Games Dhirubhai Played!

The success of the recent rights issues by Reliance Industries Limited (RIL) takes one’s memory to a wonderful anecdote in Gita Piramal’s Business Maharajas. The anecdote concerns Dhirubhai Ambani and his relationship with the stock market. The power he commanded on the markets did not emerge overnight. Nor did it come easy. In fact, if one has to term the coming of age of the Indian stock market, one has to go back to 1982 episode in the Bombay Stock Exchange.

 

Dhirubai loved perhaps roulettes and nothing better illustrated the episode of 1982. As India Today put it then, on one side of the ring lay rags to riches, ambitious, manipulative, high flying and perhaps possessed the most intelligent of the business brains, Dhirubhai Ambani. To Dhirubhai, it was hardly a decade and half that he had made it to the virtual top of the Who’s Who in the Indian industry. Up against him, again to borrow from the India Today, was a syndicate of stock market men, deeply drenched in the satta dynamics of Bombay market. Conceivably, they were backed by a set of industrialists wanting to get back one at Dhirubhai who was perhaps an outsider to the Indian business landscape.

 

In early 1982, Reliance came up with the partly convertible debenture issue. At this time, a bear cartel suspected to be from Calcutta, decided to attack Reliance. It was not that Reliance was the first one on the scanner of this bear cartel. Other companies too faced this and suffered. But Dhirubhai was of a sterner stuff. The cartel began its game and started selling short Reliance shares just about half an hour before close on March 18, 1982. The pressure was so intense that the price fell from Rs. 131 to 121 in just about half an hour with 350000 shares being short sold, though there was recovery with the market closing at Rs. 125. In short selling, one sells the share without having them. As the prices crash, they buy these shares at lower prices and ensure delivery of shares on the settlement date. In case they are not able to, it would be rolled over on payment of premium in what had come to be known as badla system.

 

The financial thriller led to a wiping out of nearly Rs. 250 crores in about 25 minutes across board. By the end of April almost 11 lakh shares of RIL valued over Rs. 16 crores were short sold.  While this was going on, the legendary Dhirubhai was plotting his counter moves. In fact to him, it was an existential battle. Either he would win or his decade and half old empire would perhaps come crumbling down at the feet of bear cartel. Dhirubhai’s brokers began mopping every Reliance share that was on offer. In fact, a group called ‘Friends of Reliance’ led this counter attack of mopping up every share on offer.

 

In those days, the stock market would undertake a settlement twice month on second and fourth Fridays. The settlements could be rolled over as mentioned earlier. But Dhirubhai wanted something different. April 30, 1982 proved to be a day of history at the BSE for good or bad. It was perhaps the day when the sheer manipulative and brilliant mind of Dhirubhai was in full flow or the sheer ugliness of the dynamics of the Bombay Stock Exchange was on display. Of the 11 lakh shares that had been short sold, around 8.57 lakhs were with Friends of Reliance. From a seller’s market it had turned into a buyer’s market. It a near monopsony in the BSE on that day when it came to Reliance’s shares. In fact, the spirit of the  law of the day was such that was a restrictive practice was discourage, but technically, there was nothing that prevented Ambani’s men to execute their own purchase of shares. Ambani yet again proved that he was the master of the letter of law but cared a hoot for the spirit of the law. 

 

The Friends of Reliance decided to demand delivery of the shares. This was unexpected and out of the blue. Rarely was a case wherein any buyer had demanded delivery of the share. Further they were determined not to resort to badla settlement. The panic struck the bear cartel which now tried to mop up the Reliance shares at whatever price they could get. In the absence of delivery, the market could not be settled. If the market is not settled, the markets cannot resume functioning. The deadlock meant the exchange stayed closed for three days. The exchange authorities tried to bring out some kind of compromise between the two parties. Yet the bargaining was tough. The monopsony market gave the bargaining power to Reliance backers and they exploited to the hilt.

 

It seemed Ambani would not let go without their demand for flesh. The Reliance shares began to be mopped up everywhere even those with institutions like LIC. This meant that prices started to zoom up. The badla if agreed to would have costed the bear cartel Rs. 25 per share per day. Translated into the sheer number of shares in play, it was mind boggling. As the bears hunted to buy the shares, the price rose up to Rs. 210 by May 10.

 

In fact, rumors were afloat that the major supplier of share certificates was Dhirubhai himself. As the price increased, it was apparent that the cartel was buying it at those prices and delivering the same back to Dhirubhai at Rs. 150. So Dhirubhai not only made a cool profit but extracted revenge that would sink around many for years to come.

 

In fact, the one quality that made Dhirubhai stand apart from his peers was not merely shrewdness but sheer bold moves not hesitant to be manipulative when it came to the shove. The bears thought they will tame Dhirubhai as they did others but faced a virtual knock down from him. Dhirubhai perhaps did not believe in taking prisoners and that was manifested in March-May 1982. The legend was made and redefined the markets for ages to come.