Mahabharata in Polyester

by McDonald, Hamish

  Two very large issues of partially ‘non-convertible’ debentures by Reliance during 1984 and 1985 had been jumped on by a swarm of small companies, whose registered addresses were often those of Reliance companies and employees. Each had raised finance from the big Indian banks by pledging Reliance shares and debentures as security, or with guarantees from Dhirubhai’s younger brother Nathubhai, often in identical, simultaneous transactions that breached central bank rules on loans for speculative sharemarket purchases.

  Gurumurthy asked what point there could be in, say, Mac Investments (an Ambani investment company) borrowing Rs 1.5 million from Canara Bank at 18 per cent interest to buy debentures carrying 13.5 per cent interest. The borrower must have known that the capital appreciation of the Reliance shares, obtained from conversion of the non-convertible portion of the debentures, would yield a profit of 400 per cent. The Ambani management would also have consolidated its hold on Reliance by borrowing to buy its own company’s shares – which was expressly forbidden by the Reserve Bank. Reliance had already started talks with the Ministry of Finance to have the two series of debentures fully converted. The company’s shares had already started booming in expectation. ‘If this is not speculation then what is?’ asked Gurumurthy.

  Gurumurthy had not done so well in his overseas inquiries. The lawyers and private eyes engaged in London were laboriously searching company records in tax havens to trace ownership of the NRI investors in Reliance, but results were slow in coming. A letter from the London contacts on 16 April enclosed a fresh report from King’s Investigation Bureau with the comment that it was ‘very feeble’.

  King’s had been asked to look into nearly 120 companies, ostensibly owned by non-resident Indians, which had invested either directly in Reliance shares, as in the 1982 case, or by subscription to the Reliance B and F series debentures. Possibly with the help of concerned banking officials, Gurumurthy had also obtained lists of NRI companies that had borrowed from the Bank of Oman and certain other banks to buy into the Reliance issues.

  The nationalised Bank of Baroda had played a big role in financing the issue. Mostly from its London office, the government bank had advanced a total US$33.5 million to NRI companies and individuals, apparently nominated by Reliance, to help them to subscribe to the F series debentures. This was about 40 per cent of the Rs 1.08 billion investment made by NRI sources. The loans had similar terms: two percentage points over the London interbank rate, or 10 per cent a year, while the return from interest was 11 per cent after tax. The investors were clearly after the capital gain from eventual conversion to equity.

  The detectives had exhaustive searches made on the names in the Channel Islands as well as the Isle of Man, but most turned up negative. In the Isle of Man they found that ten of the eleven controversial companies from 1982 had undergone a sudden change of ownership and directors in August 1985. The two most provocative names had also been changed to something more innocuous: Crocodile Investments had become Asian Multi-Growth Investments, and Fiasco Investments had become Asian Investments.

  With the ten companies, the various Shahs and Damanis of Leicester, Berlin, Djibouti and New York had suddenly transferred their 55 to 80 per cent shareholdings in August 1985 to newly formed holding companies in the British Virgin Islands with names matching those of the Isle of Man companies they now owned. Inquiries in Leicester found that the Shahs had not received any noticeable jump in their wealth from the sale of control over equity by then worth more than Rs 1 billion or US$80 million. Indeed, family members professed the same degree of ignorance as they had in 1983. By then, Krishna Kant Shah – Dhirubhai’s old Junagadh schoolmate – was too ill to meet anyone (and died in May 1986).

  The New York investors, Praful and Nalini Shah, turned out to be a middle-class young couple mostly living off Praful’s average-size salary as clerk in a city law firm. They had bought their modest home in the suburbs for $49 000 with a $34 000 mortgage and drove an eleven-year-old Dodge. They had not apparently come into any recent wealth either, but any connection they had with Dhirubhai was not discovered.

  As of August 1984 the British Virgin Islands had had a company code designed for the discreet investor. Called the International Business Companies Ordinance, it allowed companies to issue shares to an unnamed bearer who was allowed to vote at company meetings. Companies could issue non-voting shares, so that technically an NRI could own 60 per cent of the capital to comply with the Indian rules but have no voting rights at all. And it could have faceless shareholders through trusts, corporate bodies and the like. Directors and shareholders could even participate in meetings by telephone.

  Including these companies, Gurumurthy’s inquiries found that a total of thirty-two companies registered in the Isle of Man or the Channel Islands had subscribed a total Rs 141 million to the F series debentures. The ten British Virgin Islands companies had subscribed Rs 50 million. And forty-one companies in the United Arab Emirates had been lent an average of Rs 1 million each by the Bank of Baroda to subscribe.

  Out of the new names in the British tax havens, the searches found that new directors had been appointed in August and September 1985, just after the F series issue. Many had an Indian resident of Dubai, Homi Ratan Colah, as their new director wielding majority control. Others had people of Indian names listed as residents of Nigeria.

  The Dubai companies had some fanciful names taken from various ancient Sanskrit scriptures: ten from the Vigneshwara Ashtotra and twelve from the Sandhya Mantra. Several others took names from the avatars of Lord Shiva and other divinities. Reliance’s Middle East ‘coordinator’ and Dhirubhai’s old colleague from Besse & Co. in Aden, Bharat Kumar Shah, subscribed Rs 35 million in the names of himself and his family. In the first week of September 1985 he had sent a list of borrowers including himself to the Bank of Oman.

  Through a firm of Panamanian lawyers with an office in London, the investigators had also done a search in Panama on more than a hundred company names matching those on the list of Reliance investors. They found some of the names, all registered on the same day in July 1985. Listed among company officers were two members of an Indian firm of chartered accountants in Dubai that had done work for Reliance. But the London investigators reported back to Bombay that their local agents had not been able to get information out of the Panama lawyers who had incorporated the companies. ‘Our agents have been advised that this is a most delicate matter and should not be pursued further,’ they said.

  It was unsatisfactory – and tantalising, given that the trail seemed to lead through the tax havens and corporate hideouts of the globe back towards India. The leads in Panama and Dubai were not enough to build a story on. But it was enough for Gurumurthy to resume the chase abandoned by the Indian press in January 1984 – when, he claimed, the Ananda Bazar Patrika group had been warned off by the withdrawal of all Reliance advertising.

  In a four-part article published over 11–14 June – under the heading ‘Reliance, crocodiles & fiascos’ – he went through the story of the Isle of Man companies once again, emphasising the series of coincidences that pointed to a single manipulator close to the action in Bombay. Given the secrecy rules applying in the British Virgin Islands, how was the Reserve Bank of India to verify that the companies had 60 per cent control by non-resident Indians, as required by the Indian rules? Had the central bank even been informed of the changed control in 1985? Gurumurthy also highlighted the way in which changes in the investment rules had been timely for the investments by the Isle of Man companies. Between late March and August 1982, during two bear attacks against Reliance, some 1.872 million shares in the company – nearly 10 per cent of the then issued capital – had been bought by brokers on behalf of unnamed NRI investors.

  The investment rules had been relaxed first on 14 April 1982, just after the first bear attack, to give repatriation rights to NRIs and extend investment freedom to companies, partnerships and trusts with 60 per cent NRI ownership. Then on 20 August, just after the s
econd attack, the rules were further relaxed to remove the Rs 100 000 (face value) ceiling for any one NRI investor. Instead, each NRI investor could hold up to 1 per cent of the paid-up capital of the company. Instead of having to distribute the 1.872 million Rs 10 shares among 187 owners, the requirement was now just ten separate shareholders. Only on 9 August 1982, Gurumurthy pointed out, had the various Shahs and Damanis acquired their 60 per cent-plus control of the ten Isle of Man companies. The amendments to the investment rules had clearly been ‘tailor-made’.

  • • •

  So far, it had been just words – wounding as they were to Dhirubhai and Reliance. But within three months the Indian Express campaign led to action. Late on the night of 10 June 1986 the government announced a ban on the conversion of non-convertible debentures into shares. 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. Only 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. The government’s decision meant that 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, Dalal Street was crowded with investors offloading their Reliance debentures in ‘kerb’ transactions.

  More bad news was coming in. On 17 June Finance Minister V.P. 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 an extra duty of Rs 3000 a tonne on imports of PTA to help the domestic manufacturers of the alternative feedstock DMT.

  Dhirubhai was also embattled on several other fronts. The Central Bureau of Investigation was looking into the alleged leak of the May 1985 policy change on PTA imports, the Reserve Bank of India into the ‘Reliance loan mela’. In addition, both Reliance and Bombay Dyeing were being 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 with the urgency of the accounting intricacies involved.

  Dhirubhai’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, 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, although delivering his speech was obviously a physical strain for him. 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. 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.

  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 other publications were taking up the attack on Reliance. On 5 July the tabloid Blitz published letters and telexes which suggested that a Bombay branch of the state-owned Canara Bank had doctored a letter of credit for PTA imports by Reliance to get a larger amount booked before the import policy changed.

  The Reserve Bank of India meanwhile gave its preliminary findings on the loan mela. It found that nine banks had given advances totalling Rs 592.8 million in India during 1985 to sixty-three companies apparently associated with Reliance, against security of Reliance shares and debentures. Reliance had placed money with all 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, although 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 funds.

  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 thirty months, in some cases twelve months, and thus were not long-term loans (five years and more) that required RBI approval. But by granting large advances to Reliance-linked 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.

  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 network to support the tumbling share price. This limited Dhirubhai’s ability to stem the rout. But things went so badly, with Reliance dragging down the whole market, that the exchange also put a similar margin on sales, putting shackles on the bears as well.

  Gurumurthy then weighed in with yet another sensational allegation that kept the share price falling: Reliance had smuggled in an industrial plant worth Rs 1 billion.7 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 10 000-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.

  Each of the second and third plants consisted of a polycondensation unit and four spinning lines. Bought new, each would cost about Rs 2 billion and second-hand, about half that. ‘Doesn’t the enforcement branch want to know where Reliance got the foreign exchange to pay for these?’ asked Gurumurthy.

  In a follow-up article, the Express connected the ‘smuggled’ yarn capacity with a change in policy announced on 3 July 1986 by the Minister of Industry Narain Dutt Tiwari, whom the newspaper had described as an ‘unabashed Reliance admirer’. Tiwari said polyester producers were now free to switch production between staple
fibre (spun from cut lengths of yarn) and filament yarn. Reliance would now be able to churn out more of the high-priced filament yarn without attracting notice. The policy applied to manufacturers with a polycondensation capacity of 30 000 tonnes and a filament yarn capacity of 15 000 tonnes – another apparently ‘tailor-made’ criterion that only Reliance then fitted.

  On 20 August a team of six officials and engineers from relevant ministries arrived at the Reliance factory to see exactly what machinery was installed. According to a report on the mission by its leader, M.S. Grover, to the Ministry of Industry on 10 September, ‘Messrs Reliance either did not give the information timely or the information given was inadequate.’

  The officials met Reliance representatives a second time at the Customs House in Bombay on 22 August. The answers were still not satisfactory, and several other follow-up meetings were held in New Delhi, leading to a presentation by Reliance on 1 September. The officials were still unsatisfied: Reliance refused to give precise specifications of equipment because it was ‘proprietary knowledge’.

  The committee asked Reliance at least to explain how the capacity of the PTA unit’s air compressor – a component that gave a clue to the overall plant capacity – was nearly 50 per cent greater than needed for the licensed plant and how the polyester filament yarn plant came to have twelve spinning lines instead of the eight cleared for import. On the first point, the officials appeared to have been left uncertain. On the second, Reliance said the four extra spinning units were made from disassembled parts shipped with the four second-hand spinning lines brought in as part of the ‘balancing equipment’ in 1984. Reliance executives were disputing that any precise tonnage could be assigned to a given plant. With constant meterage (length of fibre produced) almost any tonnage could be produced by varying the denierage (thickness) of the filament, it maintained. In its applications for licences, Reliance had made certain denierage specifications. At no stage had the government told it of any policy decision that the controlling factor was the tonnage.