Blind Ambition

In a country where "business ethics" is considered a contradiction in terms, where mutterings about the "business-political nexus" raises only a few tired eyebrows today, the Reliance group continues to draw extreme responses. From the creator of unequalled wealth for lakhs of shareholders to Devil incarnate, an amoral behemoth which has brutally subverted the nation's politico-economic system to have its cake and devour it, at every opportunity it has got. Says S. Gurumurthy, veteran Reliance-basher: "Most of the major houses have broken many rules and grown because of their proximity to the political leadership. But everyone has a notion of a lakshman rekha which they never transgress. Reliance does not have such a dividing line."

The five allegations that are haunting Reliance, and which have plunged the Indian capital markets into a period of uncertainty unsurpassed since the days of the securities scam are:

•  That Reliance has issued fake shares.
•  That it has switched shares sent for transfer by buyers to make illegal profits.
• That it has indulged in insider trading in shares.
•  That it has established an unholy nexus with the Unit Trust of India (UTI), to raise huge sums of money to the detriment of UTI subscribers.
•  That it has, through front companies, attempted to monopolise the private telecom services market.

Scratch the surface of that ambition, and you find the raw sensitiveness of a businessman who has been incredibly successful, but is still hankering after some sort of elusive respectability, what he considers a rightful place in the Indian business pantheon. At the Bombay Stock Exchange (BSE) and the Mulji Jetha Market in Bombay, most old stockbrokers and traders love to regale listeners with tales about Dhirubhai. "When he was trading yarns and fabrics," says an old-timer, "Dhirubhai often had to wait for hours to meet Bombay Dyeing chief Nusli Wadia. Reliance Industries is an answer to all the humiliation he suffered at the hands of the traditional business bigwigs."

 With blind ambition has also come the arrogance that rags-to-riches men are easy prey to. Reacting to charges of financial irregularities and political manipulation lev-elled at him by Indian Express some years ago, he told a business magazine: "It's a price to be paid for success. My skin fortunately is very thick. The fact is that when an elephant walks, dogs tend to bark."

This time round, the dogs may have drawn more blood than the elephant had expected. Though Dhirubhai can feel good about one aspect at least. A symptom of the awe that Reliance generates is the fact that of more than a dozen industrialists, stockbrokers and investment bankers Outlook spoke to, none would go on record for anything other than mundane generalities. Yet, it is high time each of the controversies was dejargonised and reduced to its basic points.

The Duplicate Share Controversy: In January 1994, broker R.D. Choksey delivered 26,650 Reliance shares (worth around a crore at that time) belonging to Dr Rajul Vasa to the BSE clearing house for passing on to the next buyer. In April, Vasa wrote to Reliance Consultancy Services (RCS), the group's registrar and share transfer agent, that she had lost these shares. RCS followed procedures, and issued duplicate shares. Meanwhile, however, these "lost" shares had been bought by a company called Opera Investment & Trading, through its broker V.K. Jain, and lodged with RCS for transfer to Opera's name.

 RCS did not transfer these shares, claiming —reportedly verbally, to Jain—that the signatures did not match. Jain complained to the BSE, whose arbitration committee awarded Rs 1.066 crore against Choksey, who had, after all, delivered these shares. But Choksey had, by that time, been termed a defaulter by the BSE. The defaulters committee of the BSE then held that RCS had no business issuing duplicates for these shares. Because while the duplicate issue procedure was going on, the "lost" shares were first in RCS' possession, having been delivered there by V.K. Jain, and then with the BSE, where Jain took the shares for arbitration. Reliance claimed that this was a bureaucratic bungle due to the volume of share transfer work that RCS does. It paid up the Rs 1.066 crore to the BSE.

THAT seems fine, the only problem being that Dr Rajul Vasa is Dhirubhai Ambani's personal physiotherapist, and that Opera Investment is an associate company of Reliance. So, if a clerical error is the best case scenario, the worst case scenario is that Reliance knowingly issued duplicate shares to Vasa. In this scenario, RCS would refuse to transfer the lost shares lodged by Opera (RCS obviously cannot transfer the same shares twice), and Opera would simply take the shares back and sit on them. Vasa would then sell her newly acquired duplicate shares (which she did), thus paying for only one set of shares, and selling two. If such was the case, then the plan went bust when Jain went ahead and complained to the BSE. The caper works out only if Jain does not complain and the "lost" shares are shredded at Opera's end.

Whatever the case, legally, Reliance is in the clear. It has accepted its mistake, and paid a fine. But not so Vasa and Choksey. If Vasa sold the shares through Choksey, she should have been paid by Choksey within 14 days or so. If so, then she was clearly lying when she claimed three months later to RCS that the shares were lost. So too, if the broker had not paid her. Alternative explanation: Choksey stole the shares from Vasa; so, naturally the signatures did not match, as RCS claimed. Vasa is reportedly attending a month-long medical conference in Sweden or Switzerland.

The Share-Switching Controversy: In February 1992, just before the securities scam broke, Fairgrowth Financial Services, later accused as one of the perpetrators of the scam, bought 15 lakh Reliance shares through its broker (also to be scam-tainted pretty soon) Pallav Sheth. These were sent for transfer to RCS, but for reasons that are still unclear, Fairgrowth gave Pallav Sheth an authority letter to withdraw the shares before transfer. Within months, the scam was out, Fairgrowth was notified by the Government, and for three years, Fairgrowth claims, it got neither its shares back nor money in lieu of the shares. While Sheth stalled Fairgrowth's inquiries, RCS did not furnish any details about what had happened to these shares in spite of repeated requests from Fairgrowth. Finally, when, on November 20, 1995, the Special Court asked RCS to furnish the details, it was found that these shares were now divided between the UTI, Canfina and several other companies.

Nothing wrong with that. Sheth may have taken the 15 lakh shares back from RCS and sold them to these parties, and conveniently forgot to pay Fairgrowth back. The only problem was that the UTI transaction had taken place in November 1991, three months before Fairgrowth asked Sheth to sell them. That is, the UTI had received the shares three months before they had been sold!

The UTI had in fact sent 24 lakh Reliance shares to RCS in November 1991 for transfer. But RCS replaced 8.7 lakh of these shares with the ones sent by Fairgrowth. In fact, it has since come to light that RCS may have, over the years, replaced more than 45 lakh shares sent for transfer by the UTI. Again the best case scenario is the Reliance explanation. That among the myriad finance companies that the Reliance group has, some are "holding companies" (let's call them A group companies) which buy Reliance shares at the issue price and simply hold on to them, never selling them. Others are "investment companies" (B companies), which play the market.

Some B companies sold more shares to the UTI than they had in their possession at that point of time, a common enough stockmarket practice. When it came time to deliver the shares, it borrowed some shares from A group companies and gave them to the UTI. When the UTI sent these to RCS for transfer, the B group companies took the borrowed shares back and replaced them with some other shares belonging to them. For, if the A group shares had been transferred to the UTI, the A companies would have to pick up the same number of shares again from the market, that is, at a far higher cost, and since the UTI was interested in buying any 24 lakh Reliance shares and not any par -ticular ones, it made no difference to the UTI if the shares it had sent for transfer were not the ones it received back.

But, again, questions remain. If RCS replaced 8.7 lakh A company shares with an equivalent number of B company shares, then it only proves that Fairgrowth had bought these shares from Reliance group B companies, because remember, these shares had never been transferred in Fairgrowth's name, so they remained in the names of the people who sold these shares to Fairgrowth.

Charges CPI MP Gurudas Dasgupta: "Reliance replaced the UTI's shares to get rid of scam-tainted shares. It is time that Reliance is meted out the proper punishment, as an example to other corporates."

The worst case explanation: Sheth took the price of the 15 lakh shares from Fairgrowth, and lent it, with or without Fairgrowth's knowledge, to some Reliance group companies against the shares. These shares were never meant to be transferred, so they were withdrawn by Sheth, who may have, for all one knows, borrowed more money against these shares from other parties, with or without the collusion of the Reliance companies which owned these shares. Then the scam broke, the Special Court froze these shares, banning all transaction in them, and the pre-Fairgrowth owners were stuck with them. These shares needed to be concealed, and the best place to hide them was in the UTI, which owns such a huge number of Reliance shares that only a stroke of huge bad luck would lead to the discovery of a mere 8.7 lakh shares among them—a needle in a haystack. That stroke of bad luck, according to the worst case scenario, then was Sheth who, out of greed or lack of funds, did not pay Fairgrowth back. If this is true, that involves these Reliance companies in illegal activities at the heart of the securities scam.

The Insider Trading Controversy: The formal decision to merge Reliance Polypropylene (RPPL) and Reliance Polyethylene (REPL) with Reliance Industries (RIL) was taken by the RIL board on November 8, 1994, and conveyed to the BSE on the same day. If a canny investor got wind of this decision earlier, he should have bought huge amounts of REPL and RPPL shares, and then after the merger was announced, converted them into lucrative RIL shares. In the five months before RIL announced its decision, while the national stockmarket index moved between 20 to 30 per cent, REPL and RPPL shares appreciated by 262 per cent, from a low of Rs 40 on June 1 to a high of Rs 105 on November 8.

Among the top buyers of these two shares during this period were Taurus Mutual Fund, floated by Creditcapital Corporation, in which RIL has a 10 per cent stake; Kothari Pioneer Mutual Fund, whose promoter has married into the Ambani family; Amar Investment Company and Vatsa Industries which are alleged to be associate companies of Reliance, and Dr Rajul Vasa.

The best case scenario: that this is totally circumstantial evidence, with not a shred of the sort of proof that is admissible in court. And the worst case? Recalls a top stockbroker: "When the price started going up in June 1994, these shares had no intrinsic value; even the civil works had not started for their projects. These two shares used to be referred to derisively in the market as Illu and Pillu. These shares would be highly overpriced even at Rs 40."

The UTI Controversy: Between November 1994 and March 1995, the UTI invested about Rs 1,000 crore to buy RIL shares in two private placement deals: at a price of Rs 385 a share aggregating to Rs 773 crore in November 1994, and at a price of Rs 401 per share aggregating to Rs 300 crore. And the Rs 773-crore deal comes with a five year lock-in provision; the UTI cannot sell these shares before November 1999. Assuming even a 50 per cent dividend on RIL shares, the UTI will make about Rs 14 crore every year on the investment.

Paradoxically, the Rs 1,000 crore that RIL has reportedly invested over the past one year in the Unit 64 scheme (which has no lock-in provision) should net RIL around Rs 190 crore a year, assuming a 26 per cent dividend.

Be that as it may, the point that anti-Reliance circles are making is that at a time when money for industry is frighteningly scarce, RIL has managed to mop up funds at a mere 16 per cent, several percentage points below the average industrial borrowing rate prevailing. The UTI can, of course, say that it found the investment an attractive one, and if the RIL share price took a big dip after the transaction, that's common market risk. Twenty-five CPI(M) MPs have asked for a probe into the "Reliance-UTI nexus".

The Telecom Controversy: Also on December 18, the CPI's Dasgupta revealed that among the top buyers of REPL and RPPL shares in the five months leading up to the merger was Himachal Futuristic Communications (HFCL), already notorious for its alleged role in the basic telephone services privatisation mess. HFCL bought 10,19,500 REPL shares in that five-month period, and 10,01,800 RPPL shares, which, post-merger, were converted to 5,55,415 RIL shares. The immediately-in-circulation conspiracy theory was that HFCL is a front organisation for Reliance, which had declared huge ambitions in telecom, but which ended up with seven cellular telephony circles, and five of the least attractive basic telephony circles.

The hate-Reliance theory being circulated: that Reliance did not want to come to the forefront in telecom, knowing that this would be asking for some controversy or the other. So it got HFCL to take care of the most lucrative circles, while it took care of the lower end. Some years later, Reliance will silently take control of HFCL and get the monopoly it is looking for. But if that is so, then this seems to be one case where the Ambanis, supposedly so adept at getting Congress governments on their side, have really messed it up. Because, after the Government's decision to limit the maximum number of circles allowed to a company, and the announcement of new reserve prices, Reliance will have to bid again for all the circles that it had won, and bid manifold higher than its original bids. Besides, forming an alliance with another company is definitely not illegal.

But, says Dasgupta, even with what the alleged alliance has, it would still manage something of a monopoly. "The Reliance-Nynex combine having seven out of the 19 state-wide cellular circles, and HFCL's bids in four basic telecom circles being accepted by the Department of Telecommunications goes against the communications minister's policy of capping which, in the first place, was introduced to prevent replacement of public sector monopoly with that of the private sector," says he.

THE Government has ordered a probe into the duplicate share and share-switching charges. Maybe probes will be ordered into the others too. But already it seems highly unlikely that the Ambanis will be found guilty of any wrongdoing. In the Vasa case RCS is in the clear, in the share-switching case it may take years to fig-ure out the chain of shares through hundreds of Reliance group finance companies, if such a trail at all exists. It is very improbable that any concrete evidence, beyond the circumstantial variety, exists to prove insider trading. Says L.C. Gupta, member, SEBI: "It is very difficult to convict people on charges of insider trading. All around the world the percentage of conviction in cases of insider trading is very small. But that doesn't mean that you don't try." The UTI allegations will most likely take its place among those many supposed scandals that are bandied about, and then vanish one day from the front pages. The telecom conspiracy cannot be proved.

Besides, cynicism about probes by Government agencies abounds. Dasgupta wants either a Joint Parliamentary Committee (JPC), or an all comprehensive judicial probe. But Samata Party MP George Fernandes has little faith in any probes. "After the failure of the JPC on the securities scam, I wash my hands of any other JPC. I have no faith in JPCs anymore," he says. "Knowing the clout of Reliance and the fact that few people who are not in cahoots with them, one will have to be cautious in weighing the outcome of this probe. If the Government is keen on unearthing Reliance's rackets, it should order the appropriate investigative agency to take charge of all shares of RIL's bogus companies —which would easily number over 1,000, including those in offshore islands. By taking charge of these shares lodged with banks, financial and term lending institutions, it would be possible to find out how may bogus shares of Reliance are there, which would be a colossal amount. " BJP General Secretary Pramod Mahajan disagrees. "Since even the assassins of Mahatma Gandhi and Indira Gandhi were given a fair trial, which took a few years to complete, Reliance, the country's premier private sector company with three million shareholders, should not be pre-judged and condemned without a proper probe." And, he says, other corporates too may be guilty of what Reliance is being charged with: duplication of shares, insider trading and price rigging. "Their shares have not been bathed in the Ganges." He sees no point in setting up a JPC. "Today RIL has been put in the dock, tomorrow it may be the turn of another top business house, and yet another next. Is it possible for us to go on constituting one JPC after another?" he asks.

The Ambanis will not go to jail. But Reliance will be deeply damaged, and will need years to rebound to top form. If, as Reliance sources claim, that this is all a conspiracy hatched by the conglomerate's business rivals to hurt Reliance, then they would have achieved their purpose.

This is the way Reliance has been damaged. Its image, which had recovered a great deal from the beating it took throughout the '80s, is now back in the dumps. Reliance will find it difficult to raise money through its beloved share issue route for some time to come; at the very least, it will not be able to charge a large premium. It will have to stay away from the UTI's funds for some time. It will not be able to raise money through Euro-issues and Global Depository Receipts.