The Polyester Prince (38 page)

In addition, Dhirubhai also appeared to be gearing up for more corporate power-play.

Over the course of 1995-96 (to March), the Reliance sharcholding in Larsen & Toubro jumped from 5.96 per cent to 8.73 per cent, while its holding in the cash-cow Bombay & Suburban Electric Supply Co moved up slightly to above 6 per cent. The neglected subsidiary Reliance Capital & Finance Trust was also charged up with sizable capital through rights issues and private placements and renamed simply Reliance Capital, under the ‘third son’ Anand Jain. In 1995-96 it declared a profit of Rs 1.109 billion, and had a net worth of about Rs 10 billion.

Around the end of 1993, most of Dhirubhai’s old Aden colleagues remaining in service were eased out into retirement. Mukesh and Anil felt these men no longer had the drive necessary to push Reliance’s huge expansion forward, but some were a little bitter that they could not stay on. The Gujarati flavour of the company was further diluted by the recruitment of more man agers and technical staff from other parts of India. The family also formalised a split of assets that saw Dhirubhai’s two brothers Ramnikbhai and Nathubhai give up their remaining executive roles in Reliance and concentrate on their own personal businesses outside. Though both remained on the board, it was made clear that their children were not in the line of succession to run the company though the two sons of Dhirubhai’s nephew and close associate, Rasikbhai Meswani, who had died in 1985, were taken on as executive directors once they finished their education.

The reorganisation was an effort to prevent two of the failings that hit many Indian companies once they pass from the control of the founding entrepreneur. The companies are often run as highly personalised fiefdoms by the original patriarch, who holds most of the decision-making powers and delegates little to managers, mixes personal and corporate finances, and requires a high level of sycophancy ftom employees. When the empire passes on to two or more pampered sons, frictions are almost inevitable, and usually the only solution is a split of assets and businesses. In some cases this is relatively amicable, as with the children and grandchildren of G. D. Birla. In others it is bitter, as with the Modi brothers and cousins, and requires intervention by the big banks and financial institutions that may have investments or loans with the group. The result is a plethora of groups holding the same family name, distinguished by the initials of the particular owner. The other failing is a consequence of continuing this personalised leadership–a lack of professionalism throughout the organisation and weak systems of financial and operational control.

In a diverse conglomerate like the original Birla or Modi groups, a split can be beneficial.

In a highly integrated company like Reliance it could be disastrous. To all appearances, Dhirubhai’s succession plan looked free of immediate trouble. The two sons had never shown any sign of dispute or dissatisfaction with their positions at Reliance. The older son Mukesh’s elevation to vice-chairman, after Ramnikbhai Ambani, Dhirubhai’s older brother, stepped down as joint managing director, indicated that he would take charge eventually. As Dhirubhai slowed down in his sixties, and attended the office for a shorter working day, Mukesh assumed more and more of the major decisions, though Dhirubhai retained the ultimate say. Reserved, and deceptively mild in appearance, Mukesh was regarded as highly determined and even ruthless by acquaintances, as well as being a talented engineer and manager. Anil was more the public face of Reliance, talking to the press and investors.

Either individually or put together, however, the two sons seemed unlikely to display all the attributes of Dhirubhai, especiafly his genius for forging personal relationships at A levels and, perhaps, his boldness of vision. That this was a question mark over Reliance was recognised by an attempt to show the wide range of professional skills in the company’s expanding workforce. But the Ambanis seemed caught in a dilemma.

Formalising the company’s process of formulating new policies and strategies or taking running decisions could rob it of its ability to move fast and grab opportunities. Reliance could end up like the slow-moving committee-driven corporate bureaucracies it often derided.4

As Dhirubhai moved closer to realising his dream of an integrated petroleum empire and of handing on a modern corporation, however, events took a turn that made Bombay wonder whether the Ambanis and Reliance had changed at all in essence from the buccaneering days of the early 1980s. Suppressed scandals came to the surface, including a dispute that seemed to question Dhirubhai’s most often professed loyalty. to the millions of shareholders in his ‘Reliance family’ who had put their savings into the security of Reliance shares.

On 29 November 1995, the Bombay Stock Exchange faced perhaps the biggest challenge to its existence in its scandal and crisis-ridden 120 years. A letter arrived that day from Reliance Industries, signed by a junior executive on behalf of its board. Recalling that Reliance had been first listed on the Exchange in November 1977, the letter said: ‘We regret to state that we are constrained to terminate the said listing.’

The six-page letter went on to blast the Exchange for singling out Reliance for ‘biased and prejudiced action’ and accused some of its board members of being part of a cartel of ‘bears’ that had been hammering down the company’s share price, to the detriment of its millions of investors. It was now moving to the new National Stock Exchange, a computerised rival set up by the government as an alternative to the score of unruly, casino-like city exchanges.

Reliance at that time had a weighting of about 10 per cent in the Bombay Exchange’s most commonly used index of price movements, the 30-share Sensitive Index or Sensex.

The most liquid of the 6500 listed stocks, it typically accounted for almost 30 per cent of the daily trading volumes. Dealing in Reliance shares was bread-and-butter for Bombay’s brokers. The company and its founder Dhirubhai had been credited for much of the explosion in share ownership among the Indian public since the 1970s. Now Dhirubhai was taking his bat and ball, and moving to another pitch.

As if to rub it in, a massive upsurge in trading volume simultaneously hit the National Stock Exchange, where Reliance had just been listed. If Reliance were allowed to move, the Bombay Exchange suddenly faced obsolescence.

But whatever the jitters among its broker members, Dhirubhai was wrong if he thought the Exchange’s executive board would be quickly cowed. Its president, Kamal I.’ abra, immediately likened Reliance to a ‘fugitive from justice’ fleeing to another jurisdiction.

Dhirubhai had been in and out of many scrapes before. His alleged misdeeds and manipulations had filled the front pages of newspapers and taken up many hours of parliamentary debate, just as his industrial and financial acumen had preoccupied the glossy business magazines. The dispute that had led to his attempt to delist his stock was undoubtedly the most hurtful and damaging of all. It struck at the very heart of his repeated claim that, whatever else he might have done, he had always looked after his shareholders.

At issue was whether Reliance had knowingly issued more than one copy of each share and deliberately mixed up records of share ownership. If such suspicions were true, it meant that Reliance had been giving worthless paper to investors, or giving them shares owned by someone else. It could be fraud. It would threaten the most basic trust underpinning India’s capital markets.

The dispute blew up in the latter half of 1996, but the constituent chemicals had been mixed nearly a decade earlier and the fuse smouldering for three years. Dhirubhai and Reliance had been involved with several of the major players in the money market manipulations that had collapsed in the 1992 Bombay securities trading scandal.

According to brokers and bankers involved, the practice began in 1984-85 when the portfolios of several public-sector banks were churned over on behalf of Congress Party fund-raisers for Raiiv Gandhi’s election, raising Rs 4 billion. ‘The brokers who did the transaction got the confidence and started doing it on a big scale,’ one banker recalled.’

The Reserve Bank was aware that bankers’ receipts, or BRs, were being issued without the backing of actual securities, but did little about it. For ten years until 1992, the RBI’s deputy governor supervising banking operations was Amitava Ghosh, later criticised in a Joint Parliamentary Committee report on the seam as having taken a ‘casual’ approach to his role. Dhirubhai is widely credited with having swung Ghosh’s unusual second five-year term as deputy governor.

The entry of public-sector enterprises (
PSES
) in the late 1980s stepped up the unofficial market’s tempo. Approvals for borrowings given by the Ministry of Finance to the enterprises were valid for a year, so the enterprises would make their bond issues before the approvals lapsed, even if the investment programmes for which the funds were intended were delayed. Few of the bonds would be marketed to the public: nearly A were sold in bulk to the banks who needed such government-backed securities for their reserves. The banks would be stuck with low-interest paper and the enterprises with surplus cash. Both parties had a need to beat the interest rate on the bonds.

Enter the ‘portfolio management scheme’, whereby the enterprises (and private-sector companies) would lend their spare cash to the banks which would make high-yield investments on their behalf. The transfer was not a deposit (in which case the banks would have had to put 54.5 per cent into their reserves), and no return could be guaranteed. The risk would be on the enterprise, not the bank.

That was the theory, anyway. In practice, the banks competed for
PSE
funds by giving an ‘Indicative’ return. The PSEs wrote the placement down as a ‘deposit’ in their own books.

If the banks made more than the indicated return, they kept it. The risk stayed with the owner of the money. In practice, the banks were not equipped to make high-return speculative investments, usually in the sharemarkets, and developed informal relationships with brokers. But because the banks were not allowed to lend money to brokers, a subterfuge was needed. The cover was a fake securities transaction, whereby the broker obtained an unbacked BR from a compliant bank to give in return for the funds. The transaction would usually take the form of a ‘ready-forward’ or ‘repurchase option (repo)’ deal, whereby there would be an agreement to sell back the security after a certain time. The repo deals became a substitute for interest-bearing loans, to avoid interest rate controls, reserve requirements and withholding tax on interest. It was a market in which inside information on interest rate changes, dividends paid by the Unit Trust of India and so on could be turned to money by fleecing the less informed.

Dhirubhai, according to the same sources, became interested in the money market in the late 1980s and played it to recover some of the funds lost in the desperate 1986-87 defence of the Reliance share price. He had built Reliance’s fundraising operations to such a level that one analyst likened them to a virtual banking business parallel to and almost as important as the polyester business.2 It is hard to believe that the opportunities in the repo market would be unknown to him or unused. But transactions would have been put through brokers such as Hiten Daial, a former V D. Desai & Co employee who had started on his own in 1989. And even then, the brokers were themselves officially not there in the dealings between banks.

The best known figures in the 1992 repo boom, Harshad Mchta and his brothers, had been caught in the crushing of bear brokers engineered by the ‘third son’ Anand Jain at the end of 1986. They had escaped lightly after pulling a family connection-one of the brothers was married to a daughter of the vice-chairman of the Industrial Credit & Investment Corp of India, a major lender to Reliance. The father-in-law had interceded with Reliance auditor D. N. Chaturvedi. Chastened, the Mchtas stayed clear of Reliance and turned to the money market. In 1990, they correctly judged it time to return to equities and by 1991 had built up a huge reputation in the sharemarket, where even rumours of their interest were enough to send a stock rocketing upwards.

Around November 1991, the Mchtas put in a call to Anil Ainbani to break the ice. Their first meeting discussed the 1986 affair; it was agreed to let bygones be bygones. They started meeting frequently. The Ambanis were concerned about their share price, which was hovering between Rs 130 and Rs 170 despite the efforts of legendary market movers like stockbroker Nimesh Shah. They wanted to be first in India with a Euro-issue and to sell it at a high price.

The Mehtas found that Reliance was still seen in the market as a seller of its own shares.

Every time the price rose Rs 20 or so, its brokers would start booking profits. The Mehtas agreed to start pushing up the share price, on condition that Reliance itself stopped selling. The intervention worked. From Rs 127 at the start of 1992, the Reliance share price rose to Rs 241 at the end of February and Rs 455 at the end of March. That was against a background of wild builishness in the market-the Sensex rose from 1915 at the end of December to a peak of 4467 on 22 April 1992-but the ramping of Reliance was a substantial cause in itself.

Harshad Mchta became a celebrity. The press speculated about his source of funds, gave respectful attention to his novel theories about valuing stocks, and wrote without envy about his ostentatious wealth. He and his brothers lived in a huge apartment on the Arabian Sea at Worli, with some 27 foreign and locally made cars in the garage. Harshad was declared India’s biggest income taxpayer. He was also dubbed ‘the Big Bull’ a title once given to Manohar Pherwani in his days heading the Unit Trust of India. Mehta’s fellow Gujaratis came to regard him as a second Dhirubhai. He had come from a similar unprivileged background (his father a shopkeeper, and his commerce degree a bare pass from a low-status college). A thrusting young bull was shouldering aside the old bull.