The company’s shares had already started booming in expectation.
‘f this is not
speculation then what is?’, asked Gurumurthy.
The accountant-turned-journalist also took aim at another carefully nurtured
Reliance claim: that it did not rely on funding from government banks but on direct
borrowings and investment from the public. This had been a condition put by the
government on the licences for the new PTA plant and other units in 1984, so as not
to strain the resources of the banks. Among others, the industry minister, Narain
Dutt Tiwari, had recently praised Reliance for raising Rs 3.5 billion on its own. ‘But
would all these gentlemen have said had they known that more than Rs 1 billion of
this actually came from banks in one of the most elaborate tricks played on the
system? Or is it just possible that some in authority actually knew and chose to turn
a blind eye to the facts?’ Gurumurthy had not done so well in his overseas inquiries.
The lawyers and private eyes engaged in London were laboriously searching
company records in tax havens to trace ownership of the non-resident investors in
Reliance, but results were slow in coming. A letter from the London contacts on 16
April enclosed a fresh report from King’s Investigation Bureau with the comment that
it was very feeble’.
King’s had been asked to look into nearly 120 companies ostensibly owned by non-
resident Indians which had invested either directly into Reliance shares, as in the
1982 case, or by subscription to the Reliance E and F series debentures. Possibly
with the help of concerned banking officials, Gurumurthy had also obtained lists of
NRI companies which had borrowed from the Bank of Oman and certain other banks
to buy into the Reliance issues.
The nationalised Bank of Baroda had played a big role in financing the issue. Mostly
from its London office, the government bank had advanced a total US$33.5 million to
NRI companies and individuals, apparently nominated by Reliance, to help them to
subscribe to the F series debentures. This was about 40 per cent of the Rs 1.08
billion investment made by NRI sources. The loans had similar terms: two
percentage points over the London interbank rate or 10 per cent a year, while the
return from interest was 11 per cent after tax. The investors were clearly after the
capital gain from eventual conversion to equity.
The detectives had exhaustive searches made on the names in the Channel Islands
as well as the Isle of Man, but most turned up negative. In the Isle of Man they
found that 10 of the 11 controversial companies from 1982 had undergone a sudden
change of ownership and directors in August 1985. The two most provocative names
had also been changed to something more innocuous: Crocodile Investments had
become Asian Multi- Growth Investments, and Fiasco Investments had become Asian
Investments. In the case of the 11th corn any, Tricot Investments, 1 p it was not
possible to establish non-resident Indian ownership at all.
With the 10 companies, the various Shahs and Damanis of Leicester, Berlin, Djibouti
and New York had suddenly transferred their 55 to 80 per cent shareholdings in
August 1985 to newly formed holding companies in the British Virgin Islands with
names matching those of the Isle of Man companies they now owned. Inquiries in
Leicester found the Shahs had not received any noticeable jump in their wealth from
the sale of control over equity, by then worth over Rs 1 billion or US$80 million.
Indeed, family members professed the same degree of ignorance as they had in
1983. By then, Krishna Kant Shah- old Junagadh schoolmate - was too ill to meet
anyone (and died in May 1986).
The New York investors, Praful and Nalini Shah, turned out to be a middle-class
young couple mostly living off Praful’s average-size salary as clerk in a city law firm.
They had bought their modest home in the suburbs for US$49 000 with a $34 000
mortgage and drove an 11 -year-old Dodge. They had not apparently come into any
recent wealth either, but any connection they had with Dhirubhai was not
discovered.
As of August 1984, the British Virgin Islands had had a company code designed for
the discreet investor. Called the International Business Companies Ordinance, it
allowed companies to issue shares to an unnamed bearer who was allowed to vote at
company meetings. Companies could issue non-voting shares, so that technically an
NRI could own 60 per cent of the capital to comply with the Indian rules but have no
voting rights at all. And it could have faceless shareholders through trusts, corporate
bodies and the like. Directors and shareholders could even participate in meetings by
telephone.
Including these companies, Gurumurthy’s inquiries found that a total of 32
companies registered in the Isle of Man or the Channel Islands had subscribed a total
Rs 141 million to the F series debentures. The 10 British Virgin Islands companies
had subscribed Rs 50 million. And some 41 companies in the United Arab Emirates
had been lent an average Rs 1 million each by the Bank of Baroda to subscribe.
Out of the new names in the British tax havens, the searches found that new
directors had been appointed over August and September 1985, just after the F
series issue. Many had an Indian resident of Dubai, Homi Ratan Colah, as their new
director wielding majority control. Others had people of Indian names listed as
residents of Nigeria.
The Dubai companies had some fanciful names taken from various ancient Sanskrit
scriptures: 10 from the Vigneshwara Ashtotra, and 12 from the Sandhya Mantra.
Several others took names from the avatars of Lord Shiva and other divinities.
Reliance’s Middle East co-ordinator old colleague from Besse & Co in Aden, Bharat
Kumar Shah, subscribed Rs 35 million in the names of himself and his family, and in
the first week of September 1985 had sent a list of borrowers including himself to
the Bank of Oman.
Through a firm of Panamanian lawyers with an office in London, the investigators
had also done a search in Panama on more than 100 company names matching
those on the list of Reliance investors. They found some of he names, registered on
the same day in July 1985. Listed among company officers were two members of an
Indian firm of chartered accountants in Dubai which had done work for Reliance. But
the London investigators reported back to Bombay that their local agents had not
been able to get information out of the Panama lawyers who had incorporated the
companies. ‘Our agents have been advised that this is a most delicate matter, and
should not be pursued further,’ they said.
It was unsatisfactory--and tantalizing, given that the trail seemed to lead through
the tax havens and corporate hideouts of the globe back towards Bombay. The leads
in Panama and Dubai were not enough to build a story on. But it was enough for
Gurumurthy to resume the chase abandoned by the Indian press in January 1984-
when, he claimed, the Ananda Bazar Patrika group had been warned off by the
withdrawal of all Reliance advertising.
In a four-part article published over 11-14 June-under the heading ‘Reliance,
crocodiles & fiascos - he went through the story of the Isle of Man companies once
again, emphasising the series of coincidences that pointed to a single manipulator
close to the action in Bombay. Given the secrecy rules applying in the British Virgin
Islands, how was the Reserve Bank of India to verify that the companies had 60 per
cent control by non-resident Indians, as required by the Indian rules? Had the
central bank even been informed of the changed control in 1985?Gurumurthy also
highlighted the way in which changes in the investment rules had been timely for the
investments by the Isle of Man companies. Between late March and August 1982,
during two bear attacks against Reliance, some 1.872 million shares in the
company.-nearly 10 per cent of the then issued capital-had been bought by brokers
on behalf of unnamed NRI investors. The investment rules had been relaxed first on
14 April 1982, just after the first bear attack, to give repatriation rights to NRIs and
extend investment freedom to companies, partnerships and trusts with 60 per cent
NRI ownership. Then on 20 August, just after the second attack, the rules were
further relaxed to remove the Rs 1 00 000 (face value) ceiling for any one NRI
investor. Instead, each NRI investor could hold up to one per cent of the paid-up
capital of the company. Instead of having to distribute the 1.872 million Rs 10 shares
among 187 owners, the requirement was now just 10 separate shareholders. Only on
9 August 1982, Gurumurthy pointed out, had the various Shahs and Damanis
acquired their 60 per cent-plus control of the 10 Isle of Man companies.
The amendments to the investment rules had clearly been tailor-made. In
Gurumurthy’s 12 articles over three months, the Indian Express had fired a
devastating broadside at some of weakest defences. It had been an expensive
lesson for having got on the wrong side of the old Marwari newspaper baron sitting
at the top of Express Towers.
UNDER SIEGE
So far, it had been just words-wounding as they were to S Dhirubhai and Reliance.
But within three months, the Indian Express campaign led to action. Late on the
night of 10 June 1986, the Ministry of Finance in New Delhi issued a formal
notification that the political affairs committee of Rajiv Gandhi’s cabinet, comprising
the prime minister and his most senior ministers, had decided to ban the conversion
of nonconvertible debentures into shares.
The timing of the cabinet decision could not have been more pointed. It had been
widely known that the board of Reliance had been called to meet the next day, 11
June, specifically to decide to recommend conversion of the E and F series
debentures at the annual shareholders meeting two weeks later. On 4 June, a
meeting of finance officials had given in principle’s approval for conversion, and the
Reliance share price had jumped to a high of Rs 392. Once approved by the
shareholders meeting, the company would have applied for formal permission to the
Ministry of Finance.
The government’s decision meant the company had lost a chance to extinguish Rs
3.23 billion in debt, and make a core spending boost to its reserves and net worth,
while cutting about Rs 480 million in annual interest. The debenture holders had lost
the chance of a quick 200 per cent gain on their original investment. Even before
trading opened in the Bombay Stock Exchange on 11 June, Dalal Street was crowded
with investors off-loading their Reliance debentures in kerb transactions.
The E Series debentures had been trading around Rs 222.50 and the F Series at
about Rs 210 up to then. They crashed within a few hours to around Rs 110.
Dhirubhai met his other directors late in the afternoon, and adjourned to consider
other proposals to put to shareholders.
More bad news was coming in. On 17 June, Finance Minister Singh presided over an
open house hearing of claims and counter-claims about the Rs 15 000 a tonne anti-
dumping duty that had been applied on polyester yarn back in November 1982. Anil
Ambani represented Reliance. Jamnadas Moorjani attended for the All-India
Crimpers’ Association to oppose the levy. The next day, Singh abolished the duty and
yarn prices dropped 20 per cent immediately. The same month, the authorities
placed a Rs 3000 a tonne extra duty on imports of PTA to help the domestic
manufacturers of the alternative feedstock DMT. Dhirubhai was embattled on several
other fronts. Just as the newspapers reported the ban on conversion of
nonconvertibles, Gurumurthy began his series on the Isle of Man and other NRI
investors. Four months earlier, on 18 March 1986, the minister of commerce, E Shiv
Shankar, had confirmed to parliament that the Central Bureau of Investigation was
looking into the alleged leak of the May 1985 policy change on PTA imports.
At the start of June, Finance Minister V P Singh had ordered the Reserve Bank of
India to seek the facts of the Reliance loan mela’. In addition, both Reliance and
Bombay Dyeing were getting drawn into complicated litigation launched by small
shareholders who seemed to have ample legal resources at their disposal. The same
complaints were also being taken to ministers, the Company Law Board and the
heads of financial institutions by backbench MPs suddenly seized of the urgency of
the accounting intricacies involved.
The case against Reliance had been taken to the Supreme Court by one Om Prakash
Arora, a medical practitioner in New Delhi who-according to his letterhead-offered
cult treatment for baffling diseases affecting the head, skin, sex life, nerves and
stomach, and who lived by the motto that ‘life is not a problem to be solved but a
mystery to be lived’ . He alleged that Reliance was cheating on the interest paid to
holders of F Series debentures.
Nusli Wadia, for his part, had to divert attention to a case taken, inconveniently, to
the Calcutta High Court by one Kamal Singh Bhansall, who owned five Bombay
Dyeing shares. He alleged wrong entries in the company’s accounts for 1984-85 and
obtained a court injunction against distribution of dividends-just two days before
Wadia was due to hold his annual shareholders meeting. Bhansall’s shares were
worth about Rs 2600 but he had been able to engage one of India’s most costly firms
of solicitors and a team of advocates whose combined fees for the case would have
been 100 times that amount.
Dhirubhai’s response to the crisis was typically flamboyant and combative. On 26
June, he held his meeting with shareholders as scheduled. The Cooperage Football
Ground had been replaced as too small a venue. Instead, some 30 000 investors
flocked to the Cross Maidan, a large central park in Bombay, and sat under canvas
awnings. The small investors were anxious for their annual theatre. They wanted to
see how Dhirubhai was shaping up, after his stroke in February and the onslaught by
the Indian Express. They expected Dhirubhai to come up, once again, with the
unexpected and get around the conversion ban.
Dhirubhai did not disappoint, though his speech was obviously a physical strain for
him to deliver. Reliance would soon come out with a new, fully convertible debenture
issue on a rights basis to existing share and debenture holders, and would convene
an extraordinary general meeting to approve it. The company would try again to win
permission to convert the E and F Series. Reliance was meanwhile selling 42 per cent
more in the first five months of 1986 than it had in the same months of 1985, and
sales might cross the Rs 10 billion mark for the full year. The company was drawing
up plans for a further Rs 20 billion investment in new and existing products,
including plastics at the proposed petrochemical plant at Hazira in Gujarat.
As for the propaganda against the company, this was a result of success which had
created jealousy. Nonetheless some 320000 new shareholders had recently joined
the Reliance ‘family’, swelling the ownership spread to 1.8 million. The company
operated fully within the law. The management did not own a single F Series
debenture.
The non-resident investors numbered 11 000 and were spread across 55 countries.
Anywhere else but India, this achievement would be honoured. But the news
continued to get worse for Dhirubhai. Pleas to Goenka by Mukesh and then Dhirubhai
himself had brought a temporary truce in the Express campaign. But this peace was
accidentally broken by the Reliance camp when a pro-Congress magazine called
Onlooker ran an attack on Wadia, despite last- minute efforts by Dhirubhai’s friend,
the MP Murli Deora, to have it canned.’ In any case, other publications were taking
up the attack on Reliance. On 5 July, the tabloid Blitz took an existing scandal a lot
further. Understatement was not a hallmark of its editor, Russy Karanjia. The front-
page splash began: the meteoric rise of the
Reliance group of companies to the pinnacle of monopoly power was fuelled by a
series of swindles of a magnitude unparalleled in the annals of corporate fraud in this
country, incontrovertible evidence in the possession of Blitz reveals...’s What the
newspaper possessed actually related to one trans- action, an enhancement of one
of the letters of credit for the import of PTA carried out in May 1985. A branch in
Bombay of the Canara Bank, owned by the government, had increased the finance
provided in the letter by US$6.93 million (to US$8.32 million) in a handwritten
amendment dated 29 May 1985-the same day that the import policy was changed.
As well as the amendment, Blitz had a copy of a letter by a Reliance finance manager
dated 31 May to the Canara Bank branch. It complained that in the bank’s
communication to the M supplier (the British chemicals giant ICI) ‘he fact the above
LC has been enhanced on 28.05.85 has not been brought out clearly ... You are
aware the effective date of enhancement of the above LC is one of the important
factors which now you may communicate to the beneficiary stating that the LC has
been enhanced on 28.05.85’s .
The company was worried that a letter of credit dated the same day as the policy
change would be disallowed. The branch manager obliged by sending a telex to ICI
to this effect on 1 June. In a follow-up article, Blitz reproduced correspondence from
Reliance to ministers and senior government officials in which the company insisted
A letters of credit were taken out before 29 May--assertions Blitz described as lie’s
and cooling the government’s .
The bank manager’s action could be put down to a willingness to correct a simple
clerical error that could disadvantage his client, if indeed the transaction had been
made on 28 May. But it had already drawn rebukes from the Canara Bank’s own
inspectors at head office-who asked what were the ‘important factors’s and a request
from the central bank for the discrepancies in dates to be cleared up. And as the Blitz
report came just after Gurumurthy’s account of the loan mela in which several
Bombay branches of the Canara Bank had figured, against their board’s initial
wishes-the possibility of a more serious forgery was more credible.
The Reserve Bank of India had meanwhile reported to the Ministry of Finance at the
beginning of July on its preliminary inquiry into the loan mela. It found that nine
banks had given advances totalling Rs 592.8 million in India during 1985 to
companies apparently associated with Reliance, against security of Reliance shares
and debentures. The loan accounts totalled 187, given to 63 companies. Reliance
had placed money with the nine banks, totalling Rs 919 million, as deposits, not
collateral. Several of the borrowing companies had been established very recently,
and in some cases with a capital of only Rs 1000 or Rs 10 000 though they had
borrowed amounts as great as Rs 9.5 million. The purpose of the loans was generally
stated as working capital or purchase of shares’. In all cases, the security offered
was shares or debentures of Reliance, held either in the name of the borrowing
company or that of another company connected with Reliance. The banks had not
worried about repayment capacity of the companies, or looked into the end use of
the funds.
The loans had not broken every rule. RBI directives required that shares pledged
against loans of more than Rs 50 000 be transferred to the lending bank’s name.
This had been complied with, generally. The loans had been repayable within 30
months, in some cases 12 months, and thus were not long-term loans (five years
and more) which required RBI approval. But by granting large advances to Reliance-
