The Polyester Prince (41 page)

Mahendra Doshi, the broker in the sale, said he had dealt with Anand Jain and Manoj Modi of Reliance Capital for the delivery of the shares. He knew nothing about the sellers; jain had told him the company names to which contract notes and bills were to be issued. The shares had been handed over by another Reliance Capital executive, Tushar Sarda, and the proceeds handed to him. Six months earlier, Doshi had carried out a similar sale to the Unit Trust of 2.2 million shares. Jain had initially denied knowledge of the 13 Group A companies, then admitted to being involved in the sale.

According to correspondence produced by
RCS
, the 14 Group B companies had requested the registry to inform them of any transfers lodged by third parties for their shares, because the shares were placed from time to time as collateral, on condition that they not be transferred in the name of the creditor unless approved by them. The tax inspectors said this was not supported by evidence, and the letters were found to be fabricated. The sales were real, and the income from them should be taxed. The swapping of shares was a systematic evasion of capital gains tax, by substituting the newly bought shares of Group A for the older and more cheaply acquired holdings of Group B. Not a single case of switching for sellers outside the group was found.

The tax-reduction explanation made some sense, but did not fit with everything that Reliance was saying. It had pointed out that the switching had been confined to the period March-October 1992, yet Mukesh Ambani had said it was a common practice. If it had made good tax sense in 1992, and had been legal, why not continue it?

Some business analysts tended to believe that the share - switching occurred as a part of the cover-up of Dhirubhai’s close involvement with brokers in the 1992 scam. They speculated that shares handled by brokers such as Harshad Mehta and Hiten Dalal were hurriedly dumped on friendly institutions such as the Unit Trust and the Canara Bank funds as the scam broke in April 1992.

Others veered to the explanation put up by the 27 Ma in parliament, alleging systematic pledging of duplicates of shares owned by the Ambanis and other management investors, which would be switched if they were ever sent for ownership transfer in the company-controlled registry and would never be in marketable lots. The central bank inquiry into the 1986 loan mcia tends to contradict this latter allegation: it found that all the Reliance shares pledged by the group companies had been transferred to the names of the lending banks. But that was 1986. And if the banks had attempted to transfer the shares to a third party, the Reliance registry could still have intervened.

At least one former fund manager, admittedly no friend of Reliance, recalls a case in 1989 where a bank sold him shares pledged by Reliance. The company raised hell with the bank to get the shares taken back and exchanged for others.7

As the bedraggled Narasimha Rao government neared the end of its term, some other controversies came back to haunt Dhirubhai and Reliance.

In January 1996, the government filed an appeal in the Supreme Court against the ruling by the Customs, Excise and Gold Appellate Tribunal that had upheld the controversial 1989 decision of the former Bombay Collector of Customs, K. Viswanathan, to drop the charges of evading duty on the ‘smuggled’ polyester yarn plant at Patalganga (though the tribunal had said that duty should be reassessed on the four extra spinning lines that had appeared out of ‘spare parts’). The petitions filed by Reliance in 1990 had delayed the tribunal hearing by three years.

Later that month, a team of
CBI
officials flew to Bombay and suddenly revived the case against Dhirubhai and others of backdating the letters of credit for the
PTA
imports in May 1985. Dhirubhai was ordered to appear in a magistrates court, but his lawyers successfully argued through the rest of the year against the need for a personal appearance. The case was a warning shot by Narasimha Rao. Reliance had been falling behind in the campaign funding it had promised the Congress Party, apparently seeing no point in pouring further money into a lost cause. The company was also suspected within Congress of stirring up the telephone licence scandal in order to distract attention from its own problems.

In 1995, a young police officer with the Central Bureau of Investigation in Bombay, V P Singh, had begun digging into the private placement with the Unit Trust of India and the two government insurance giants in 1994. His request to see the papers on the placement caused panic at the Trust. The highly unfavourable placement had been forced on the institutions by senior figures in the Narasimha Rao government, he concluded. After careful study of the laws governing institutional investments, he drew up a report listing some 20 illegalities, including conspiracy and fraud, and recommending charges against a string of senior officials.

After picking up signs of discontent among Oil & Natural Gas Commission engineers ‘during a visit to a Bombay High oil platform, Singh also began looking into the award of the Arabian Sea oil and gas fields to the Reliance-Enron-
ONGC
consortium in 1994. The bidding had been extremely bitter, with rival groups accusing Reliance of inside knowledge of tender evaluation criteria that were kept unclear for others. Singh found that the new owners had come into the fields with little compensation to
ONGC
for its past costs of exploration and preliminary development. The new operators had also been given a highly unusual bonus on the oil price guaranteed by the government.

Singh asked his superiors at the CBI for permission to start a preliminary inquiry. Instead, in March 1996, he was abruptly transferred back to the Maharashtra State Police, after being accused of mishandling another case. Singh lodged an appeal with an administrative tribunal. However, two other authorities-the Planning Commission member G. V Ramakrishna (a former Petroleum Secretary and Securities Board chairman) and the Comptroller & Auditor-General’s office-took up similar criticism of the oilfield contracts. In October 1996, the private secretary of Satish Sharma, the petroleum minister at the time the contracts were awarded, told the CBI that Reliance had paid Sharma Rs 40 million between June 1993 and February 1994 (and that two other companies involved in bidding had also made payments). Reliance denied the allegations

If Dhirubhai had rubbed Narasimha Rao the wrong way, his relationships with the opposition parties were also ambivalent. Sections of the Janata Dal and Left continued to regard him as anathema, yet he had successfully cultivated many of their leaders at state level. In the Hindu nationalist camp, he paid court to senior
BJP
leaders such as L. K. Advani and Atul Bihari Vajpayee. But a section of the party’s MPs such as Jaswant Singh had been Ambani critics for more than a decade, and his old nemesis S. Gurumurthy of the Indian Express campaigns, had become a close legal adviser to Advani. Their hostility was often neutralised in party forums by a claque of Ambani supporters, such as the
BJP
secretary-general Pramod Mahajan, who once defended Dhirubhai as ‘not someone who sleeps with you then refuses to recognise you in the morning’. The metaphor cannot have been to the taste of the RSS-trained cadres of the party.

Within the
BJP
leadership, Dhirubhai became distrusted for the split he helped engineer in the party’s Gujarat branch soon after it took power in the March 1995 state elections.

Dhirubhai backed a lower-caste
BJP
leader called Shankersinh Waghcla in disputes with the newly elected chief minister, lceshubhai Patel. In September 1995, the two openly split, and Dhirubhai flew Wagheia’s faction of state MPs to the central Indian resort of Khajuraho, famed for its erotic temple carvings, to keep them together. Around this time, Vajpayee was appalled to find Dhirubhai on the telephone, putting forward a ‘solution’ to the Gujarat crisis: Waghcla should be made deputy chief minister. Highly embarrassed, Vajpayee refused. A year later, Waghela ousted Patel’s faction and formed a government with Congress backing. It is not clear whether Dhirubhai had any intention to destabilise the
BJP
nationally or just install a cooperative state government to help his industrial plans.

Having gathered damning material on the share-switching cases, and little on the supposed ‘bear conspiracy’ against Reliance, the Securities Board and the Department of Company Affairs shuffled responsibility for prosecution between them, and eventually the decision fell into the limbo caused by the calling of elections for early May 1996. The elections produced a three-way hung verdict, with the
BJP
having narrowly the largest number of seats. It decided to form a government, knowing it was unlikely to pick up support. Vajpayee was sworn in as prime minister, with Jaswant Singh as finance minister and Ram Jethmalani as law minister-a combination unpromising for Dhirubhai.

India’s first
BJP
government lasted only two weeks-but long enough for Jaswant Singh to order a show-cause notice to be issued to Reliance for breaches of the Companies Act.

Jethmalani passed up on endorsement of Singh’s order, saying he had made too many appearances for and against Reliance, and it passed to the next government to implement.

Dhirubhai had plenty of friends in the 13-party coalition which took over, including the new prime minister, H. D. Deve Gowda, who flew back to Bangalore to resign his job as Karnataka state chief minister in Dhirubhai’s executive jet. Jaswant Singh’s decision resulted in 29 charges being laid against Dhirubhai, other executives and his companies in a Bombay magistrate’s court. One of the charges was a serious one, mentioning ‘Intent to defraud’.

In October, the entire duplicate share and switching issue was wrapped up by a government decision to allow Reliance to 1compound’ the charges-a process whereby a company simply pays a set fine for technical breaches and avoids a prosecution in court.

Reliance had argued that the offences had been inadvertent, due to pressure of work on the registry. No loss had been caused to shareholders, no gain to the company. The magistrate, A. M. Thipsay, agreed that intent to defraud had not been substantiated. The total penalty came to Rs 6.396 million, while the registry, RCS, was suspended from operations for six months from April 1997.

The penalty was ‘very light’, judged the Economic Times… if Reliance says it will clean up its act and actually set standards for securities transactions by joining the depositary [an independent, computerised share registry], it is because longterm self interests dictate so. A group depending heavily on international markets for resources has to be seen to have some basic corporate hygiene.’ It was ‘a tap on the wrist’, agreed the Business Standard. The issue had ended with a whimper, the paper said. ‘The case called for a lifting of the corporate veil, and judging whether the entire episode was more than a result of clerical error.’ ==

It had been close, a crisis almost ranking with the 1980s Polyester Mahabharata, but once again’ Dhirubhai had come through.

Rliance emerged from the duplicate share and share-switching crisis without substantial penalty. The ‘compounding’ of the various charges reduced the scandal to a series of admitted technical offences against the Companies Act. The delay in the six-month suspension of its share registry allowed Reliance to inoculate itself by placing the major portion of its issued shares with the new independent share depository opened in Bombay at the end of 1996 and find a new registry for the rest. The stock thus remained tradeable and liquid throughout the suspension, and Reliance could claim virtue from taking the lead in using this long-overdue facility to protect investors.

But the corporate myth of Reliance Industries had been cracked. Its reputation with investors in India had been badly damaged. In those international centres of investment management most familiar with India at that point, notably London and Hong Kong, fund managers already felt burned by Reliance and the Ambanis after the Unit Trust of India private placement and the twin companies’ merger in 1994. The share-switching and duplicates cases only compounded the deep mistrust.

The switching case had exposed - as somewhat hollow the much-professed devotion to the huge numbers of small investors. By the company’s own defence, its share registry was inadequately managed. By the more severe of the accusations made against it in parliament, the registry was the heart of a cynical manipulation depriving investors of secure title to their shares and the ability to trade them freely, though this was never proved.

The performance of Reliance shares in the market was augmented by a sustained purnp-prirning effort, using the company’s own funds or money raised from banks for other declared purchases.

Reliance’s position as India’s largest private-sector company was challengeable because of the opacity in its accounts on the amount of intergroup transactions included in sales and the possible artificiality of profits in some bad years. The emphasis on absolute numbers of sales, assets, profits and so on distracted attention from the ratios that measure the relative profitability or efficiency of a company, such as return on capital.

Transactions with the more than 200 ‘trading and investment’ companies controlled or owned by the family management might point to investment profits being taken from Reliance to these companies. In other words, the Ambanis at least sometimes treated a company in which they have had normally a 26 per cent sharcholding as their personal property.

The huge private placement to the government financial institutions and the instances of funding from banks against pledged management shares undercuts the claim that Dhirubhai successfully by-passed the banks and raised capital chiefly from the public.

The long delays in completing projects after the early success at Patalganga in 1984 and the insatiable appetite for funds have raised questions about the company’s efficiency in managing capital-even whether fundralsing and deployment had not become a more important activity for Reliance than making petrochemicals and textiles.