The Polyester Prince (9 page)

By the end of the 1980s, the banks’ nonperforming assets or bad loans greatly exceeded their capital base by a wide margin, and but for endless capital infusions by the treasury almost all would have become insolvent. When private sector banking was again encouraged, after the 1991 liberalising reforms, the Pai family took over a small southern-based institution, the Lord Krishna Bank. If offered the chance to buy back the Syndicate Bank, family members said, they would refuse it.

Immediately after his bank was taken away, Indira consoled T A. Pai by drafting him to apply his ideas as the first chairman of the nationalised Life Insurance Corporation of India. Soon afterwards, he was inducted as a Congress member of the upper house of parliament (the Rajya Sabha or State’s House) to enable him to become her government’s minister of commerce, handling trade matters. Later in the 1970s, Pai became minister for industries, which gave him a decisive role in the allocation of industrial licences. He continued as minister during the suspension of democracy under Indira’s declaration of Emergency between 1975 and early 1977. Pai died in 1981, having realised at the end-his relatives say-that his talents had been misused as a respectable cover by the corrupt circle around Indira and Sanjay. ‘The enterprise of adventurers always sucks in plain, decent men,’ commented the editor of the Indian Erpress, Arun Shourie, not long after his death.

‘The number of times men like C. Subramaniam [another of Indira’s ministers] and the late T A. Pai lied on Maruti [Sanjay’s car project] far exceeded whatever Mrs Gandhi said about it …’

For Dhiirubhai, Pai’s elevation meant that, as well as still having friends in a major bank, he now had a friend in a key position to approve import schemes and manufacturing plans.

In the early 1970s, the immediate pay-off was favourable changes in the import-export regime. Dhirubhai was not a law - breaker but had a creative attitude towards regulation.

As one former colleague recalled: ‘He would say: “You should not do anything illegal.

First of all, the law should be changed.”

‘He would not go into anything which was unlawful,’ agreed Sasmira’s Kothary

‘Everything he did was permitted to do by any other man. But his reading of the system!

You have a law, the interpretation which you make – he would take advantage of a particular system in a way which others could not see. By the time other people started anything the government was also waking up and the system would be changed.’

The key to profits in the Indian synthetic textile business through the 1970s was access to supplies of the basic filaments and yarns. Influenced by Mahatma Gandhi’s notions of self-reliance and the virtues of home-spun cotton, and by a strong lobby of cotton growers, New Delhi had discouraged use of synthetics, regarding them as a rich man’s textile.

India already had a few factories making rayon (derived from cellulose material, usually wood, pulp) which had been developed in France in 1891, and the more modern artificial fibres derived from coal and petroleum including nylon (developed by Du Pont in 1935) and polyester (first produced in Britain in 1941 and later marketed under proprietary names like Dacron, Fortrel and Terylene).

But these domestic sources met only a fraction of the demand, particularly for polyester, as Indians began to appreciate its durability, lustre (in some forms), colour – fastness, and case of washing. As well as in pure polyester fabrics, the fibre was in demand for blending with cotton at both the large industrial mills and the widely dispersed power-loom workshops.

Former colleagues say Dhirubhai resisted any temptation to smuggle in supplies.

‘Everyone knew smuggling was there, but Dhirubhai would not want to get involved,’ one former Reliance manager said. ‘Government support meant too much to him. We used to buy yarn that was obviously smuggled because it was cheap. But we were told this should be kept separate. By the time it reached the manufacturers it would have gone through many hands. But people knew this was smuggled goods.’

Instead, over the 1960s Dhirubhai had steadily become master of the trade in replenishment licences, which were entitlements to import yarn earned by exporters of finished textiles and garments. After the war with China in 1962 and another with Pakistan in 1965, India’s external balances were under strain and the government was ready to entertain more contrived schemes to boost export earnings.

Dhirubhai’s coup was to persuade Pai in 1971 to authorise imports of polyester filament yarn (
PFY
) against exports of nylon fabric. Previously, nylon fabric exporters had earned some rights to replenish their stocks of nylon fibres through imports. Dhirubhai argued that if he could sell nylon or other manufactured textiles (known as ‘art silks’) at Rs 4.25 a yard, more than double the price stipulated in the old scheme, the exporter should be rewarded by permission to import
PFY
, which was in greater domestic shortage because local production was far below demand.

This resulted in what was called the Higher Unit Value Scheme, which made Dhirubhai a fortune while it lasted. At that time, the domestic price of
PFY
was seven or more times higher than the prevailing international price. Even if the nylon or polyester exports fetched only a quarter or one third of cost, this was more than offset by the 600 per cent or more profit on the
PFY
imports.

Reliance went into a high-profile export drive, targeting some of the weaker economies of the world. Poland was one focus, with fashion shows mounted in Warsaw and delegations of Polish trade officials lavishly hosted by Dhirubhai in Bombay. Another was Saudi Arabia, where Dhirubhai had another old Aden colleague from Besse & Co’s Halal Shipping division, Bharat Kumar Shah, then working as a trader in Jeddah and acting as Reliance’s Mid-East ‘co-ordination manager’. Dhirubbai would take out full-page advertisements in The Times of India to announce special charter flights taking his export products to foreign markets.

But many senior figures in the textile industry still believe this export business was mostly bogus. ‘If these goods were not saleable at two rupees, how could they sell at four rupees?’, one remarked. According to this theory, Dhirubhai would have provided his own export earnings, by sending the money out to the ostensible buyer overseas through the illegal foreign exchange channels known as havala (accepting the 20 per cent havala premium on the official exchange rate). The goods would be sent to a free port such as Singapore or Dubai, to avoid customs duty, and then he disposed of at giveaway prices, left to rot on the docks, or even dumped at sea. The effective outgoings would be the 20

per cent havala premium on the funds sent out, and the 60 per cent of the same funds actually spent on buying
PFY
overseas for import back into India. The returns would be this 60 per cent multiplied by seven or more. The profit would be 425 per cent of the outlay. And as long as Dhirubhai had the ‘export remittance’ arriving back in his account in Bombay, he could claim credit for doing his bit for India’s trade balance.

In an interview with the magazine Business lndia in April 1980, Dhirubhai said Reliance Commercial Corp accounted for more than 60 per cent of the exports made under the Higher Unit Value Scheme. ‘The schemes were open to everyone,’ he said. ‘I cannot be blamed if my competitors were unenterprising or ignorant.’

Textile trade sources familiar with that era say this was not exactly the case. The adoption of the Higher Unit Value Scheme was not widely publicised in 197 1. Dhirubhai had a clear run of one or two years before other exporters began trying to take advantage of the same scheme, or putting up similar proposals for other categories of textile exports. One of these exporters, Bipin Kapadia, later recounted his experience to Bombay police who sought it as background to the sensational murder conspiracy case of 1989 (see Chapter 13).

Over two years in the early 1970s, Kapadia’s family company Fancy Corp expanded its exports from Rs 2.5 million a year to Rs 15 million on the expectation of receiving import entitlements for
PFY
from the Commerce Ministry’s Chief Controller of Imports and Exports. ‘On one pretext or another’ the authorities withheld the import licences over a 30 month period in 1972-74, causing Kapadia a huge loss.

Between 1971 and mid-1975, Kapadia made many trips to New Delhi to plead with officials. At his hotel, Kapadia told the police: ‘I used to receive repeated calls on telephone offering me company of women, threatening me of dire consequences, if I were not to leave the persuasion of my import licences.’ During one such business trip, Kapadia was approached in the hotel parking lot at night by a knife-wielding man who called out to him. A friend pushed Kapadia out of the way, and the man ran off.

In 1974, when some other exporters managed to get
PFY
shipments coming through and the domestic premium began tumbling, Dhirubhai was blamed by his rivals for instigating a complaint to the Collector of Customs in Bombay, I. K. Gujral, that the others were either importing ‘substandard’
PFY
or under-declaring the value to avoid taxes. Gujral seized all the suspect
PFY
shipments, but did not launch proceedings. It was not until a year later, after Gujral was replaced by an energetic Customs officer named J. Datta, that the Customs issued ‘show – cause’ notices to the importers asking them to reply to the complaints. In a one-day hearing on I July 1975, Datta listened to the importers and decided in their favour. The goods were released, but the
PFY
premium tumbled to about 100 per cent and all the importers suffered losses.

The High Unit Value Scheme continued as long as Indira Gandhi’s government did. It enabled Dhirubhai to gain dominance over the supply of polyester yarn to India’s highly decentralised textile weaving industry, where over 70 per cent of capacity is spread over thousands of small-scale power-loom workshops.

Dhirubhai became the major polyester importer in India, from the Italian company Ital Viscosa and the C. Itob group, Asahi Chemicals in Japan, where his hosts feted the Indian businessman on his buying trips. Later Reliance switched more of its sourcing to the American chemicals firm E. I. Du Pont de Nemours & Co (Du Pont), which had developed technology for a partially oriented yarn (
POY
, polyester filament not yet stretched after its extrusion to bring all its long polymer molecules into alignment or orientation along the length of the fibre) that had a longer useful life than the other companies’
POY
.

The former Du Pont agent Suresh Kothary recalls Dhirubhai overcoming Du Pont’s reluctance to ship to India. They said India was not used to containerisation, they didn’t want any claims. Dhirubhai said he would never claim. There were then no trucks to take containers from here to Ahmedabad, and the roads were bad. Somehow Dhirubhai did it.’

The scale of Dhirubhai’s imports grew. Around 1978, says Kothari, Dhirubhai heard that Dupont had idle capacity of 300 to 400 tonnes a month at its polyester plant in Germany.

‘Dhirubhai booked it for six months,’ Kothari said.

In addition, Reliance also built up to about 50 per cent share of the lucrative business of ‘crimping’, whereby polyester fibre is texturised by passing it through gear-like rollers to impart a waviness to the filament, or coiled to give stretch-attributes which make the yarn more opaque, lustrous and easier to dye. Industries Minister Pai overruled objections from his department to give Reliance the clearances to quadruple its texturising capacity in 1975.

Two anecdotes are told about Dhirubhai’s confident, even brazen, approach to the muttered denigration of his success that inevitably sprang up. On one occasion, a rival yarn trader allegedly spread the rumour that Dhirubhai was going bust. He was indeed short of cash, but went to a public noticeboard in the yarn market and put up a sign inviting anyone he owed money to come and have their advances repaid. No one did.

Another story is attributed to D. N. Shroff, president of the Silk and Art Silk Mills Research Association in the 1970s. Market gossip accused Dhirubhai of black marketeering. Dhirubhai asked Shroff to convene a meeting of the association’s executive committee, which included many of his critics, and then turned up to face it. ‘You accuse me of black marketing,’ he challenged, ‘but which one of you has not slept with me?’ All present had bought or sold yarn to Dhirubhai at some stage.

In March 1977, however, Indira and Congress were swept from power in the elections called after her two years’ rule under Emergency powers was lifted. But her government gave Dhirubhai a parting gift. Over the 1976-77 fiscal year (April-March) Dhirubhai had accumulated
REP
licences both from its own exports and from purchases in the market, worth some Rs 30 million. On 7 February, about three weeks after the elections were announced, the government was persuaded to exempt all polyester yarn imports under
REP
licences issued since April 1976 from customs duty, which was then 125 per cent. It was a gift of Rs 37.5 million to Dhirubhai.

Indira’s replacement was the Janata [People’s] Government, a coalition of anti-Congress parties under Morarji Desai, the austere and self-righteous former finance minister Indira had driven from Congress because he had opposed her nationalisation policies in the late 1960s.

But, at least to begin with, Dhirubhai fared well under Janata, helped by the good offices of the prime minister’s son, Kantilal Desai. On 22 August 1977, the janata minister for commerce, Mohan Dharia, abruptly cancelled the High Unit Value Scheme, and allowed any
REP
licence holder-not just exporters of nylon fabric-to import a specific quantity of polyester yarn.

The premium on licences for
PFY
crashed from 500 per cent to 50 per cent almost overnight. It was reported a year later by the Indian Express that Reliance stepped into the market to acquire licences at this low premium, and opened letters of credit for imports totalling Rs 50 million. Then, on 2 September, the Chief Controller of Imports and Exports (in the Commerce Ministry) announced another sudden switch of policy. To help ‘bona fide users’ of
PFY
secure their reasonable requirements, the linkage of exports of synthetic textiles with the import of
PFY
was restored with immediate effect.