The Polyester Prince (39 page)

It caused some pique at Reliance that a mere broker was achieving such glory, and even presuming to correct Dhirubhai on his investment strategy. The Mehtas were buying up debentures that Reliance was selling, particularly those of the struggling Reliance Petrochemicals and Larsen & Touhro. The Reliance Petrochemicals debentures were a good buy, ultimately providing a very cheap entry to shares in Reliance itself after conversion and then the merger. In December 1991, the Mehtas had also virtually taken over part of the triple debenture issue by Reliance, by placing a massive order and asking the company to stay out of the field itself.

A small incident may have helped convince the Ambanis that Harshad Mehta was getting too big for his boots. Harshad and Anil Ambani had ridden down together in the elevator at Maker Chambers IV, the building housing the Reliance head office in Bombay’s Nariman Point, and stood together on the steps while their cars were hailed. Harshad’s arrived first, a gleaming new Toyota Lexus, at that time the only one in India. Anil looked at it in admiration and made some complimentary remark. Harshad promptly handed over the keys and told Anil: ‘Take it, it’s yours.’ Anil refused, but the gesture may have left him feeling patronised.

A net was closing in on the Mehtas in any case. The central bank’s governor, S. Venkitaramanan, had been trying again to goad his deputy governor, Ghosh, into cracking down on the BR trading between banks. He was also intrigued by Harshad Mehta’s apparently inexhaustible source of funds. An income tax raid on Mehta in February had failed to crack the secret because the Mehtas kept their data on encoded computer disks. Venkitaramanan had not quite put his suspicions together and made the mental link, but he was getting closer. In March, he asked the State Bank of India to look at Harshad Mchta’s account. The bank reported huge inward and outward flows of money. Over April, the State Bank began pressing Mehta to reconcile the huge shortage, Rs 6.2 billion, in his business with it. He sought to roll over the obligation, and on 24 April brought in cheques to settle his dues.

But by then the scam was out. On 23 April, Ue Times of India had reported a Rs 5 billion shortfall in the State Bank’s treasury on account of transactions with a broker called ‘the Big Bull’. The music stopped, and ten leading banks were left with a Rs 40 billion gap in their books.

It soon emerged that Harshad Mehta had paid his dues with funds provided by a fully-owned subsidiary of the central bank itself, the National Housing Bank. Venkitaramanan, after his own appointment by the Chandrashekhar government, had brought back the former Unit Trust of India chairman Pherwani as the Housing Bank’s chairman and managing director. Still wildly ambitious, Pherwani had thrown the bank into the thick of the repo-based securities trades. When Harshad Mehta was put in a squeeze by the State Bank, the Housing Bank had obliged him with cheques made out to
ANZ
Grindlays Bank. Mehta had banked these into his own account with
ANZ
Grindlays, and then paid the State Bank of India. (The Australian-British bank was later pulled up for breach of banking rules and forced to return Rs 5.06 billion to the Housing Bank pending arbitration on its defence that crediting cheques to brokers’ accounts had been established practice. After four years of hearings and deliberation, the arbitrators returned the money to
ANZ
Grindlays.)

According to sources close to the Mehtas, Dhirubhai had been the first person Harshad Mehta had contacted when put on the spot by the State Bank. Dhirubhai had told him:

‘Don’t call anybody, I’ll look after the matter.’ According to an account by the financial journalist R. C. Murthy, Pherwani had agreed to bail out Mehta at a meeting with Harshad Mehta and ‘an industrial tycoon’.3 One acquaintance confirms that Pherwani said Dhirubhai had been the person who interceded for Mchta. ‘I was forced to do,’ Pherwani told this person. However the Mehta linked sources deny that a joint meeting took place between Pherwani, Dhirubhai and Mehta.

The Mehtas later came to assert privately that Reliance had been the cause of their downfall, bringing them to the attention of the tax authorities, Venkitaramanan and then the press. ‘The whole securities scam was an exercise to eliminate us, but like putting ink on a blotting paper it could not be contained,’ a source close to the Mehta brothers claims.

It is hard to believe this, given that Reliance was still more than two weeks away from its
GDR
issue when the scam blew open on 23 April 1992, and that Harshad Mehta had been a key operator jacking up the Reliance share price. Nor does it reconcile with the pressure put on Pherwani to pull Harshad out of the soup. Pherwani had been the fall guy for Dhirubhai once before, losing his Unit Trust of India job over the Larsen & Toubro affair. Now he faced complete disgrace. Harshad was unable to pull off the big securities deal he promised Pherwani, whereby a government corporation would have parked the funds through him with the Housing Bank. Pherwani resigned on 9 May. In the early hours of 21 May, family members found him dead at his Bombay home. The journalist Murthy got a phone call and rushed to the house about 8 am. Pherwani’s body looked ‘blue’, he remembers. It was cremated at 11.30 am the same day, with the face covered instead of left open in the normal Hindu way. The death was ascribed vaguely to a ‘heart attack’. Murthy and many others believe Pherwani committed suicide.

The opening up of the securities scam led to investigations by the Reserve Bank of India, the Central Bureau of Investigation and finally the Joint Parliamentary Committee. Senior bankers were sacked, several brokers and bankers arrested (including Harshad Mehta) and a special court set up to try those charged. Three ministers ultimately lost their posts for improper financial dealings. The blame was widely spread among financial system regulators, including the Reserve Bank governor, Venkitaramanan.

The links between Reliance and Harshad Mehta or other brokers were never made explicit throughout the entire investigation, though the favours shown to Reliance by several banks were criticised in the parliamentary committee’s report. It noted how funds put by the Oil & Natural Gas Corp in portfolio management schemes with two banks had been channelled through brokers into Reliance shares; how Reliance had recruited the
ONGC
chairman immediately on his retirement; and how some banks had given large amounts of credit to Reliance and its associated ‘front companies’ through bill discounting. In a general note on the overall scam, it said: ‘There is some evidence of collusion of big industrial houses playing an important role.’

The Congress majority in the committee, who included Dhirubhai’s old friend Murli Deora, prevented the probe going any further than that. A note by the opposition minority pointed out that there were still gaps in the investigation, and that the
CBI
had made many lapses (its chief investigator, K. Madhavan, had resigned in protest during the inquiries). A second note by three Left MPs pointed out that the Reliance name had surfaced more often that those of other industrial houses, but this must still be only ‘the tip of the iceberg’. One MP who was in the committee recalls: ‘There was always a lurking suspicion that big interests were behind the scam, but there was no trace. It was one reason why we put all the evidence in the parliamentary library instead of having it destroyed, which is the usual practice. There was some resistance to this.‘4

Many of the committee members also had their doubts about the central bank governor, Venkitaramanan. In the 1980s, as head of the Ministry of Finance, he had been openly accused in the press of belonging to a pro-Reliance clique of officials, and was distrusted because of this by his then minister, V P Singh. His appointment as Reserve Bank governor was generally seen in Bombay as a favour called by Dhirubhai during Chandrashekhar’s brief prime ministership. It emerged also that Venkitaramanan’s son was linked in a business venture in Madras with Dhirubhai’s son-in-law, Shyam Kothari.

Venkitaramanan had been India’s man of the hour in March-June 1991, handling the external payments crisis when New Delhi was paralysed by political crisis. A year later, the opposition MPs wondered, was he helping to cover up aspects of a scandal that pressured his own friend and head of a central bank subsidiary, Pherwani, to the point of suicide?

The Reliance
GDR
issue was successfully put to the market over 11 – 18 May, despite the financial mayhem breaking out back in Bombay. Fortunately for Reliance, the
CBI
did not move in to arrest Harshad Mehta and his brother Ashwin until well after the issue closed, on 4 June.

Dhirubhai’s connections with the scam had been buried and, as he might have said to his old friends in the yarn market, a first-class fountain had been built on top. Or so it seemed.

Since his stroke in February 1986, Dhirubhai had been careful to keep up his exercise and worked hard to bring back full dexterity to his right side. He employed a well-qualified young physiotherapist with a Bombay suburban practice, RaM Vasa, who soon became a regular visitor to the Ambani household at Usha Kiran and then Sea Winds. As well as paying her her normal fees, Dhirubhai rewarded Vasa with allocations of Reliance shares.

In January 1994, Ram and her husband Gajendra decided to cash some of their paper wealth, and sold 26 650 Reliance shares through a broker, R. D. Choksey. In turn, Choksey delivered the share certificates and the signed transfer forms to broker V K. Jain who had bought and paid for them on behalf of a company named Opera Investments.

In April, the Vasas wrote to the Reliance’ share registry, Rellance’Consultancy Services (
RCS
), notifying the loss of certificates for 33 809 shares and asking for duplicate certificates. Among the distinctive numbers they listed were the shares sold in January In June, the broker V K. Jain brought the shares along to
RCS
to register the transfer of ownership to his client. The registry rejected the transfer form because, it said, the signatures did not tally with those on its record. In August, the same registry issued new share certificates to the Vasas, who later sold them to Merrill Lynch. Jain had meanwhile complained of a bad delivery to the Bombay Stock Exchange, which had begun an inquiry.

Over a year later, in September 1995, the Exchange began asking Reliance about the Vasa case. In early October it began recovery of the claim against the Vasas’ broker, R. D. Choksey. In their meetings with the Exchange’s board, the Reliance representatives headed by Anand Jain were surprised at the hostility of the questions. ‘

We are Reliance,’ Anand Jain told the Exchange’s president, Kamal Kabra, according to one board member’s account of the meeting. ‘Don’t ask this kind of question to us.’

‘Behave yourself,’ Kabra is claimed to have said. ‘You are Reliance in Maker Chambers IV but in this chamber you are just one of 6800 listed companies.’

Anand Jain offered to settle the outstanding claim immediately, putting down a pay order for Rs 10.8 million, on condition that the investigation and penalty action be halted. The Exchange’s board met and considered the action. On the face of it the persons at fault were Rajul Vasa and her husband. So why should Reliance step in?

The board decided that money was not enough. On 16 October, the Exchange sent a show-cause notice to Reliance. Neither Reliance nor its registry,
RCS
, had raised any queries with the Vasas, or told Opera Investments about the issue of duplicates for the shares it had presented. It had not filed any complaint with the police, or told the Exchange of any steps to enforce an indemnity given by the Vasas when they applied for the duplicates, or, ‘despite the obvious fraud’, started any legal proceedings. Reliance was thus guilty of gross negligence, if not an accomplice.

Almost at the same time, another timebomb blew up. One of the financial houses deeply involved in the 1992 securities trading scandal had been a fast-growing and politically well-connected firm called Fairgrowth Financial Services Ltd. It was caught up in a mass of claims before the special court set up to handle the scam cases, presided over by Justice S. N. Variava. One claim that Fairgrowth was pursuing concerned a parcel of 1.5 million Reliance shares it had bought through a broker named Pallav Sheth in February 1992, and then sent for transfer to
RCS
. In March that year, Sheth had arrived back with Ajit Ambani, brother of Reliance’s company secretary Vinod Ambani (no relation to Dhirubhai) and urged Fairgrowth to withdraw the transfer. They undertook to sell the shares in the market. It was the last Fairgrowth saw of the shares or its money. In 1993, Fairgrowth obtained a court order for Sheth to repay it Rs 515 million in monthly instalments. Sheth defaulted after one payment.

In October 1995, Fairgrowth began trying to trace the funds on a second front. It filed a petition in the special scam court asking Justice Variava to compel Reliance and
RCS
to tell it where the shares went. News of the two cases, Fairgrowth and Rajul Vasa, became the talk of the markets. Rumours that duplicate shares were in circulation caused a sharp fall in the price of Reliance shares in Bombay and of its GDRs in London.

Reliance read a plot into the cast of characters ranged against it. Two of the most vocal Bombay Stock Exchange directors against it were M. G. Damani and Rajendra Bhantia.

Damani was an old Exchange bear. Bhantia was a friend of Nusli Wadia, and had been connected to FairWowth previously. The Fairgrowth lawyer, Mahesh jethmalani, son and legal partner of Ram Jethmalani, had defended Wadia in the Fairfax affair and appeared against Reliance in the court battles of the 1980s. The old fighting instincts were roused.

On 30 October, a letter arrived from Reliance at the desk of the Securities and Exchange Board of India’s chairman, D. R. Mchta:

We regret to bring to your kind notice that over the past few weeks a systematic and well orchestrated campaign has been conducted by a cartel of bear operators against us, Reliance Industries Ltd, with a view to bleniishing our fair reputation as India’s No 1 private sector company, bringing down the market price of our share and thus our market capitalisation, and causing in the process huge losses and untold anxiety to our 2.4 million strong family of small and institutional investors.