The Polyester Prince (24 page)

Hershman was about to make a visit to Korea, where the government had retained Fairfax to advise on security for the 1988 Olympics in Seoul. Gurumurthy asked him to extend his trip to India, which he did, arriving in New Delhi early on 15 November and checking into the Oberoi Hotel. Over the three days of his stay, Hershman was introduced by Gurumurthy to Bhure Lal, and reached agreement to work for the Government of India in return for a contingency payment of 20 per cent of any moneys recovered-a reward in line with standard payments to informers by the Enforcement Directorate, though the amounts involved were potentially huge in the Reliance case.

The three subjects for investigation were Du Pont and Chemtex, regarding the supposedly smuggled yarn plant, and the Bank of Credit and Commerce International about the financing of the non-resident investments in Reliance. On the
BCCI
, Hershman started making inquiries in London during a stopover on his way back to Washington, and was soon made to realise he was on dangerous ground. A tough-looking young Sikh knocked on the door of his hotel room, and warned him against asking questions about
BCCI
.

It was not until 21 December that Bhure Lal arrived in New York to get down to work with Hershman, who came to his hotel along with his vice-president at Fairfax, Gordon McKay. On 22 December they went in to see joseph D. Bruno, head of the Criminal Investigation Department in the Internal Revenue Service. Bhure Lal sought from Bruno whatever help could be provided to trap certain well-known operators of the Indian havala trade providing dollars in the United States in return for rupee payments in India-which Bruno agreed would be illegal in the US if they exceeded US$ 10 000 and had not been cleared under American foreign exchange laws. Bhure Lal asked for help on the Dreyfus case, involving the alleged US$3 million cornrnissions on supplies of cooking oil to India’s State Trading Corp over 1982-86. And he followed up on the same lines as Gurumurthy and Wadia in the Reliance puzzles.

Bhure Lal detailed the involvement of the New York legal clerk Praful Shah in the Isle of Man companies, supplying the company names and the amount of dividends and interest on debentures that should have accrued to him from Reliance. This income had not been declared to US tax authorities, Bhure Lal said. Praful Shah did not have the resources for the investments put in his name, and had claimed to he the nominee of Krishna Kant Shah in Britain, who had died in May 1986. But nor was K. K. Shah rich enough, and he had not declared his investments to the UK tax service. The real investor was suspected to be an Indian who siphoned off funds in a clandestine manner and got them recycled through the Shahs, thereby evading payment of taxes in India. Praful Shah re-fused to disclose his source of funds, and Bruno was urged to investigate.

The Indian official then mentioned the role of
BCCI
, through its London operations, in the Isle of Man investments, citing the names of senior
BCCI
executives including Swaleh Naqvi, and a Mr Abidi (probably referring to the BCCI’s founder, Agha Hasan Abed!). The
BCCI
had provided much of the funding to ten of the Isle of Man companies over 1982-83, along with the European Asian Bank in three cases, channelling the loans through the company facilitators in the island tax haven. The loans had been repaid in New York on 14 June 1985 by credits to the two banks. Who had made the payments, and how? Who had stood guarantee against the loans by the two banks?

Along with Gordon Mckay and a lawyer from a Delaware law firm named J. E. Liguori, Bhure Lal went on to the Du Pont headquarters at Wilmington to tackle the chemicals giant. The trio were met by a director, E D. Oyler, and a legal adviser, Geoffrey Gamble, and handed over a sheet of 15 questions about payments for the purchase of plants and technology by Reliance, and a list of 25 offshore companies including many registered in the Isle of Man to see if these had been party to any transactions.

A week later, on 30 December, Gamble called Bhure Lal and handed over Du Pont’s reply to the questionnaire. Bhure Lal was deeply disappointed in the answers, which he felt had flicked the ball on to Chemtex and given Du Pont itself some escape clauses. ‘To the best of our information and belief at this time, the capacities of the plants are as indicated in the contracts which were approved by the Indian Govt,’ the document said. ‘.

. . To the best of our information and belief, no second-hand equipment has been sold directly by Du Pont to Reliance from Canada, the United States or anywhere else.’

Was any other equipment procured by Chemtex?
‘To the best of our information and belief, no.’ Did Reliance pay amounts to Du Pont prior to approval from the Government of India other than from India and were those payments adjusted by Du Pont after receiving money from India after approval?
‘No.’ Did Du Pont have any business relations in India with [25 names of Isle of Man and other investment companies]?-No reply was attached.

Bhure Lal had found most of the people he wanted to meet in Chemtex to be out of town over the Christmas-New Year period. He got through to an assistant legal counsel, who suggested he call the company offices on 2 January, Bhure Lal’s last day in his authorised tour, already extended once. He rang, and found the office closed.

After returning to New Delhi on 3 January 1987, Bhure Lal continued to correspond with Du Pont by telex and letter, with Fairfax acting as his agents in Washington. He reported verbally to Revenue Secretary Vinod Pande, who was busy with budget preparations and did not want to hear details. On 29 January, the Du Pont lawyer Gamble gave five more documents to Mckay. Bhure Lal was again disappointed: the papers concerned agreements made in 1981 for the original polyester yarn plant at Patalganga, not the additions made over the following five years. On 11 February, he wrote again to Gamble with eight further questions.

The enforcer had meanwhile met an executive vice-president of Chemtex, Jullo J. Martincz, who had come out to India around 21 January-to avoid dealing with the Fairfax agents, Bhure Lal suspected. Martinez promised full cooperation, but his reply sent on 2

February failed to satisfy Bhure Lai, who wrote back: As I told to you over phone, I was disapppointed with your inadequate response and cannot help feeling that your letter conceals a distinct unwillingness to come out with correct facts, your assurance of cooperation notwithstanding.’

Bhure Lal enclosed a six-page list of queries about the equipment supplied by Chemtex to Reliance from Du Pont’s Hamm Uentrop Plant in West Germany. He wanted details of payment, copies of documents such as invoices, certificates about the condition of the machinery, and a detailed list of items. How was it, he asked, that the three spinning units originally supplied by Chemtex (for a nominated 10 000 tonnes a year of polyester filament yarn) had resulted in actual production of 18 000 tonnes, when the additional nine units gave only a further 1 5 000 tonnes in installed capacity and 6000 tonnes in actual capacity?

By that stage, government engineers had confirmed the presence at Patalganga of machinery imported without licence. The Ministry of Industry had accepted the Reliance explanation that four of its spinning units had been ‘split’ into eight units ‘to suit layout requirements’ but the Finance Ministry had not been convinced. After further inspections at Patalganga in December, the Customs Directorate issued its show-cause notice on 10

February 1987 charging Reliance with smuggling and under-invoicing plant worth Rs 1.14 billion and evading duty of some Rs 1.2 billion. Who had paid for the smuggled machinery and how?, Bhure Lal wondered. In addition, who had paid Du Pont the royalties due for extra polycondensation capacity and spinning lines which amounted to something between US$6 million and US$12 million?

Du Pont and Chemtex could not be forced to answer, unless Fairfax found some breach of American law in the transactions. But they might find themselves blacklisted in the world’s second most populous country, where levels of textiles and chemicals consumption were extremely low. Indians were quick to take offence at any implied disparagement of their sovereignty by foreign multinationals, and the disaster at the Union Carbide plant in Bhopal, where thousands of Indian residents had been killed or maimed by a toxic gas leak in 1984, had hardly helped the image of American chemical companies.

While the law enforcers were closing in on his foreign transactions, Dhirubhai was under increasing pressure on the home front. The successive accusations in the Express and the mounting load of show-cause notices against Reliance had allowed the bear operators in the Bombay sharemarket to get the upper hand for the first time in several years. Led by the veteran broker Manubhai Maneklal, the bears pushed down the Reliance share price from its peak of nearly Rs 400 towards Rs 200 at several moments during the year.

In spite of the defiant message given in June by Dhirubhai before his assembled shareholders at the Cross Maidan, the company was undergoing its first profit squeeze since it went public in 1977. The ban on conversion of its E and F Series of debentures had swollen its interest bill, and the removal of the anti-dumping duty on polyester yarn and additional duty on
PTA
imports had sharply cut the profit margins on its products.

Dhirubhai desperately needed more cash in the company. An attempt to float a new finance and leasing affiliate, Reliance Capital & Finance Trust Co, at a substantial premium had been rejected by the Controller of Capital Issues. He had proposed that Reliance Capital & - Finance Trust, incorporated in March 1986, he listed at a Rs 25 premium on its Rs 10 shares-a virtually unheard-of privilege for a company with no track record of trading, let alone profits. The issue would have raised Rs 1.25 billion in equity which, given the leasing nature of its business, Dhirubhai would have been able to gear ten times by issuing high-interest debt instruments to the public. The proposed premium was rejected in August, and Reliance Capital was to remain unlisted until April 1990, when its shares were offered at par.

The answer was the Reliance G Series of fully convertible debentures opening on 29

November 1986. In June, the directors had proposed an issue of 20 million debentures of Rs 200 each to existing share and debenture holders. This would bring in Rs 4 billion, and with a 25 per cent retention of any excess subscriptions a total of Rs 5 billion-making it India’s biggest ever issue at that time. Each debenture would he convertible into one Reliance share on 30 June 1987, earning 13.5 per cent interest until then. Within a little more than six months from a successful issue, Reliance would once again transform debt into massive new capital.

By the time the extraordinary general meeting that was needed to approve the issue convened on 28 August, the premium on conversion had been pared down in the light of the less favourable market. The company now proposed an issue of 32 n-dillon debentures at Rs 125 each. Reliance would raise the same total but would have to dilute its share base a lot more. The share - holders accepted Dhirubhai’s forecast of increased profits for 1986. Half a dozen of their fellows criticised the sustained ‘vilification’ of the company among them a former deputy governor of the Reserve Bank of India, R. K.

Hazarl, and one Bharat Shah, identified to reporters as a ‘non-resident investor from West Asia’ but in fact Dhirubhai’s own Middle East Co-ordinator who had figured in the F Series bank loans.3

Dhirubhai could still run a good meeting. But the question was: did the Ambani magic still work in New Delhi and in the market?

The answer to the first part was no: on 27 October the Controller of Capital Issues eventually cleared the issue, but only on condition that each debenture would convert to two shares. In other words, the premium on the basic Rs 10 share had been brought down from Rs 190 to Rs 62.5. Even then, it was going to be a tricky issue to market. Income tax authorities raided sharebrokers in mid-November, causing a brief shutdown at the Bombay exchange, and locking up large volumes of share certificates for inspection.

Several other big issues were also planned for December, in a market where the bears were dominant.

Dhirubhai decided to go in quickly and boldly. At a press conference on 11 November he admitted the polyester market was bad. ‘But as far as Reliance is concerned, there would be no adverse impact on the company’s profitability, which will be higher than last year,’ he said.4 On 19 November, Reliance began another series of bold advertisements in the press across India. ‘What can Reliance give you for Rs 145 that nobody else will?’, it began.

‘… As you probably know, a Rs 10 Reliance share today is worth Rs 225 in the open market. So nobody will sell you a Reliance share for less. Excepting Reliance. That’s what this advertisement is all about. Another profitable opportunity from Reliance. A convertible share issue which offers you not one, but two Reliance shares for an unbelievable price of Rs 145 after conversion …

‘The series went on under the headline ‘What can you say about Reliance if …’ with a different facet of the company picked up in each: that it was the third largest in the private sector, now diversifying into petrochemicals; that in nine years its sales had multiplied nine tirnes, its assets 42 times and its profits 24 times; and so on. Another ad showed a husband and wife wondering whether to buy a new refrigerator or invest in the Reliance bonds. Why not do both?, was the message: take the profit on sale of the shares after conversion and then buy the fridge.

Directed by Dhirubhai, and executed by a dozen leading stockbrokers - chief among them Nimesh Kampani of J. M. Financial & Investment Consultancy Services, and Vallabh Bhansall of Enam Financial Consultants-Reliance had some 15 000 of its retail outlets, wholesalers and suppliers set up as collection centres for subscription forms, some of them formally appointed as sub-brokers. Scooter-rickshaws fitted with loud speakers cruised the streets of Bombay and other cities, spruiking the issue. In Ahmedabad, Reliance had subscription forms scattered from a helicopter over the suburbs. The big American stockbrokers Merrill Lynch were engaged to market the debentures to non-resident Indians worldwide.