Mahabharata in Polyester

by McDonald, Hamish

  All the plants listed for construction at Hazira had been cited as proposed activities by Reliance when it garnered subscriptions to its G Series debentures in November 1986, and the acquisition of land at Hazira had been reported to Reliance shareholders in June 1987, along with the dismal 1986 results.

  The site remained a swamp, as Dhirubhai tried to muster more cash and credit to start building his dream. At the end of May 1988 Reliance had applied to the Controller of Capital Issues for permission to make yet another massive debenture issue to finance its Hazira project, this time though a newly created subsidiary called Reliance Petrochemicals Ltd. The fully convertible debentures would be priced at Rs 200 each and bring one Rs 10 share in the new company immediately on issue, with the remainder being converted to more shares in two stages over the next three to seven years. The issue would raise Rs 5.934 billion towards an investment estimated at Rs 25 billion by the time it was completed in 1994.

  The issue was cleared early in July 1988 and opened for subscription at the end of August, even though, as the Indian Express pointed out, Reliance Petrochemicals did not appear to have yet obtained the industrial licences it needed for the project. It was also the first case of a new company with no assets against its name being allowed to issue fully convertible debentures, which was against the policy laid down by the Finance Ministry controllers until then. The Express also questioned whether Reliance was raising money a second time, through the subsidiary, for the same projects the G Series debentures were supposed to fund. Reliance persuaded the Supreme Court to bar the Express from publishing anything on the validity or legality of the approvals obtained by Reliance Petrochemicals in connection with the issue. The order was lifted on 23 September after the issue closed. By then Dhirubhai had 2.3 million new investors in his empire, among them many of the existing 1.8 million shareholders in the parent company.

  The petrochemicals plant would make Reliance only the second producer of high-density polyethylene in India and its biggest producer of PVC. But Dhirubhai’s ambitions were racing even further ahead. In October that year the economic affairs committee of Rajiv’s cabinet approved his proposal to build a gas cracker – a plant that breaks down the components of natural gas into different petroleum gases – alongside the petrochemicals plant at Hazira. It would produce 320 000 tonnes a year of ethylene, 160 000 tonnes of propene and 50 000 tonnes of butadiene. The feedstock would come from the nearby South Bassein natural gas field being developed by the government’s Oil and Natural Gas Commission.

  This was another big project, using proprietary technology of the world’s petroleum and engineering giants. How was Dhirubhai to finance this when the big petrochemicals plant had just been put off the parent company’s own rather stretched accounts?

  Dhirubhai already had his eye on one of the jewels in the Indian corporate world, which he felt a friendly government had put in reach. The Bombay engineering firm of Larsen & Toubro, founded by two Danish engineers in 1938, had become one of India’s biggest listed companies by 1987, with assets of Rs 9 billion, annual sales of Rs 5.8 million and gross profit of Rs 820 million. It was building all kinds of factories, making offshore platforms for the new oil and gas discoveries in the Bombay High field and fabricating high-performance equipment for India’s nuclear power, space and defence programs. It was something of a strategic national asset.

  As far as ownership went, the Danes had retired from the scene. The firm’s shares were widely dispersed, but the government’s financial institutions held a combined 42 per cent that decided the fate of its management. It had made some ill-timed diversifications into shipping and cement, but was a conservatively run company with an impressive range of technical expertise. While regarded widely as ‘sleepy’ and not giving its potential performance, it was still making a return on net worth that was twice that of Reliance in the bad days of 1986–87. It was immensely rich in internal cash reserves and borrowing power – a tempting takeover target, and the Dubai-based Chhabria brothers had already started nibbling in the market in 1987. But without the support of the institutions, no raid could succeed.

  In May 1988 the Bank of Baroda, one of the score of nationalised commercial banks, decided to get into investment banking and to set up a subsidiary called Bank of Baroda Fiscal Services, soon abbreviated to BoB Fiscal. Two months later it asked the Unit Trust of India (UTI) and the Life Insurance Corporation (LIC), two of the biggest institutional investors in the share market, to help it start a portfolio by selling it baskets of shares. Oddly, 63 per cent of the basket from LIC and 46 per cent of the basket from UTI (by value) were Larsen & Toubro shares, bought for a total Rs 270 million on 3 August. BoB Fiscal sold these shares two days later for Rs 300 million to V.B. Desai & Co., a firm of share-brokers who did a lot of work for Reliance. Later in August, BoB Fiscal repeated the same exercise with the General Insurance Corporation (GIC), taking delivery of Larsen & Toubro shares for some Rs 141 million, about 55 per cent of the basket from GIC. These were also sold to V.B. Desai & Co. two months later. The brokers then transferred the two lots of shares, amounting to 8 per cent of Larsen & Toubro’s equity to the Reliance offshoot Trishna Investments. Reliance suddenly emerged in October as the biggest non-institutional shareholder in the blue-chip firm.

  Meanwhile, the Company Law Board, not until then the most vigorous regulator of corporate misdemeanours, had been activated by a minor scandal in the Larsen & Toubro management over the use of a company-owned apartment. The financial institutions agreed that it was time for a new broom. On 11 October 1988 Mukesh Ambani and the Reliance director M.L. Bhakta joined the Larsen & Toubro board by invitation. Dhirubhai proclaimed the new alliance ‘a merger of the professional skills of Larsen & Toubro and the entrepreneurial skills of Reliance’. It meant greater risk-taking ability for Larsen & Toubro, he told journalists.

  Reliance continued to buy Larsen & Toubro shares in the market, helped by a share price that had fallen on news of their effective takeover. It had built up a stake of about 20 per cent by early in 1989, when Dhirubhai was invited in as chairman and Anil Ambani also appointed to the board.

  Just what Dhirubhai had in mind about greater ‘risk-taking’ came soon afterwards. In March 1989 Larsen & Toubro raised Rs 800 million for ‘working capital’ in a convertible debenture issue, then put Rs 760 million into Reliance shares to cement the relationship. It was paying over 12 per cent interest to the debenture holders and earning about 2.5 per cent in dividends on the shares.

  In September 1989 Dhirubhai announced some other measures to tighten the alliance. Larsen & Toubro’s shipping division would acquire two new ethylene carriers, which could be used to deliver feedstocks to the Reliance Petrochemicals plants at Hazira. And Larsen & Toubro would be given the job of building the new Rs 5.1 billion natural gas cracker that would eventually give an in-house supply of ethylene and other feedstocks.

  The downside was that Larsen & Toubro itself would be financing the order it had just won. It would raise Rs 8.2 billion (Rs 9.43 billion with retained oversubscriptions) through a ‘mega issue’ of debentures. Out of this, Rs 6.35 billion would be given to Reliance as ‘supplier’s credit’ for the natural gas cracker that Larsen & Toubro would build for Dhirubhai’s company at Hazira.

  Dhirubhai explained that the deal with Reliance would give the engineering firm access to gas-cracking technology that it could apply to projects all round the world. Around this time, Dbirubhai was also talking up some grand infrastructure projects in which Larsen & Toubro could take a lead: an undersea tunnel linking crowded inner Bombay with the open land across its wide harbour; a long dam across the Gulf of Cambay gradually collecting fresh water behind it; a superhighway linking Bombay, Delhi and Agra. It was time for Larsen & Toubro to think big.

  As he was with Reliance. In December 1988 Dhirubhai announced he was applying for permission to build an oil refinery with a capacity to produce 6 million tonnes a year at Bharuch in Gujarat. Until then, oil refining had been reserve
d for government-owned or -controlled companies. His chances of approval were slim (and his application was turned down six months later), but Dhirubhai declared that, sooner or later, New Delhi would realise that it could not finance all of India’s burgeoning refining needs. Other diversifying projects put up around this time included sponge-iron, power generation, television tubes and pharmaceuticals, none of which made much progress.

  But bankers and accountants looked at the potential downside. The supplier’s credit would be given to Reliance at 15 per cent interest, a margin of 2.5 percentage points above the rate Larsen & Toubro would be paying investors. But this was a puny return on funds that could be used to expand Larsen & Toubro itself. And the amount of supplier’s credit, to one company and one project, was equivalent to some 55 per cent of Larsen & Toubro’s total assets. It was a massive exposure for the company to a single risk.

  Gurumurthy cried ‘plunder’ in the Indian Express, as the Ambani takeover progressed. The helpfulness of Dhirubhai’s friends in the financial institutions, notably the chairman of the Unit Trust of India, Manohar Pherwani, was noted. Gurumurthy recalled that the chairman of the Bank of Baroda, Premjit Singh, had also helped Reliance out in the past by providing $25 million in loans for overseas Indians to subscribe to its F Series debentures in 1985. An enterprising and evidently plausible reporter on the Express, Maneck Davar, made a trip to southern Gujarat, where he found the sons and daughter-in-law of the bank chairman running a polyester yarn texturising company set up in October 1986. It took partially oriented yarn from the Reliance plant at Patalganga, then sent the crimped yarn back to Reliance, earning an estimated profit of Rs 5.5 million a year. Davar inquired whether he too could send yarn for texturising: he was told the firm worked only for Reliance. No one in the government wanted to know.

  • • •

  Dhirubhai had meanwhile moved further up in his scale of living. In November 1988 the entire Ambani clan had moved away from Usha Kiran, the Altamount Road building where he and his brothers owned flats. The new family home was a seventeen-storey apartment building named ‘Sea Wind’ off Cuffe Parade in Colaba, close to the business heart of Bombay. An Ambani company had bought the building in its entirety, and the family spread out through its upper floors. The first five floors were devoted to car parking, the sixth and seventh to a gymnasium and swimming pool, and several other floors to guest rooms.

  Dhirubhai was also on the way to satisfying an urge to counter the Indian Express in print and perhaps to attain the indefinable status of the media baron. He had talked for some years of getting into the media business and already had a successful advertising agency, Mudra Communications, which was ranked fifth in India by annual advertising billings. This helped to pressure editors, as we have seen, but Dhirubhai wanted an editorial voice of his own.

  He had looked at several newspapers that came on the market and had earlier bought a controlling interest in the pro-Congress newspaper, the Patriot, which had made vitriolic attacks on Nusli Wadia in response to the Express campaigns. At the end of 1988 his son-in-law Raj Salgaocar bought the Bombay weekly newspaper Commerce. Financially ailing, it had passed through five owners in recent years, including Kapal Mehra of Orkay Silk Mills, but had a useful business and economic research bureau. Prompted by Salgaocar and Anil Ambani, Dhirubhai agreed to transform Commerce into a mainstream daily business newspaper, to be modelled on London’s Financial Times. As editor he hired Prem Shankar Jha, a former editor of The Hindu, son of a former foreign secretary and government economist and himself a noted writer in the academic world on India’s political economy. Jha hired nearly sixty of India’s best journalists, paying salaries that set a new benchmark for Indian newspapers. But partly due to a foul-up in ordering printing equipment, the new Observer of Business and Politics was not to launch until December 1989 when, as we shall see, it was already too late to turn the political tide, even if Dhirubhai’s hired pens had been able.

  His problems with the law were being pushed aside. The director of the CBI, Mohan Katre, had not been keen on investigating the allegations raised by the Indian Express. Early in 1987 the anti- corruption agency’s additional director, Radhakrishna Nair, had recommended prosecution over the backdating of the letters of credit for the PTA imports in May 1985, but Katre had effectively sent the file on a bureaucratic wild goose chase by referring it to the Finance Secretary S. Venkitaramanan, who in turn referred it to the Ministry of Law and Justice. On 25 November 1988 the junior Finance minister, Eduardo Faleiro, told parliament that the CBI’s report had been examined ‘in consultation with the RBI and no further action is contemplated for the matter’.

  In 1987 Katre had been a prominent guest in the VIP box at the World Series cricket tournament, sponsored that year by Reliance. The venue for the New Delhi games was a stadium at a convenient walking distance from the office complex housing India’s security and intelligence agencies.

  Nair volunteered for early retirement in 1988.

  By launching a High Court action, Reliance had stalled the 1985 show-cause action started by the Assistant Collector at Kalyan for alleged evasion of Rs 270 million in excise on its polyester yarn production. There was still the show-cause notice issued in February 1987 over the alleged smuggling of its Rs 1.14 billion worth of yarn equipment and evasion of Rs 1.2 billion in duty. Reliance had tried to get the Bombay High Court and the Customs, Excise and Gold (Control) Appellate Tribunal to quash this notice also, but without success. It was due for hearing in April 1988 before the Bombay Collector of Customs, Sukumar Mukhopadyay, who was regarded as an upright official immune to political and other pressures. The scheduled hearing on 25 April had to be called off when Mukhopadyay was summoned to New Delhi for a meeting of western India collectors of customs, convened with little notice by the junior Finance minister in charge of revenue, Ajit Panja. The hearing was relisted for 5 May. On 4 May Mukhopadyay was transferred to a new position and the case postponed again.

  The new Bombay Collector, K. Viswanathan, took his time to familiarise himself with the case. Nearly eight months later, on 31 January 1989, he announced his decision to drop the smuggling charges against Reliance. ‘There is no direct evidence, documentary or otherwise, of undervaluation,’ he ruled. ‘… the charge of undervaluation is based on a capacity which is founded purely on theoretical calculations and calculating them by misreading the relevant data of the documents of contract … Reliance Industries Ltd had not exceeded their licensed or the designed capacity and the capacity of the plant imported by them is neither in excess of the contract nor is the import contrary to the import licence.’

  • • •

  The battle with Nusli Wadia’s Bombay Dyeing had moved upstream in the petroleum product chain from PTA and DMT to their common ingredient, paraxylene. Once again with funds to spare, Reliance was getting its long-delayed PTA plant into operation during 1988 and achieved commercial production late in the year. The PTA plant, as we have seen, included its own paraxylene-producing unit, which used napththa as feed stock. Bombay Dyeing’s DMT plant continued to use paraxylene, which it needed to import for lack of domestic supply.

  In March 1988 the government raised the customs duty on paraxylene from 85 per cent to 120 per cent, even though world market price for the feedstock had recently moved up from around $400 a tonne to $685. At this stage, Reliance was still using imported PTA on which duty had been cut ten months earlier. Bombay Dyeing was the only Indian importer of paraxylene and now received a double hit from the world price and the duty hike.

  Reliance also received another benefit for its Patalganga paraxylene plant. In July 1988 the Finance Ministry granted it the status of a refinery, ahead of some twenty other napththa-based industries also seeking the same ruling, including National Peroxide, associated with Bombay Dyeing. The status meant that Reliance could get its napththa from domestic refineries at the concessional price of Rs 30 000 a tonne instead of Rs 100 000. The decision had been opposed by two members of the Ce
ntral Board of Excise and Customs, B.R. Reddy and Jyotirmoy Datta, who pointed to the massive subsidy it implied through loss of excise, but they were overruled.

  On 1 March 1989 the government cut the duty back to 90 per cent, but transferred paraxylene imports from the open general list to the ‘canalised’ category with the government-owned Indian Petrochemicals Ltd as the importing agency. In effect, this meant that Bombay Dyeing’s independent sourcing of the vital feedstock was throttled back. The official in charge of petrochemicals called a meeting of paraxylene users, including Bombay Dyeing and Reliance, to ask whether there were any surplus supplies. A week or so later Reliance notified the government that it had about 40 000 tonnes to spare and that there was no need for imports.

  If this indicated that Reliance indeed had greater capacity at Patalganga than authorised, the excess was quickly legitimised: in March the ‘minimum economic size’ for PTA plants under the industrial licensing system was raised from 100 000 tonnes a year to 150 000 tonnes and in June to 200 000 tonnes. The minimum size for DMT units remained at 60 000 tonnes.

  Wadia remonstrated with the government over the next three months, taking his complaint to the Cabinet Secretary, B.D. Deshmukh. Reliance had effectively taken over the profitable paraxylene business from the government’s own Bharat Refineries, using its napththa. Meanwhile Indian Petrochemicals was keeping Bombay Dyeing on a hand-to-mouth supply line for its paraxylene; the company ran out of the vital feedstock twice in this period. Reliance was asking the equivalent of the landed cost of imports, about Rs 28 000 a tonne, for its surplus. Bombay Dyeing estimated that its cost of manufacture was between Rs 10 000 and 11 000 a tonne. With domestic excise and sales tax a combined 19 per cent, this suggested a profit of Rs 11 400 to 12 400 a tonne. Wadia argued that paraxylene should be made available to all DMT and PTA producers at the same price, as set by the Bureau of Industrial Costs and Prices. This would be about Rs 7000 a tonne lower than the Reliance price.