The Polyester Prince (25 page)

On 26 November, three days before the issue opened, the Indian Express began a counter-campaign. Under the cross-heading ‘Reliance G series debentures-I’ which promised yet another multi-part criticism, the main headline called the Reliance advertisements A disinformation campaign to sell bonds’. The glib lines were typically enticing to Reliance share and debenture holders. ‘But the Reliance family member-its shareholder-is torn between the tempting promises from Reliance and his own experience of the recent past. He knows that he must think along practical lines, and distinguish the myth &om the reality. He now suspects that the tailor-made situations of the past, in which Reliance jumped the queue with impunity and flourished through its stage management of the goverrunent, are over.’

Just look at the refusal of permission to convert the F series bonds, or the removal of the Rs 15 000 a tonne dumping duty on polyester yarn. The impact of these decisions on Reliance’s finances had not been told to shareholders. The company had gone into disinformation instead. On 27 June 1986, it had claimed that its working results for the first five months of 1986 were better than for the same period a year earlier. Yet the obligatory disclosures in the prospectus for the G Series showed a vastly different picture: profit for the first six months had been Rs 225.6 million as against Rs 630 million for the first half of 1985 and Rs 610 million in January-june 1984. The second half of the year would be even worse. Even the claimed first-half profit was suspect, as the company had counted discounts given to its wholesalers in the form of credit notes as part of sales figures. ‘The days of super profits are over,’ said the Express, ‘and Reliance must behave like any other company standing in the queue. Political clout is no longer a credit.’

An attempt was made to silence the newspaper. Later, on 26 November, one Abdul Rehman Hussein Malkani, who said he and his family owned Reliance shares and debentures worth Rs 4 millon, petitioned the Bombay High Court to restrain the Express from publishing further articles on the G Series issue. Assisted by leading advocates, Malkani claimed the first article contained distorted and incorrect information-the first-half profits given for 1985 and 1984 were actually the full-year figures - causing damage to Reliance and its shareholders. Justice N. K Parekh obliged with an interim injunction.

The Express and its editors immediately applied for a lifting of the gag order. Led by the redoubtable senior advocate Ram Jethmalani-later to enter parliament’s upper house against Congress-the Express undertook to correct immediately any factual errors such as the profit figures (included by oversight), and would publish any refutation of reasonable length given by Reliance within two days of receipt. The articles were justified and fair comment on matters of public importance. Malkani’s counsel argued that the lawsuit was based not on defamation but on the tort of injurious falsehood affecting the property rights of his client-though indeed the Express could hardly claim fair comment based upon incorrect allegations of fact. Reliance, which had joined the case, argued it was a matter of defamation.

On 28 November, Justice Parekh lifted his order. Malkani’s attack on the grounds of injurious falsehood had undercut his case for restraint on publication. 1-lakh said that ‘the public’s right to know the truth is paramount and outhalances the plaintiff’s [Malkani’sl right to protect his property rights.’ Any harm caused by further publication could be righted by monetary compensation, if proven. But the undertakings given by the newspaper provided the opportunity for any wrong to be set right forthwith.

The next morning, the Express resumed its series, adding a correction to its first article without comment or apology. (In fact, the figures were still wrong: the net profit in 1985 had been Rs 713 million.) Reliance’s business success came not from its factories but from its political clout in New Delhi. Its shareholders had come to believe there was nothing the company’s lobbyists could not achieve. The help given by New Delhi had scared away the bears. The reasons for the run-up in the Reliance share price to Rs 393 in June 1986 had been exposed by the Rangarajan report into the loan mela: speculative pressure had been generated by Reliance itself.

The share price was now on its way down to reality. Knowing that the flow, of funds for Reliance’s price support had been cut, stockbrokers close to Reliance had begun to borrow badla (carry - over) fmds even at interest rates over 36 per cent in order to postpone deliveries. The company had tried to give the impression that it was back in favour-by virtue of the approval of the G Series, and a meeting between Dhirubhai and Rajiv Gandhi in October-but these were formalities. The issue was always going to be cleared, to fund the new projects licensed over 1984-85. The price was the real issue.

The Express also pointed to some novel features in the G Series. Unlike those in the earlier issues, the rights of existing shareholders to subscribe could be renounced. This was probably because the management’s front companies, already having to pay back their loan mela borrowings, would be hardpressed to take up their rights. It was curious that the subscriptions reserved for the public would open on 4 December and close on 24

December, but the rights issue would stay open for 45 days. Reliance could thus get the public moneys in, and sell the rights of the front companies later when it would not matter if a drop in the share price resulted. Inevitably, it seemed, the market price of the debentures would tumble.

A separate article in the Express claimed that, while millions of subscription forms were being made available through Vimal textile showrooms and other outlets, copies of the prospectus were in very short supply. Investors were not being given the detailed information they needed for an informed decision.

Then it was Reliance’s turn to be hit by a barrage of litigation. In the southern city of Hyderabad, on 2 December, the Andhra Pradesh High Court made an order halting the G Series offer to the public, on a lawsuit filed by one P Murali Krishna, a local holder of F Series debentures. Murali Krishna said the Controller of Capital Issues had erred in removing the rights to the G Series which Reliance had originally proposed be attached to existing debentures as well as to shares. It was not clear what the issue was for, or what was a fair value of the underlying Reliance shares, which had been fluctuating wildly.

The existing debenture holders had already suffered enough: the new issue was a fraud on the public.

In Bombay, Ajit Jayantilal Modi and two other Reliance shareholders argued in the Bombay High Court before the same Justice Parckh that the G Series issue, as it was eventually approved by the government, did not have the valid approval of Reliance shareholders-since it was greatly amended from the proposal put to the 28 August extraordinary meeting. In addition, the prospectus and advertising contained false information. And in a city civil court in Bombay, a sharebroker named Arunkumar Jajoo obtained a stay order on the G Series, over alleged violations in the way Reliance had given prospectuses and subscription forms to brokers and set their commissions.

On 3 December, Reliance obtained an order from the Supreme Court in New Delhi which naified the Andhra Pradesh court’s stay on the issue, giving the company more time to argue its case in the lower court. In Bombay, Justice Parekh declined to give the three petitioners there any interim restraint order, and adjourned their case for two weeks.

(Two days later, on 5 December, the three shareholders dropped their lawsuit.) The civil court meanwhile lifted its stay on the issue. It had been a busy couple of days for the legal profession.

As the public part of the issue opened on 4 December, the Indian Express carried Reliance’s reply to its articles on its front page. The letter, written by the New Delhi-based vice-president, V Balasubramanian, made much of the mistaken figures in the first article and disputed the basis of the conjectured absence of real profits in 1986. It was part of a ‘motivated and malicious mudslinging campaign’ to damage the G Series issue.

The newspaper ran its own commentary alongside, attacking the company’s response as ‘not enlightening’.

The Reliance share price continued to fall, as word spread of the seriousness of the customs and excise evasion inquiries, touching a low point of Rs 179 on 25 December.

On 5 December, the Central Excise and Gold (Control) Appellate Tribunal dismissed an appeal by Reliance against the show-cause of October 1985 alleging evasion of Rs 273 million in excise. The case could go on to adjudication.

But the share price then began to climb upwards, partly as a result of a bold plan executed by a young recruit to the Reliance finance section. Anand Jain, then 29, had been a schoolmate of Mukesh Ambani before qualifying as an accountant. He joined Reliance at the beginning of December 1986, when Dhirubhai was persuaded to let him take over management of the sharemarket operations from his old colleague Chandrawadan (‘Mama’) Choksi. Jain managed to get hold of confidential Bombay Stock Exchange records giving the reported positions of Bombay’s big stockbrokers in Reliance shares. In many cases, these were at wide variance with the positions Reliance knew to be the case from its own registry Jain threatened to expose the brokers, bringing down heavy penalties on their heads, unless they immediately squared their positions by taking delivery of Reliance shares. The rout ended, and many of the bears suffered ruinous losses. Jain, who later went on to head the Reliance Capital & Finance Trust arm of the group, had won his spurs. He soon became a replacement for Dhirubhai’s late nephew Rasikbhai Meswani as the company’s chief troubleshooter and dealmaker, the inside track to getting transactions and orders from Reliance. By the mid-1990s, he was being referred to around Bombay as the ‘third son’ in the Ambani circle.

By early February 1987, the G Series issue could also be claimed a dazzling success. The block of debentures reserved for the public, worth Rs 1.32 billion, won subscription applications of Rs 4.94 billion in total. The Rs 880 million reserved for non-resident Indians had Rs 1.5 billion offered. Together with the Rs 1.6 billion subscribed by shareholders and Rs 200 million by staff, the total money subscribed came to Rs 8.24 billion. Dhirubhai thus had Rs 3.24 billion more than the Rs 5 billion he could keep. Even with a ‘rapid refund’ scheme for unsuccessful applications, he could keep the money to play with for at least two months.

In addition, to ease the pressure on the Reliance share price, the company’s share registry, Reliance Consultancy Services, sat on the rush of share transfer applications lodged just before the 29 November cut-off date for the G Series rights attached to shares. According to stock exchange rules, ownership transfers were to be made within one month of delivery, but by late February 1987 investors and brokers were screaming that some 3 million shares were still in limbo. By keeping these out of the market, the company created a scarcity of floating shares that helped keep the price rising from the late-December nadir.

The financial pressure was off, temporarily. Reliance had the funds to complete its PTA and LAB plants, which were way behind schedule (the polyester staple fibre plant had opened six months late, in July 1986), and to refurbish its image of technological prowess. And Dhirubhai could still claim that the small investors believed in him, in their millions. Reliance now claimed the largest shareholder base of any company in the world: 2.8 million.

But the fight against the bears in the stockmarket over 1986 to stop a freefall of his share price had drained his personal reserves, the parallel fund that had sustained the Ambani magic. Huge amounts had been spent on counter-publicity to the Indian Express and efforts to block his political critics. One senior broker close to Dhirubhai at that time estimated that Dhirubhai had lost about Rs 5 billion by early 1987, not including the fall in value of his sharcholding.

Dhirubhai would also have known by then that the Indian Express had been right in its forecast of a drastic profit decline for Reliance, its first since listing. In fact his forecast of a profit rise for 1986, made less than two months before the financial year closed, in retrospect looked puzzling. The annual results for 1986 that were published in April 1986 showed net profit had dropped to a mere Rs 141.7 million, lower even than the first half profit the G Series prospectus had reported, and an 80 per cent fall from the 1985 profit.

And then there was the unshakeable enforcer Bhure Lal, eyes fixed ahead, who had quickly dismissed an attempt at a conciliation by Mukesh Ambani at a meeting granted during the year. By January 1987, Dhirubhai would have been hearing back from his contacts in Du Pont and Chemtex, and the dilemma his deals had put them in. The Customs Service was about to issue its show-cause notice on the allegedly smuggled yarn plant in February Dhirubhai had some more financial breathing space, but he was still in a closing trap.

Dhirubhai Ambani needed something more. He needed to unlock the doors in New Delhi that had suddenly become closed to him in 1985.

The master key was obviously Rajiv Gandhi-but how to win over a young man who clearly regarded Dhirubhai as the epitome of everything that had been wrong with the Licence Raj and the Congress Party?

Although he had grown up in the household of prime ministers, Rajiv had been born without the ruthlessness that distinguished Indira and her other son Sanjay. Rajiv was interested in technology and nature, a keen amateur photographer and home computer buff, but seemed to lack the mental drive to push himself to higher achievement. He had failed to complete his degree in mechanical engineering at Cambridge. And until he was drafted into the party by Indira after Sanjay’s death, he had been supremely happy flying the second-echelon turboprop aircraft in the Indian Airlines domestic fleet.

Even after five years in the prime ministership, he left some acquaintances, like the industrialist Rahul Bajaj, with the feeling of a personality not fully matured, not hardened into adulthood. Capable of great affection and enthusiasm, he tended to let a rush of emotion push his judgements-as in the quickly reached 1settlements’ of deep-rooted ethnic and communal disputes in Punjab and Assam, settlements that soon became meaningless in the absence of the follow-up measures only a skilled politician could deliver, or in sometimes grandiose and adventurist foreign policy initiatives.