Capital markets

Lock, stock, and Reliance

Print edition : March 21, 2014

Union Minister for Disinvestment Arun Shourie with RIL chairman Mukesh Ambani at a press conference held to announce the offer for sale by the Government of India of equity shares in IPCL, in Mumbai in February 2004. Photo: PAUL NORONHA

Controversies involving the Reliance group in the stock market have been many.

ON February 24, the Securities Appellate Tribunal sought clarifications from the regulator of the country’s capital markets, the Securities and Exchange Board of India (SEBI), on the impact of its new consent mechanism norms on a seven-year-old ongoing case between the regulator and India’s biggest privately controlled corporate entity, Reliance Industries Limited (RIL).

The consent mechanism, which was notified on January 9 by SEBI but which comes into retrospective effect from April 2007, allows companies and individuals to settle their disputes with the regulator of the markets by paying a sum without admission or denial of alleged wrongdoing after disgorgement or repayment of any gains that were illegally obtained. This case against RIL dates back to 2007 when the company was accused of “insider trading”—or illegally transacting in the financial instruments of a public company by accessing information which is not in the public domain—when Reliance Petroleum Limited (RPL) was merged with it.

It was alleged that before RPL’s merger with RIL, the flagship company had “short-sold” a 4.1 per cent stake in RPL that was valued at Rs.4,023 crore to prevent a fall in the price of the stock. Short-selling is the practice of selling financial instruments that are not owned by the seller but who subsequently repurchases these—a form of speculation that is considered illegal. It was claimed that the shares of RPL were sold first in the futures market and later in the spot market, covering the first set of share sales in the futures market.

In 2008, SEBI started investigating the allegations of short-selling. Two years later, the regulator initiated quasi-judicial proceedings and thereafter found that RIL had booked a profit of Rs.513 crore in the futures segment through this deal. SEBI argued that the company was aware of the sale of shares and sold futures ahead of this and that this was tantamount to insider trading. RIL challenged the show-cause notice sent to it by SEBI in December 2010. But the regulator insisted that the company had violated insider-trading norms. RIL then moved SEBI for a consent settlement of the dispute, which was not entertained by the regulator. The company then moved the appellate tribunal.

The short point: even after seven years, the disgorgement of ill-gotten proceeds has not taken place.

‘Equity cult’

This is hardly the first time that the corporate conglomerate headed by India’s richest man, Mukesh Ambani, has been accused of manipulating the stock markets. His late father, Dhirubhai Ambani, was often described as the person who successfully spread the “equity cult” in the country from 1977 onwards when RIL went public. He decided that unlike most Indian businessmen who borrowed heavily from financial institutions to nurture their entrepreneurial ambitions, he would instead raise money from the public at large to fund his industrial ventures.

No businessman before him successfully convinced close to four million Indians, most of them belonging to the middle classes, to invest their hard-earned savings in shares as he did in the case of the Reliance group companies. He was fond of describing shareholders as “family members”, and the group’s annual general meetings have an atmosphere of melas attended by large numbers of people.

In 1982, Dhirubhai created waves in the stock markets when he took on a cartel of bear operators that had sought to hammer down the share price of Reliance Industries. The cartel badly underestimated the Ambanis’ ability to fight back. Not only did Dhirubhai manage to ensure the purchase of close to a million shares that the bear cartel offloaded, but he demanded physical delivery of shares. The bear cartel was rattled. In the process, the bourses were thrown into a state of turmoil and the Bombay Stock Exchange had to shut down for a couple of days before the crisis was resolved.

Even as Reliance group companies believed in rewarding its shareholders handsomely, it is also true that the companies’ promoters were often accused of manipulating share prices. Two group companies that once carried the cumbersome names of Reliance Poly-Ethylene and Reliance Poly-Propylene—popularly called Ilu and Pilu—went to the extent of blandly stating in the fine print of their public issue prospectus documents that the values of the shares of the companies had been increased through “thin and circular trading”.

The year 1986 was crucial for Dhirubhai. He suffered a stroke in February that year. A few months later, Indian Express began publishing a series of articles attacking the Reliance group as well as the Indira Gandhi regime for favouring the Ambanis. These articles were co-authored by Arun Shourie, who, ironically, as Union Minister for Disinvestment in the Atal Bihari Vajpayee government, presided over the sale of 26 per cent of the equity capital of the former public sector company, Indian Petrochemicals Corporation Limited (IPCL), to the Reliance group in May 2002. By gaining managerial control over IPCL, the Reliance group was able to dominate the Indian market for a wide variety of petrochemical products.

Shourie’s co-author for the famous series of anti-Reliance articles was the Chennai-based chartered accountant S. Gurumurthy, who happens to be a leading light of the Swadeshi Jagran Manch, an outfit that espouses the cause of economic nationalism and is closely affiliated to the Rashtriya Swayamsewak Sangh (RSS), the ideological parent of the Bharatiya Janata Party (BJP). The Indian Express articles written by Shourie and Gurumurthy meticulously detailed a host of ways in which the government of the day headed by Indira Gandhi had gone out of its way to assist the Ambanis.

One article was on how the Reliance group imported “spare parts”, “components” and “balancing equipment” of textile manufacturing machinery to nearly double its production capacities. The article provocatively claimed that the Ambanis had “smuggled” in a textile plant. Another story detailed how companies registered in the tax haven Isle of Man, with ridiculous names like Crocodile Investments, Iota Investments and Fiasco Investments, had purchased RIL shares at one-fifth their market prices. Curiously, most of these firms were controlled by a clutch of non-resident Indians who had the same surname, Shah. Though the then Finance Minister Pranab Mukherjee had to change a reply he gave in Parliament on the investments made by these firms, an inquiry conducted by the Reserve Bank of India could not find any evidence of wrongdoing. Yet another article detailed how the group had been the beneficiary of a “loan mela”—a number of banks had loaned funds to more than 50 firms that had all purchased debentures issued by RIL.

Vishwanath Pratap Singh was one of the few politicians who took on the Ambanis. After he became Prime Minister in December 1989, government-owned financial institutions like the Life Insurance Corporation and the General Insurance Corporation stonewalled attempts by the Reliance group to acquire managerial control over Larsen & Toubro (L&T), one of India’s largest construction and engineering companies. Sensing defeat, the Ambanis resigned from the board of the company after incurring large losses. Dhirubhai, who had become L&T chairman in April 1989, had to quit his post to make way for D.N. Ghosh, former chairman of the State Bank of India.

Once again, in an ironical twist of fate, more than 11 years later, the Reliance group suddenly sold its stake in L&T to Grasim Industries headed by Kumar Mangalam Birla. This transaction too attracted adverse attention. Questions were raised about how the Reliance group had increased its stake in L&T a short while before the sale to Grasim had taken place. SEBI instituted an inquiry into the transactions following allegations of price manipulation and insider trading. Reliance had to later cough up a token fine imposed by SEBI.

These are hardly the only controversies involving the Reliance group. There had been a major uproar in the stock exchanges over alleged cases of “switching” of shares and the issue of duplicate shares. Some of these transactions pertained to Dhirubhai’s personal physiotherapist. In 2001, Raashid Alvi, now a spokesperson of the Indian National Congress who was then a Member of Parliament belonging to the Bahujan Samaj Party, levelled a large number of allegations against the Reliance group. He distributed a voluminous bunch of photocopied documents to journalists that included a January 1998 letter in which a Reliance group company functionary had sought to “buy peace” with the Income Tax Department by agreeing to shell out a sum of Rs.25 crore. The MP accused Reliance group companies of manipulating their balance sheets and annual statements of account.

A week after Dhirubhai’s death on July 6, 2002, the Department of Company Affairs (DCA) confirmed that there was basis to some of the allegations raised by Alvi and that there were certain discrepancies in the balance sheet issued by Reliance Petroleum seven years ago. A group spokesperson sought to dismiss the discrepancy as a minor printing error that had been inadvertently committed. The DCA subsequently confirmed that different Reliance group companies had transferred interest income to one another in a questionable manner.

During the days of the licence raj, Dhirubhai Ambani, more than most of his fellow industrialists, understood the importance of “managing the environment”, a euphemism for keeping those in positions of power and authority happy. He made no secret of the fact that he did not have an ego when it came to paying obeisance to politicians and government officials, however highly placed or lowly they may have been. Long before Dhirubhai’s rise as an industrialist, politicians were known to curry favour with businessmen. Licences and permits would be farmed out in return for handsome donations during election campaigns.

Business and politics

By the time the Reliance group’s fortunes were on the rise in the 1980s, the Indian economy had become more competitive. It was now insufficient for those in power to merely promote the interests of a particular business group; competitors too had to be shown their place. That is precisely what happened to the rivals of the Ambanis, and this was an important new dimension to the nexus between business and politics.

Few today remember a company called Swan Mills or, for that matter, Kapal Mehra, who headed a corporate group named Orkay, and who was raided by tax personnel and jailed. Another business rival of the Ambanis, Nusli Wadia of Bombay Dyeing, became a pale shadow of what he might have been had his entrepreneurial ambitions been fulfilled. Dhirubhai’s sons, Mukesh and his younger sibling Anil, learnt their lessons in management and entrepreneurship under his tutelage. Dhirubhai had tried to create a corporate conglomerate (with complex and intricate financial structures and cross-holdings of shares) which could not be easily broken up; but he was wrong. Soon after his death, his sons fought bitterly. One of the most important reasons why Mukesh and Anil parted ways was their dispute to control access to natural gas from the Krishna-Godavari basin.

When, in 2009, Anil publicly accused former Petroleum Minister Murli Deora of favouring Mukesh, the Minister promptly dragged the government into the issue and contended that gas was national property and therefore only the government had the right to determine its price. The implicit assertion was that the government was the unbiased and impartial custodian of the resources that belonged to the people. Anil argued that Deora’s claim was incorrect, and that his actions were aimed only at helping Mukesh by undermining the private agreement between the two brothers.

The tussle was about who owned the gas, the Ambanis or the government, and therefore, who would have the right to fix the price of gas. Ownership would also influence to whom Mukesh’s company could sell the gas, and in what quantities. Though this dispute was resolved in the Supreme Court on May 2010 in favour of the older sibling, various controversies relating to the price and the production sharing contract between the government and Reliance continue until the time of writing.

Paranjoy Guha Thakurta, an independent journalist, educator and documentary film-maker, has written a book titled Gas Wars—Perspectives in Crony Capitalism: Ambani Brothers and the Battle for India’s Resources , which is due to be published.