Mahabharata in Polyester

by McDonald, Hamish

  The results for 1993–94 showed that Reliance had edged past the Tata Iron and Steel Co., founded in the first decade of the century, to become India’s largest private-sector company measured by annual sales, operating profit, net profit, net worth and assets. Its 2.4 million shareholders were the most widely spread equity base of any industrial company in the world.

  But even as it was coming back into a single image, Reliance was creating new windows on the screen. In the main picture was the gas cracker at Hazira, consuming much of the parent company’s financial resources. It was running years behind schedule (it eventually came on stream in the 1996–97 year, some three years late), but this had been due to eighteen months of delays in getting the final licence issued after the November 1988 letter of intent from the government. Then it had been decided in 1992 to expand its capacity to 750 000 tonnes a year of ethylene (from 400 000 tonnes).

  Because of this burden, any other new projects would have to be started off the Reliance books. In 1992 Reliance came out with two new subsidiaries. Two of its associated investment companies had been transformed into Reliance Polypropylene Ltd and Reliance Polyethylene Ltd to build new plants making those products within the Hazira complex. The need for separate companies was explained by the equity involvement of the Japanese trading house Itochu (the former C. Itoh & Co.), which was to contribute $50 million for a 15 per cent stake in each firm, making it the biggest investment planned by a Japanese firm in India at that point. The issue of equity shares and optionally fully convertible debentures in November 1992 was wildly oversubscribed: the share issues by around a hundred times in each case and the debentures by three to four times. All in all, about 10.5 million investors offered Rs 34.43 billion. Dhirubhai was able to keep Rs 3.25 billion for each company, and the rest was a loan at 15 per cent interest until it was refunded by mid-March 1993.

  Even before they were born, the Reliance ‘twins’ – as the two new companies were dubbed – were the cause of controversy. SEBI had noted that their shares were being ramped on the Mumbai Stock Exchange and insisted that the prospectuses carried the warning: ‘The current market price of the shares is not a true indication of the actual worth of the shares as the current market price is only as a result of circular and thin trading among a smaller number of interested parties.’ But SEBI found that this had occurred before it issued its new stockmarket regulations. The problem was shuffled over to the Bombay exchange, which identified the brokers involved but did not press penalties. The ‘twins’ later became problem children.

  The secret was revealed – but then only to a few Mumbai insiders – in a leaked investigation by the Deputy Commissioner of Income Tax in Bombay, G.S. Singh, in 1994. In his report Piercing the Corporate Veil, the tax official found that during the 1992–93 financial year, thirty-seven small investment companies controlled by Reliance had received nearly Rs 600 million from Reliance via Reliance Capital to buy rights attached to partially paid shares the affiliates owned in the twins. Each of the original shares in the twins had rights to no fewer than forty new shares attached. The group companies had acquired the shares in the twins mostly in May 1992, at Rs 17.50 a share, soon after they were renamed on 19 May 1992. The rights could be exercised in the public issue at the end of 1992. The cut-off date for owning the rights, announced in the issue documents later in the year, was 6 June. It was a nicely timed investment by the thirty-seven group companies. Reliance had later paid the companies Rs 39 for each right; that is, for a Rs 17.50 investment, the companies had received Rs 1560. An investment of Rs 644.6 million in the twins’ partly paid shares shows up in the Reliance accounts on 31 March 1993, accounting for the rights purchase plus fees to Reliance Capital. Those looking for insider trading before the twins’ merger two years later had missed this earlier example of funds being taken out of Reliance.

  • • •

  Dhirubhai had also begun setting up a new company to carry out his biggest dream, building a full-scale oil refinery. In 1992 he had gained clearance from the Foreign Investment Promotion Board attached to the Prime Minister’s office for Itochu to take 26 per cent of the refinery’s output of 9 million tonnes a year. In August 1993 he announced that Reliance Petroleum would make its inaugural capital raising through an even more complex issue called a triple option partially convertible debenture. Subscribers were offered debentures with a face value of Rs 60. Of this, Rs 20 was to be converted into equity shares at par, one on allotment and one after eighteen months. The Rs 40 balance, non-convertible, would be paid back, doubled, in three annual instalments from the sixth year (equivalent to an effective 14.35 per cent annual interest). Two attached warrants for shares could be sold on the market, or exercised for Ps 20 each. Alternatively, investors could get their money back on the Rs 40 non-convertible portion after forty-six to forty-eight months and receive two shares from the warrants at Rs 20 each.

  If Dhirubhai had previously made the non-convertible convertible, the new issue was surpassing. Investors would get equity shares immediately in a business that did not yet exist and which was years away from earnings and would have non-convertible debentures that would not earn any returns until the sixth year. It was extremely cheap money until then, almost free.

  But when put to the market in November 1993, it raised the targeted Rs 21.72 billion from institutional investors and the public, and was oversubscribed three times. Reliance itself put in Rs 5.773 billion, taking the total proceeds to Rs 27.493 billion, or close to $1 billion at that time. Itochu was no longer in the picture and not mentioned in the prospectus. The absence was not really explained. Together with another partly convertible debenture issue to Indian institutions along with overseas suppliers’ credits, lease finance and some overseas borrowings, the issue was to fund the refinery’s cost of Rs 51.42 billion by its planned completion in three years time; that is, late 1996. Dhirubhai now had 2.6 million shareholders in Reliance Petroleum as members of his ‘family’.

  Almost immediately, the project met delays on the ground, as disputes were reported with landowners on the site at Moti Khadvi, about 25 kilometres outside Jamnagar on the west side of the Saurashtra peninsula. Court actions were to continue until May 1996 when the company established its hold over 2240 acres. But by the time Dhirubhai arrived on 23 January 1995 for the bhumi puja, or ritual groundbreaking prayers, which involved the breaking of a coconut and the chanting of Vedic scriptures by a Hindu pundit, the size of the refinery had expanded in his plans to 15 million tonnes a year. There would also be another petrochemicals complex alongside it, making 1.4 million tonnes a year of paraxylene and other downstream products, and a third PTA plant of 350 000 tonnes.

  The cost of the refinery was now put at Rs 86.94 billion and the petrochemicals works were another Rs 45 billion. However, the completion date had slipped two years, to late 1998 or 1999, which would be just before the returns on the non-convertible part of the debentures were due. Would Reliance Petroleum then disappear back into the parent company, many investors wondered, in another many-for-one share swap? Would there be more delays and more expansions?

  The new investors, especially the foreign portfolio funds, had by then learnt that Dhirubhai was capable of constant surprises. Reliance was moving in so many directions simultaneously that it was hard to put the whole sum together. Probably only Dhirubhai, his two sons and a few others had the whole equation in their heads.

  The cachet with the new foreign investment funds had been turned into cheap finance raised in London, Luxembourg and New York. Despite the mayhem in the Bombay capital markets in May 1992, Reliance had then been the first Indian company to float Global Depository Receipts (GDRs), a convertible bond priced in US dollars but initially priced in a linkage with the Reliance share price in India. It had been a Herculean effort of share price support against the background of the securities scam and, once the issue closed on 18 May, Reliance had to offload the shares it had bought on the market on to the books of friendly Indian institutions, mutual
funds and merchant banks which had been persuaded that helping India’s first GDR issue was a patriotic duty. Within two months the GDRs were trading at a 25 per cent discount to the issue price.

  When India’s financial image recovered the next year Reliance was back with a $140 million Euro-convertible bond issue in November 1993 managed by Morgan Stanley, whose investment guru Barton Biggs rated Reliance scrip one of the best buys in Asia. Many other investment advisers then saw Reliance, the most liquid security in the sharemarket, as a ‘surrogate’ for the entire Indian market.

  Anil Ambani, the more outgoing of the two sons, became the public face of Reliance in the numerous ‘roadshows’ held in world investment centres from then on. In February 1994 the company made the biggest GDR issue yet, of $300 million, after some delays in permission from the Ministry of Finance, which had noted that the proceeds of the previous Euro-issues had not yet been completely used for the designated purpose and that Reliance seemed to have money to play the share market.

  The foreign enthusiasm was dashed considerably at the end of 1994, however, when Reliance carried out two manoeuvres that many investors felt had broken important assurances. On 22 October Reliance announced it was placing 24.5 million shares with Indian financial institutions to raise a total Rs 9.43 billion to fund its oilfield developments. It emerged that the Unit Trust of India had put in Rs 7.73 billion, the rest coming from the Life Insurance Corporation and the General Insurance Corporation A five-year ‘lock-in’ applied, meaning that the institutions could not sell the stock for that time.

  Just over two weeks later, Reliance announced that it was merging the ‘twins’ Reliance Polypropylene and Reliance Polyethylene into itself, in a share swap set by two accountancy firms that seemed quite generous to the shareholders of the two subsidiaries, which were still a year away from production. Foreign investment fund managers were livid. Early in October Reliance had presented its first-half results to market analysts in Hong Kong. The Reliance financial manager, Alok Agarwal, had been repeatedly asked whether the company had any plans to raise equity capital in the near future. Agarwal and other company executives had left everyone with the impression that there were no plans to do so. Now within a month, Reliance had made two moves that involved the issue of about 99 million new Reliance shares, expanding the share base by more than 30 per cent.

  The foreign funds had by then lifted their combined shareholdings to 13 per cent of previous total equity on the expectation of very strong growth in earnings per share, a widely used yardstick of the profitability of a share. Their analysis was now way out of touch. Profits would be spread over a much greater number of shares, so earnings per share would be much lower. To complaints that Reliance had given no hint of such a ‘dilution’ of equity the company rather lamely said it had not specifically ruled it out.

  Some fund managers in Bombay threatened a revolt, telling Reliance they would vote their shares against the merger at the extraordinary general meeting called to approve it on 6 December 1994. They produced evidence of heavy buying of shares in the twins before the announcement. For those in the know about the swap ratio, it would have been either a cheap entry into Reliance itself or a chance for some insider-trading profits.

  One investor that was not complaining, oddly enough, was the Unit Trust of India. It was not clear whether its top officials had been told of the twins’ impending merger, even though it was announced only two weeks after the private placement and had an immediate and unfavourable impact on the Reliance share price. If the merger plan had not been foreshadowed, UTI might have been able to argue that a material event had not been disclosed and to seek redress for its unit-holders. If it had been told, the performance of its managers was open to question.

  No one was arguing with the logic of consolidating the twins into the parent company at some stage. It added sales, assets and profits while eliminating the sales tax that would apply to transactions between separate companies. But this should have happened closer to the time the twins’ plants came on stream.

  The investment bankers did not ostracise Reliance for very long. The angry fund managers in Bombay were called by their head offices in Hong Kong and London and told not to make a fuss at the 6 December shareholders meeting. There were still some fat fees to be earned from managing new capital issues and borrowings. Reliance had burnt bridges with many equity investors in Europe. But there was still the debt market and the whole new world of the American debt and equity markets to tap into, which it proceeded to do.

  The retreat of the Indian Government from its monopolising of many infrastructure sectors had also opened up numerous opportunities. Dhirubhai had often used the old-fashioned adage ‘Stick to your knitting’ to keep his executives looking at associated activity (his first industrial activity had actually been the knitting machines at Naroda). The sons were keen to try something new. If tenders were won, that’s where Reliance would go.

  Many projects were proposed by the mid-1990s, including a software technology park near Hyderabad, a small transport aircraft with Hindustan Aeronautics Ltd in Bangalore, diamond mining with South Africa’s De Beers Corporation in Madhya Pradesh, and a tollway from Mumbai to Pune. The firmest steps, however, were in power and telecommunications. Reliance gained approvals for three mid-size power plants in Patalganga, Jamnagar and Delhi. It also won the licence to operate a basic telephone service in Gujarat, in partnership with the American utility Nynex, called Reliance Telecom, for a licence fee of Rs 33.96 billion payable over fifteen years. The only competitor would be the cash-strapped and trade union-bound government telephone service and two private cellular services. In addition, Reliance Telecom won licences to run cellular services in the states of Madhya Pradesh, Orissa, Bihar, West Bengal, Assam and Himachal Pradesh and in the north-eastern hill states for modest total licence fees of Rs 3.37 billion over ten years. The telephone licences covered nearly a third of India’s population but (aside from Gujarat) were in some of its poorest regions.

  In addition, Dhirubhai also appeared to be gearing up for more corporate power-play. Over the course of 1995–96 (to March), the Reliance shareholding in Larsen & Toubro jumped from 5.96 per cent to 8.73 per cent, while its holding in the cash-cow Bombay and Suburban Electric Supply Co. moved up slightly to above 6 per cent. The neglected subsidiary Reliance Capital and Finance Trust was also charged up with sizeable capital through rights issues and private placements and renamed simply Reliance Capital, under Anand Jain.

  • • •

  Around the end of 1993 most of Dhirubhai’s old Aden colleagues remaining in service were eased into retirement. Mukesh and Anil felt these men no longer had the drive necessary to push Reliance’s huge expansion forward. Some were a little bitter that they could not stay on. The Gujarati flavour of the company was further diluted by the recruitment of more managers and technical staff from other parts of India. The family also formalised a split of assets that saw Dhirubhai’s two brothers Ramnikbhai and Nathubhai give up their remaining executive roles in Reliance and concentrate on their own personal businesses outside. Although both remained on the board, it was made clear that their children were not in the line of succession to run the company – although the two sons of Dhirubhai’s nephew and close associate, Rasikbhai Meswani, who had died in 1985, were taken on as executive directors once they finished their education.

  The reorganisation was an effort to prevent two of the failings that had hit many other Indian companies once they passed from the control of the founding entrepreneur who typically ran them as personal fiefdoms: mixing personal and corporate finances, and delegating little authority to managers. When such empires passed to two or more pampered sons, frictions are almost inevitable, and usually the only solution is a split of assets and businesses. In some cases this was relatively amicable, as with the children and grandchildren of G.D. Birla. In others it was bitter, as with the Modi brothers and cousins, and required intervention by banks and financial institutions that had inv
estments or loans with the group. The result has been a plethora of groups holding the same family name, distinguished by the initials of the particular owner, who tends to continue the pattern of personalised leadership.

  In a diverse conglomerate like the original Birla or Modi groups, a split can be beneficial. In a highly integrated company like Reliance it was potentially disastrous. To all appearances, as Dhirubhai aged, his succession planning looked free of immediate trouble. The two sons had never shown any sign of dispute or dissatisfaction with their positions at Reliance. The older son Mukesh’s elevation to vice-chairman, after Ramnikbhai Ambani, Dhirubhai’s older brother, stepped down as joint managing director, seemed to indicate general acceptance that he would take charge eventually. As Dhirubhai slowed down in his sixties and attended the office for a shorter working day, Mukesh assumed more and more of the major decisions, although Dhirubhai retained the ultimate say.

  Reserved and deceptively mild in appearance, Mukesh was regarded as highly determined and even ruthless by acquaintances, as well as being a talented engineer and manager. Anil appeared content as the public image-maker of Reliance, talking to the press and investors.

  The question mark was whether between them the two sons would show all the attributes of Dhirubhai, especially his genius for forging personal relationships at all levels and, perhaps, his boldness of vision. This concern was addressed by an attempt to showcase the widening range of professional skills in the company’s expanding workforce.