In a sinking ship

Anil Ambani and his group of companies are in a downward spiral that could jeopardise the investments of millions of shareholders.

Anil Ambani, a file picture.

IN a case of how the mighty can fall, one of India’s top businessmen, Anil Ambani, chairman of the Anil Dhirubhai Ambani Group (ADAG), faces the prospect of spending time in jail and going bankrupt. The Supreme Court has held the younger of the Ambani brothers in contempt for not paying the Swedish telecom major Ericsson’s dues of Rs.550 crore. Anil Ambani’s RCom (Reliance Communications), once the country’s telecom giant, is facing insolvency proceedings at the National Company Law Tribunal (NCLT), which it cites as the reason for its inability to pay up. 

The Supreme Court ruling has obviously shaken the business world. But more importantly, it has sent out a strong signal that the country is cracking down on massive borrowers and that no businessman, however powerful and wealthy, can enjoy financial impunity. Corporate India observers believe that while it is not the end of the road for Anil Ambani, he will need to buck up and change his strategy if he is to survive and protect thousands of investors, including middle and lower middle income individuals whose personal wealth is locked in Reliance stock. 

The estranged brother of Mukesh Ambani, chairman of Reliance Industries, Anil Ambani has been given four weeks beginning February 20, 2019, by the Supreme Court to pay up or face up to three months in jail. Yet, this is only one part of his worries.

It has been a financially miserable year for Anil Ambani. RCom was forced to shut wireless operations towards the end of 2017 owing to huge debts and falling revenue leading to widening losses. The company is struggling under a staggering Rs.45,000-crore debt, a large part of which is attributed to the entry of his brother’s Jio brand. Poor management in other ADAG companies and the overall decline in market conditions have put him on a sinking ship.

The Supreme Court has also slapped a Rs.1-crore fine on RCom, Reliance Infratel and Reliance Telecom each. In its detailed order, the apex court bench hearing the matter said: “We have seen that right from the beginning, Rs.550 crore was undertaken to be paid without having to depend upon any act or omission of a third party…. To say that the sum… would be paid only out of sale of assets of the three Reliance companies is a deliberate misstatement… which was done with the purpose of circumventing orders of this court. We are also of the view that… wilful default is made out.” 

It added: “It is clear that the three companies had no intention, at the very least, of adhering to the time limit of 120 days or to the extended time limit of 60 days plus, as was given by way of indulgence…. The undertakings given on the footing that the amount of Rs.550 crore would be paid only out of the sale of assets was false to the knowledge of the three Reliance companies. This itself affects the administration of justice, and is therefore, contempt of court.”

The court also said that this was “not a case of accidental or unintentional disobedience”. “As is clear from the letter dated January 21, 2019, the Reliance companies are able to pay this amount, but are wilfully refusing to do so,” it pointed out. 

Suppliers and vendors in Mumbai have numerous stories on Reliance companies and their stalling tactics when it comes to making payments. According to a supplier, a Reliance executive said that “just working for Reliance will get you much more business, so why are you demanding cash from us”.

However, Ericsson, which had been waiting for four years to be paid, was unwilling to continue this endless charade and eventually took RCom to court. 

The case goes back to 2013 when Ericsson and RCom entered into an agreement under which Ericsson would provide RCom managed services. In May 2017, Ericsson had not been paid for these services. Following several notices, the Swedish company finally terminated the agreement with Reliance in September 2017.

Ericsson moved an insolvency petition in the NCLT against RCom seeking more than Rs.1,500 crore. In May 2018, the petition was admitted by the NCLT. RCom appealed and settlement talks began. On May 30, 2018, the NCLT ordered RCom to pay Rs.550 crore by September 30 under the settlement deal. Anil Ambani promised the tribunal that the deadline would be met. When RCom did not honour the assurance, Ericsson was compelled to file a contempt of court petition against the RCom chairman in the Supreme Court. 

RCom responded to the lawsuit, saying that the dues would be paid once their asset sale to Reliance Jio took place. The Supreme Court gave RCom time until December 13, 2018. RCom missed this deadline too and sought another extension, which the Supreme Court rejected. Ericsson filed a second contempt notice and the Supreme Court served the contempt notice and directed Anil Ambani to appear in court. RCom then offered an olive branch, saying that it would pay if Ericsson withdrew the petition, but Ericsson refused.

RCom then moved the bankruptcy court in an attempt to save itself. Eventually, on February 20, 2019, the Supreme Court told Anil Ambani that he was being held guilty of contempt of court and gave him one last chance to pay up. Jio’s failure to buy Rcom assets

At the centre of Anil Ambani’s problems was Reliance Jio’s failure to buy RCom’s assets. According to an investment banker, RCom owns a substantial part of the spectrum that Jio requires to expand its network. The two companies had come to an agreement to buy the assets. “As much as Anil needed Mukesh to bail him out, the fact is Mukesh’s Jio needs RCom too,” the banker said.

Keeping in mind the crisis in RCom, the Supreme Court directed the Department of Telecom (DoT) to approve RCom’s plan to sell spectrum to Jio after accepting a Rs.1,400-crore corporate guarantee, instead of a bank guarantee, as well as a parcel of land from an RCom subsidiary to cover the spectrum user charge claim of Rs.2,947 crore, which the Anil Ambani company was disputing. Jio apparently said that it could not be held liable for RCom’s past dues, to which the DoT said that meant the deal was off. “Both brothers have lost this fight,” said the banker. “Anil will get the short end of the stick though, as he needs the money. Mukesh has deep pockets and is shrewd enough to find a way out.” 

Root of crisis

Jio has, in effect, been singularly responsible for the downfall of RCom, once the jewel in Anil Ambani’s crown. When the two brothers split in 2005-06 following the death of their father, Dhirubhai Ambani, Anil Ambani got RCom, a Rs.1,800-crore (market capital) company that once was the country’s largest private telecom entity. The brothers signed a no-compete agreement, which safeguarded their companies. 

Few analysts are willing to go on record when it comes to the Ambanis, but in 2010, the brothers cancelled the no-compete agreement. This apparently sounded the death knell for RCom. In 2015, Mukesh Ambani announced a big bang entry into telecom with Jio. Selling data at throwaway prices, as low as Rs.2 per gigabyte, Jio did not just destroy RCom, it strangled the lifelines of every telecom company in the country. Four have already shut shop.Fallen but not dead

An analyst said that Anil Ambani has a few options that he is using to get out of the current crisis. To begin with, RCom has an asset monetisation plan that can pare down the debt by Rs.18,000 crore. Jio rejected the sale, but there are other companies that may be interested. Some income tax refunds are expected, which should bail him out in the interim. Anil Ambani has apparently also been asking lenders to release some funds to save the mother ship. He cannot seek help from other group companies as this would put minority shareholders at risk. 

Analysts’ reports suggest that the difference in business styles between the brothers also led to Anil Ambani’s downfall. There are several reports detailing Mukesh Ambani’s vision on data being the next Big Thing and therefore pumping in huge investment to be in on it first. He also enjoyed the advantage of having control over Reliance Industries Limited, a behemoth oil and gas company. Both brothers diversified their businesses, but Anil Ambani did not have the advantage of a massive oil and gas giant backing him that could bankroll other businesses.

In the split, Anil Ambani took over the group’s newer companies—RCom (telecom), Reliance Power (energy), Reliance MediaWorks (media), Reliance Capital (financial services) and Reliance Infra (infrastructure). There are a host of smaller entities as well, including a hospital. More recently, ADAG created Reliance Defence, which recently came under scrutiny over the $8.7 billion deal with France for Dassault Aviation’s Rafale fighter jets. Every ADAG company listed above has seen decline, according to the investment banker. Until RCom started sliding, Anil Ambani was up there with the top corporate leaders of the country. His net worth was once pegged at $1.8 billion by Forbes  magazine.

When the news of insolvency emerged, ADAG wiped about Rs.10,500 crore in investor wealth in five days, according to a report from the Bombay Stock Exchange. On account of Anil Ambani’s troubles, the fate of millions of investors who own his group companies’ stock hangs in balance.