The Polyester Prince (20 page)

Thanks to the help of Finance Minister Mukhedec, Reliance looked like having 100 per cent of India’s PTA production, and 34 per cent of the country’s combined DMT and PTA output. Its control of other feedstocks, by-products and end-products in the polyester chain ranged from 38.6 per cent up to 62.5 per cent, according to Gurumurthy. India’s anti-monopoly law defined a dominant undertaking as one with more than 24 per cent of national installed capacity, but none of Reliance’s applications had been referred to the Monopolies and Restrictive Trade Practices Commission.

Raising the example of the pre-World War 11 industrial, trading and banking combines in Japan called the zaibatsu, Gurumurthy warned that India too risked having its government ‘controlled from the boardrooms of industry’.

Powerful as the critique was, Gurumurthy was working up to then from published knowledge. On 15 May 1986, he began reporting from the results of his own investigations, in a three - part series entitled ‘Reliance Loan Mcia’-mela meaning a fair or bazaar, and ‘loan mela’ referring to the notorious practice of Congress politicians handing out loans from government to their constituents in carnival-like ceremonies. The Reliance loan mcia was not a case of giving a few hundred rupees to a poor family to buy a buffalo or irrigation pump, said Gurumurthy. ‘It has to do with crores of rupees smuggled from banks in an ingenious and brazen scheme to divert public funds to private ends.’

It began with the Rs 843 million E series of debentures (in October 1984) and the Rs 2.7

billion F series issue (in June 1985). After each issue, the main branches of the big Indian banks received requests for loans from numerous small unknown companies, pledging Reliance shares and debentures as security. In June 1985, for example, the Punjab National Bank had received nine near-identical requests from nine small companies with names like Patience Holdings & Trading and Inspirations Investments & Trading for Rs 9

million each, with each offering to pledge 90 000 Reliance shares as security.

Gurumurthy’s investigations found that the registered addresses of such companies were often those of Reliance offices, its associates or employees. Many put up Reliance shares as collateral, in some cases the same debentures for which they were seeking the loan to buy. In some instances, the loan was facilitated by a personal guarantee from Nathubhai Ambani, Dhirubhai’s younger brother. The Ambani family investment vehicle Mac Investments had been lent Rs 6.64 million in October 1984 by the European Asian Bank-the same bank that had lent to three of the Isle of Man companies through its Colombo branch in 1982. The same day Mac’s subsidiary Real Investments also got the same amount from the same bank. Around that time another Mac subsidiary, P@am Investment & Trading Co got Rs 5 million from Bank Indo-Suez and another subsidiary, Nikhil Investment, got Rs 5 million from the Bank of Credit and Commerce International.

A few banks (among them Punjab National Bank and the State Bank of India) had turned down the applications. Most did not: the article listed 16 banks as giving a total Rs 1.018 billion in loans, among them many of the state-owned banks. In some cases, middle managers of government banks had ignored specific board directives and authorised loans on specious ground of urgency. Some had been rewarded with promotions. None of the banks had obtained the Reserve Bank of India’s clearance for loans above Rs 500 000 against shares, as required by central bank guidelines. And to enhance security of loans, the borrowers had also been able to get Reliance to deposit large amounts of the public subscriptions to the debenture issues with the lending banks-a way of recycling the public’s money back to the management.

‘This entire operation,’ said Gurumurthy, ‘taking in dozens of companies holding what are essentially the management share – holdings of Reliance, was a planned affair, tied up intimately with the Ambanis and Reliance, for the purpose of cornering more than Rs 100 crore [one billion] to invest in the two Reliance debenture issues.’

The operation was known to the Reserve Bank, whose inspectors had noted that ‘the possibility of a common link in the management of these companies with Reliance Industries cannot be ruled out’. As the stockmarket boomed in 1985, the central bank had sent a circular to commercial banks urging caution in lending against shares, and to see that bank advances were not used for ‘speculative or other anti-social purposes’. It told banks that ‘the main point of emphasis is that in granting advances against shares, banks should be more concerned with what the advances are for, rather than what the advances are against’.

Gurumurthy asked what point there could be in, say, Mac Investments borrowing Rs 1.5 million from Canara Bank at 18 per cent interest to buy debentures carrying 13.5 per cent interest. The borrower must have known that the capital appreclation of the Reliance shares obtained from conversion of the nonconvertible portion of the debentures, would yield a profit of some 400 per cent. The Ambani management would also have consolidated its hold on Reliance by borrowing to buy its own company’s shares – expressly forbidden by the Reserve Bank. Reliance had already started talks with the Ministry of Finance to have the E and F series fully converted. The company’s shares had already started booming in expectation. ‘If this is not speculation then what is?’, asked Gurumurthy.

The accountant-turned-journalist also took aim at another carefully nurtured Reliance claim: that it did not rely on funding from government banks but on direct borrowings and investment from the public. This had been a condition put by the government on the licences for the new PTA plant and other units in 1984, so as not to ‘strain’ the resources of the banks. Among others, the industry minister, Narain Dutt Tiwari, had recently praised Reliance for raising Rs 3.5 billion on. its own. ‘Mat would all these gentlemen have said had they known that more than Rs 1 billion of this actually came from banks in one of the most elaborate tricks played on the system? Or is it just possible that some in authority actually knew and chose to turn a blind eye to the facts?’

Gurumurthy had not done so well in his overseas inquiries. The lawyers and private eyes engaged in London were laboriously searching company records in tax havens to trace ownership of the non-resident investors in Reliance, but results were slow in coming. A letter from the London contacts on 16 April enclosed a fresh report from King’s Investigation Bureau with the comment that it was ‘very feeble’.

King’s had been asked to look into nearly 120 companies ostensibly owned by non-resident Indians which had invested either directly into Reliance shares, as in the 1982 case, or by subscription to the Reliance E and F series debentures. Possibly with the help of concerned banking officials, Gurumurthy had also obtained lists of
NRI
companies which had borrowed from the Bank of Oman and certain other banks to buy into the Reliance issues.

The nationalised Bank of Baroda had played a big role in financing the issue. Mostly from its London office, the government bank had advanced a total US$33.5 million to
NRI
companies and individuals, apparently nominated by Reliance, to help them to subscribe to the F series debentures. This was about 40 per cent of the Rs 1.08 billion investment made by
NRI
sources. The loans had similar terms: two percentage points over the London interbank rate or 10 per cent a year, while the return from interest was 11 per cent after tax. The investors were clearly after the capital gain from eventual conversion to equity.

The detectives had exhaustive searches made on the names in the Channel Islands as well as the Isle of Man, but most turned up negative. In the Isle of Man they found that 10 of the 11 controversial companies from 1982 had undergone a sudden change of ownership and directors in August 1985. The two most provocative names had also been changed to something more innocuous: Crocodile Investments had become Asian Multi - Growth Investments, and Fiasco Investments had become Asian Investments. In the case of the 11 th corn any, Tricot Investments, 1 p it was not possible to establish non-resident Indian ownership at all.

With the 10 companies, the various Shahs and Damanis of Leicester, Berlin, Djibouti and New York had suddenly transferred their 55 to 80 per cent sharcholdings in August 1985 to newly formed holding companies in the British Virgin Islands with names matching those of the Isle of Man companies they now owned. Inquiries in Leicester found the Shahs had not received any noticeable jump in their wealth from the sale of control over equity, by then worth over Rs 1 billion or US$80 million. Indeed, family members professed the same degree of ignorance as they had in 1983. By then, Krishna Kant Shah-Dhirubhai’s. old Junagadh schoolmate-was too ill to meet anyone (and died in May 1986).

The New York investors, Praful and Nalini Shah, turned out to be a middle-class young couple mostly living off Praful’s average-size salary as clerk in a city law firm. They had bought their modest home in the suburbs for US$49 000 with a $34 000 mortgage and drove an 11-year-old Dodge. They had not apparently come into any recent wealth either, but any connection they had with Dhirubhai was not discovered.

As of August 1984, the British Virgin Islands had had a company code designed for the discreet investor. Called the International Business Companies Ordinance, it allowed companies to issue shares to an unnamed bearer who was allowed to vote at company meetings. Companies could issue non-voting shares, so that technically an NRI could own 60 per cent of the capital to comply with the Indian rules but have no voting rights at all. And it could have faceless shareholders through trusts, corporate bodies and the like.

Directors and shareholders could even participate in meetings by telephone.

Including these companies, Gururnurthy’s inquiries found that a total of 32 companies registered in the Isle of Man or the Channel Islands had subscribed a total Rs 141 million to the F series debentures. The 10 British Virgin Islands companies had subscribed Rs 50

million. And some 41 companies in the United Arab Emirates had been lent an average Rs 1 million each by the Bank of Baroda to subscribe.

Out of the new names in the British tax havens, the searches found that new directors had been appointed over August and September 1985, just after the F series issue. Many had an Indian resident of Dubai, Homi Ratan Colah, as their new director wielding majority control. Others had people of Indian names listed as residents of Nigeria.

The Dubai companies had some fanciful names taken from various ancient Sanskrit scriptures: 10 from the Vigneshwara Ashtotra, and 12 from the Sandhya Mantra. Several others took names from the avatars of Lord Shiva and other divinities. Reliance’s Middle East ‘co-ordinator’ and Dhirubhai’s old colleague from Besse & Co in Aden, Bharat Kumar Shah, subscribed Rs 35 million in the names of himself and his family, and in the first week of September 1985 had sent a list of borrowers including himself to the Bank of Oman.

Through a firm of Panamanian lawyers with an office in London, the investigators had also done a search in Panama on more than 100 company names matching those on the list of Reliance investors. They found some of the names, 0 registered on the same day in July 1985. Listed among company officers were two members of an Indian firm of chartered accountants in Dubai which had done work for Reliance. But the London investigators reported back to Bombay that their local agents had not been able to get information out of the Panama lawyers who had incorporated the companies. ‘Our agents have been advised that this is a most delicate matter, and should not be pursued further,’ they said.

It was unsatisfactory—and tantalising, given that the trail seemed to lead through the tax havens and corporate hideouts of the globe back towards Bombay. The leads in Panama and Dubai were not enough to build a story on. But it was enough for Gurumurthy to resume the chase abandoned by the Indian press in January 1984-when, he claimed, the Ananda Bazar Patrika group had been warned off by the withdrawal of all Reliance advertising.

In a four-part article published over 11-14 June-under the heading ‘Reliance, crocodiles & fiascos-he went through the story of the Isle of Man companies once again, emphasising the series of coincidences that pointed to a single manipulator close to the action in Bombay. Given the secrecy rules applying in the British Virgin Islands, how was the Reserve Bank of India to verify that the companies had 60 per cent control by non-resident Indians, as required by the Indian rules? Had the central bank even been informed of the changed control in 1985?

Gurumurthy also highlighted the way in which changes in the investment rules had been timely for the investments by the Isle of Man companies. Between late March and August 1982, during two bear attacks against Reliance, some 1.872 million shares in the company.-nearly 10 per cent of the then issued capital-had been bought by brokers on behalf of unnamed
NRI
investors.

The investment rules had been relaxed first on 14 April 1982, just after the first bear attack, to give repatriation rights to NRIs and extend investment freedom to companies, partnerships and trusts with 60 per cent
NRI
ownership. Then on 20 August, just after the second attack, the rules were further relaxed to remove the Rs 1 00 000 (face value) ceiling for any one
NRI
investor. Instead, each
NRI
investor could hold up to one per cent of the paid-up capital of the company. Instead of having to distribute the 1.872 million Rs 10 shares among 187 owners, the requirement was now just 10 separate shareholders. Only on 9 August 1982, Gurumurthy pointed out, had the various Shahs and Damanis acquired their 60 per cent-plus control of the 1 0 Isle of Man companies.

The amendments to the investment rules had clearly been ‘tailor-made’.

In Gurumurthy’s 12 articles over three months, the Indian Express had fired a devastating broadside at some of Dhirubhai’s weakest defences.

It had been an expensive lesson for having got on the wrong side of the old Marwari newspaper baron sitting at the top of Express Towers.