The Polyester Prince (12 page)

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’ 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’ 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’ 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,’ 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’ 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 fulfil 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’ stock in the market, and Dhirubhai himself began receiving panegyrics in magazine profiles as the ‘messiah’ 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 45 000 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 filainents 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 Dhirubhai’s 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.

Dhirubbai 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 totalling Rs 6.72 billion in outlays. India had recently had its first taste of hostile takeover bids when the London-based expatriate Indian, Swraj 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 Dhirubhai’s wider ambitions. The word ‘Textile’ 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’. BusinessIndia spoke of his ‘brilliant financial acrobatics’ and ‘superlative business performance’ which had helped him create corporate history’ and become a ‘le nd in his own ge 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’ Pandit Sundaram in New Delhi told Ambani he would be India’s No. I 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,’ 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’d 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’ Phoolan Devi or the southern sandalwood smuggler Vecrapan 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.