The Polyester Prince (37 page)

But even as it was coming back into a single image, Reliance was creating new windows on the screen.

In the main picture was the gas cracker at Hazira, consuming much of the parent company”s financial resources. It was running years behind schedule (it eventually came on stream in the 1996-97 year, some three years late), but this had been due to 18 months of delays in getting the final licence issued after the November 1988 letter of intent from the government. Then it had been decided in 1992 to expand its capacity to 750 000 tonnes a year of ethylene (from 400 000 tonnes).

Because of this burden, any other new projects would have to be started off the Reliance books. In 1992, Reliance came out with two new subsidiaries. Two of its associated investment companies had been transformed into Reliance Polypropylene Ltd and Reliance Polyethylene Ltd to build new plants making those products within the Hazira complex. The need for separate companies was explained by the equity involvement of the Japanese trading house Itochu (the former C. Itoh & Co) which was to put in US$50

million for a 15 per cent stake in each firm, making it the biggest investment planned by a Japanese firm in India at that point. The issue of equity shares and optionally full convertible debentures in November 1992 was wildly oversubscribed: the share issues by around 100 times in each case and the debentures by three to four times. All in all, about 10.5 million investors offered Rs 34.43 billion. Dhirubhai was able to keep Rs 3.25 billion for each company, and the rest was a 15 per cent loan until it was refunded by mid-March 1993.

Even before they were born, the Reliance ‘twins’ were the cause of controversy. The Securities and Exchange Board of India had noted that their shares were being ramped on the Bombay Stock Exchange, and insisted that the prospectuses carried the warning: ‘The current market price of the shares is not a true indication of the actual worth of the shares as the current market price is only as a result of circular and thin trading among a smaller number of interested parties.’ But
SEBI
found this had occurred before it issued its new stockmarket regulations. The problem was shuffled over to the Bombay exchange, which identified the brokers involved but did not press penalties. The ‘twins’ later became problem children.

Dhirubhai had also begun setting up a new company to carry out his biggest dream, building a full-scale oil refinery. In 1992, he had gained clearance from the Foreign Investment Promotion Board attached to the prime minister’s office for Itochu to take 26 per cent of the 9 million tonne a year refinery. In August 1993, he announced that Reliance Petroleum would make its inaugural capital raising, through an even more complex issue called a triple option partially convertible debenture. Subscribers were offered debentures with a face value of Rs 60. Of this, Rs 20 was to be converted into equity shares at par, one on allotment and one after 18 months. The Rs 40 balance, nonconvertible, would he paid back doubled in three annual instalments from the sixth year (equivalent to an effective 14.35 per cent annual interest). Two attached warrants for shares could he sold on the market, or exercised for Rs 20 each. Or investors could get their money back on the Rs 40 nonconvertible portion after 46 to 48 months and receive two shares from the warrants at Rs 20 each.

If Dhirubbai had previously made the nonconvertible convertible, the new issue was surpassing. Investors would get equity shares immediately in a business which did not yet exist and which was years away from earnings, and would have non-convertible debentures which would not earn any returns until the sixth year. It was extremely cheap money until then, almost free.

But when put to the market in November 1993, it raised the targeted Rs 21.72 billion from institutional investors and the public, and was oversubscribed three times. Reliance itself put in Rs 5.773 billion, taking the total proceeds to Rs 27.493 billion or close to US$1 billion at that time. Itochu was no longer in the picture and not mentioned in the prospectus. The absence was not really explained. Together with another partly convertible debenture issue to Indian institutions along with overseas supplier’s credits, lease finance and some overseas borrowings, the issue was to fund the refinery’s cost of Rs 51.42 billion by its planned completion in three years time, that is, late 1996.

Dhirubhai now had 2.6 million shareholders in Reliance Petroleum as members of his ‘family’.

Almost immediately, the project met delays on the ground, as disputes were reported with landowners on the site at Moti Khadvi, about 25 kilometres outside Jamnagar on the west side of the Saurashtra peninsula. Court actions were to continue until May 1996 when the company established its ho ‘Id over some 2240 acres. But by the time Dhirubhai arrived on 23 January 1995 for the bhumi puja or ritual groundbreaking prayers involving the cracking of a coconut and the chanting of Yedic scriptures by a Hindu pundit, the size of the refinery had expanded in his plans to 15 million tonnes a year, with another petrochemicals complex alongside making 1.4 million tonnes a year of paraxylene and other downstream products and including a third
FTA
plant of 350 000 tonnes.

The cost of the refinery was now put at Rs 86.94 billion, and the petrochemicals works were another Rs 45 billion. However, the completion date had slipped two years, to late 1998 or 1999, which would be just before the returns on the nonconvertible part of the debentures were due. Would Reliance Petroleum then disappear back into the parent company, many investors wondered, in another many-for-one share swap? Would there be more delays and more expansions?

The new investors, especially the foreign portfolio ftmds, had by then learnt that Dhirubhai was capable of constant surprises. Reliance was moving in so many directions simultaneously that it was hard to put the whole sum together. Probably only Dhirubhai, his two sons and a few others had the whole equation in their heads

The cachet with the new foreign investment funds had been turned into cheap finance raised in London, Luxembourg and New York. Despite the mayhem in the Bombay capital markets in May 1992, Reliance had then been the first Indian company to float Global Depository Receipts (GDRs), a convertible bond priced in US dollars but initially priced in a linkage with the Reliance share price in India. It had been a Herculean effort of share price support against the background of the securities scam, and once the issue closed on 1 8 May Reliance had to offload the shares it had bought on market onto the books of friendly Indian institutions, mutual funds and merchant banks which had been convinced that helping India’s first
GDR
issue was a patriotic duty. Within two months the GDRs were trading at a 25 per cent discount to the issue price.

When India’s financial image recovered the next year, Reliance was back with a US$140 million Euro-convertible bond issue in November 1993 managed by Morgan Stanley, whose investment guru Barton Biggs rated Reliance scrip one of the best buys in Asia.

Many other investment advisers then saw Reliance, the most liquid security in the sharemarket, as a ‘surrogate’ for the entire Indian market or the quintessential ‘India story’.

Anil,Ambani, the more outgoing of the two sons, became the public face of Reliance in the numerous ‘roadshows’ held in world investment centres from then on. In February 1994, the company made the biggest
GDR
issue yet, of US$300 million, after some delays in permission from the Ministry of Finance which had noted that the proceeds of the previous Euro-issues had not yet been completely used for the designated purpose and that Reliance seemed to have money to play the sharemarket.

The foreign enthusiasm was dashed considerably at the end of 1994, however, when Reliance carried out two manoeuvres which many investors felt had broken assurances.

On 22 October, Reliance announced it was placing 24.5 million shares with Indian financial institutions to raise a total Rs 9.43 billion to fund its oilfield developments. It emerged that the Unit Trust of India had put in Rs 7.73 billion, the rest coming from the Life Insurance Corp and the General Insurance Corp. A five-year ‘lock-in’ applied, meaning that the institutions could not sell the stock for that time.

Just over two weeks later, Reliance announced it was merging the ‘twins’ Reliance Polypropylene and Reliance Polyethylene into itself, in a share swap set by two accountancy firms that seemed quite generous to the shareholders of the two subsidiaries, which were still a year away from production.

The foreign investment fund managers were livid. Early in October, Reliance had staged a ‘roadshow’ in Hong Kong to present its first-half results to market analysts. The Reliance financial manager Alok Agarwal had been repeatedly asked whether the company had any plans to raise equity capital in the near future. Agarwal and other company executives had left everyone with the impression that there were no plans to do so. Now, within a month, Reliance had made two moves which involved the issue of about 99 million new Reliance shares, expanding the share base by over 30 per cent.

The foreign funds had by then lifted their combined shareholdings to 13 per cent of previous total equity, on the expectation of very strong growth in earnings per share, a widely used yardstick of the profitability of a share. Their analysis was now way out of touch. Profits would be spread over a much greater number of shares, so earnings-per-share would be much lower. To complaints that Reliance had given no hint of such a ‘dilution’ of equity, the company rather lamely said it had not specifically ruled it out.

Some fund managers in Bombay threatened a revolt, telling Reliance they would vote their shares against the merger at the extraordinary general meeting called to approve it on 6 December 1994. They produced evidence of heavy buying in shares of the twins before the announcement. Both Reliance Polypropylene and Reliance Polyethylene were trading at around Rs 40 early in June 1994, but climbed steadily to peak at Rs 105 and Rs 92.5 respectively on 8 November when the announcement was made. For those in the know about the swap-ratio, it would have been either a cheap entry into Reliance itself-since its shares were trading at more than Rs 400 by October-November-or a chance for some insider-trading profits.

One investor that was not complaining, oddly, was the Unit Trust of India. It was unclear whether its top officials had been told of the twins’ impending merger, even though it was announced only two weeks after the private placement and had an immediate unfavourable impact on the Reliance share price. If the merger plan had not been foreshadowed, the Unit Trust might have been able to argue that a material event had not been disclosed and seek redress for its unitholders. If it had been told, the performance of its managers was open to question.

No one was arguing with the logic of consolidating the twins into the parent company at some stage. It added sales, assets and profits while eliminating the sales tax that would apply to transactions between separate companies. But this should have happened closer to the time the twins’ plants came on stream. As the London investment group Crosby Securities noted in a company report in 1996, ‘The surprise equity dilutions … had cast a shadow of doubt on the treatment of minority shareholders’. The effect was a fall in the Reliance share price, and an even sharper tumble in the price of its GDRs listed in Luxembourg.

The investment bankers did not ostracise Reliance for very long. The angry fund managers in Bombay were called by their head offices in Hong Kong and London and told not to make a fuss at the 6 December shareholders meeting.

There were still some fat fees to be earned from managing new capital issues and borrowings, though Reliance had burnt bridges with many equity investors in Europe.

But there was still the debt market, and the whole new world of the American debt and equity markets to tap into.

In 1995, Reliance made some more new capital-raising firsts for Indian companies. In July it raised US$150 million in a seven-year syndicated ‘bullet’ loan in Europe, meaning that it was repayable in one lump at the end of the term. In October of that year, it placed US$150 million worth of 10-year bonds at 1.9 percentage points over the US Treasury 10-year rate with American institutions, having gained a favourable credit rating from the National Association of Insurance Companies. By mid-1996, it had gained an investment grade rating by one of the two big New York rating agencies, Moody’s, though not from the other, Standard & Poor’s. It put through US$200 million in bonds with the help of Merrill Lynch, half for 20 years and half for 30 years. Reliance Petroleum meanwhile raised US$260 million for the Jamnagar refinery through two bond and GDR issues in the first half of 1996.

The retreat of the Indian Government from its monopolising of many infrastructure sectors had opened up numerous opportunities. Dhirubhai had often used the old-fashioned adatye ‘stick to your knitting’ to keep his executives looking at associated activity (his first industrial activity had actually been the knitting machines at Naroda).

The sons were keen to try something new. If tenders were won, that’s where Reliance would go.

Many projects were proposed by the mid-1990s, including a software technology park near Hyderabad, a small transport aircraft with Hindustan Aeronautics Ltd in Bangalore, diamond mining with South Africa’s De Beers Corp in Madhya Pradesh, a toilway from Bombay to Pune. The firmest steps, however, were in power and telecommunications.

Reliance gained approvals for three mid-size power plants in Patalganga, Jamnagar and Delhi. It also won the licence to operate a basic telephone service in Gujarat, in partnership with the American utility Nynex, called Reliance Telecom, for a licence fee of Rs 33.96 billion payable over 15 years. The only competitor would be the cashstrapped and trade union-bound government telephone service and two private cellular services. In addition, Reliance Telecom won licences to run cellular services in the states of Madhya Pradesh, Orissa, Bihar, West Bengal, Assam and Himachal Pradesh and in the northeastern hill states for modest total licence fees of Rs 3.37 billion over ten years. The telephone licences covered nearly one-third of India’s population, but (aside from Gujarat) were in some of its poorest regions.