The Polyester Prince (40 page)

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’ 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 Ecnomic Times. ‘If the ego of the Ambanis really got so battered, perhaps the solution is to ask Ms Vasa to give it some therapy.‘5

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.‘6 A huge advertising campaign, reminiscent of the 1986 series, declared: ‘The world can wait. Our shareholders can’t.

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 outpouring 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 corninents 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 rnatter not be pursued, even though we are advised there exist in law sufficient grounds to do so.

It was a climbdown. Reliance was soon back on the defensive. The Unit Trust angle to the Fairgrowth 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 Fairgrowth be the same lot of 1.5 inillion 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 Mchta 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 & Toubro 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 Naraslinha 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 conmuunications 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 Naraslinha 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’t come apart even if the duplicate shares are offloaded 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 share-switching 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 Bharatlya 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’, 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, 1992-93), 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 twins’ partly 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.