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 It was not until a year later, after Gujral had been replaced by an energetic customs officer named J. Datta, that the customs issued ‘show cause’ notices to the importers asking them to reply to the complaints.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 1 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 decentralised textile weaving industry, in which more than 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 C. Itoh & Co.’s 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) that had a longer useful life than the other companies’ POY.
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.’ The scale of Dhirubhai’s imports grew. Around 1978, says Kothari, Dhirubhai heard that Dupont had idle capacity of 300 to 400 tonnes a month at its polyester plant in Germany. ‘Dhirubhai booked it all for six months,’ Kothari said.
In addition, Reliance also built up to about 50 per cent its share of the lucrative business of crimping, 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 that 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 Dhirubhai’s 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 noticeboard in the yarn market and put up a sign inviting anyone he owed money to come and have their advances repaid. No one did.6 Another story is attributed to D.N. Shroff, president of industry group Sasmira in the 1970s. Market gossip accused Dhirubhai of black marketeering. Dhirubhai asked Shroff to convene a meeting of his association’s executive committee, which included many of his critics, then turned up to face it. ‘You accuse me of black marketing,’ he challenged, ‘but which one of you has not slept with me?’ All present had bought or sold yarn to Dhirubhai at some stage.7
In March 1977 Indira and Congress were swept from power in the elections called immediately 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 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 government, a coalition of anti-Congress parties under Morarji Desai, the austere and self-righteous former Finance minister whom 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 ‘bona fide 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 firm 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 (STC), 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 until 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’, 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 Middle East and later the United Kingdom, trying to place stocks of Vimal artificial silks. S.B. Khandelwal, owner of the emporium Sari Mandir (Sari Temple) in Leicester, where many Gujaratis settled after being expelled from East Africa, recalled 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’.)
Until around 1977 exports took between 60 and 70 per cent of the fabrics produced at Naroda, Dhirubhai noted to BusinessIndia 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 such products as Disco Dazzle Sports Jersey or Supertex dress material. It was an advertising expenditure of Rs 10 million a year, then unprecedented in India and more than four times that of established textile producers like Bombay Dyeing. And it worked. In 1979 Reliance Textile Industries raised its sales to Rs 1.55 billion (then $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-face case for further inquiry’ 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, wh
ich focused on the ambition of the Finance minister, Charan Singh.
It gave Dhirubhai the opportunity to cement a relationship with Indira Gandhi that gave him unrivalled influence over government poilicies. In the murky dealings of 1979 his 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 that year 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 early 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 to government, held at the Ashoka Hotel in New Delhi, was hosted by Congress MPs from Gujarat and paid for by Dhirubhai. Political observers noted that Indira spent more than 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.’
6
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 fifty 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’.1
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 Sanjay, 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 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, although 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 licences given by the government for manufacture of polyester filament yarn, the location being stipulated as the ‘backward’ area of Patalganga in the hills of Maharashtra, inland from Bombay. In a field of forty-three 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 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 place a $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 that involve heat and 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 Dhirubhai’s 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 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 also 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 twenty-six 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 and Prime Minister from 2004), R.N. Malhotra, M. Narasimhan and S. Venkitaramanan, 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) in 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 ‘massive intervention in corporate business’, most notably in the nationalisation of major Indian banks the following year. On his arrival at the Ministry of Finance in 1979, his job was partly to set the rules by which companies could raise money by issuing shares or bonds, 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 British capitalism 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 for abuse of clients’ trust. After periodic busts, the general public had learned to distrust the sharemarket. With only very small percentages of equity being 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 t
he average annual total of money raised by Indian companies from capital markets was only Rs 580 million ($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 in this dramatic increase. Sen Gupta had taken up a study by an Indian economist with the World Bank, D.C. Rao, who suggested greater use of convertible debentures – paper that 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 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 11 000. 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 Rs 60 million. By March 1977 the company had been relocated from Bangalore, capital of Karnataka, 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.
Mahabharata in Polyester Page 7
