As Rajiv’s Finance minister, Singh applied a carrot-and-stick approach to taxation. In his first budget, at the end of February 1985 for the year starting 1 April, Singh slashed income tax rates and wealth tax and abolished death duty. Industrial licensing laws were also relaxed and investment approvals streamlined. This new wave of reform sparked a stockmarket boom.
But business circles were less happy from mid-year when Singh began applying his second budget promise. The counterpart of lower tax rates, he had warned, would be stricter enforcement. The agencies under the Ministry of Finance that police the economic laws began raids on and inspections of some of India’s best-known business houses for allegedly evading excise, concealing income or keeping funds offshore. No one felt safe from Singh’s inspectors.
Rajiv’s new broom was also sweeping closer to Dhirubhai. As his DMT plant moved closer to production, Nusli Wadia had been lobbying hard for greater protection against imports of DMT and PTA. In particular, he argued that trade policy should support the big investment in domestic DMT capacity by Bombay Dyeing and the two state producers. Allowing a switch to PTA meant a loss of foreign exchange on imports that could be substituted domestically. The Petroleum Ministry was sympathetic to the argument that PTA imports should not be given any advantage, and recommended on 16 May 1985 that imports should be approved only after verification that domestic competitors were not damaged, as was already the case with DMT imports.
Thus, as Dhirubhai was holding his open-air shareholders’ meeting in Bombay on 20 May 1985, the government was moving towards a decision that would have a drastic effect on Reliance’s production and possibly force it to use DMT from Nusli Wadia’s DMT plant. On 29 May the government announced that PTA was placed on the controlled import list with immediate effect.
Dhirubhai was not worried. For a ninety-day grace period from 29 May the government said it would allow those PTA imports for which irrevocable letters of credit had been opened against firm contracts by 29 May. It emerged that, by the time of the notification on that date, Reliance had opened such letters of credit for 114 000 tonnes of PTA – more than enough to supply its existing and planned polyester capacity through to the opening of its own PTA plant expected at the end of 1986. Moreover, the letters of credit had been opened in a burst of frenetic activity with several banks over 27–29 May up to a few hours before the import policy change was announced. One revolving credit from Canara Bank for 2000 tonnes of PTA a month up to 30 June 1985 had been enhanced on 29 May itself to pay for 12 000 tonnes and the shipment date extended to 30 June 1986. Letters of credit were taken out also with three foreign banks on contracts signed some months earlier, for a further 42 000 tonnes.
On 27 May Reliance had got an entirely new contract for 50 000 tonnes of PTA registered with the Petroleum Ministry in New Delhi and covered the same day by letters of credit from three overseas banks at their Bombay offices. The Exchange Control Manual for banks in India required importers to submit original copies of registered contracts before letters of credit could be opened. Getting this all done during office hours in one day between New Delhi and Bombay seemed a miracle of logistics.
The government was unhappy to learn that its policy change to protect the domestic DMT industry had been so stunningly thwarted. It was even angrier as it learnt the details of the three-day Reliance rush to open letters of credit, suggesting the possibility that the pending policy change had been leaked to the company. Authorities told Reliance that the ninety-day grace period would be enforced: all the 114 000 tonnes of PTA would have to be landed by 30 September.
Fourteen thousand tonnes having arrived, Reliance took the government to court about the remaining 100 000 tonnes, arguing that the cut-off date was arbitrary and in violation of the implicit three-year guarantee of stability in import policies before 29 May. It also argued that it had ‘switched over’ to PTA and that to go back to DMT as a feedstock would require ‘crores of rupees’ (one crore equals 10 million) plus new equipment and take ‘several months’.
A single judge in the Bombay High Court awarded Reliance a ‘stay’ on the government’s decision and authorised the company to import 5000 tonnes, which were already available for shipment. For the remaining 95 000 tonnes, the company should approach the government for a supplementary licence – on which the government should decide by 31 October, failing which Reliance could revert to the court for further interim relief.
The government appealed against this order to a more senior bench of two judges in the High Court. While waiting a hearing, the import duty on DMT and PTA was raised a further 50 percentage points to a total of 190 per cent. This did not deter Dhirubhai, as international market prices of the two feedstocks were falling rapidly. In court on 28 October the government argued against the clearance of the 5000 tonnes permitted by the lower court and for removal of the 31 October deadline for the remaining 95 000 tonnes. The bench dismissed the appeal, but agreed to stay clearance of the 5000 tonnes – the shipment was due in Bombay the next day – for seven days to allow the government to appeal to the Supreme Court.
This the government did. On 4 November the Supreme Court decided to allow Reliance to clear the 5000 tonnes of PTA but not to use it pending settlement. The government was given three weeks to make its case and Reliance a week after that to respond, with the High Court to make a final decision during December.
In the background of the litigation, Reliance kept feeding the press with accounts of the allegedly unacceptable quality of Bombay Dyeing’s DMT, made at its ‘second-hand plant’. A small polyester producer called Swadeshi Polytex had told the Industry Ministry’s Director-General of Technical Development about alleged defects in a 68-tonne DMT shipment from Bombay Dyeing: sacks supposed to contain DMT pellets were 20 to 80 per cent powder, black particles were found in the pellets, bits of thread, metal and wood were found in the bags and so on. The picture painted was of Bombay Dyeing pumping out filth from a wheezing, obsolete plant and angling for massive protection so it could jack up prices to struggling yarn-makers.
The lobbying and propaganda war became frenetic in early November. Reliance issued press notes that played up the cost and difficulty of switching polyester plants back from PTA to DMT: it was like modifying a diesel engine to run on petrol; the modification would involve ‘huge expenditure’ and take nine to twelve months. Another note put the investment at Rs 58.6 million (then about $4.6 million) and the time at twelve to fifteen months. If Reliance could not get its PTA, work would stop, with huge numbers of workers being laid off. On 2 November another polyester producer J.K. Synthetics actually announced it was suspending production at its plant in Kota because it was unable to get an import licence for PTA.
The private war got dirtier. According to the tabloid Blitz, two ‘campaign briefs’ were circulated by the Reliance office in New Delhi among MPs, officials and others. Orkay was accused of pledging the same stock with banks several times to get loans, issuing bogus bills, claiming tax rebates on non-existent production and under-invoicing imports of polyester chips to evade duty.
With his earlier excise evasion case still being heard, Orkay Silk Mills’s Mehra was arrested on 1 November 1985 on another charge. He had allegedly evaded Rs 15 million in duty on polyester chip imports in 1982 and 1983, by under-invoicing the imports from C. Itoh & Co. in Japan, according to ‘voluminous documentary evidence’ collected by the Directorate of Revenue Intelligence ‘from Japan’ a few days earlier. Mehra had bought the material 7.5 per cent below the regular price: evidence of ‘under-invoicing’ according to the policers, just a ‘trade discount’ according to Mehra.
Mehra’s counsel, Ram Jethmalani, said a ‘rival tycoon’ had instigated the raids to sabotage a share issue financing Orkay’s expansion. Later it was noted that Dhirubhai had been in Japan not long before, visiting among others C. Itoh & Co., which had been accustomed to giving Reliance a 20 per cent discount on polyester yarn sales. Whatever the case, Mehra spent fifteen days in jail befor
e obtaining bail – missing the Diwali festivities – and for years was contesting claims for evaded excise and duty and personal fines.
The other target of the Reliance ‘briefs’ was Bombay Dyeing. It had been getting import policy on PTA and DMT changed to help it out of the ‘total mess’ created by its decision to buy a DMT plant originally built in 1953. The 1977 price of Rs 300 million had ballooned to nearly Rs 1 billion by the time it was reassembled. ‘What else can be expected from a junk [sic]?’ the Reliance note said.5 Wadia also came under personal attack: a story put out by the newsagency United News of India quoted ‘official sources’ alleging Wadia and his wife were involved in a ‘fraudulent’ deal to sell land belonging to a Parsi trust of which they were trustees.6
But Dhirubhai was now fighting on two new fronts, as well as the legal battle for his PTA imports. On 26 October newspapers had begun reporting that the Central Bureau of Investigation – New Delhi’s highest criminal investigation body, which deals principally with corruption cases – had begun inquiries into the possible leak of the decision to put PTA on the restricted import list in May. A few days later Finance minister V.P. Singh denied that he had ordered any inquiry, but newspapers reported moves at official level for an investigation in concerned ministries, including Finance.
For its part, Reliance said it was not aware of being under investigation and put out lengthy written explanations as to why its import contracts in May had coincidentally preceded the policy change. The 50 000-tonne PTA contract approved by the Petroleum Ministry on 27 May had been submitted to it on 14 May. The quantities it sought to import were not in excess of its own use over the eighteen months until its own PTA plant opened, nor could Reliance conceivably hope to evade the September duty hike. Reliance was a victim of ‘mischievous propaganda’ – the allegations were based on ‘tailored facts and twisted information circulated by vested interests too obvious to name’.
On 29 October, however, Reliance took another blow which showed conclusively that the Finance Ministry was no longer a friend. On that day the Assistant Collector of Central Excise at Kalyan, covering Patalganga, presented the company with a ‘show-cause’ notice claiming that Reliance had evaded a total of Rs 272.34 million (then about $21.8 million) in excise on polyester production since October 1982 by under-reporting production and misdeclaring waste. Backed by nine pages of annexures giving the details of the polyester manufacturing process, the notice invited Reliance to argue why it should not be forced to pay the Rs 272.34 million, have its factory confiscated and pay an additional penalty for evasion. It was the biggest excise evasion charge in Indian corporate history and, even discounting the ambit nature of the Assistant Collector’s proposed penalty, a big threat to the profit line in the Reliance results.
The company affected not to be worried. A press release on 15 November described the show-cause notice as ‘routine’ and noted that similar notices had been issued to other manufacturers in the Thane area. It was all part of a drive to raise revenue. The claim against Reliance was based on ‘theoretical calculations and assumed technical information’, the company said. ‘The notice was issued in the normal course of business and the company would soon be filing a reply and expected no liability to arise out of the show-cause.’
But Dhirubhai was sweating. On 26 November it was revealed that a compromise on the PTA imports was being worked out. The government would allow actual users of PTA to import their own requirements for six months ahead, but would not allow existing users of DMT to switch over and import PTA. Meanwhile, the Bureau of Industrial Costs and Prices would commence a study of DMT costs, to help regulate prices so that domestic DMT had a cost advantage over imported PTA. The condition for Reliance getting import licences, it was suggested, was to drop its High Court action. It could hardly argue.
By this stage, too much corporate blood had been spilt for the dispute to be papered over and forgotten like so many controversies before. Kapal Mehra had been jailed and humiliated. Nusli Wadia, despite the tariff and quota protection given to domestic DMT producers, had been forced to close his new plant for months because of the feedstock glut that Dhirubhai had engineered by the PTA imports he had managed to get through and by the constant denigration of his product.
• • •
Dhirubhai had meanwhile lost his key lieutenant in charge of public relations and government contacts. On 30 August his nephew and Reliance director Rasikbhai Meswani had died suddenly. It took some years for other publicists and lobbyists to take his place. As 1985 drew to a close, Dhirubhai was being openly described as a monster threatening Indian democracy. Blitz observed: ‘If the allegations against Dhirubhai Ambani and Reliance are proved, whether in the matter of evasion or in the alleged fraud of letters of credit opened with two foreign and three Indian banks for the import of PTA, then the conclusion becomes inescapable that, since 1969, a single industrialist had been literally dictating the government’s textile and import policies and manoeuvring import rules to “kill” his rivals and maintain his lead in the market.’7
Although he had limited contact with V.P. Singh – confined to direct industrial concerns – Nusli Wadia had kept up his ties with Rajiv Gandhi and can be expected to have voiced similar concerns to those of Blitz about the impunity with which Reliance had operated.
At that point Rajiv was still fired with zeal to cleanse the Augean stables as well. When Congress Party delegates gathered in Bombay at the end of December to mark the centenary of the party’s founding, Rajiv delivered a stinging attack on its corruption. On the backs of ordinary party workers rode the ‘brokers of power and influence, who dispense patronage to convert a mass movement into a feudal oligarchy’. Rajiv attacked the legions of tax-dodgers in Indian companies and the ‘government servants who do not uphold the law, who shield the guilty tax collectors who do not collect taxes but connive with those who cheat the state’. But industrial empires built on excessive protection, social irresponsibility, import orientation and corruption might not last long.8
The Mahabharata Polyester War had been lifted out of the factories of Patalganga and from the Pydhonie yarn market to the national arena.
9
The paper tiger
It was at this stage that the Polyester Mahabharata was joined by an entirely new set of combatants. It became a life-and-death struggle for Dhirubhai’s company and the critical test of Rajiv Gandhi’s efforts to clean up the Indian Government. Dhirubhai survived. Rajiv failed and lost power as a result.
The new element was ‘Seth’ (Master) Ramnath Goenka, the legendary Indian newspaper tycoon. From a Marwari trading background in Calcutta, Goenka had moved to the southern city of Madras in the 1920s – according to some accounts, at the instigation of his own family, as even they found him too hard to work with – and begun building up the chain of English-language newspapers put under a common Indian Express masthead in the 1950s. By 1985 the Express had India’s biggest newspaper circulation, 670 000, from twelve regional editions.
Inclined to the Jana Sangh and critical of Congress, although never committed either way, Goenka was happiest in an opposition role, exposing cant and corruption. Like most Marwaris, Goenka was a strict vegetarian, but he did not shrink from drawing blood in print. In the 1950s he had employed Indira’s husband Firoze Gandhi and encouraged his exposure of the Mundhra scandal. The Express had been one of the few newspapers to resist the censorship imposed by Indira during the Emergency and consequently had been put under all kinds of pressures, including a move to demolish its New Delhi buildings for alleged building code violations. Ultimately Indira had baulked at closing him down – some say because Goenka threatened to publish private papers of her late husband about their unhappy marriage.
In late 1985 Goenka was 81 and his health was starting to fail. But mentally he was still alert and combative. From his sparsely furnished penthouse on the twenty-fifth floor of Express Towers in Bombay Goenka intervened daily in editorial decisions on the Express, hiring
and firing editors with great frequency He was far from reclusive, receiving a daily stream of visitors anxious to keep in his good books and flying frequently to New Delhi, where the Express had its own guesthouse.
Dhirubhai had been introduced to Goenka in the mid-1960s by Murli Deora, the yarn trader who was moving up in the city’s Congress Party circles and later to become a member of parliament. Goenka had noted Dhirubhai as someone of promise, and thereafter the young Gujarati businessman made regular visits. Goenka was regarded as a family friend, addressed as ‘Bappuji’ (Grandfather) by the Ambani children. The Express frequently reported the controversies involving Reliance, but when protests were made Goenka seems to have placated Dhirubhai by explaining that his target was the Congress government.
Nusli Wadia also became a close friend and, as with the childless J.R.D. Tata, became something of a son to the old Marwari. (Goenka’s only son had died at an early age, depriving him of his only heir bearing the Goenka name.) Together with his wife, Wadia had got into a routine of having lunch or dinner at least once a month with Goenka. On one such occasion, around October 1985, Goenka asked Wadia how his business was going. Wadia made a noncommittal reply, but Maureen Wadia intervened and related the smear campaign against Bombay Dyeing in the press, including the Express group’s own newspapers.
Mahabharata in Polyester Page 12
