The Polyester Prince (36 page)

Shareholders were already packing into the Biria Matashri Auditorium, close to the downtown Churchgate suburban rail terminus. It was too late to call off the meeting. The Larsen & Toubro directors, including Mukesh and Anil Ambani, appeared on the podium, and pandemonium erupted. Unaware of the Government’s decision, agitated shareholders rushed the microphones set up in the aisles and fired off volleys of questions and accusations. There was cheering and jeering by rival factions. The directors were shouted down as they tried to speak. Eventually they gave up and retreated behind the back curtain to exit the auditorium through a stage door. A swarm of shareholders surged onto the surrendered stage.

The shouting continued for half an hour, but it was all over. Dhirubhai had suffered what he later told close confidants was his greatest defeat. The government institutions went on to appoint a seasoned Larsen & Toubro executive as the new chairman. A Supreme Court ruling in May 1992 cleared the way for conversion of the 1989 debentures, diluting the Reliance stake down to about 8 per cent, the company’s original entry level. The alleged forgery of proxies was never fully investigated. Bombay police prepared to raid the godown where Reliance had stored the proxy forms, but were called off by the Maharashtra chief minister’s office half an hour before they moved in.

Within Reliance, the failure was a sobering lesson that times were changing for Indian business. The government could no longer so obviously play favourites if it wanted to entice foreign investment. The value of licences had gone. Tariffs and excise duties were still high, but the trend would be to lower and uniform rates. Financial markets and institutions would have their transactions and performance scrutinised in public. The ‘level playing field’ was the motto of the times. The transformation had just begun, but this was the way it would be, sooner or later.

The implications for industries like Reliance was that their production would have to attain world-competitive cost levels by the time the economy was fully opened. His expansionary vision had put Dhirubhai in a good position. Whether by ‘smuggling’ capacity or not, his polyester and petrochemical plants were the largest in the private sector and had the best economics of scale. By getting in early with his petroleum projects, he could keep his capital costs down and be ready for the time when the sector was deregulated and prices were brought down to world market levels.

Dhirubhai and his sons astutely portrayed themselves as part of the new India, raw-spirited capitalists champing to have the bridles of failed Nehruvian socialism taken off.

The foreign investment funds had,already had their eye on Reliance since the boom of 1985. In September 1986, the business magazine Forbes, which refers to itself as the ‘capitalist’s tool’, ran a four-pagg profile of Dhirubhai which described him as ‘a mixture of Ted Turner [the founder of the cable TV network
CNNI
and Horatio Alger [the 19th century American inspirational novelist whose writings put the notion of success through hard work]’. It shrugged off the controversies raging around him at that time. Since then, many more business journalists have profiled Dhirubhai for the world’s press, and have usually taken his word that he has been dynamic and his rivals ‘complacent’.

The investment fund managers who flocked to Bombay from Hong Kong, Singapore and London from the end of 1991 were also inclined to overlook the ‘colourful’ past.

‘Someone who can smuggle in a whole factory clearly has something going for him,’ one Kleinwort Benson researcher remarked at the tiMC.3 Imbued with the notion of ‘emerging markets’-forgetting that Bombay’s stock exchange, set up in 1875, was among the world’s most established-the fund managers had reached India after selling their clients on the business ventures of Thai and Indonesian generals, Chinese People’s Liberation Army units and East Asian dynasties newly listed on new stock exchanges.

India was a cinch by comparison. Soon research reports were piling up, pointing to India’s large middle class and its hidden savings, the basic soundness of its British-style legal and corporate institutions, the sHI of its top administrators and managers, and the political safety valves in its complex but democratic political system.

Even before the first foreign portfolio funds were authorised to invest from mid-1992, the Indian sharemarkets had enjoyed a spectacular boom and crash on the euphoria generated by the reforms. The unprecedented bull run in Bombay saw the market’s capitalisation (the total value of shares in the 6000 listed companies) rise from Rs 756 billion in March 1991 to Rs 2764 billion in March 1992.

The source of the funds puzzled Finance Minister Singh and many of his officials, given that the central bank was still applying a tight liquidity squeeze, with interest rates around 20 per cent, as part of its attack on the external payments crisis. Then it was discovered that bank reserves were being turned into speculative cash. To help finance the huge government deficit, commercial banks were obliged at that time to keep a total 54.5 per cent of their deposits in government securities and cash. To make more profit from this compulsory investment, the banks traded and swapped their holdings of bonds issued by the treasury or government corporations in search of higher yields. Changes in interest rates would raise or lower the market value of bonds carrying rates fixed at earlier times.

The deregulation of interest rates on bonds early in 1991 allowed public-sector enterprises to offer much higher rates on new issues, so the market value of their existing bonds fell sharply.

At the end of 1991, banks were more keenly trading their securities in search of higher yields. Banks were the only parties authorised by the Reserve Bank of India to trade in ‘gilts’ (government securities), but several brokers had established themselves as trusted middlemen for particular bank treasury departments. The
RBI
was ill-equipped to control this growing market. Its register of who owned which gilts at any time was through handwritten entries in Dickensian ledger books at its old building in Bombay, and new ownership notes were posted out to banks. To speed up their transactions, the banks and brokers developed their own informal system outside the central bank’s aegis through the use of chits called ‘banker’s receipts’ or Rs which were simply certificates issued by the banks themselves indicating that they owned the securities being sold.

At the end of April 1992, it was revealed that many of the BRs were not backed by securities at all. And the brokers, among them a young Gujarati named Harshad Mchta who had earned the sobriquet ‘the Big Bull’ from his aggressive sharemarket purchases, had been diverting the huge settlement cheques passing through their hands, on the way from bank to bank, into their own accounts. While on such unauthorised ‘loan’, the funds were put into the sharemarket. An article in The Times of India by a young business reporter, Sucheta Daial, brought the circus to a stop on 23 April. Several Indian and foreign banks were left short of some US$1.4 billion worth of securities in their vaults.

The sharemarket collapsed, inquiries and prosecutions launched and the new Securities and Exchange Board of India (
SEBI
) had a perfect excuse to bring Bombay’s clubbish stockbroking fraternity to account. By late 1993, the market bounced back as international investors discovered the ‘India story’ en masse and prices climbed to a new record in September 1994.

The 1991-92 boom helped Dhirubhai quickly overcome his Larsen & Toubro disappointment.. In August, the Controller of Capital Issues (the post was abolished six months later) cleared the expansion of the Reliance debenture issue, from the previous Rs 5.7 billion to Rs 8.583 billion, plus the right to retain 15 per cent oversubscription. At a total Rs 9.87 billion it exceeded any previous issue in India. Split into three series of bonds-one convertible, one convertible with detachable warrants to buy shares, and another straight nonconvertible-it was more complicated than any of the previous issues, but was successfully put to the market over November and December. In April 1992, Reliance also rolled over its F Series debentures from 1985 for another seven years, offering investors a warrant to buy a Reliance share with the renewed debentures.

Dhirubhai had actually fared rather better under V P Singh’s prime ministership and its aftermath than he had under Singh’s tenure in the finance portfolio. Reliance’s results for 1990-91 (April-March) showed a tough year, but sales had grown 13 per cent to Rs 2 1.05 billion and net profit 39 per cent to Rs 1.25 billion. The dividends were still a (for Reliance) low 30 per cent of the basic Rs 10 share, and a bonus issue was out of the question. The new year, 1991-92, had started out with little growth in sales or profit, given the brakes on the economy. But Dhirubhai asked his shareholders, at their annual meeting in October 1991, to look at Reliance’s massive projected expansion now that licensing had been removed on nearly all the company’s products.

This meant that the existing Patalganga plant would be further expanded to ‘International size’ and its supplies of napththa and kerosene would soon come by pipeline from the Bharat Petro-chemicals refinery at Chembur, whose own plans for downstream expansion had been virtually pre-empted by Reliance. The new petrochemicals complex was coming up by the Tapti River at Hazira, on the former tidal flat reclaimed by use of a massive Dutch dredger and extensive piling. Its monoethylene glycol plant came into production late in 1991, and its polyvinyl chloride and high-density polyethylene plants were expected on stream during 1992. But the cost had blown out some 70 per cent from the original Rs 10 billion because of the rupee’s devaluation and the failure of government authorities to chip in their share of the power plant and jetties. Financially, the subsidiary Reliance Petrochemicals was struggling.

At this point, Dhirubhai decided to merge the petrochemicals arm back into the parent company. The shareholders of Reliance Petrochemicals approved the move at a meeting, in August 1991, held at Hazira where not too many of the 2.4 million stockholders could have turned up. The meeting also allowed the early conversion of the remaining portions of the company’s big debenture issue and the issue of fresh shares to the Reliance parent company at par in payment of a loan from it. The merger was announced as a decision by both boards on 28 February 1992, and made effective from 1 March.

Three of Bombay’s leading chartered accountancy firms recommended a swap of 10 Reliance Petrochemicals shares for one Reliance share. It meant that Reliance acquired the massive assets of the subsidiary at a discounted price, and from 1992-93 was able to add its growing production stream to its own sales or keep them in-house at cost for use at Patalganga. The depreciation benefits of the subsidiary’s investment were transferred to Reliance, where they were a shield against corporate income tax for several years.

Reliance’s profits indeed showed a strong leap the next year. The 1991-92 year had finished strongly, showing a 30 per cent rise in profits to Rs 1.63 billion. The merged group nearly doubled profit in 1992-93, to Rs 3.21 billion. Reliance shares had risen high again, so few of the subsidiary’s old shareholders were complaining.

In December 1993, Dhirubhai announced that a duplicate of Patalganga would be added to Hazira in a second polyester-
PTA
complex. Another 350 000 tonnes a year of
PTA
plus 120 000 tonnes of polyester yarn, 120 000 tonnes of polyester staple fibre and 80 000 tonnes of the bottle-making plastic
PET
would be ready in two years. In September 1993, he had also entered a joint venture with
ICI
, Terene Fibres India, to take over ICI’s 30 000 tonne a year polyester fibre plant at Thane, outside Bombay. The three polyester works would make Reliance the fourth biggest producer in the world (after Germany’s Hoechst, America’s Du Pont and Taiwan’s Nanya), and the only one with production integrated from napththa down to fabrics.

The integration was to move even further back ‘upstream’. In February 1994, Narasimha Rao’s cabinet decided to award three oil and gas discoveries in the Arabian Sea to a consortium involving Reliance with the Houston-based Enron 011 & Gas Corp and the government’s own Oil & Natural Gas Corp, which had discovered and delineated the fields but did not have the funds to develop them. Two of the fields, Mukta and Panna, contained an estimated 265 million barrels of oil, and the third, Mid and South Tapti, some 67 billion cubic metres of gas. Cost of development was put at Rs 38 billion (then about US$1.25 billion) of which Reliance was responsible for 30 per cent. Enron would be the operator initially, but would transfer the role after five years to Reliance.

The results for 1993-94 showed Reliance had edged past the Tata Iron & Steel Co, founded in the first decade of the century, to become India’s largest company measured by annual sales, operating profit, net profit, net worth and assets. Its 2.4 niillion shareholders were the most widely spread equity base of any industrial company in the world.

Dhirubhai’s return to stockmarket leadership was marked by a resumption of the journalistic accolades cut off in 1986. The magazine BusinessIndia put him on its cover as its Businessman of the Year for 1993. ‘With no business background to speak of, Ambani has emerged as a symbol of the New Indian Dream and his success has rewritten the conventional code that only the rich can get richer,’ it said. Dhirubhai had set the example for a host of industrial clones: ‘The last decade saw the rise of an altogether different entrepreneurial breed on the industrial scene; one that was impatient to get ahead, willing to take risks and wend its way through the regulatory maze, displaying an entrepreneurial zeal that somehow seems to have evaporated in the more established business houses.’ Mile it galled some that he seemed to have crossed A limits in influencing politicians, Dhirubhai’s supporters said he didn’t do anything different from others. The business environment compelled it, and it was no use singling out any one person.,Anil Arnbani was quoted as saying: ‘Perhaps my father’s only fault has been that he thought too big and clearly ahead of his time.’