GAS WARS: CRONY CAPITALISM AND THE AMBANIS
Page 48
As we close this incomplete chronicle of how a single corporate conglomerate led by an oligarch fine-tuned the art of crony capitalism in collusion with particular politicians and pliant bureaucrats, it is important to emphasise that within the same government establishment there are functionaries who have refused to be intimidated and who have against all odds valiantly attempted to uphold the interests of not just the exchequer but the people of India.
EPILOGUE
History has repeatedly shown that a culture of uncontained greed along with uncontrolled markets leads to disasters.…Historically, and all acrossthe globe, predatory forms of capitalism seem to organize themselves, firstand foremost, around the extractive industries that seek to exploit the vast, but exhaustible, natural resources. Water, forests, minerals and oil—they are all being privatized; and not being satisfied, the voices that speak for predatory capitalism seek more.
— Justice B. Sudershan Reddy of the Supreme Court of India on 7 May 2010 in his judgement on the Reliance Industries Limited versus Reliance Natural Resources Limited case
Internally, the history of oil mirrors the evolution of American capitalism...Oil continues in its growth as one of the gigantic industries of the country.Its effective functioning in what has become—at least for the indefinitefuture—a permanent war economy is a vital element of national security.In the United States this entire galaxy derives its origins from the individualright of private ownership of the oil that lies beneath the earth’s surface.Upon this ethic is built one of the most complex collective systems known to modern man.
— Robert Engler, The Politics of Oil: A Study of Private Power and Democratic Directions (New York, Macmillan, 1961)
The reality is that extracting Ugandan crude is most likely to exacerbatepoverty, distort the ... economy, exacerbate human rights violations, entrenchthe power of military forces, escalate tensions across the border with Congo,create new health problems for local communities, increase both intentionalcorruption and revenue mismanagement, reduce Uganda’s wildlife stocksand pollute the land, water and air.
— Mika Minio, Cursed Contracts (Platform, February 2010)
Oil, gas and other hydrocarbons are among the most politicised commodities on the planet we live in, whether these be situated in the US, in Uganda or in India. Like the governments of many other countries, that the government of India should prefer to place corporate interests before consumer interests should not surprise, for that is the way the government of the world’s largest democracy has been functioning for quite some time now. As has been stated in the first chapter of this book, some of the ‘richest’ parts of India and the world also paradoxically happen to be the poorest because their scarce (and hence, very valuable) natural resources have attracted the most corrupt and venal entrepreneurs. The phrase ‘resource curse’ signifies how the presence of natural resources in developing countries, whose economies depend on such minerals or forests, have contributed to corruption, conflict, and the absence of democratic governance. It may be argued that the resource curse has not been present in India in its most acute forms as it has in certain countries in Africa. But what has been truly amazing about the controversies relating to extraction of natural gas from the Krishna-Godavari basin was the brazen manner in which the interests of the largest privately- owned company in India were sought to be equated with ‘national interests’ by the government.
That’s not all. What has been truly scandalous about this episode in the six and a half decades of politically independent India is that ministers in the Union government have exercised their political prerogative to ride roughshod over the recommendations of their own bureaucrats and technical experts to suit corporate interests. The last has surely not been heard about natural gas that is being extracted from under the ocean bed in the Bay of Bengal, below the spectacularly strange swirling waters off the basin of the two largest rivers of southern India, the Krishna and the Godavari. Only time will tell whether, and if, the new elected government of India will act differently from its predecessors. But what cannot be denied is that more people are now aware of the implications of crony capitalism than ever before.
APPENDIX 1
Shourie’s selective memory
by Paranjoy Guha Thakurta
Published by Rediff.com on 11 August 2003
Dhirubhai Ambani was an amazing entrepreneur who aroused extreme responses in people. Either you loved him or you hated him. There was little or nothing in between.
However, there is at least one important individual who had started out disliking the man who had founded the Reliance group of companies, India’s single-largest privately owned corporate conglomerate, before becoming his admirer if not a faithful follower.
He is none other than Arun Shourie, former economist with the World Bank and one-time crusading journalist who is now the high-profile Union Minister for Communications, Information Technology and Divestment in the Atal Bihari Vajpayee government.
One should not expect anybody to speak ill of a departed person on the occasion of his death anniversary. However, Shourie’s explanation for his ‘180 degree turn’ with regard to his acquaintanceship with the late Dhirubhai Ambani seems selective and incomplete.
Before one attempts to unravel a part of what is undoubtedly a complex and convoluted story, let us first go through what Shourie said on a rainy morning in Mumbai in the presence of a galaxy of luminaries from the world of Indian business and politics. The occasion was a function held on July 6 for the delivery of the First Dhirubhai Ambani Memorial Lecture by the President of India A P J Abdul Kalam. (For references to what Minister Shourie said that morning, one would be depending on the full text of his speech reproduced in the Indian Express newspaper on July 8.)
The minister stated that he first learnt about Dhirubhai through the articles of his former colleague S Gurumurthy, Chennai-based chartered accountant and convenor of the Swadeshi Jagran Manch.
(The SJM, an organisation espousing the cause of economic nationalism, is affiliated to the Rashtriya Swyamsevak Sangh, the ideological parent of the ruling Bharatiya Janata Party).
Shourie claimed the point of most of the articles written by Gurumurthy during 1986 and 1987 -- many of which he had co-authored -- “was that Reliance had done something in excess of what it had been permitted to do: that it had set up capacities in excess of what had been licenced, that it was producing in excess of those capacities.”
The minister then stated: “Most would say today that those restrictions and conditions should not have been there in the first place, that they are what held the country back. And that the Dhirubhais are to be thanked, not once but twice over: they set up world class companies and facilities in spite of those regulations and thus laid the foundations for the growth all of us claim credit for today. . .”
Shourie then paraphrased what Austrian economist Freidrich von Hayek, the guru of most believers in free enterprise capitalism, had said: “by exceeding the limits in which those restrictions sought to impound them, they helped create the case for scrapping those regulations”
Before moving on to what Shourie reminisced about his meetings with the late Dhirubhai Ambani, let us briefly examine the minister’s contention about what “most” of the Express articles written by Gurumurthy and him had stated about the Reliance group and the way it was encouraged by the government headed by Indira Gandhi.
In the humble opinion of this correspondent, Shourie and Gurumurthy’s series of articles on the Reliance group contained much, much more about the Ambani family controlled corporate empire and the government of the day than the fact that Reliance group companies had often produced more than their licenced manufacturing capacities.
Besides, even if one does not agree with the thrust and tenor of the laws of the land as they existed at a particular point of time, the fact that a corporate group was accused of violating these laws cannot be denied.
1986 was a crucial year for Dhirubhai. He suffered a stroke in
February that year. A few months later, the Express began publishing a series of articles by Shourie and Gurumurthy, which meticulously detailed a host of ways in which the Indira Gandhi government had gone out of its way to assist the Ambanis.
One article was on the subject of how the Reliance group imported “spare parts”, “components” and “balancing equipment” of textile manufacturing machinery to nearly double its production capacities. The article provocatively claimed the Ambanis had “smuggled” in a plant.
Another story detailed how companies registered in the tax haven, Isle of Man, with ridiculous names like Crocodile Investments, Iota Investments and Fiasco Investments had purchased Reliance shares at one-fifth their market prices.
Curiously, most of these firms were controlled by a clutch of Non-Resident Indians who had the same surname, Shah.
Though the then Finance Minister Pranab Mukherjee had to change a reply he gave in Parliament on the investments made by these firms, an inquiry conducted by the Reserve Bank of India could not find any evidence of wrongdoing.
Yet another article detailed how the group had been the beneficiary of a “loan mela” -- a number of banks had loaned funds to more than 50 firms that had all purchased debentures issued by Reliance Industries.
Vishwanath Pratap Singh was one of the few politicians who took on the Ambanis. In May 1985, as finance minister in Rajiv Gandhi’s government, he suddenly shifted imports of PTA from the OGL (Open General Licence) category. At that juncture, Reliance needed to import this product to manufacture polyester filament yarn.
It was found that the group had “persuaded” a number of banks to open letters of credit that would allow it import almost one full year’s requirement of purified terephthalic acid (PTA) on the eve of the issuance of the government notification changing the category under which PTA could be imported.
It was hardly a coincidence that soon after V P Singh fell out with Rajiv Gandhi, various tax agencies of the Indian government raided the premises of the Express group.
Things got even more difficult for the Ambanis after Singh became Prime Minister in December 1989. In 1990, government-owned financial institutions like the Life Insurance Corporation and the General Insurance Corporation stonewalled attempts by the Reliance group to acquire managerial control over Larsen & Toubro, one of India’s largest construction and engineering companies.
Sensing defeat, the Ambanis resigned from the board of the company after incurring large losses. Dhirubhai, who had become L&T chairman in April 1989, had to quit his post to make way for D N Ghosh, former chairman of the State Bank of India.
The mid-eighties were also a period during which the Reliance group got locked in a bitter turf battle with Bombay Dyeing headed by Nusli Wadia.
The two corporate groups were producing competing products -- Reliance was manufacturing PTA and Bombay Dyeing, di-methyl terephthalate (DMT). Wadia lost the battle and reportedly became the source of information for many of the Express articles against the Ambanis written by Shourie and Gurumurthy.
In 1985, the Mumbai police had accused a general manager in a Reliance group company of conspiring to kill Wadia, a charge that was never established in a court of law.
Eight years later, a newspaper owned by the Ambanis would accuse Wadia of illegally holding two passports and played up the fact that he was Mohammed Ali Jinnah’s grandson.
By this time, Shourie had built his bridges with the Ambanis and the newspaper concerned, the Observer of Business and Politics, would carry a regular column written by Shourie for which he was suitably remunerated.
In May 2002, as Union minister for divestment in the Vajpayee government, Shourie presided over the sale of 26 per cent of the equity capital of the former public sector company, Indian Petrochemicals Corporation Limited (IPCL), to the Reliance group in May this year.
By gaining managerial control over IPCL, the Reliance group has been able to dominate the Indian market for a wide variety of petrochemical products.
Speaking on the occasion of Dhirubhai’s first death anniversary on July 6 this year, Shourie pointed out that Reliance’s bid for IPCL was twice as high as that of its nearest rival, the public sector Indian Oil Corporation and this resulted in “immediate” as well as “huge” gains for both the government and the country.
The minister added that “there had been unbelievable pressures throughout to disqualify Reliance”.
“The position that eventually prevailed within the government was that the Cabinet had earlier settled guidelines for qualifying and disqualifying bidders,” Shourie said.
He stated that the “pressures brought not just this transaction but almost the whole divestment process to a halt.” During this period, Shourie said that he had not been contacted by Dhirubhai “directly or indirectly” even once. “But obviously he (Dhirubhai) was getting to know what was going on -- for which mere journalists like me don’t even know there are places,” the former journalist quipped in his ministerial avatar.
After it was formally announced on May 18, 2002 that Reliance’s bid for IPCL had been successful, Dhirubhai called up Shourie and spoke to him in a voice “choked with emotion.”
“I know what you have been put through. Anyone else would have given up. I will never forget. I don’t care about business. I care about relationships. No one in my family will ever forget,” the late Dhirubhai reportedly said over the phone.
Shourie then said: “Actually, I hadn’t realised that the contest had meant that much to him. I had merely been implementing government policy.”
The minister, in this case, is perhaps being a bit too naïve. Surely he knew that there would not have been “unbelievable” pressures on him -- from various quarters including from with the Union Cabinet -- if so much had not been at stake for the Reliance group.
The Reliance group had been eyeing IPCL, one of the government’s navratnas (or nine jewels), for at least four years. Why? The reason is disarmingly simple.
By being at the helm of affairs at IPCL, the Ambanis are now able to control at least two-thirds of the total Indian market for all kinds of petrochemical products.
More significantly, the Reliance group is able to control between 70 per cent and 90 per cent of the market for specific products such as paraxylene, polypropylene, mono-ethyl glycol (MEG), poly-butadene rubber (PBR), poly-vinyl chloride, di-methyl terphthalate (DMT), low and high density polypropylene (LDPE and HDPE) and so on.
It had been reported in newspapers that the Cabinet was split down the middle on the issue of handing over managerial control of IPCL to Reliance.
It was even claimed that Prime Minister Vajpayee had to personally intervene to break the deadlock and support Shourie’s position. There were also reports of senior officials in the Prime Minister’s Office lobbying in favour of the Ambanis.
The Reliance group bagged the 26 per cent stake in IPCL for Rs 1,491 crore (Rs 14.91 billion) by bidding Rs 231 per share against Rs 128 bid by IOC, Rs 110 by Nirma and an official “reserve” price of Rs 131.
Why did the Ambanis bid as high as they did? This question is relevant since the market price of the IPCL scrip had stood at Rs 92 on April 17, 2002 and had thereafter gone up to Rs 133 on May 15 that year.
Having lost out earlier in its bids to acquire stakes in IBP (formerly Indo-Burma Petroleum) and Videsh Sanchar Nigam Limited (VSNL) to IOC and the Tata group respectively, the Reliance group made no mistakes on this occasion.
The Ambanis made sure their bid for IPCL was unassailable. In order to achieve this goal, the Reliance group was willing to pay a hefty premium on the market price of the share -- so that the group could completely dominate the Indian market for petrochemicals.
The country’s market for petrochemicals is currently growing at roughly 15 per cent per year against an international growth rate of 5 per cent. India is expected to soon become the third largest market for petrochemicals in the world after China and the United States.
There are a few i
mportant questions relating to this episode that remain unanswered. Why did the IOC bid so low for IPCL’s shares?
Did the public sector petroleum behemoth seriously contemplate tying up with the Oil & Natural Gas Corporation (ONGC) to put in a joint bid for IPCL? Why did a contest that was expected to have a photo-finish end up with the Reliance group yards ahead in the race?
As India’s largest petroleum refining and marketing company, the government-owned IOC had lodged a strong protest when it was disallowed by the government from bidding for the shares of its smaller sisters, Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL).
The former IOC Chairman M A Pathan had argued that it would be clearly discriminatory on the part of the government if Reliance was allowed to bid for IPCL while denying IOC the opportunity to bid for HPCL and BPCL.
A monopoly is supposed to be bad, irrespective of whether it is in the private sector or the public sector.
As a matter of fact, many economists would argue that if a monopoly has to exist, it is better that it be controlled by the government (or the representatives of the people) than by private entrepreneurs.
Clearly, such logic did not cut much ice with Vajpayee and Shourie. The divestment minister claimed that a monopoly is not necessarily such a bad thing provided market dominance is not abused.