In their conclusions, the officials knocked down the denierage arguments about capacity and homed in on the one fact that was obvious to the eye. Instead of the eight spinning lines that Reliance was cleared to import, its factory was operating twelve lines. Nowhere in any of the documentation produced by Reliance could any reference be found to this additional capacity. As for the complete filament yarn plant, the inspectors rated its capacity at between 55 000 and 63 000 tonnes a year – more than double the licensed output of 25 125 tonnes.
The report, crammed with numbers and dry engineering detail, was passed to the Customs Service, which then looked back through the records of equipment imports by Reliance. It was to lead four months later to Bombay Customs, so often sympathetic to Dhirubhai in the past, handling Reliance a show-cause notice alleging that the company had smuggled in spinning machines and undeclared industrial capacity worth Rs 1145 billion. The Customs valued the duty evaded at Rs 1196 billion and invited Reliance to ask why this should not be levied. In addition, the company faced the possibility of fines up to five times that amount and confiscation of the smuggled goods, while individual executives could be prosecuted for smuggling.
Meanwhile, Dhirubhai’s friends in the government and Congress Party were ducking for cover. Pranab Mukherjee had been miserably sidelined by Rajiv Gandhi. At the party’s December 1985 centenary conference, Rajiv had snubbed him by calling a lunch break during Mukherjee’s speech defending Indira’s economic policies. Then, in April 1986, Rajiv had summarily expelled Mukherjee from the party after newspapers began reporting a revolt by Indira loyalists against his leadership.
In Gurumurthy’s articles, the Indian Express had fired a devastating broadside at some of Dhirubhai’s 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.
10
Sleuths
To see Bhure Lal on his evening walk around New Delhi’s Lodhi Gardens was to know at once a man not easily diverted from his objective. Military-style moustache always neat, eyes narrowed on some distant point ahead, arms swinging, Bhure Lal attacked his exercise routine with the intensity of a soldier on a desperate forced march to lift a siege. Friends among the senior bureaucrats who favoured the Lodhi circuit struggled to keep up with his blistering pace.
The military bearing was no affectation. Bhure Lal had joined the Indian Army on a short-term officer’s commission soon after the Chinese attack along the eastern borders in 1962 and saw action against Pakistan in the 1965 war. He retired from military service with the rank of captain in 1970, when he won a place through examination in the elite Indian Administrative Service. After several district posts in Uttar Pradesh, he became a secretary to V.P. Singh when he was the state’s Chief Minister. At the end of March 1985, just after Singh as Rajiv’s Finance minister had declared his war on the black economy, Bhure Lal was made Director of Enforcement in the Ministry of Finance, responsible for finding transgressions of India’s highly detailed and restrictive exchange control laws. By early 1986 he too had joined the attack on Dhirubhai.
The Director of Enforcement enjoyed wide discretionary powers about whom he investigated and was allowed to operate with minimal circulation of reports outside his own office to avoid compromising arrests and search raids. In addition, Bhure Lal had the confidence of his immediate superior, the Revenue Secretary in the Ministry of Finance, Vinod Pande, who in turn was a confidant of V.P. Singh himself. It was a closed circle that frustrated Dhirubhai’s network of sympathetic officials within the Finance Ministry among whom many fellow bureaucrats and politicians placed the able and ambitious head of the ministry, the Finance Secretary S. Venkitaramanan.1
Bhure Lal made his first foray overseas to pick up Dhirubhai’s hidden financial trails in May 1986. He went to London to look into the ownership of the Isle of Man companies, but found a baffling wall of secrecy in the tax havens. He travelled to Leicester in an attempt to persuade the Shahs to talk, but arrived a few days after the family head, Krishna Kant Shah, had died. His attempt to prosecute the Kirloskar group over its alleged front company in Germany had also failed because the suspect company’s financial statements could not be sequestered.
The Enforcement Directorate also raided the Bank of Credit and Commerce International (BCCI) in Bombay and brought charges against its local general manager and five other staff under a special law against smuggling of currency, which went by the acronym COFEPOSA. Bhure Lal met the head of the BCCI’s Asian operations, Swaleh Naqvi, and offered to go soft on the bank’s staff provided it supplied all details of Dhirubhai’s suspected transactions to fund the purchase of Reliance shares by the offshore companies. Naqvi agreed, but reneged once back in London and asserted that as a Luxembourg-domiciled bank, the BCCI was not bound by Indian law. The BCCI was closed by the Bank of England and other Western central banks in 1991 amid allegations that it was a major money-laundering operation for drug traffickers.
To clinch a prosecution under the Foreign Exchange Regulation Act, the enforcers needed to produce evidence of the overseas ‘leg’ of a havala transfer. Bhure Lal became convinced that his intelligence agency would have to tap non-official sources to obtain the breaks it needed to build a case. But the private investigation agencies he found in London were too expensive for his office to hire out of its discretionary funds. Requesting a special budget would have blown the cover completely on his inquiries.
India’s own embassies in foreign capitals were worse than useless. In a later note on his 1986 inquiries, Bhure Lal complained that any information given to Indian missions was usually passed on to the suspect. When the Enforcement Directorate had sought information from the Indian Embassy in Washington about suspected secret commissions paid by the American grain-trading giant Louis Dreyfus Corporation to the New Delhi industrialist Lalit Thapar’s Ballarpur Industries, the embassy had telexed a vigorous complaint back to the Ministry of External Affairs.
The enforcer discussed his dilemma in September with his superior, Revenue Secretary Vinod Pande, who in turn raised the problems during his frequent meetings with V.P. Singh. The Finance minister gave his clearance to the proposal to use foreign investigating agents, on condition that any payments be made after receipt of evidence. The choice of the agents and other operational matters were left to the Director of Enforcement.
It was left to Gurumurthy to point Bhure Lal towards the help he needed. The two had met first in July, in the coffee shop of New Delhi’s Janpath Hotel. Thereafter through the second half of 1986 they had had informal meetings when Gurumurthy was in the capital, in the Taj Mahal Hotel’s coffee shop, in Nehru Park, then at the Indian Express guesthouse.
Gurumurthy had also been in London in May on a separate visit. With Goenka’s resources behind him, he had not been deterred by the expense of British sleuths. But the inquiries by King’s had come to an impenetrable wall of secrecy in Panama and Dubai. His attention was turning to the United States where initial inquiries had not unearthed much evidence. Parallel with his published articles, Gurumurthy had circulated a stream of detailed position papers to concerned officials and politicians about the various allegations against Reliance. In some cases, these papers made recommendations for corrective action – some of which were taken up, as with the banning of conversion of non-convertible debentures – or for further investigation.
Nusli Wadia had also kept up his contact with Rajiv Gandhi about Reliance. The two got on well: they were of similar age, each had a Parsi parent and both were considerably more cosmopolitan than their everyday cohorts. Early in 1986 the Prime Minister agreed that Reliance should be targeted. As a fuller picture of Dhirubhai’s operations emerged, Rajiv also agreed that the case of the smuggled factories, and the disguised payments that must have been made for them through illegal havala channels, were the most vulnerable points on which Dhirubhai could be nailed. Rajiv wanted to hear the full story first-hand from Gurumurthy. Accord
ingly arrangements were made through Wadia for a series of meetings over a week around the end of August, but in the event the veteran Congress politician and Gandhi family loyalist Mohammed Yunus spoke to Gurumurthy instead.2
In late September Nusli Wadia was also making inquiries while on a visit to New York. The American-based Praful Shah, who had been listed as a shareholder in some of the Isle of Man companies, remained a mystery. Seeking a way of pressuring Shah to talk, Wadia consulted a New York accountancy firm called Kronish, Lieb, Weiner & Hellman to see whether Shah had been breaking any American laws. A partner advised that an American resident such as Shah would have had to declare any income derived from the investment in his name, whether or not it was distributed to him, and that the sale of his shares would be a ‘taxable event’.
In October, Gurumurthy was given the name of a private investigation agency based on the outskirts of Washington, the Fairfax Group. The agency had been founded in 1983 by a former government anti-fraud investigator named Michael Hershman, then 41. The Madras accountant went on to Washington and spoke to Fairfax on behalf of Goenka.
By then, Gurumurthy had published his articles on the ‘smuggled’ filament yarn capacity, and it had become clear that the counter-parties to any secret payments by Reliance would have been either the suppliers of the equipment, principally Du Pont, or the American engineering firm that arranged the purchase and shipment of second-hand plant, Chemtex Fibers Inc. Hershman pointed out that he would need an authority from the Indian Government to get the companies to divulge material they would otherwise classify as commercial in confidence.
At Gurumurthy ‘s request Hershman visited India, arriving in New Delhi early on 15 November 1988 and checking into the Oberoi Hotel. Over the three days of his stay Hershman was introduced by Gurumurthy to Bhure Lal and reached agreement to work for the Government of India in return for a contingency payment of 20 per cent of any moneys recovered – a reward in line with standard payments to informers by the Enforcement Directorate, although the amounts involved were potentially huge in the Reliance case. The three targets for investigation were Du Pont and Chemtex, regarding the supposedly smuggled yarn plant, and BCCI about the financing of the non-resident investments in Reliance. Hershman started making inquiries about BCCI in London during a stopover on his way back to Washington and soon realised that he was on dangerous ground. A tough-looking young Sikh knocked on the door of his hotel room and warned him against asking questions about BCCI.
It was not until 21 December that Bhure Lal arrived in New York to get down to work with Hershman, who came to his hotel along with his Fairfax colleague Gordon McKay. On 22 December they went in to see Joseph D. Bruno, head of the Criminal Investigation Department in the Internal Revenue Service. Bhure Lal sought from Bruno whatever help could be provided to trap certain well-known operators of the Indian havala trade providing dollars in the United States in return for rupee payments in India – which Bruno agreed would be illegal in the United States if they exceeded US$10 000 and had not been cleared under American foreign exchange laws. Bhure Lal asked for help on the Dreyfus case, involving the alleged $3 million commissions on supplies of cooking oil to India’s State Trading Corporation over 1982–86. And he pursued the same lines as Gurumurthy and Wadia in the Reliance puzzles.
Bhure Lal detailed the involvement of the New York legal clerk Praful Shah in the Isle of Man companies, supplying the company names and the amount of dividends and interest on debentures that should have accrued to him from Reliance. This income had not been declared to US tax authorities, Bhure Lal said. Praful Shah did not have the resources for the investments placed in his name and had claimed to be the nominee of Krishna Kant Shah in Britain. But nor was K.K. Shah rich enough, and he had not declared his investments to the UK Inland Revenue. The real investor was suspected to be an Indian who siphoned off funds in a clandestine manner and got them recycled through the Shahs, thereby evading payment of taxes in India. Praful Shah refused to disclose his source of funds, and Bruno was urged to investigate.
The Indian official then mentioned the role of BCCI, through its London operations, in the Isle of Man investments, citing the names of senior BCCI executives, including Swaleh Naqvi and a Mr Abidi (probably referring to the BCCI’s founder, Agha Hasan Abedi). BCCI had provided much of the funding to ten of the Isle of Man companies over 1982–83, along with the European Asian Bank in three cases, channelling the loans through the company facilitators in the island tax haven. The loans had been repaid in New York on 14 June 1985 by credits to the two banks. Who had made the payments and how? Who had stood guarantee against the loans by the two banks?
Along with Gordon McKay from Fairfax and a lawyer from a Delaware law firm named J.E. Liguori, Bhure Lal went on to the Du Pont headquarters at Wilmington to tackle the chemicals giant. The trio were met by a director, E.D. Oyler, and a legal adviser, Geoffrey Gamble, and handed over a sheet of fifteen questions about payments for the purchase of plants and technology by Reliance and a list of twenty-five offshore companies, including many registered in the Isle of Man to see whether these had been party to any transactions.
A week later, on 30 December, Gamble called Bhure Lal and handed over Du Pont’s reply to the questionnaire. Bhure Lal was deeply disappointed in the answers, which he felt had flicked the ball to Chemtex and given Du Pont itself some escape clauses. ‘To the best of our information and belief at this time, the capacities of the plants are as indicated in the contracts which were approved by the Indian Govt,’ the document said. ‘To the best of our information and belief, no second-hand equipment has been sold directly by Du Pont to Reliance from Canada, the United States or anywhere else.’
Was any other equipment procured by Chemtex? ‘To the best of our information and belief, no.’ Did Reliance pay amounts to Du Pont before approval from the Government of India other than from India, and were those payments adjusted by Du Pont after receiving money from India after approval? ‘No.’ Did Du Pont have any business relations in India with [twenty-five names of Isle of Man and other investment companies]? No reply was attached.
Bhure Lal had found most of the people he wanted to meet in Chemtex to be out of town over the Christmas–New Year period. He got through to an assistant legal counsel, who suggested he call the company offices on 2 January, Bhure Lal’s last day in his authorised tour, already extended once. He rang and found the office closed.
After returning to New Delhi on 3 January 1987, Bhure Lal continued to correspond with Du Pont by telex and letter, with Fairfax acting as his agents in Washington. He reported verbally to Revenue Secretary Vinod Pande, who was busy with budget preparations and did not want to hear details. On 29 January the Du Pont lawyer Gamble gave five more documents to McKay. Bhure Lal was again disappointed: the papers concerned agreements made in 1981 for the original polyester yarn plant at Patalganga, not the additions made over the following five years. On 11 February he wrote again to Gamble with eight further questions.
The enforcer had meanwhile met an executive vice-president of Chemtex, Julio J. Martinez, who had come out to India around 21 January – to avoid dealing with the Fairfax agents, Bhure Lal suspected. Martinez promised full cooperation, but his reply sent on 2 February failed to satisfy Bhure Lal, who wrote back: ‘As I told to you over phone, I was disappointed with your inadequate response and cannot help feeling that your letter conceals a distinct unwillingness to come out with correct facts, your assurance of cooperation notwithstanding.’
Bhure Lal enclosed a six-page list of queries about the equipment supplied by Chemtex to Reliance from Du Pont’s Hamm Uentrop Plant in West Germany. He wanted details of payment, copies of documents such as invoices, certificates about the condition of the machinery and a detailed list of items. How was it, he asked, that the three spinning units originally supplied by Chemtex (for a nominated 10 000 tonnes a year of polyester filament yarn) had resulted in actual production of 18 000 tonnes when the additional nine units gave only a
further 15 000 tonnes in installed capacity and 6000 tonnes in actual capacity?
By that stage, government engineers had confirmed the presence at Patalganga of machinery imported without licence. The Ministry of Industry had accepted the Reliance explanation that four of its spinning units had been ‘split’ into eight units ‘to suit layout requirements’, but the Finance Ministry had not been convinced. After further inspections at Patalganga in December, the Customs Directorate issued its show-cause notice on 10 February 1987 charging Reliance with smuggling, under-invoicing plant worth Rs 1.14 billion and evading duty of some Rs 1.2 billion. Who had paid for the smuggled machinery and how, Bhure Lal wondered. In addition, who had paid Du Pont the royalties due for extra polycondensation capacity and spinning lines, which amounted to something between $6 million and $12 million?
Du Pont and Chemtex could not be forced to answer, unless Fairfax found some breach of American law in the transactions. But they might find themselves blacklisted in the world’s second most populous country where levels of textiles and chemicals consumption were extremely low. Indians were quick to take offence at any implied disparagement of their sovereignty by foreign multinationals, and the disaster at the Union Carbide plant in Bhopal, where thousands of Indian residents had been killed or maimed by a toxic gas leak in 1984, had hardly helped the image of American chemical companies.
Mahabharata in Polyester Page 15