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. From late 1980 the issues of partially convertible debentures came from Reliance in quick succession, raising Rs 108 million in September from its Series II and Rs 240 million from its Series I 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 non-convertible portions of the four debenture issues into equity. By this ‘brilliant and unconventional move’ (in the words of a magazine journalist) 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.
Sen Gupta later denied that he was unduly permissive to Reliance, or that he ever received any benefits from Dhirubhai such as share allotments. ‘On 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 1pm 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 7pm, 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 had raised an unpreceded 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.’2 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’ – and Dhirubhai could rightly claim some of the credit for it.
Between 1980 and 1985 the number of Indians owning shares increased from less than a million to four million. Among those, the number of shareholders in Reliance rose to more than a 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 Gujarat 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 South-East Asia after their miserable expulsion from East Africa in the 1960s and augmented by direct immigrants qualifying for professional and skilled entry to advanced economies. Since Pranab Mukherjee’s 1982 budget, these ‘non-resident Indians’ (or NRIs) and their companies had been able to invest directly in Indian equities. The third class was the larger landowning farmers, who were prosperous after the huge crop-yield increases of the Green Revolution during the 1960s and 1970s, and who continued to enjoy tax exemption on their income.
The equity cult spread from nearly twenty 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 twenty-eight-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 nineteenth 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 ‘jobbers’ 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 slowdown 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 scrip would pass through fifty 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.
Although 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, about $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 bhel puri from a nearby stall, had to rely on a network of subbrokers 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 ma
de 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.
• • •
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 eighteen 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 while undertaking a Master of Business Administration degree and put in charge of the new project. Aged 24 at the outset and 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 Pont’s then international director, Richard Chinman, that such a plant would have taken twenty-six months to build in the United States, had wide publicity in India.
Dhirubhai still demonstrated his uncanny grip on government trade and industrial policy and their implementation. While the ‘canalisation’ of imports through the State Trading Corporation had been abandoned in April 1981 and polyester filament yarn (PFY) and partially oriented yarn (POY) placed on the ‘open general list’ 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’ 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 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 ‘misleading, distorted and untruthful’. Domestic polyester output had risen 60 per cent in 1981 to 16 000 tonnes and still fell short of demand estimated at 50 000 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 ear 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 17 600 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 amending the income tax law to require 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 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 terephthalic 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 arm’s-length enforcers. The journalist Kanti Bhatt recalled 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 dandiya 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 not 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 most. 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 350 000 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 NRI investors ‘based in West Asian countries’. Eventually the friendly brokers bought more than 800 000 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 w
ere the NRI investors who arrived so providently on the scene with more than Rs 100 million (then more than $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 newspapers as a ‘pivotal’ stock in the market, and Dhirubhai himself began receiving panegyrics in magazine profiles as the ‘messiah’ of the small investor. Dhirubhai’s brokers went on to pick up a further million Reliance shares by August 1982 for the mysterious NRIs, bringing the outlay since March to about Rs 260 million.
Mahabharata in Polyester Page 8
