The Reliance tussle

Published : Jan 14, 2005 00:00 IST

Mukesh Ambani, chairman of Reliance Industries Ltd. - ANU PUSHKARNA

Mukesh Ambani, chairman of Reliance Industries Ltd. - ANU PUSHKARNA

The battle of the Ambanis brings to the fore, among other things, issues of corporate governance and transparency.

THERE is no end in sight to the spat between corporate India's most famous siblings. More than two months after the news of the rift between Mukesh Ambani and Anil Ambani broke, the media are flooded with stories and counter-stories from both camps, alleging irregularities, improprieties and violations of corporate governance norms. The crux of the battle, despite all the protestations of the two, appears to centre on the question of who controls Reliance Industries Ltd. (RIL), the flagship of the Reliance empire, which is worth more than Rs.90,000 crores. It is ironical that such a question should even be raised. After all, public memory associates the company intimately with the late Dhirubhai Ambani, the father of the siblings and the founder of the Reliance Group.

Mukesh Ambani, 47, opened the floodgates in early November by making an "off the cuff" remark to a television reporter about "ownership issues" which, he later claimed, "were torn out of context". Apparently the reporter had asked Mukesh Ambani on the sidelines of a conference about the future of Reliance and he had responded saying that it was a professionally managed company that was stronger than any individual. He added that there were some "ownership issues" but that these were in the "private" domain. The fact that the interview was telecast two days after Mukesh Ambani spoke to the TV channel raised more questions about motives because at the time his comments were on air he was out of the country.

Anil Ambani, 45, fired his first salvo following this by telling the media his side of the story. His case rested on the claim that the elder brother had attempted to marginalise him by surreptitiously introducing a "supplementary agenda" at a board meeting of the RIL on July 27. E-mails and documents circulated within RIL earlier now made their way to the media. Anil Ambani claimed that "Item 17" of the supplementary agenda introduced at that meeting curtailed his powers while conferring sweeping powers on the chairman and managing director, Mukesh Ambani.

The newly empowered Mukesh now had, among others, the authority to "vary or revoke all or any duties, responsibilities or powers given to managing director Anil and to confirm modify or countermand any actions or decisions made by him". The younger sibling claimed that the agenda had not been pre-circulated or discussed prior to the meeting. He sent e-mails to Mukesh Ambani and others within the company on the issue, some of which have appeared in the media.

THERE is much speculation about the reasons for the discord. Anil Ambani's political foray, aided by his association with the Samajwadi Party (S.P.), which enabled him to get elected to the Rajya Sabha, is said to be one.

Those who have followed the fortunes of Reliance in the past few decades have observed that the company's success has largely arisen out of its ability to test the regulatory systems governing industry. Its resounding success in the textile intermediate business and later in petrochemicals rested crucially on the way fiscal duties - on its own products as well as those of its competitors - were aligned.

After liberalisation, since the 1990s, its forays into telecom, power and oil - all industries that were traditionally classified as natural monopolies - have required Reliance to deal with political authority with a degree of finesse. The deregulation of these sectors after 1991 meant new opportunities for private Indian conglomerates. But the fact that the sectors were not governed by the rules of market competition meant that regulatory agencies and the state still enjoyed substantial discretion in the way business would be conducted. It thus made sense for Reliance to steer clear of political risks in this situation.

Although Dhirubhai Ambani participated in the Congress' victory celebration after Indira Gandhi's return to power in the 1980 general elections, he generally adhered to the principle that he must not be seen as being close to any one political formation. This made sense, particularly when politics went into a state of flux after the late 1980s. With the Congress in decline, and with the emergence of multiple coalitions in the States, it made sense to diversify the portfolio of political preferences. This strategy stood the group in good stead after the National Democratic Alliance (NDA) came to power in 1998. It is possible that Mukesh Ambani sees his brother's closeness to the S.P. as going against the demands of the group. After all, the three newly emerging areas of Reliance's business are all in sectors where regulatory structures and governmental discretion are still fairly dominant. And, it could well be that the elder brother does not wish to add political risks to business risks.

However, it would be unwise to simplify the dispute between the two brothers as being simply about politics. Indeed, the most credible explanation appears to be the one which relates the dispute to the way the two brothers see their future as businessmen. While the elder Ambani has set his heart on Reliance Infocomm's telecom venture, the younger brother has ambitious projects lined up for Reliance Energy Limited (REL), which is under his charge. The problem, however, is that both the brothers have to turn to the same tap - RIL - for funding their dream projects.

From the start Mukesh Ambani had ambitious plans for Reliance Infocomm. Within a short time it acquired critical mass, even if competitors considered the means employed unfair. The cost of this plan was huge. But RIL "invested" over Rs.10,000 crores in preference shares of the company at a rate of interest regarded to be well below market rates. Apparently, Anil Ambani, also competing for resources from the same cash cow, had objected to the `soft loans' provided by RIL to Infocomm. Moreover, although most of the money for Infocomm came from the flagship, Mukesh Ambani in his individual capacity got a higher equity stake in Infocomm.

Infocomm's strategy from the beginning was simple. It started operations late, after the market had stabilised to a degree. But when it did, it did it with a splash. Its aim was to acquire critical mass quickly by undercutting competition, because it saw the direction in which the telecom industry was heading, towards an oligopoly. But this required heavy capital expenditure, which was to be funded from RIL's deep pockets.

Although this meant huge losses in the short term, Reliance understood that only a few telecom operators would remain in the next few years. It is possible that Anil Ambani saw the investments as being risky, particularly when competing investment options were on the anvil, most notably his power projects in Uttar Pradesh.

Anil Ambani's camp has claimed that RIL earned Rs.16 crores as dividend on Rs.8,100 crores it invested in the preference shares of Infocomm, implying a return of 0.2 per cent. The younger Ambani has claimed that Reliance Infocomm's equity structure is such that Mukesh Ambani and other investing companies and trusts have a 27.5 per cent direct shareholding, while RIL itself has a direct share of only 7.5 per cent, for which it paid Rs.31 crores. The implication is that although the mother company bankrolled Infocomm's foray into telecom, it is hardly going to profit from it.

Anil Ambani has also claimed that Mukesh Ambani acquired a stake of 12 per cent in Infocomm at a much lower price as sweat equity, thereby hurting RIL's interests. In short, the claim is that while the mother company has made all the investments, Mukesh Ambani would enjoy the profits, if and when they come.

Recent reports in the media indicate that a complex web of companies had been woven to funnel investments from RIL to Infocomm. There have also been reports that Reliance Infocomm parked about Rs.3,500 crores in receivables in an off-balance-sheet deal at the end of March 31, 2004, with Smart Entrepreneur Solutions Pvt Ltd, a Reliance Communications Infrastructure Ltd (RCIL) subsidiary. RCIL is the holding company of Infocomm.

Last year RIL also entered into an arrangement with Reliance Infocomm to buy and sell mobile handsets, maintain accounts, bill subscribers and collect the money due to Reliance Infocomm, activities completely out of the normal for a company whose main line of business is in oil and petrochemicals. However, RIL accumulated receivables amounting to almost Rs.3,500 crores. Reports now indicate that Anil Ambani refused to sign the RIL balance sheet, arguing that the receivables ought not be on RIL's books. After Anil Ambani raised these objections, the receivables were passed on to Smart Entrepreneur Solutions Pvt Ltd. RCIL gave a loan of Rs.3,426 crores to Smart Entrepreneur to finance this.

Anil Ambani has claimed that the manner in which his brother acquired 12 per cent "sweat equity" in Infocomm raises many questions. He has pointed out that Mukesh signed an agreement with RCIL in July 2000 to acquire the stake for Rs.50 crores. The deal was actually consummated in April-May 2004; Anil Ambani claims that the value of the stake then would have been more than Rs.7,000 crores. He has also pointed to serious anomalies in the agreement. For instance, he has pointed out that RCIL did not even exist in 2000 when the agreement was signed; it was formed only in March 2002.

Moreover, Anil Ambani also alleged that disclosure norms have not been followed. The stock exchanges and the Securities and Exchange Board of India (SEBI) have also not been informed about the agreement, he claimed. Faced with the prospect of suffering embarrassment at RIL's board meeting on December 27, the company announced on December 23 that Mukesh Ambani was foregoing the "sweat equity".

ANIL AMBANI, who is in charge of Reliance Energy (the erstwhile BSES Ltd), had drawn up ambitious plans for it. Beginning from Dhirubhai Ambani's time, Reliance Industries had coveted BSES and slowly went about accumulating its shares. It was only in 2002 that it managed to acquire a controlling position. The company was renamed Reliance Energy Limited (REL) and Anil Ambani was anointed chairman. With his newfound political partner the S.P., Anil Ambani announced that REL would build a mega power project costing in excess of Rs.11,000 crores in Dadri, Uttar Pradesh. This power project was also dependent on RIL, not just for funds but also for the supply of gas as fuel.

In fact, Mukesh Ambani once said there may not be enough gas reserves to supply the U.P. plant. And as the chairman of RIL, he is in a position to deny REL the much-needed support it requires. This has put Anil in a quandary and has effectively choked his grand plans. Which is why the battle really centres around the question of control of the flagship company RIL.

RIL, the petrochemical and oil behemoth, annually generates prodigious cash flows (in excess of Rs.10,000 crores). Cash flows of this magnitude can enable the company to leverage debts that can be several times the annual cash flows. This means that RIL's cash flows can bankroll mega investments. However, even a mega company can have its limits. "Underwriting individual mega projects like Infocomm and REL does not pose a problem for RIL, but funding both at one time would begin to stretch its resources," says an investment banker.

A recent report released by Standard & Poors, the global rating agency, observed that the rift between the brothers has the potential of weakening the Reliance Group's strategic direction and business plans. It termed RIL's liquidity position as "weak", noting that the company's debts amounting to Rs.6,400 crores are due for repayment during the next year. "In the event of a default by Reliance, recovery prospects on its debt are low in the near- to medium-term," it noted.

WHO owns Reliance is, of course, the most contentious and tangled issue. The family is said to control directly or indirectly approximately 34 per cent of the voting capital of RIL. As per public disclosures, the family directly owns only 5.13 per cent in the company. The Petroleum Trust holds another 7.5 per cent. In addition to this, a set of investment companies classified as `persons acting in concert' hold 34 per cent of the company. While the ownership of these companies (rumoured to be in the region of 300 to 400 companies) is not directly connected to the family, they are believed to be under the family's control. But the structures of these companies are unavailable. It is significant that neither the stock exchanges nor SEBI has been able to clarify who owns how much in the company. In fact, the claim that Reliance is the pioneer in building the equity cult has a rather hollow ring about it in the wake of the ongoing controversy.

Has Mukesh Ambani managed to wrest control over these investment companies, thereby settling the `ownership issue' in Reliance once and for all? "This issue can be a double-edged sword for the family as the unravelling of the investment maze can expose the close nexus the family has with these companies - something that would attract the attention of the regulators and the tax authorities," says the investment banker.

After Dhirubhai Ambani's death, it was assumed that ownership and management had been separated and while ownership was equal between the brothers, Mukesh Ambani would have the final voice as he was elected chairman of the company. "With his extraordinary foresight, he (Dhirubhai Ambani) has also settled all ownership issues pertaining to Reliance within his lifetime," Mukesh Ambani said in his statement released to the national press. Anil Ambani has questioned his brother's statement saying that he was unaware of these directives of their father, which is unusual as he was always kept in the loop of major decisions.

A split, say analysts, may be inevitable, but unless done cautiously, will definitely not be a prudent move for the Reliance Group. "RIL commands a premium valuation for many reasons, including the fact that it has enjoyed the advantages of being a vertically integrated oil company," says an oil sector analyst. "Breaking it up could alter this scenario and adversely affect its long-term projects. If split up, the sum of the parts would not equal the value of the combined RIL." Media reports, mostly based on market gossip, have suggested that Mukesh Ambani is willing to give his younger brother his share of the empire. However, valuing an industrial giant is extremely hazardous, as the repeated controversies over the privatisation of public sector blue chip undertakings have shown. In particular, it would be extremely difficult to value the assets of a monopoly, which is what RIL is in the petrochemicals business.

Faced with a sharp decline in its share price, RIL has announced that it is exploring the possibility of the company buying back its shares from investors. The company has claimed that this is aimed at protecting small shareholders. However, there have been reports indicating that the Anil Ambani camp sees this move as one aimed at enabling Mukesh Ambani to increase his holdings in the company.

Issues of corporate governance and transparency have come to the fore. Millions of people who had all along assumed that RIL belonged to the Ambanis, find themselves facing the rather simple question: "Who controls Reliance?" It must surely be galling for company shareholders to see their vice-chairman asking their chairman questions about the ownership of the company. Specifically, speculation has been rife about the true holders of the 34 per cent of the shares of the company that are said to held by "persons acting in concert". While most observers have speculated that Mukesh Ambani effectively controls this chunk of shares of the company, it is not clear how he actually controls this bloc. Crucially, does he control these shares by virtue of having control of the levers of the mother company as its chairman; or, is it simply because he controls because he owns?

The extensive speculation about the most basic of issues relating to ownership in Reliance has led observers to point to the pitifully poor standards of governance, transparency and public accountability. A senior financial expert, who serves on the boards of several top Indian companies, told Frontline: "This is no time to take sides but to critically examine the poor disclosure norms followed by companies." For instance, details of Reliance's investments in the Infocomm venture indicate that although most of the money has been invested by RIL, Mukesh Ambani, in his personal capacity, was given a much bigger equity stake, in the garb of "sweat equity". This is not to imply that all is well with the other side. How did the board of the REL authorise massive investments amounting to more than Rs.10,000 crores in power projects, without even getting a clearance from the mother company? In the two months since the controversy erupted there are more questions than answers.

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