The Polyester Prince (11 page)

Again, Dhirubhai was primed and ready for the new policy. As Reliance expanded its production in the early 1970s, he had begun looking at taking it public in order to raise capital. In 1973, Dhirubhai and members of the Pai family had floated a company named Mynylon Ltd in Karnataka (the Pai family’s home state). The intentions remain obscure, for Mynylon’s paid - up capital was only Rs 1 000. In July 1975, Dhirubbai took consent of the Karnataka and Bombay High Courts, and carried out an amalgamation whereby the tiny Mynylon took over the assets and liabilities of Reliance, which by that time had assets of some Rs 60 million.

By March 1977, the company had been relocated from Bangalore back to Bombay and its name changed back to Reliance Textile Industries. For a period that roughly coincided with the Emergency-when T A. Pai was a powerful minister-Reliance did not formally exist in name. The manoeuvre later became a widely used case study in tax minimisation.

In October 1977, Reliance had gone public, with a public offer of 2.8 million equity shares of Rs 10 each at par, taken from the holdings of Dhirubhai and his younger brother Nathubhai. With its shareholding thus broadened to meet listing requirements, Reliance was listed on the stock exchanges in Bombay and Ahmedabad in January 1978.

Thereafter Reliance expanded its equity base through frequent rights and bonus issues to shareholders, while financial institutions converted 20 per cent of their loans into equity in September 1979. But it was through the use of convertible debentures that Dhirubhai made his big splash in the capital markets. Indeed, Dhirubhai had anticipated Sen Gupta’s policy with the Series I issue of partially convertible debentures by Reliance in October 1979, raising Rs 70 million.

Reliance was not alone in trying the long disused instrument promoted by Sen Gupta.

The Tata group’s automotive firm Telco raised Rs 230 million with a fully convertible issue in 1980, followed by the Gujarat Narmada Fertiliser Corp with a Rs 430 million issue. But from late 1980 the issues of partially convertible debentures came from Reliance in quick succession, raising Rs 108 million in September from its Series 11 and Rs 240 million from its Series 111 the next year, and Rs 500 n-tillion from Series IV in April 1982.

Dhirubhai capped that by obtaining from Sen Gupta clearance to do what should normally be legally impossible: converting the non-convertible portions of the four debenture issues into equity.

By this method, dubbed a ‘brilliant and unconventional move’ by the magazine ‘The Economic Scene’ in a September 1984 cover story on Dhirubhai-Reliance was able to chop Rs 735 million off its debt book in 1983, and turn it into comparatively modest equity of Rs 103 million, while reserves were raised by Rs 632 million. Instead of an annual interest bill of Rs 96.5 million on debentures, the dividend burden from the extra equity was only around Rs 36 infflion. This transmutation allowed Reliance to continue raising more quasi-debt, with its E Series of partially convertible debentures in October 1984 which raised another Rs 800 million.

Sen Gupta denies that he was unduly permissive to Reliance, or that he ever received any benefits from Dhirubhai such as share allotments. ‘On my first encounter with him I had to say no,’ Sen Gupta recalled. With the third series of debentures, Dhirubhai had put in a request that the holders be entitled to renounce rights attached to their implicit share entitlements. Sen Gupta insisted that the debentures were not shares until converted.

But Reliance was highly persuasive. On another occasion, Sen Gupta rejected the premium that Reliance was seeking to put on an issue, on the ground that projected profitability had not been indicated. Without a pro-forma balance sheet for the current year-an extension of results to date-it could not be accepted.

It was 1 pm that day; Sen Gupta was due to fly that evening to Bombay for a meeting of his seven-member committee on capital issues the next morning. Obviously it would be impossible to have the paperwork ready for this meeting. He told Reliance.

Coming out of the arrivals hall of Bombay Airport at 7 prn, Sen Gupta was met by accountants from Reliance, and handed a copy of the pro-forma balance sheet and results for each of the seven committee members. ‘I had no option but to take up the matter at our meeting,’ Sen Gupta said.

By the end of 1986, Dhirubhai was to raise an unprecedented Rs 9.4 billion from the public over eight years, including Rs 5 billion from one debenture issue alone. ‘In fact this one company, Reliance,’ wrote Sen Gupta, ‘made significant contributions to the growth of the debenture market in the country through its successive issues of convertible debentures, a new experiment in running a big business undertaking entirely on the resources drawn from the public at large without being backed by any multinational, large industrial houses, or without taking termloans from financial institutions on a significant scale.

It was not entirely true that Dhirubhai did not tap the banks, as we shall see, but his heyday in the capital markets did coincide with the rise of what Indian business magazines came to call the, ‘equity cult’-and Dhirubhai can rightly claim some of the credit for it.

Between 1980 and 1985, the number of Indians owning shares increased from less than one million to four million. Among those, the number of shareholders in Reliance rose to more than one million by the end of 1985. It was by far the widest shareholder base of any Indian company – and, until the privatisation of major utilities like British Telecom or Nippon Telephone & Telegraph, probably in the world. It was evidence of a popular following that made many politicians, especially in Guiarat where Dhirubhai had earned local hero status-think twice before denying him anything.

Sen Gupta put the sharemarket craze down to the entry of three ‘non-traditional’ classes of investors. One was the Indian middle class, who had forgotten about their misadventure in the stockmarket in the Second World War. Another was the expatriate Indian communities, prospering rapidly in Britain, North America and Southeast Asia after their miserable expulsion from East Africa in the 1960s, and augmented by direct migrants qualifying for professional and skilled entry to advanced economics. Since Pranab Mukherjee’s 1982 budget, these ‘non-resident Indians’ or NRIs and their companies had been able to invest directly into Indian equities. The third class was the larger landowning farmers, prosperous after the huge crop-yield increases of the Green Revolution during the 1960s and 1970s, who continued to enjoy tax exemption on their income.

The equity cult spread from nearly 20 major exchanges. The premier bourse was the century-old Bombay Stock Exchange located in Dalal Street, one of the teeming narrow streets of the city’s Old Fort district where brokers, businessmen, accountants and lawyers crammed into tiny offices in old stone buildings with the remnants of charming wooden and wrought-iron balconies.

Although surmounted by a 28-storey office tower of cement, steel and glass, the trading floor in the podium operated until the mid-1990s much as it had done in the 19th century.

Some computer monitors flickered on the periphery but no one expected them to keep up with the frenetic trading done by brawling, shouting, gesticulating ‘jobbers’ in blue jackets, or with the thriving after-hours kerb market where shares were traded informally.

The paperwork was also miles behind the action. Share transactions were recorded on scraps of paper at brokers’ offices, but transfers were not necessarily lodged with company registrars immediately. Settlements came every second Friday, causing a slowdown in trading and sometimes pandemonium when defaults were found. But brokers and traders need not settle even then, if they could afford the upfront margin payments and sometimes exorbitant interest rates on finance for a badia (carry-forward) deal.

Using this prototype futures system, settlement could be deferred for months, often amplifying speculative runs in prices. On occasion, a scrip would pass through 50 buy and sell transactions before being lodged for transfer of ownership. If the signature of the original seller did not pass muster, professional forgers operating in the side lanes of Dalal Street would guarantee an authentic-looking copy.

It was an environment where research was just another word for insider trading, where the key knowledge was finding out which stocks were going to be ramped upwards or driven down by cartels of moneybag brokers and operators.

Though it had thousands of listed companies and a nominal capitalisation similar to that of middle-sized stock markets like Hong Kong or Australia, the Indian sharemarket was not very liquid. Huge blocks of equity in the better companies were locked up by investment institutions or controlling families. Many of the smaller companies hardly traded at all. The ‘floating’ equity in the major companies forming the market indices amounted to a few billion US dollars. Even in the 1990s, a concerted move with a relatively small amount of funds, upwards of US$50 million, could make the market jump or crash.

Investors outside Bombay who could not hang around Dalal Street, browse the issue documents sold off barrows or pavements, or listen to the gossip while snacking on a bhel puri (potato-filled puff-bread) from a nearby stall, had to rely on a network of sub-brokers and agents reporting to the fully-fledged stockbrokers in the big towns. They scanned a new crop of market tipsheets with names like Financial Wizard and Rupee Gains for news of their stocks. In some small towns, investors impatient with their remoteness took trading into their own hands: teachers, shopkeepers and other local professionals would gather after work in public halls to conduct their own trading, settling on the basis of prices in newspapers from the city.

It was a situation made for a populist like Dhirubhai. His ebullience and punctilious nursing of relationships were transferred to a larger stage, using the mass communications techniques learned in marketing the Vimal brand name.

‘The people of Reliance,’ began one typical promotion, on the cover of an annual report.

‘Therein lies our strength. In the skills of the scientists, the technologists. In the commitment of the engineers, the employees. In the dedication of the brokers, the traders and, above all, in the undisputed loyalty of the investors. These, the people of Reliance.

In their growth lies our growth. In their prosperity, our prosperity. For we are a family.

We are all one. We are … Reliance.’

In those years, Dhirubhai and Reliance had a success story to tell. On the technical side, the polyester plant at Patalganga was put up in a fast 18 months, and put into regular production in November 1982. Construction and the debugging of production lines had been supervised by Mukesh Ambani, who had been pulled out of Stanford University immediately on completing his master of business administration degree, and put in charge of the new project. Aged 24 at the outset, with a degree in chemical engineering, Mukesh Ambani won his spurs as an industrial manager at Patalganga.

Reliance made sure that a comment by Du Pont’s then international director, Richard Chinman, that such a plant would have taken 26 months to build in the United States, had wide publicity in India. ‘Reliance Textile Industries, now the fourth largest private sector company in the country, continues to burn up the track with its blistering growth record’, said the magazine India Today in February 1983. ‘Close on the heels of the commissioning of its polyester filament yarn plant at Patalganga in Maharashtra, the company has set its sights on still bigger projects.’

Dhirubhai still demonstrated his uncanny grip on government trade and industrial policy, and their implementation. While the kanalisation’ of imports through the State Trading Corp had been abandoned in April 1981, and polyester filament yarn (
PFY
) and partially-oriented yarn (
POY
) placed on the ‘open general list’ of imports, the right to import the yarn was still confined to so-called actual users. The Customs House in Bombay took the line that these did not include large cotton textile mills – despite the growing demand for cotton-polyester blends-but only the small ‘art silk’ power-looms. Reliance had already organised power-looms as outsources, giving them polyester yarn and taking back their ‘grey’ cloth for finishing and dyeing at Naroda. On 23 November 1982, three weeks after Patalganga went into production, the government put an additional Rs 15 000 a tonne duty on
PFY
and
POY
imports, allowing Reliance to raise its prices and still force India’s small yarn crimpers and power-looms to buy its products.

The policy switch had been telegraphed early in November by a submission made to New Delhi by the Association of Synthetic Fibre Industry that dumping of
PFY
and
POY
by foreign producers under the open general licence channel was causing a curtailment of local production and pile-up of inventories, leading to heavy losses.

The All-India Crimpers’ Association, representing about 150 small processors who texturised
PFY
and
POY
into fibre ready for weaving and knitting, took out a series of anguished newspaper advertisements headlined: ‘Should the country’s texturising industry be allowed to die?’ The crimpers said the case for anti-dumping duty was ‘misleading, distorted and untruthful’. Domestic polyester output had risen 60 per cent in 1981 to 16000 tonnes, and still fell short of demand estimated at 50000 tonnes a year. The rush into
PFY
production by new producers scarcely pointed to a glutted market.

Existing customs duties worked out to a total 650 per cent on landed costs for importers, topped by further excise duty and sales tax on the processed product. Texturised polyester yarn had become more lucrative for smugglers than the traditional gold, wristwatches and electronics-and huge consignments had recently been intercepted, usually misdeclared as some other low-duty goods. Instead a case existed for an immediate duty cut and freedom for anyone to import.

The pleas were ignored. ‘The government has finally declared a deaf car to our cry of anguish,’ said the Crimpers’ Association in an advertisement on 7 December. By its calculation, the effective duty on
PFY
and
POY
had risen to 750 per cent with the addition of the Rs 15 000 a tonne anti-dumping levy.