The Polyester Prince (21 page)

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’ 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 corresponding 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, Daial 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 ‘anti-dumping’ 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

‘occult 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 he 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.

Dhirubbai’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 320 000 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. T’he ftont-page 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…’

What the newspaper possessed actually related to one transaction, 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) ‘the 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’.

The company was worried that a letter of credit dated the same day as the policy change would be disaowed. 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 ‘lies’ and ‘fooling the government’.

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’ – 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 mcia. 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 0 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 ftmds.

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-lird,,ed 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 Daial 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 day’s 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 ‘scrutinised 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 scrip 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.2

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. ‘We 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 . .’ 3

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 25 000 tonnes a year of polyester filament yarn.

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 ‘re-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.