Mahabharata in Polyester

by McDonald, Hamish

  • • •

  Meanwhile, the initial optimism about Reliance’s prospects under the Chandrashekhar government had been dissipating as Chandrashekhar showed little urgency in reversing the policy changes made by V.P. Singh.

  Dhirubhai’s friends had begun to move back into positions of economic and financial control. The former Finance Secretary, S. Venkitaramanan, was made Governor of the Reserve Bank of India, replacing R.N. Malhotra, as a matter of priority. Several accounts say that Dhirubhai’s lobbying was decisive. In November 1990, even before Chandrashekhar was sworn in, Dhirubhai had told one diplomatic visitor: ‘Mr Malhotra will be replaced shortly and the new RBI governor will be Mr S. Venkitaramanan.’ Dhirubhai indicated that it was his recommendation.8

  In March 1991 Venkitaramanan had in turn appointed the former Unit Trust of India chairman, Manohar Pherwani, as chairman and managing director of the central bank’s housing refinance subsidiary, the National Housing Bank.

  But Larsen & Toubro had remained outside Dhirubhai’s control, even though in January a junior minister assisting Chandrashekhar, Kamal Murarka, had observed that Larsen & Toubro was ‘Ambani’s company’. Reliance was holding back its new debenture issues because it saw a weak reception in the market, although ostensibly delays in approvals were cited. With cost overruns in the Reliance Petrochemicals plant at Hazira, let alone the future gas cracker, it still badly needed the supplier’s credit. To rub in the loss, Larsen & Toubro’s chairman, D.N. Ghosh, had started the new year by writing to Dhirubhai pointing out that Reliance was late in paying Rs 1 billion on bills for work done by Larsen & Toubro. Mukesh Ambani lamely replied nearly a month later, claiming that Larsen & Toubro itself was behind schedule in some work.

  On 15 February Ghosh had resigned at the request of the government. But the resulting uproar in the newspapers – Gurumurthy wrote under the headline ‘L & T under hijack again’ – had caused the financial institutions to delay a board meeting to appoint a successor. Before Reliance could overcome this hesitation, the government had fallen and the appointment had come under the rules banning a caretaker administration from making major appointments. The plum had stayed just out of reach.

  Chandrashekhar and his ministers had been proving unruly clients in any case. The Reliance political lobbyists in New Delhi faced constant demands for cash to keep the government’s small band of MPs from defecting again. As the minority government became shakier in February the scramble for funds became even more desperate. Eventually, the Reliance political team were getting almost daily demands for large bundles of cash from Chandrashekhar’s office and his key political managers such as the Law minister, Subramaniam Swamy. The dependence on one capitalist was a particular irony in the case of Chandrashekhar: as one of the ‘socialist’ Young Turks in the Congress Party of the late 1960s, he had led the attacks on the industrial licences awarded to the Birlas that had caused the 1969 Hazare inquiry.

  While the economy slowed down, the politicians fanned out for an election held, unusually, in the hottest months of the year. The results from the first of three days of voting on 20 May showed that Rajiv Gandhi would not have achieved the same comeback as his mother had done in 1980. Congress would have slid back even further from the 1989 result of 192 seats, to perhaps 160 seats out of 544 in parliament’s lower house. It would still have been the biggest party, and Rajiv would have tried to govern with the support of smaller parties while an enhanced BJP waited to topple him.

  But that was not to be. On 21 May 1991, as Rajiv campaigned in Tamil Nadu for the next round of voting, he was killed by a suicide bomber sent by the Tamil Tiger separatists in Sri Lanka. His assassination created a sympathy wave in the later stages that gave Congress an increased tally of 226 seats. Rajiv left a well-planned strategy for economic reform that applied the measures advocated since 1990.

  Whether Rajiv might also have changed his business friends yet again is something that will never be known. The Bofors scandal was still very much alive, and he would have spent his second term keeping a lid on it. But a tantalising indication that he might have changed his view of Dhirubhai comes from an account of a meeting between Rajiv and Nusli Wadia in early May 1991, about three weeks before Rajiv’s death.

  Wadia had a call from Rajiv early in the week, asking for a meeting. Wadia was busy preparing for an important business trip overseas the following Saturday, but Rajiv insisted. So, after completing his work, Wadia flew up to Delhi on the Friday evening, arriving at Rajiv’s heavily guarded bungalow on Janpath about 11pm. It was their first meeting since the Fairfax affair, and both men were edgy.

  Rajiv opened up by complaining about the Indian Express sniping, which continued against him. Wadia exploded. This was nothing compared to what Gurumurthy and he had suffered: arrest, harassment by the bureaucracy, constant inspections, his passport and visa problems, and finally the murder conspiracy. Wadia asked Rajiv why he had refused to see him when the forged Fairfax letters were announced. Rajiv said he was not aware of any approach. Wadia said he must have known. It was general knowledge that Rajiv’s secretary, V. George, to whom he had spoken, always took in requests for meetings for Rajiv to tick or cross off.

  Rajiv explained that once the Thakkar–Natarajan inquiry was appointed he was committed to a course of action. He also reminded Wadia about the ‘detective’ asking questions in Switzerland. Wadia pointed out that this was part of the whole forgery plan. Did Rajiv appreciate, he asked, that his panicky decision based on the forgeries – this one avoidable thing – had started the whole confrontation that ultimately brought the downfall of his government?

  The conversation went on past midnight. Refreshments, coffee, soft drinks and sweets were sent in as the two men talked on into the small hours. Wadia must have abandoned plans to find a hotel room. Finally the napping aides in the hallway heard a flurry of voices. It was about 5.30am, and the first light was coming through the tall neem trees and bougainvillea vines in the garden. Rajiv and Wadia came out into the portico and stood waiting while Wadia’s driver was roused. Before Wadia turned to get into his car, he and Rajiv shook hands. It was evident that they parted as friends once again.

  Wadia went straight to the airport and took an early morning flight back to Bombay. That evening he flew out of Bombay to Europe. He was still abroad three weeks later when he heard that Rajiv had been assassinated.

  15

  Under the reforms

  After the shock of Rajiv Gandhi’s murder, the Congress Party chose an elder as its new leader. P.V. Narasimha Rao had been in the top circles of power for much of a long career in politics. He had handled the Ministries of Home Affairs and External Affairs with great skill under Indira and Rajiv, and his intelligence and erudition (in nine Asian and European languages) were undoubted. But after an undistinguished stint as Chief Minister in his home state of Andhra Pradesh, he had been judged lacking in the charisma needed for the prime ministership. In 1991 he was already 70 and was preparing to retire from parliament when the party installed him as a stopgap chief.

  But those who expected an early leadership fight within Congress or an early return to the polls had reckoned without Narasimha Rao’s rejuvenated taste for power or his gift for intrigue, which was Kautilya (the third-century BC Indian ‘Machiavelli’) applied in a modern setting. From his minority starting point in parliament, Narasimha Rao steadily built up a Congress majority by attracting defectors from opposition parties and managed to serve out his full five-year term.

  For the first two years at least, Narasimha Rao provided the political umbrella under which the long-delayed economic reforms could be introduced. India in 1991 and 1992 illustrated perfectly the adage that ‘bad times make good policies’. To carry them out, Narasimha Rao installed as Finance minister the career government economist Manmohan Singh, who had reached the bureaucratic pinnacles of the ministry as Finance Secretary and then central bank Governor in the 1980s. The Cambridge-educated Singh had spent much of his earlier career he
lping to construct the edifice of government-planned investment. But then a spell making a comparative study of the world’s less-developed economies for the South Commission, a body representing many developing nations, had crystallised doubts and begun a Pauline conversion in him towards market-based allocation of resources. Singh was soon backed by the elevation of Montek Singh Ahluwalia (the economist who wrote the 1990 reform paper) as Finance Secretary. The two Sikhs, almost invariably in austere grey-blue turbans, became the public face of reform.

  Within a few days of the government taking office at the end of June 1991, Singh devalued the rupee by 20 per cent to encourage prompt repatriation of export earnings. In the deferred budget for 1991–92 (April–March), delivered at the end of July, he abolished licensing in most industries, raised fertiliser prices to cut subsidies, warned that loss-making government enterprises would not be supported indefinitely and relaxed controls on foreign investment. The second budget, at the end of February 1992 for the 1992–93 year, carried forward the same policies and pointed towards an Indian economy opened to global trade and investment flows by the end of the decade or even sooner. The rupee was made largely convertible on the current account, meaning that its exchange rate was to be set increasingly by the market, and more import items were transferred to the open list. Import tariffs, which had once ranged higher than 300 per cent, were to be no more than 110 per cent and much lower for capital goods. Foreign companies were welcomed into the petroleum sector from the wellhead to the petrol pump. The policing and pricing of new share and debenture issues by the Controller of Capital Issues was abolished, with vetting for fraud taken up by the new Securities and Exchange Board of India (SEBI). Indian companies were permitted to issue convertible securities overseas, such as Eurobonds, and foreign portfolio funds were to be allowed to buy and sell shares directly in Indian markets. ‘We must not remain permanent captives of a fear of the East India Company, as if nothing has changed in the last 300 years,’ Singh declared in his 1992 Budget speech. ‘India as a nation is capable of dealing with foreign investors on its own terms. Indian industry has also come of age and is now ready to enter a phase where it can both compete with foreign investment and also cooperate with it.’

  The first test of how helpful the new government would be to Reliance came less than a month later. On 26 July 1991 the company’s subsidiary Trishna Investments had used its substantial shareholding in Larsen & Toubro – then about 18 per cent even after it had returned the 7 per cent stake acquired through Bank of Baroda Fiscal to quell criticism in 1989 – to requisition an extraordinary general meeting of shareholders a month later. The meeting was to vote on two motions: that Mukesh Ambani be made the company’s managing director and that Dhirubhai be reinducted to the board.

  The prize was another shot at the blue-chip’s cash. The funds from Larsen & Toubro’s 1989 debenture issue had not yet been deployed, because of a court action, then a need to get government clearance for a change from the originally proposed use. Dhirubhai was still desperately short of funding to complete the petrochemical complex at Hazira and move on to the new gas cracker. The financial institutions were frowning on a revival of the supplier’s credit plans, and in May 1991 Dhirubhai had let it be known that he was expanding Reliance’s own new debenture issue from Rs 5.7 billion to Rs 9 billion. But he had still not gone to market with it. Larsen & Toubro was still dangling for the taking.

  ‘With friends in the government,’ commented one newspaper writer, ‘they [the Ambanis] are unlikely to have problems.’1 Others were not so sure. ‘Times are such that no bureaucrat will openly come out or do something which is perceived to be blatantly pro-Ambani,’ noted BusinessIndia.2 Dhirubhai indeed had many friends in the government or in the Congress leader ship, including old Indira or Rajiv loyalists such as R.K. Dhawan and Satish Sharma. But Narasimha Rao was too cautious and in too precarious a political position to give direct favours, and the Finance Ministry now had the strict Manmohan Singh in charge.

  In a drive reminiscent of his old debenture placement campaigns, Dhirubhai began canvassing Larsen & Toubro shareholders to give Trishna their proxies to vote at the meeting. The takeover in 1988 had given Reliance two vital footholds, which the V.P. Singh government had not dislodged. A former assistant company secretary at Reliance had been installed as Larsen & Toubro’s secretary, and Reliance Consultancy Services had been made the company’s share registry in place of a Tata Group firm. It meant that Reliance had no trouble in getting all details of the shareholders. Over the month before the 10.30am meeting on Monday 26 August, about 200 agents for Reliance collected 107 000 proxies. By the weekend before the meeting, Dhirubhai and his team were convinced they had Larsen & Toubro in the bag and were already celebrating. Mukesh had resigned as executive director of Reliance and was ready to take over as vice-chairman and managing director of Larsen & Toubro.

  But the renewed takeover attempt was a trumpet call to the Ambani critics of five years earlier. The Indian Express, Nusli Wadia, influential publisher R.V. Pandit and Ram Jethmalani all made frantic attempts to persuade ministers and officials that it would be improper to let this corporate jewel fall to the Ambanis.

  A new press war broke out, with each side going to the extent of questioning the other’s patriotism. In the Express, R.V. Pandit pointed out that Larsen & Toubro carried out vital defence work, seeming to suggest that the Ambanis could not be trusted with national secrets. Dhirubhai’s Observer of Business and Politics recalled that Wadia was the grandson of Jinnah, founder of Pakistan.

  Until the last minute, the government was disinclined to give any particular instruction to the financial institutions on how to vote their huge shareholdings. Jethmalani had failed to get a court injunction halting the meeting and was to fail again at an application to a judge at his residence on the Sunday morning.

  However, the Ambani critics had been collecting testimony from some Larsen & Toubro shareholders that their names had been taken as proxies by Trishna without their consent. By the end of the last week, they were alleging forgery of proxies on a massive scale. Wadia contacted the then Janata Dal MP George Fernandes on the Saturday afternoon and got him to table a faxed message about the alleged forgeries in parliament just before it adjourned.

  The opponents of the takeover managed to get through several messages to Narasimha Rao’s senior staff, who appeared startled by the warnings that the government could be seen as party to a forgery in a case that might be heading to court. The pressure worked. The Cabinet Secretary came back with the response that the institutions would maintain the status quo at Larsen & Toubro.

  It was then a matter of seeing that the instruction got through to the institutions in time. On Sunday morning calls to the chairman of the Life Insurance Corporation found he knew nothing about the decision. The cabinet office was then prompted, and it assigned an officer to the job in a special ‘control room’ to circulate the decision to the chairmen of the institutions. At 8.30 on the Monday morning, two hours before the meeting, the LIC chairman spoke to Mukesh Ambani and told him as gently as possible that unless the motions were withdrawn the institutions would vote against them.

  Shareholders were already packing into the Birla Matashri Auditorium, close to Churchgate railway station. It was too late to call off the meeting. The Larsen & Toubro directors, including Mukesh and Anil Ambani, appeared on the podium and pandemonium erupted. Unaware of the government’s decision, agitated shareholders rushed the microphones set up in the aisles and fired off volleys of questions and accusations. There was cheering and jeering by rival factions. The directors were shouted down as they tried to speak. Eventually they gave up and retreated behind the back curtain to exit the auditorium through a stage door. A swarm of shareholders surged on to the surrendered stage.

  The shouting continued for half an hour, but it was all over. Dhirubhai had suffered what he later told close confidants was his greatest defeat. The government institutions went on to appoint a seasoned Lar
sen & Toubro executive as the new chairman. A Supreme Court ruling in May 1992 cleared the way for conversion of the 1989 debentures, diluting the Reliance stake down to about 8 per cent, the company’s original entry level. The alleged forgery of proxies was never fully investigated. Police prepared to raid the godown where Reliance had stored the proxy forms, but were called off by the Maharashtra Chief Minister’s office half an hour before they moved in.

  • • •

  Within Reliance, the failure was a sobering lesson that times were changing for Indian business. The government could no longer so obviously play favourites if it wanted to entice foreign investment. The value of licences had gone. Tariffs and excise duties were still high, but the trend would be to lower and uniform rates. Financial markets and institutions would have their transactions and performance scrutinised in public. The ‘level playing field’ was the motto of the times. The transformation had just begun, but this was the way it would be, sooner or later.

  The implications for industries like Reliance was that their production would have to attain world-competitive cost levels by the time the economy was fully opened. His expansionary vision had put Dhirubhai in a good position. Whether by ‘smuggling’ capacity or not, his polyester and petrochemical plants were the largest in the private sector and had the best economies of scale. By getting in early with his petroleum projects, he could keep his capital costs down and be ready for the time when the sector was deregulated and prices were brought down to world market levels.