Mahabharata in Polyester

by McDonald, Hamish

  But the Ambanis seemed caught in a dilemma. Formalising the company’s process of deciding new policies and strategies or taking running decisions could rob it of its ability to move fast and grab opportunities. Reliance could end up like the slow-moving, committee-driven corporate bureaucracies it often derided.8

  As Dhirubhai moved closer to realising his dream of an integrated petroleum empire and of handing on a modern corporation, however, events took a turn that made Bombay wonder whether the Ambanis and Reliance had changed at all in essence from the buccaneering days of the early 1980s. Suppressed scandals came to the surface, including a dispute that seemed to question Dhirubhai’s most often professed loyalty: to the millions of shareholders in his ‘Reliance family’ who had put their savings into the security of Reliance shares.

  16

  Housekeeping secrets

  On 29 November 1995 Mumbai’s Bombay Stock Exchange faced perhaps the biggest challenge to its existence in its scandal- and crisis-ridden 120 years. A letter arrived that day from Reliance Industries, signed by a junior executive on behalf of its board. Recalling that Reliance had been first listed on the Exchange in November 1977, the letter said: ‘We regret to state that we are constrained to terminate the said listing.’ The six-page letter went on to blast the Exchange for singling out Reliance for ‘biased and prejudiced action’ and accused some of its board members of being part of a cartel of ‘bears’ that had been hammering down the company’s share price, to the detriment of its millions of investors. It was now moving to the new National Stock Exchange (NSE), a computerised rival set up by the government as an alternative to the score of unruly, often casino-like city exchanges.

  Reliance at that time had a weighting of about 10 per cent in the Bombay Exchange’s most commonly used index of price movements, the thirty-share Sensitive Index or Sensex. The most liquid of the 6500 listed stocks, it typically accounted for almost 30 per cent of the daily trading volumes. Dealing in Reliance shares was bread and butter for Bombay’s brokers. The company and its founder Dhirubhai had been credited for much of the explosion in share ownership among the Indian public since the 1970s. Now Dhirubhai was taking his bat and ball and moving to another pitch. If Reliance were allowed to move, Mumbai’s exchange suddenly faced obsolescence.

  But whatever the jitters among its broker members, Dhirubhai was wrong if he thought the Exchange’s executive board would be quickly cowed. Its president, Kamal Kabra, immediately likened Reliance to a ‘fugitive from justice’ fleeing to another jurisdiction.

  At issue was whether Reliance had knowingly issued more than one copy of each share and deliberately mixed up records of share ownership. If such suspicions were true, it meant that Reliance had been giving worthless paper to investors, or giving them shares owned by someone else. It could be fraud. It would threaten the most basic trust underpinning India’s capital markets.

  The controversy exposed the secret workings of Dhirubhai’s system for retaining control of Reliance and at the same time generating massive cash flows. Devised and operated by market professionals, it was exposed accidentally by market amateurs.

  • • •

  Since his stroke in February 1986 Dhirubhai had been careful to keep up his exercise and worked hard to bring back full dexterity to his right side. He employed a well-qualified young physiotherapist, Rajul Vasa, who soon became a regular visitor to the Ambani household first at Usha Kiran, then Sea Wind. As well as paying her normal fees, Dhirubhai rewarded Vasa with allocations of Reliance shares.

  In January 1994 Rajul and her husband decided to cash some of their paper wealth and and sold 26 650 Reliance shares through a broker. Then, in April, the Vasas wrote to the Reliance share registry, Reliance Consultancy Services (RCS), notifying the loss of certificates for 33 809 shares – including the ones they had earlier sold. They got new certificates and sold these shares to Merrill Lynch.

  The broker in the original sale found his transfer rejected by RCS and filed a complaint with the exchange. In September 1995 the exchange began recovery of the money. Reliance was represented by Anand Jain: strangely, he offered to settle the outstanding claim immediately, putting down a pay order for Rs 10.8 million, on condition that the investigation and penalty action be halted. The Exchange’s board met and considered the action. On the face of it the persons at fault were Rajul Vasa and her husband. So why should Reliance step in?

  The board decided that money was not enough. On 16 October the Exchange sent a show-cause notice to Reliance. Neither Reliance nor RCS had raised any queries with the Vasas or told the buyer, a company called Opera Investments, about the issue of duplicates for the shares it had presented. It had not filed any complaint with the police, or told the Exchange of any steps to enforce an indemnity given by the Vasas when they applied for the duplicates or, ‘despite the obvious fraud’, started any legal proceedings. Reliance was thus guilty of gross negligence, if not an accomplice.

  • • •

  Almost at the same time, another time-bomb blew up. One of the financial houses deeply involved in the 1992 securities trading scandal had been a fast-growing and politically well-connected firm called Fairgrowth Financial Services Ltd. It was caught up in a mass of claims before the special court set up to handle the scam cases, presided over by Justice S.N. Variava. It had bought 1.5 million Reliance shares in February 1992. When they were presented to RCS the registry asked Fairgrowth to withdraw the transfer and promised to sell the shares in the market for Fairgrowth. It was the last Fairgrowth saw of the shares or its money.

  In October 1995 Fairgrowth asked Justice Variava to compel Reliance and RCS to tell it where the shares went. News of the two cases, Fairgrowth and Rajul Vasa, became the talk of the markets. Rumours that duplicate shares were in circulation caused a sharp fall in the price of Reliance shares in Mumbai and of its GDRs in London.

  Reliance read a plot into the cast of characters ranged against it. Two of the most vocally critical Bombay Stock Exchange directors were M.G. Damani and Rajendra Bhantia. Damani was an old Exchange bear. Bhantia was a friend of Nusli Wadia and had been connected to Fairgrowth previously. The Fairgrowth lawyer, Mahesh Jethmalani, son and legal partner of Ram Jethmalani, had defended Wadia in the Fairfax affair and appeared against Reliance in the court battles of the 1980s. The old fighting instincts were roused. It wrote to SEBI chairman D.R. Mehta, claiming that the Vasa case was being blown up by an old bear cartel.

  The Bombay Exchange continued to hold firm. After another combative meeting with Reliance representatives on 14 November, its board decided on a three-day suspension of trading in its shares, starting on 16 November. The news was in the next morning’s paper before the formal notice arrived at Reliance late in the afternoon, too late to take out a High Court restraining order before the suspension came into effect. Dhirubhai had to endure the humiliation.

  On the day the suspension started, the special scam court dealt a second blow. Justice Variava froze the transfer of the shares sought by Fairgrowth and demanded that Reliance tell him where they now were ‘even if you have to place thirty people on the job for twenty-four hours’. The exchange declared the 1.5 million shares bad delivery.

  Then the Unit Trust of India announced that it had bought a lot of 2.4 million Reliance shares in December 1991 and sent them for transfer to RCS. They had discovered in early 1995, after queries by tax inspectors, that the share certificates sent back by RCS in their name covered shares with different distinctive numbers. Out of them, they now found that 870 000 came from the batch of 1.5 million sold to Fairgrowth and declared frozen by the court.

  Reliance quickly explained that ‘certain investors’ had delivered the original lot of shares to UTI, then taken them back and replaced them with different shares. As the sellers were the same and the shares equal in all respects, RCS had processed the transfer and given UTI the second batch of shares. It was a highly unsatisfactory explanation. UTI had not been consulted and was left with 870 000 shares –
perhaps more – on which Fairgrowth was asserting a lien. Had RCS been as casual about ownership in other cases? Who were these operators who could withdraw shares from the registry after selling them?

  The market was reeling under the shocks to its confidence. Then Reliance upped the stakes by listing on the NSE and applying to delist from the Mumbai Exchange.

  Once the Mumbai Exchange made it clear that it would refuse permission to delist, on the grounds that Reliance was hardly a defunct or bankrupted company with no remaining activity in its shares, the ball was in the court of the government, which could overrule the Exchange. After initially welcoming Reliance’s interest in its new baby, the NSE, the Ministry of Finance had woken up to the implications of exchange president Kamal Kabra’s ‘fugitive from justice’ remark. SEBI chairman D.R. Mehta was called in by the Finance Secretary, Montek Singh Ahluwalia, and asked to seek a compromise.

  Over the following days, delegations of venerable stockmarket leaders called on the warring parties, pouring wise words on the aggravated feelings of the Ambanis on one hand and the Exchange’s young bloods on the other. Both sides were looking for a way for Reliance to back off. It was found in a letter from the Exchange on 4 December, rejecting the request to delist and asking Reliance to withdraw it. The company did so, claiming it had made its point.

  It was a climbdown. Reliance was soon back on the defensive. The UTI angle to the Fairgrowth affair had opened up a whole new avenue of investigation for regulators, the press and members of parliament. UTI said it had learnt that the sellers of the 2.4 million shares had been Reliance group companies, and press inquiries found that some of the switched shares were still with small investment companies run by the Reliance company secretary Vinod Ambani; Amitabh Jhunjhunwala, the chief executive of Reliance Capital, also being involved.

  The switched shares had now been replaced by a third lot sent over to UTI by RCS. Why? Was it an attempt to get the scam-tainted shares out of circulation? Could they be duplicates also? Could the 1.5 million shares sold to Fairgrowth be the same lot of 1.5 million that, according to the reports on the 1992 scam, were bought and sold in a repo deal worth Rs 600 million that involved Citibank, ANZ Grindlays and the brokers Hiten Dalal and Harshad Mehta in mid-April 1992?

  Then there was the mysterious Raju Vasa case. The original buyer of her shares, Opera Investments, turned out to be another Reliance front company. Its broker, V.K. Jain, was a brother of Reliance Capital’s Anand Jain and had been active in the Larsen & Toubro proxy battle. What was behind this strange affair in which all parties to the transactions seemed to be linked?

  Mukesh Ambani had been in New Delhi meeting MPs and assuring them that share-switching was common practice. He explained that liquidity and tax minimisation were the reasons behind the switch. Reliance had two groups of satellite companies. One group was investment companies with large lots of shares who never sold. If they did sell, the capital gains tax would be huge. But they lent them to share-trading companies in the second group who used them for initial liquidity in deals. Later the trading firms would replace them with newly acquired shares on which the capital gains would be slight.

  The Ministry of Finance had asked UTI to check its experiences with twenty other big companies. It had found the share-switching practice not to be common at all. The Bharatiya Janata Party finance spokesman Jaswant Singh also produced two examples of Reliance shares, sold in 1989 by the Syndicate Bank, where shares of the same distinctive numbers appeared in two certificates. Mukesh’s explanation was not wholly convincing.

  On 20 December the Finance minister, Manmohan Singh, ordered a joint inquiry by the Securities and Exchange Board and the Department of Company Affairs, which had overlapping jurisdiction in applying company law. Singh asked all financial institutions to verify that their share portfolios did not contain switched or fake shares. The Income Tax Department would also continue inquiries it had started in 1992 into the tax evasion aspects of the scam.

  SEBI had already started inquiries on its own initiative and gave an interim report in mid-January 1996. According to this report, the seven custodians of shares for India’s investment institutions held between them 138.9 million Reliance shares, about 30 per cent of the company’s paid-up capital. Out of these, 6.73 million had been switched; that is, the share certificates received back from RCS after transfers bore different distinctive numbers or transferor’s names from those lodged. RCS itself found some more shares held directly, taking the total of switched shares to 7.03 million (4.7 million with UTI). Except for a very few shares, all the switches had taken place between March and October 1992. None had been detected by the custodians. Those of the original shares not transferred remained with the original owners, who were ‘trade associates’ of Reliance.

  The Securities Board investigators had found RCS less than helpful. According to their letter sent to the RCS chief executive in March 1996, the registry had given two differing versions of the UTI share switch to the board in December and hence neither could be trusted. RCS had reported corruption of its database and a loss of audit trail because of a conversion of computer systems, but ‘the fact that corruption of data is predominant in select folios of the parties involved in switching makes the explanation of RCS untenable’, the Securities Board letter said. The records were a shambles, in effect, and much of them in the switching cases seemed to have been faked.

  But perhaps the best insight into the Reliance back-shop operations came from the report Piercing the Corporate Veil, by G.S. Singh, whose officials had been looking at the Reliance front companies since June 1994. The taxmen had found 206 companies run by the Reliance company secretary Vinod Ambani from a Reliance office in Nariman Point. During 1991–92 Reliance had paid Rs 313 million to these companies in various fees, enabling Reliance to reduce its tax liability and the companies to settle their own losses or to make investments in Reliance shares and debentures in order to maintain management control.

  The tax officers focused on one of the 206 front companies, Avshesh Mercantile Ltd, to give a detailed picture of share market activities. Their account supported the explanation given by Mukesh Ambani to the MPs. They traced a sale of Reliance shares to UTI, this time a lot of 3 million sold on 22 May 1992 – four days after the first GDR issue closed – by thirteen group companies known as Group A. On that day none of the thirteen firms owned any Reliance shares. The shares delivered to UTI had been ‘borrowed’ from fourteen other group companies, known as Group B. When UTI sent them for transfer, the shares were switched for shares bought from Dhyan Investment and Trading, then a wholly owned subsidiary of Reliance Capital, and the originals returned to Group B.

  Mahendra Doshi, the broker in the sale, said he had dealt with Anand Jain and Manoj Modi of Reliance Capital for the delivery of the shares. He knew nothing about the sellers; Jain had told him the company names to which contract notes and bills were to be issued. The shares had been handed over by another Reliance Capital executive, Tushar Sarda, and the proceeds handed to him. Six months earlier, Doshi had carried out a similar sale to UTI of 2.2 million shares. Jain had initially denied knowledge of the thirteen Group A companies, then admitted to being involved in the sale.

  According to correspondence produced by RCS, the fourteen Group B companies had requested the registry to inform them of any transfers lodged by third parties for their shares, because the shares were placed from time to time as collateral, on condition that they not be transferred in the name of the creditor unless approved by them. The tax inspectors said this was not supported by evidence, and the letters were found to be fabricated. The sales were real and the income from them should be taxed. The swapping of shares was a systematic evasion of capital gains tax, by substituting the newly bought shares of Group A for the older and more cheaply acquired holdings of Group B. Not a single case of switching for sellers outside the group was found.

  The tax-reduction explanation made some sense, but did not fit with everything that Relianc
e was saying. It had pointed out that the switching had been confined to the period March–October 1992, yet Mukesh Ambani had said it was a common practice. If it had made good tax sense in 1992 and had been legal, why not continue it?

  Some business analysts tended to believe that the share-switching occurred as a part of the cover-up of Dhirubhai’s close involvement with brokers in the 1992 scam. They speculated that shares handled by such brokers as Harshad Mehta and Hiten Dalal were hurriedly dumped on friendly institutions such as UTI and the Canara Bank funds as the scam broke in April 1992. Others veered to an explanation put up by twenty-seven MPs in parliament, alleging systematic pledging of duplicates of shares owned by the Ambanis and other management investors, which would be switched if they were ever sent for ownership transfer in the company-controlled registry and would never be in marketable lots. One former fund manager, admittedly no friend of Reliance, recalled a case in 1989 where a bank sold him shares pledged by Reliance. The company raised hell with the bank to get the shares taken back and exchanged for others.1

  • • •

  As the bedraggled Narasimha Rao government, hit by scandals over havala trades and telephone licences, neared the end of its five-year term, some other controversies came back to haunt Dhirubhai and Reliance.

  In January 1996, the government filed an appeal in the Supreme Court against the ruling by the Customs, Excise and Gold (Control) Appellate Tribunal that had upheld the controversial 1989 decision of the former Mumbai Collector of Customs, K. Viswanathan, to drop the charges of evading duty on the ‘smuggled’ polyester yarn plant at Patalganga. Later that month, a team of CBI officials flew to Bombay and suddenly revived the case against Dhirubhai and others of back-dating the letters of credit for the PTA imports in May 1985.