The Polyester Prince (29 page)

The litigants, who included some trade unionists representing Reliance workers at Naroda, claimed that many investors might have wanted to hold on to their debentures for the full year, and earn their 13.5 per cent interest. Big financial institutions had been already informed mid-year by Reliance that profits and dividends for 1987 would stay low, and that easing of the company’s interest burden was vital. With the connivance of the government and its public financial arms, the litigants were saying, the small investor was being exploited so that Reliance could save some Rs 330 million in interest.

Debenture holders were also to discover that their bonds had been issued in units of ten, which meant the two-for-one shares they received on conversion were in lots of 20-not regarded as marketable lots’ in the stockmarket where the normal basic parcel was 50 shares. This meant delays while Reliance Consultancy Services, the group’s share registry, carried out the splitting,. and consolidation of share certificates into lots of 50.

The newly created shares were not, in any case, listed in the various stock exchanges until February 1988, meaning that for some six months after conversion the shares were not tradeable and could not add to any selling pressure on the price.

Despite all the help the government provided, Reliance was indeed still facing a dismal year. To stave off announcing a loss, it resorted to a desperate accounting move. The period of its accounts was to be shifted from the calendar year to the April - March fiscal year used by the government, meaning the 1987 year would actually have 15 months and end on March 1988. But by March, according to later analysis, Reliance was still showing a profit of only some Rs 130 million, even less than the 1986 result.

On 28 April 1988, Reliance announced it would extend its year by another three months, not of course because of its lack of profits so far, but on the novel ground of ‘synchronising’ the commissioning of the
PTA
and
LAB
plants with the accounting year.

By that stage, more favourable breaks had been given by the government in its budget for the year starting April 1988. The excise on yarn and fabrics was lowered: Reliance had been among several producers that had raised prices ahead of the budget speech and then announced that they were cutting prices to ‘pass on’ the benefits of the excise cut to consumers. A week after the budget speech, as an afterthought, the import duty on the polyester input
MEG
was cut sharply.

When the figures for the 18-month-long ‘year’ were announced in November, Reliance announced another ‘record’ result, of Rs 807.7 million net profit on Rs 17.7 billion in sales. Together with an interim dividend of 30 per cent, the final dividend of 25 per cent (of Rs 10) brought the shareholder’s reward to Rs 5.5 on each share. It was certainly the company’s largest profit yet, but when annualised it was still down on the Rs 713.4

million profit declared in 1985. It had been helped by more creative accountancy, notably the capitalising of the entire interest cost of the
PTA
and
LAB
plants and a new basis of provision for depreciation, which. had added some Rs 245.4 million to the bottom line.

By the financial ratios such as return on capital, which investment analysts used to gauge a company’s efficiency and relative profitability, Reliance had shown less than spectacular results.

The justification for Reliance’s hunger for money was the industry vision Dhirubhai could conjure up for his shareholders. At his annual general meeting in June the venue was an enclosed suburban hall rather than under the blue sky of the Cooperage Football Ground or the Cross Maidan. But Dhirubhai still looked up from the financial mires to a future of massive silver cracking towers, distilling columns and chemical containment spheres on the barren coastline of his childhood.

The company had been allocated 280 hectares of land at a new industrial zone called Hazira, on the banks of the Tapti River, across from the ancient textile trading port of Surat where the East India Company had set up its first trading ‘factories’. Reliance planned to move into petrochemicals, making high-density polyethelene, polyvinyl chloride and caustic soda-the ingredients for the plastics revolution that had reached households in Southeast Asia but not yet India, where sugar or cement was still shipped in jute sacks, women hauled water from their pumps or tanks in brass or steel urns, shopkeepers expected customers to bring their own containers for milk or rice, and farmers lugged steel irrigation pipes across their fields or just gouged crude channels in the earth. All the plants listed for construction at Hazira had been cited as proposed activities by Reliance when it garnered subscriptions to its G Series debentures in November 1986, and the acquisition of land at Hazira had been reported to Reliance shareholders in June 1987, along with the dismal 1986 results.

The site remained a swamp, as Dhirubhai tried to muster cash and credit to start building his dream. At the end of May 1988, Reliance had applied to the Controller of Capital Issues for permission to make yet another massive debenture issue to finance its Hazira project, this time though a newly created subsidiary called Reliance Petrochemicals Ltd.

The fully convertible debentures would be priced at Rs 200 each, and bring one Rs 10 share in the new company immediately on issue, with the remainder being converted to more shares in two stages over the next three to seven years. The issue would raise Rs 5.934 billion towards an investment estimated at some Rs 25 billion by the time it was completed in 1994.

The issue was cleared early in July 1988 and opened for subscription at the end of August, even though, as the Indian Express pointed out, Reliance Petrochemicals did not appear to have yet obtained the industrial licences it needed for the project. It was also the first case of a new company with no assets against its name being allowed to issue fully convertible debentures, which was against the policy laid down by the Finance Ministry controllers up to then. The Express also questioned whether Reliance was raising money a second time, through the subsidiary, for the same projects the G Series debentures were supposed to fund. This time Reliance had a more sympathetic car in the Supreme Court. On 25 August, the court barred the Express from publishing anything on the validity or legality of the approvals got by Reliance Petrochemicals in connection with the issue. The order was lifted on 23 September after the issue closed. By then, Dhirubhai had 2.3 million new investors in his empire, among them of course many of the existing 1.8 million shareholders in the parent company.

The petrochemicals plant would make Reliance only the second producer of high-density polyethylene in India, and its biggest producer of
PVC
. But Dhirubhai’s ambitions were racing even further ahead. In October that year, the economic affairs committee of Rajiv’s cabinet approved his proposal to build a gas cracker-a plant that breaks down the components of natural gas into different petroleum gases-alongside the petrochemicals plant at Hazira. It would produce 320 000 tonnes a year of ethylene, 160 000 tonnes of propene, and 50 000 tonnes of butadiene. The feedstock would come from the nearby South Bassein natural gas field being developed by the government’s Oil and Natural Gas Commission.

This was another big project, using proprietary technology of the world’s petroleum and engineering giants. How was Dhiirubhai to finance this when the big petrochemicals plant had just been put off the parent company’s own rather stretched accounts?

Dhirubhai already had his eye on one of the jewels in the Indian corporate world, which he felt a friendly goverranent had put in reach. The Bombay engineering firm of Larsen

& Toubro, founded by two Danish engineers in 1938, had become one of India’s biggest listed companies by 1987, with assets of Rs 9 billion, annual sales of Rs 5.8 nffilion, and gross profit of Rs 820 million. It was building all kinds of factories, making offshore platforms for the new oil and gas discoveries in the Bombay High, and fabricating high-performance equipment for India’s nuclear power, space and defence programmes. It was something of a strategic national asset.

As far as ownership went, the Danes had retired from the scene. The firm’s shares were widely dispersed, but the govern ment’s financial institutions held a combined 42 per cent which decided the fate of its management. It had made some ill-timed diversifications into shipping and cement, but was a conservatively run company with an impressive range of technical expertise. Mile regarded widely as ‘sleepy’ and not giving its potential performance, it was still making a return on net worth that was twice that of Reliance in the bad days of 1986—87. It was immensely rich in internal cash reserves and borrowing power. A tempting takeover target, and the Dubal-based Chhabria brothers had already started nibbling in the market in 1987. But without the support of the institutions, no raid could succeed.

In May 1988, the Bank of Baroda, one of the score of nationalised commercial banks, decided to get into investment banking and to set up a subsidiary called Bank of Baroda Fiscal Services, soon abbreviated to BoB Fiscal. Two months later it asked the Unit Trust of India and the Life Insurance Corporation (
LIC
), two of the biggest institutional investors in the sharemarket, to help it start a portfolio by selling it baskets of shares.

Oddly, 63 per cent of the basket from LIC and 46 per cent of the basket from UTI (by value) were Larsen & Toubro shares, bought for a total Rs 270 million on 3 August.

BoB Fiscal sold these shares two days later for Rs 300 million to V B. Desal & Go, a firm of sharebrokers who did a lot of work for Reliance. Later in August, BoB Fiscal repeated the same exercise with the General Insurance Corporation (GIG), taking delivery of Larsen & Toubro shares for some Rs 141 million, about 55 per cent of the basket from GIG. These were also sold to V B. Desai & Go, two months later. The brokers then transferred the two lots of shares, amounting to 8 per cent of Larsen & Toubro’s equity, to the Reliance offshoot Trishna Investments. Reliance suddenly emerged in October as the biggest non-institutional shareholder in the blue-chip firm.

Meanwhile, the Company Law Board, not until then the most vigorous regulator of corporate misdemeanours, had been activated by a minor scandal in the Larsen & Toubro management over the use of a cornpany-owned apartment. The financial institutions agreed it was time for a new broom. On 11 October 1988, Mukesh Ambani and the Reliance director M. L. Bhakta joined the Larsen & Toubro board by invitation.

Dhirubhai proclaimed the new alliance ‘a merger of the professional skills of Larsen & Toubro and the entrepreneurial skills of Reliance’. It meant greater risk-taking ability for Larsen & Toubro, he told journalists.

Reliance kept on buying Larsen & Toubro shares in the market, helped by a share price that had fallen on news of their effective takeover. It had built up a stake of about 20 per cent by early in 1989, when Dhirubhai was invited in as chairman and Anil Ambani also appointed to the board.

Just what Dhirubhai had in mind about greater ‘risk-taking’ came soon afterwards. In March 1989, Larsen & Toubro raised Rs 800 million for ‘working capital’ in a convertible debenture issue and then put Rs 760 million into Reliance shares to cement the relationship. It was paying over 12 per cent interest to the debenture holders, and earning about 2.5 per cent in dividends on the shares.

In September 1989, Dhirubhai announced some other measures to tighten the alliance.

Larsen & Toubro’s shipping division would acquire two new ethylene carriers, which could be used to deliver feedstocks to the Reliance Petrochemicals plants at Hazira. ,And Larsen & Toubro would be given the job of building the new Rs 5.1 billion natural gas cracker that would eventually give an in-house supply of ethylene and other feedstocks.

The downside was that Larsen & Toubro itself would be financing the order it had just won. It would raise Rs 8.2 billion (Rs 9.43 billion with retained oversubscriptions) through a ‘mega-issue’ of debentures. Out of this, Rs 6.35 billion would be given to Reliance as ‘supplier’s credit’ for the natural gas cracker that Larsen & Toubro would build for Dhirubhai’s company at Hazira.

Dhirubhai explained that the deal with Reliance would give the engineering firm access to gas-cracking technology which it could apply to projects all round the world. Around this time, Dhirubhai was also talking up some grand infrastructure projects in which Larsen & Toubro could take a lead: an undersea tunnel linking crowded inner Bombay with the open land across its wide harbour; a long dam across the Gulf of Cambay gradually collecting fresh water behind it; a superhighway linking Bombay, Delhi and Agra. It was time for Larsen & Toubro to think big.

As he was with Reliance. In December 1988, Dhirubhai announced he was applying for permission to build a 6 million tonne a year oil refinery at Bharuch in Gujarat. Until then, oil refining had been reserved for government owned or controlled companies. His chances of approval were slim (and his application was turned down six months later) but Dhirubhai declared that, sooner or later, New Delhi would realise it could not finance all of India’s burgeoning refining needs. Other diversifying projects put up around this time included sponge-iron, power generation, television tubes, and pharmaceuticals, none of which made much progress.

But bankers and accountants looked at the potential downside. The supplier’s credit would be given to Reliance at 15 per cent interest, a margin of 2.5 percentage points above the rate Larsen & Toubro would be paying investors. But this was a puny return on funds that could be used to expand Larsen & Toubro itself. And the amount of supplier’s credit, to one company and one project, was equivalent to some 55 per cent of Larsen & Toubro’s total assets. It was a massive exposure for the company to a single risk.

Gurumurthy cried ‘plunder’ in the Indian Express, as the Ambani takeover progressed.

The helpfulness of Dhirubhai’s friends in the financial institutions, notably the chairman of the Unit Trust of India, Manohar Pherwani, was noted. Gurumurthy recalled that the chairman of the Bank of Baroda, Premjit Singh, had also helped Reliance out in the past by providing US$25 million in loans for overseas Indians to subscribe to its F Series debentures in 1985. An enterprising and evidently plausible reporter on the Express, Maneck Davar, made a trip to southern Gujarat, where he found the sons and daughter-in-law of the bank chairman running a polyester yarn texturising company set up in October 1986. It took partially oriented yarn from the Reliance plant at Patalganga and then sent the crimped yarn back to Reliance, earning an estimated profit of Rs 5.5 million a year.