance to inoculate itself by
placing the major portion of its issued shares with the new independent share
depository opened in Bombay at the end of 1996 and find a new registry for the
rest. The stock thus remained tradable and liquid throughout the suspension,
and Reliance could claim virtue from taking the lead in using this long-overdue
facility to protect investors. But the corporate myth of Reliance Industries
had been cracked. Its reputation with investors in India had been badly
damaged. In those international centers of investment management most familiar
with India at that point, notably London and Hong Kong, fund managers already
felt burned by Reliance and the Ambanis after the Unit Trust of India private
placement and the twin companies merger in 1994. The share-switching and
duplicates cases only compounded the deep mistrust. The switching case had
exposed- as somewhat hollow the much- professed devotion to the huge numbers of
small investors. By the company's own defence, its share registry was
inadequately managed. By the more severe of the accusations made against it in
parliament, the registry was the heart of a cynical manipulation depriving
investors of secure title to their shares and the ability to trade them freely,
though this was never proved.
The performance of Reliance
shares in the market was augmented by a sustained pump-pricing effort, using
the company's own funds or money raised from banks for other declared
purchases. Reliance's position as India's largest private-sector company was
challengeable because of the opacity in its accounts on the amount of
intergroup transactions included in sales and the possible artificiality of
profits in some bad years. The emphasis on absolute numbers of sales, assets,
profits and so on distracted attention from the ratios that measure the
relative profitability or efficiency of a company, such as return on capital.
Transactions with the more than 200 trading and investment companies controlled
or owned by the family management might point to investment profits being taken
from Reliance to these companies. In other words, the Ambanis at least
sometimes treated a company in which they have had normally a 26 per cent
shareholding as their personal property.
The huge private placement to the
government financial institutions and the instances of funding from banks
against pledged management shares undercuts the claim that Dhirubhai
successfully by-passed the banks and raised capital chiefly from the public.
The long delays in completing projects after the early success at Patalganga in
1984 and the insatiable appetite for funds have raised questions about the
company's efficiency in managing capital-even whether fundraising and
deployment had not become a more important activity for Reliance than making
petrochemicals and textiles. From late 1994 the Indian share markets had gone
into a malaise. There were objective external factors: a rise in interest rates
attracting money into deposits, a sense that the economic reforms had stalled
political uncertainties, the Mexican crisis and its impact on other emerging
markets, the Bull Run on Wall Street. But a feeling that Indian markets had not
got their house in order, and perhaps a sense of exploitation by the country's
most traded company, had something to do with it as well.
Markets and sentiments turn
around, but the widespread thinking in Bombay financial circles by the end of
the 1995-96 crisis was that Dhirubhai Ambani and
Reliance could no longer look
either to Indian investors for the cheap equity capital that had financed their
early growth or to the foreign portfolio funds that were so enthusiastic about
them in 1992-93.
This is implicit in the company's
resort to debt-raising in a completely new market from the middle of 1996. In
five issues of pure-debt securities in New York between June 1996 and January
1997, Reliance raised US$614 million from international investors, with terms
ranging up to 100 years-making it the first Asian company and one, of a handful
worldwide to raise debt of such long maturity. A notable trend was a resort to
the American institutions, the pension funds and insurance companies, helped by
an investment-grade rating from two agencies. It would not be too cynical to
say that the insularity of American investors and their relative ignorance of
news from India helped greatly. But the announced plan to list these bonds on
American stock exchanges has imposed new disciplines on Reliance, notably a
requirement to shift its accounts to the 'generally accepted accounting
principles of the United States and Britain, rather than those followed up to
then by Chaturvedi & Shah, Bombay. Its representatives abroad now insist
that Reliance is a 'different company's from the Reliance of the 1970s and
1980s.
Early in 1997, in order to access
even cheaper funds, the company was working out a way to lift its credit rating
above the sovereign-risk rating of India itself. Most probably this would be
achieved by means of a mechanism placing part of the funds back into high-rated
investments outside India. This might seem highly artificial for a company so
rooted in its own country, but it would be yet another source of pride within
Reliance. Among the critics it would only confirm fears that Reliance was more
powerful than the Indian state.
Dhirubhai Ambani built his
company through outstanding abilities and drive on many fronts: as an innovative
financier, an inspiring manager of talent, an astute marketer of his products,
and as a forward-looking industrialist. The energy and daring that showed
itself in his early pranks, practical jokes and trading experiments developed
into a boldness and willingness to live with risk that few if any other Indian
corporate Chiefs would dare to emulate. His extraordinary talent for sustaining
relationships, and sometimes impressing men of standing, won him vital support
from both governments and institutions.
The dark side of his abilities
was an eye for human weakness and a willingness to exploit it. This gained him
preferential treatment or at least a blind eye from the whole gamut of Indian
institutions at various times. Over decades in India, some of the world's best
minds had applied themselves to building a system of government controls on
capital-ism. Dhirubhai Ambani made a complete mockery of it-admittedly at a
stage when the system was decaying and corrupted already. The Ministry of
Finance and its enforcement agencies, the Reserve Bank of India, the Central
Bureau of Investigation, the Securities and Exchange Board of India and the
Company Law Board proved timid and sometimes complicit in their handling of
questionable episodes concerning Reliance. The public financial institutions
that held large blocks of shares in Reliance and had seats on its board were
passive and acquiescent spectators, rather than responsible trustees for public
savings.
Dhirubhai Ambani cautioned about
the jealousy inherent in the Indian business milieu. Reliance frequently,
routinely, put any criticism or opposition to its actions down to motives of
envy or a desire to pull down anyone achieving success. Throughout every crisis
caused by exposure of alleged manipulations, its publicity took on a
self-pitying 'Why is everyone always picking on us?' tone. But the record tends
to show that it was Dhirubhai and Reliance who often made the first move to put
a spoke in a rival's wheels, whether it was Kapal Mehra, Nusli Wadia or,
latterly, the Ruias of the Essar group. Coincidentally with disputes with
Reliance, various rivals were hit with government inspections, tax problems,
unfavourable press reports, physical attacks and, in Wadia's case, a damaging
forgery, a deportation order and perhaps a conspiracy to murder him.
Reliance sought larger capacity
clearances, lower duties on its imported chemical inputs, and higher duties on
its finished products for itself-not for A players. It has been relentless in
its use of monopoly or dominant market share. The achievement of A these
efforts has been the creation of an integrated industrial enterprise from the
oilfield to finished textiles and plastics, certainly the largest in India's
private sector and in some products among the world's biggest. Dhirubhai has
managed to stay in control of this growing, enterprise through his ability to
master advanced technology and to come up with the funds to pay for it. By the
end of 1996, the gas cracker at Hazira and its associated product lines were
coming on stream. If the company continues to augment its capacities as
planned, it should stay profitable as the external protection of the Indian
economy is lowered. There are several areas of risk. A combination of adverse
business conditions, such as a simultaneous fall in petrochemical prices and
drastic devaluation of the rupee, would make the foreign debt more expensive to
service, and put the company in a squeeze if the actual physical investment it
is intended to finance is delayed. No one outside the company's highest
management can be sure exactly what further funding the company needs in order
to sustain its expansion as well as its treasury operations-- one highly
respected Bombay financier estimates that it needs US$1 billion a year in new
funding. If so, an unfavourable turn in investor or lender perceptions about
Reliance, India or emerging markets in general could create a squeeze.
Another wild card is contained in
the political hostility that Dhirubhai and Reliance have built up within India.
Every party has its Ambani men's but this is no guarantee that no government
will dare to take on Reliance or make an example of it. Most notably and
ironically, Reliance is regarded with deep distrust at the senior levels of the
Bharatiya Janata Party. The Hindu nationalist movement that may well he the
coming force in Indian politics-ironically because the BJP has positioned
itself as the champion of the swadeshi or domestic capitalist (though like many
clerical parties it is against monopolies). After 1996, Reliance may well be
cleaning up its accounting practices and its share registry, but several
investigations, tax demands and criminal prosecutions from the 1980s still
remain open. Despite the settlement of the Company Law offences in the share-switching
and duplicates cases, for example, it would still be possible for a government
to launch prosecutions under the Indian Penal Code.
The danger could be precipitated
by another display of hubris like remark to Ramnath Goenka, or if his sons,
when they take over the running of Reliance completely, overreach themselves. A
split between the two sons, or between them and the professional management or
with the big institutional investors now appears unlikely, but could emerge
once Dhirubhai's influence is gone.
The wider lessons about India
would seem to include a caution to foreign investors about the effectiveness of
India's 'British-style institutions and practices'. Investors might like to
ponder how much help and protection they would get if put in the position of a
Nusli Wadia against a well-connected Indian rival like Reliance. On the other
hand, the ANZ Grindlays bank did get its disputed Rs 5.06 billion back from the
National Housing Bank through arbitration in India. The controversy of the mid-
1990s provided an impetus to improve financial market regulations and
functioning. But, at the same time, Dhirubhai is reckoned to have inspired
hundreds of clones who have set out to win at all costs and by all means.
Some of India's left wing
politicians and academics see a case for a return to tight controls, even
tighter than those applied in the 1970s, and more sustained policing of them.
The Reliance story would suggest that those controls were unenforceable in the
absence of an entire administration of Plato's guardians of the republic. It
may seem a trite re-endorsement of the prevailing economic philosophy, but the
fairest and most efficient environment would be created by dropping barriers to
the movement of capital, industrial inputs and products in and out of India.
It is possible to draw several
conclusions about India from the Reliance story There is the flowering of
individual endeavour and entrepreneurship from a traditional, isolated
backwater like Junagadh; the accumulated ethic of centuries of business and
banking among the Bania castes being transferred into modern corporations; the
amazing numeracy of Indians from the poorest street traders to the high
financiers; the way in which the age-old trading links to the Indian Ocean rim
have been extended into Europe and North America by the past 20 years of
migration.
Indians love to tell the joke
against themselves about the exporter of live frogs to 'The kitchens of France.
He didn't need to put a lid on the crates, because as soon as one Indian frog
tried to escape, the others pulled him down. Perhaps Ambani's corporate war
does show a tendency in the culture to blow the whistle when someone makes a
run for wealth or success. Jealousy can be strong in a crowded country with
many qualified contenders for every opportunity, and where growth of those
opportunities is slow or static. But the opposition that Dhirubhai stirred up
was not always or even mostly envy, but often vigorous self-defence or a
determination to extract the truth. The country may never be an India Inc., but
it has a certain self-correcting strength in its disputatiousness. The
plurality of interests that its system acknowledges may pre-vent it attaining
the high economic growth rates of more homogeneous and disciplined nations, but
they provide safety valves and mechanisms for gradual adjustment which prevent
violent revolution or cataclysmic misjudgments by unchallenged rulers. Many of
the popular books on the Asian economic 'miracle' or the proponents
'Confucianism' or Asian value' seem to expect that India will progress only
when it adopts the more or less enforced consensus patterns of East Asia. Some
of the leading proponents of this idea in places like Singapore and Malaysia
are themselves of Indian extraction. Others ignore India or rule it out of the
Asian mainstream. It is tempting to draw a line down the Chittagong Hill
Tracts, a rough racial divide between East and South Asia, and build a theory
of Two Asias': one whose culture predisposes it to high economic success the
other condemned to a slower cycle. But this is an error of extrapolation from a
narrow period, ignoring historical factors including the different experiences
of Western imperialism, the Pacific War, the American interventions in the
countries of East Asia after the war, and so on. It fails to address the
question of creativity in the underlying culture, and its significance for
leadership in an information-based economy.
The disputes surrounding the rise
of Dhirubhai Ambani tell us something else about India: how it agonises over
the morality of change, of success and failure. The snappy analogy made by the
tabloid newspaper Blitz in 1985, comparing the erupting polyester industry
battle to the epic Mahabharata, actually captured some of this dilemma. On paper,
the Mahabharata runs to millions of words and has a dozen volumes, but the
central story is that of the King Yudisthira, who is torn between his innate
sense of rightness and his earthly duty as a ruler in which cheating, lying,
intrigue and espionage are expected under the dharma (law and duty) of that
role. Against his conscience and inclination to withdraw from strife,
Yudisthira allows his Pandava clan to enter a war of vengeance against the evil
Kauravas, culminating in the bloodiest fight of A literature at Kurukshetra
when millions are slaughtered on both sides-and a deception by Yudisthira turns
the tide of battle.
Blitz hesitated to assign the
roles of Pandava and Kaurava between Dhirubhai and his textile rivals in the
'Polyester War'. This might have been just expedient and cautious. Many of the
protagonists who stood up to Reliance, by contrast, had little doubt in their
minds that it was a clear struggle between probity and deceit. But among the
many millions of investors and newspaper readers who followed ascent, there
were probably very many who suspended judgment (and of course, many who were
simply fascinated by the action, like the audiences of the Mahabharata who chat
and smoke during the long philosophical dialogues). Was not a certain amount of
deception just part and parcel of the dharma of a businessman? And just as
Yudisthira's warrior brother Muna shrank from the prospect of killing so many
good men in the Kaurava ranks, there was little appetite for seeing Reliance
fall and the savings of so many investors put at risk.
There perhaps the analogy ends.
Dhirubhai and Reliance have not faced a corporate Kurukshetra, though at times
it must have seemed as though they were heading for an apocalyptic showdown.
The questions raised during their history are not unique to India. What are the
limits of ethical behaviour in a world full of surprise manoeuvres, innovation,
inside connections and corruption?
And unlike the relentless order
of the Mahabharata and other Hindu scriptures, modern capitalism does allow a
process of redemption in the life of a corporation. Opium-traders,
slave-owners, market cornerers, share raiders and all kinds of robber- barons
have been able to transform themselves into establishment pillars by hanging on
and consolidating during the system's periodic crashes. It will be Dhirubhai
Ambani's greatest achievement if his enterprise can move decisively beyond the
shadows that fell on many of its middle years.