An empire split

The public has not been treated to the finer details of the settlement between the Reliance brothers, but industry watchers say the deal must have been more or less fair for both brothers to accept it.

ANUPAMA KATAKAM in Mumbai

WHEN Dhirubhai Ambani died two years ago, many people prophesied that it would be only a matter of time before his two sons, heirs to the country's largest business house, would fall out. Indeed, the brothers launched into a bitter and very public battle, which spanned the past seven months. Finally, on June 18, their mother, Kokilaben D. Ambani, announced a settlement between them by sending out a statement to the press saying: "With the blessings of Srinathji, I have today amicably resolved the issues between my two sons, Mukesh and Anil, keeping in mind the proud legacy of my husband Dhirubhai Ambani."

For the three million Reliance shareholders, the announcement brought a lot of cheer as stock prices of all Reliance companies shot up. For the two brothers, this marks the beginning of their individual empires. However, the coming years will decide whether it was worth it all, or if it was perhaps better to keep aside individual ambitions and work towards the success of a single Reliance Group.

The deal chalked out by Kokilaben and close family friend K.V. Kamath, Chief Executive Officer (CEO) and Managing Director of ICICI, divides the Rs.99,000-crore empire built by Dhirubhai Ambani as fairly as possible between the two brothers. According to the statement issued by the matriarch, "Mukesh will have responsibility for Reliance Industries and IPCL while Anil will have responsibility for Reliance Infocomm, Reliance Energy and Reliance Capital." Other than stating that "I am confident both Mukesh and Anil will resolutely uphold the values of their father towards protecting and enhancing value for over 3 million shareholders of the Reliance Group which has been the foundation principle on which my husband built India's largest private sector enterprise," Kokilaben's brief one-page press statement gives no further details of the divide. Industry observers say the devil really lies in the detail, but it will probably be many weeks before that information is made public.

Shortly after Kokilaben's announcement, the younger of the two siblings, Anil Ambani, announced his resignation from the Reliance Industries Limited (RIL) board. Following this, the RIL board met and endorsed the settlement. The day after Anil, who for much of the time had played the victim through the drama, announced the formation of Anil Dhirubhai Ambani Enterprises (ADAE), which will be a holding company controlling Reliance Infocomm, Reliance Energy Limited (REL) and Reliance Capital Limited (RCL). At a press conference, Anil said the new entity will invest about Rs.2,000 crores in RCL and Rs.1,000 crores in REL. Mukesh has yet to make a formal announcement regarding his companies.

Who got the better of the spoils is debatable. An investment banker, however, said that both the brothers appeared satisfied and hopefully had ended a messy fight. "To have an elder make a decision and for the children to respect those wishes is a typical family way of running a business," he said. "Nevertheless, unless it was a fair deal, I doubt if the brothers would have accepted what they got." For instance, Mukesh had to give up his baby - Reliance Infocomm, a potential money-spinner - to Anil to make sure the division was equal. RIL is clearly the cash cow, so it would not have been a balanced deal had Anil not got something as big. With telecom emerging as the economy's new lead industry, Reliance Infocomm, which is already a dominant player in the industry, has the potential to become huge. "But I think what is more important than who got what here is that the three million investors have not been affected," he said.

Either the exact details of the settlement have not yet been resolved or perhaps they are being withheld deliberately. But the Reliance board has gone so far as saying that the board had "decided to consider a proposal to reorganise the businesses as per Ms Kokilaben Ambani's principle of ensuring the highest shareholder value". The statement provided no further information on the reorganisation plan. In effect, this does not mean much. An industry observer and Reliance watcher said that in all likelihood the negotiations included matters such as cross-holdings within the group and personal wealth transfer; otherwise the announcement would not have been made. It is speculated, he says, that Anil Ambani's holding company will take over RIL's shares in REL, Infocomm and RCL. In return, each RIL shareholder will get one share in the holding company. As for the interests and cross-dependency of companies, as in the case where RIL will be supplying gas to REL's new 3,740 megawatt power plant in Dadri, Uttar Pradesh, the companies are expected to hammer out amicable arrangements.

THE public battle between the two brothers can be traced back to early November 2004. It was Mukesh who opened the floodgates by making a seemingly off-the-cuff remark to a television reporter about "ownership issues", which he later said was "torn out of context". Apparently, he told a reporter on the sidelines of a conference that there were "ownership issues" within Reliance but these were in the private domain. Given how painfully cautious Reliance is about releasing information to the media, not many are willing to buy his "off-the-cuff" line. Clearly, the fight had been simmering, and it was only a question of time before it boiled over into the public domain.

Industry sources say that the acrimony started becoming public as early as July 2004, probably at the time of a board meeting. Various e-mails and documents circulated within Reliance, which conveniently made their way to the media, show that the board had introduced a supplementary agenda, which sought to redefine the role of managing directors. Subsequently, the resolution, or Item 17 as it is now known, was passed by the board. Essentially, the resolution gave Mukesh the power to reduce Anil's role in the company. A furious Anil shot off several communiqus to Mukesh and board members questioning them on why the resolution had not been pre-circulated, a procedure that had to be followed before a resolution was passed. Anil was so angry that he told the media that it "is me against the Reliance XI". But while this incident appears to have made the family feud public, the divide between the brothers had more fundamental reasons.

Of course, a lot of colourful reasons have been attributed to the discord, ranging from Anil's foray into politics with the Samajwadi Party to more gossipy ones such as the two wives not getting along. But industry observers say that at the heart of the dispute were the divergent views of the brothers on certain key initiatives. For instance, Mukesh's dream project Reliance Infocomm was implemented on an audacious scale, and was practically underwritten by RIL. Over Rs.10,000 crores of RIL money has been invested in preference shares of the company, at a rate of interest much below market standards. Apparently Anil always doubted the viability of the project and objected to the "soft loans" being given to the telecom company. Meanwhile, Anil merrily inked an agreement with the Uttar Pradesh government to set up a Rs.11,000-crore power plant in Dadri. The power project depended on RIL for financial support and gas from Reliance's fields. Mukesh was reportedly sceptical about the project and was even said to have commented that RIL did not have enough gas reserves to feed the plant.

Reliance is no stranger to controversy. The difference this time was that the storm was within the family, which remained closely knit until recently. From the time Dhirubhai Ambani founded his textile trade in 1968, in which he used various loopholes in the country's import-export policy to expand his business, to the telecom scam in recent times, Reliance was quite often in the news for the wrong reasons. In the late 1980s there was the famous Ambani vs. Nusli Wadia war. In 1991, RIL faced serious charges of share-switching and was hauled up by the Securities and Exchange Board of India (SEBI). Then in 1996, the Bombay Stock Exchange suspended trading in Reliance because of negligence in duplicate shares and share-switching.

Towards the end of the 1990s, RIL faced an inquiry by SEBI into allegations of price manipulation and insider trading with regard to the sale of its stake in Larson & Toubro to Grasim Industries. And if this is not enough, two of Reliance's senior executives have been accused of violating the Official Secrets Act. These men were apparently prying around for information on the sanctions imposed on India after the nuclear tests in 1998. It is said that Dhirubhai thrived on controversy.

Clearly, if there is one part of his legacy that the sons are taking forward, it is to keep Reliance in the news and not always for the right reasons.