Reliance - The Loser is You

Reliance

The Loser Is You

The Mukesh-Anil spat has broken the RIL cult of silence. Both brothers
were milking shareholders' funds into little-known companies. But no
one spoke. Updates

ALAM SRINIVAS
Tearing At The Parent:

Family members of Mukesh's loyalists and Anil's close relatives own
firms that have direct dealings with RIL; woven sacks made by Jai Corp
supplied to RIL, the flagship's waste management handled by Polyole
Synthetics, the largest consignment agent of RIL close to Anil.

Rs 3,500 crore commitment sought by Reliance Energy, run by Anil.

Rs 18,000 crore commitment by Reliance group as direct equity,
preference shares, bonds, guarantees and handsets purchased on behalf
of Reliance Infocomm.

Gas commitment sought by Reliance Energy for its proposed project in UP.

Rs 100 crore for pet hospital projects of family members -- Rs 82
crore for one that Nita, wife of Mukesh, is interested in and another
that Anil is.

Huge sums diverted from Reliance Infocomm for investment purposes—the
money was invested in ONGC and TCS IPOs.

The A-serial on the battle between the two Ambani brothers, Mukesh and
Anil, is being directed by media management teams. But each episode is
being scripted by private sleuths. Yes, both camps have hired
detectives to dig out dirt about their opponents. These are men who
rummage official records, take people close to family members to dance
bars to confirm suspicions, and find details of firms owned by senior
aides to the two brothers that have business and financial links with
the Reliance group. Finally, they expose how money was diverted from
the cash cow, Reliance Industries Ltd (RIL), to finance projects and
charities that were promoted due to personal whims of the family
members and/or their loyalists.

Secrecy is the key in these operations. Even those who deal with the
media go to great lengths to hide identities. One of them uses an
e-mail ID that indicates the sender is Mohandas Karamchand Gandhi.
Another calls from a private mobile number and insists that landlines
are not used by either side; his reasoning: "It's difficult to tape
mobile-to-mobile conversations." A third meets you at innocuous
Barista and Cafe Turtle. All of them send you information on blank
sheets, from faxes that cannot be directly traced to any Ambani-owned,
publicly known firms. Reminds you of the Great Ambani-Wadia Media War
in the 1980s! How times have changed.

You or me—as one of 35 lakh shareholders in Reliance group firms—had
no inkling of what was happening in India's largest business empire.
At some point in time, we ceased being part of the Reliance family,
which the late patriarch Dhirubhai insisted throughout his life we
were. We, the part owners, however small those morsels, lost the trust
of the two brothers who began running their companies like their
fiefdoms. Dhirubhai always kept his common Indian investors in mind;
but today, you could well form the impression that Mukesh and Anil
only seem to be concerned about their personal wealth. Dhirubhai's
philosophy was that running a modern enterprise "is not about
ownership, it's about trusteeship. It's not about amassing personal
wealth, but about enlarging the collective wealth of millions of
shareholders". Those words sound empty today as it's clear the feud is
only about money and ownership.

"The episode has exposed the group, it has shown the distinction
between RIL and other professionally managed companies like Infosys. I
feel cheated," says a Mumbai-based businessman, who deals in jewellery
and owns RIL shares worth over Rs 5 lakh. "I will never touch this
scrip again, even if the company registers great growth," he adds
while revealing he's waiting for the first chance to exit. But many
others are still hopeful. "The shareholders are concerned but there's
such huge faith in Reliance that the group stocks have not fallen as
was expected. My clients call me everyday to find out what to do with
their Reliance holdings," reveals Devang Shah, a Mumbai-based broker.

One can still understand that individual investors were too irrelevant
to be told about the nitty-gritty of RIL's operations. But it's now
quite clear that even the institutions—both domestic and foreign—which
have substantial holdings in RIL, or even independent board members,
knew very little. Worse, did they know about the goings-on and still
remain silent? Why did not domestic and foreign institutions question
the brothers? Why did the so-called independent directors on RIL's
board behave like mere rubber stamps? There are many questions that
expose the apparently glaring lack of corporate ethics and corporate
governance norms in RIL which, claim the two brothers, is world-class
and professionally managed.

"Reliance...endeavours to follow the principles of...full
disclosure...and communications."
Dhirubhai Ambani, June 2001
Who's the loser in this saga of seemingly unethical conduct,
non-transparent dealings and total absence of trust and faith?
Unfortunately, you and me. In the last two decades, the RIL stock has
outperformed the Sensex; while the BSE index has shown a growth of
over 16 per cent on an annualised basis, the RIL stock has scored over
27 per cent. However, in the last year or so, the scrip has
underperformed vis-a-vis the Sensex; in the last month or so,
investors have seen RIL's market cap being trimmed by around a massive
Rs 7,000 crore. "What sticks out in this feud is the lack of
transparency...but the fundamentals of Reliance group companies are
still strong," says Gaurav Dua, senior analyst, Anagram Stockbroking.
Adds a Mumbai-based fund manager who's waiting for higher valuations
to sell his RIL stock, "To hear that the Ambanis took away
shareholders' money for personal gains was very negative for their
credibility."

Today, shareholders don't even know who owns RIL. In his lifetime, we
knew it was the father who controlled the stake held by the matrix of
hundreds of investment companies on behalf of the Ambani family. Now
Mukesh claims it's him. Anil does so too, but he's contesting it on
legal and moral grounds. And no one knows the matrix except a few
select Reliance men who changed it over the past six years (see
'Really Fine Print' in Outlook, December 20). Over the last few weeks,
Anil has asked Mukesh to disclose details, but there have been none.
All that Mukesh claims is that ownership and control of investment
firms, which hold over 34 per cent in RIL, were always with the
flagship's chairman—earlier it was with Dhirubhai and now with him.

Those squarely pitched in the Mukesh camp also contend that the
holding pattern is an investment web for most Indian business groups.
"We have conducted a study which concluded that, except in one or two
cases, control and ownership is held in a similar manner as RIL.
There's a criss-cross of firms and complicated holding patterns
through subsidiaries and investment companies that can blur the real
holding power of the promoters," says Kirit Somaiya, former BJP MP and
president, Consumer Grievances Forum.

In RIL's case, there are irreconcilable differences. Both the brothers
are questioning the other's right to ownership and, hence, it becomes
the shareholder's right to know details. Dhirubhai didn't leave a
will—there's only a deed of separation that dissolves the HUF (Hindu
Undivided Family) and says the members are legally dividing the HUF's
assets which may not include the stakes held by hidden investment
firms. So can anyone claim control over the Reliance empire, except
through legal means or arbitration?

Reliance will...endeavour to unlock value from its investments...for
the benefit of its shareholders."
Dhirubhai Ambani, June 2001
That's exactly what's not happening in RIL's case.Each brother seems
to feel that money generated by the cash cow should be used for
projects dear to him (see graphic on page 43). So, Anil demands that
RIL commit Rs 3,500 crore for projects mooted by Reliance Energy,
which he runs. This also includes the Rs 10,000-crore power project in
Uttar Pradesh; he also expects RIL to provide gas for the proposed
plant and that too in 2006, not 2008. When there was talk that the
younger brother can also run Reliance Capital, he asked RIL to provide
at least a few thousand crore of rupees to turn the company into a
financial giant. (At present, Reliance Capital's annual revenues are a
mere Rs 549 crore.) It's not important whether the UP power plan is
viable or not, and whether Reliance should expand his operations in
financial services.

Mukesh insists he wants to use RIL's coffers for Reliance Infocomm,
his and his father's dream project.Already the group has pumped in
somewhere in the region of Rs 18,000 crore in the telecom company.This
includes handsets (worth Rs 4,000-5,000 crore; each costing Rs 6,000)
purchased by RIL on behalf of Reliance Infocomm and guarantees given
to the latter's vendors and suppliers. What irks us as shareholders is
that money is being routed from publicly listed firms, owned majorly
by RIL, to little-known and private ones for investment. Until
recently, not too many knew about Smart Infosolutions and Smart
Entrepreneur Solutions which together have purchased nearly 13.5
million shares in ONGC's IPO. The two are subsidiaries of Reliance
Communications & Infrastructure Ltd (RCIL), which controls Reliance
Infocomm and has RIL as a 45 per cent promoter. (Just to mention here,
Smart Entrepreneur Solutions' office at 806/807, Embassy Centre in
Mumbai's Nariman Point, is the same as that of Jai Corp Ltd, owned by
family members of Anand Jain, Mukesh's closest friend and a director
in Reliance Infocomm.)

It gets more bizarre. RIL has invested Rs 8,100 crore through
preference shares in Reliance Infocomm. The shares (face value of Re
1) were allotted at a premium of Rs 49. But Mukesh was given "sweat
equity" of 12 per cent in Reliance Infocomm at face value! Well, he's
an entrepreneur who deserves it. Only, does not the same apply to RIL,
which has promoted RCIL that controls Reliance Infocomm?

Today, group investors are caught in a quandary as no one knows
what'll happen to future plans. Anagram's Gaurav is convinced that
he'll take "a cautious view on future investment plans in Reliance
Energy. It's possible that they may be put on hold for some time since
the supply of fuel from RIL to the proposed power plant in UP may be
stalled. This may lead to some sort of postponement or revision." And
what if the family feud forces RIL to go slow on money being diverted
to Reliance Infocomm? If the telecom venture fails, it may bring down
the entire Reliance empire.

Everything can be considered fair if the shareholders benefit. After
all, all business houses use their cash cows to finance future
expansion and greenfield ventures (see table below). Reliance has,
however, not disclosed any details to its investor family. We don't
know about the financials of Reliance Infocomm, which are simply
clubbed with RIL. Only after the fight broke out did we get to know
the extent of its losses and the actual commitments made by RIL.

"I took care of them (the Reliance family of shareholders).... You
have the responsibility to protect and promote their interests."
Mukesh Ambani, quoting Dhirubhai, October 2002

Apart from his two sons, Dhirubhai also expected the six independent
directors on RIL's board to do the same. Anil's camp says that the RIL
board didn't know anything about actual exposure in Reliance
Infocomm.Mukesh's side feels Anil went ahead and announced his
projects—be it the power project in UP or his decision to bid for
airport privatisation deals—on his own without referring the matter to
the board. When Outlook asked two independent directors, they refused
to comment. "I can't tell you anything that transpired in board
meetings; I'll say that for every company on whose board I am, and not
just for Reliance Industries," says 75-year-old D.V. Kapur, former
secretary (chemicals and petrochemicals), who's been RIL director for
four years. In the same vein, 65-year-old Mahesh P. Modi, former
bureaucrat and RIL director for three years, says, "The fight has
caused great anguish for all of us and you can understand that I don't
want to comment on anything."

But without saying whether the board was aware of some of the issues
mentioned above, Kapur is categorical that "all decisions by the board
were through complete consensus.Not one director complained or
disagreed." Which implies that if the board didn't know about certain
things, then whatever problems Mukesh or Anil had with each other's
plans were discussed through personal e-mails and letters.That does
seem to be the case if one looks at scores of mails written by the
brothers even while they haven't been on talking terms for months.

It really didn't matter. Because, as Kapur himself admits, no one
questioned anything anyway at board meetings. As one of Anil's aides
told Outlook last month, "It's only a board consisting of rubber-stamp
directors. They just nod their heads in approval for everything." If
this camp has to be believed, many of the independent directors are
there because they happened to be on the right side of Reliance during
their bureaucratic tenures. For instance, Kapur was the government
secretary that gave the licence for RIL's Hazira plant. "So, you are
saying that they rewarded me 15 years after I retired from government
post in 1986? I never met Dhirubhai during my stint in various
ministries; in fact, I met him two years after I retired and became an
RIL director only in 2001," retorts Kapur.

What were the domestic financial institutions and foreign
institutional investors (FIIs) doing about the happenings in RIL? As
per current information, the former hold 8.77 per cent stake in RIL,
and the latter own 22.85 per cent. Well, one of the domestic
institution heads was apparently playing the mediator role to make the
brothers come to an agreement. And the FIIs were merely praying that
the fight stops soon. Remember one thing, the FIIs knew everything.
They have been obliquely talking about Reliance Infocomm's future in
several of their analysts' reports. Only, they didn't do anything
about it. "We're not active investors, we're typically passive and
don't interfere unless things go bad and in extreme cases of frauds.
We're not managers, we're investors. And if we feel the business of a
company is slipping, we'll exit the stock and find other places to
park our funds," feels the chief investment officer of a leading
Mumbai-based FII.

Only now that the Ambani battle has dragged on for weeks that CLSA
Asia-Pacific Markets, a subsidiary of a leading European bank, has
come out with a damning report on Reliance. Of the key issues the
report talks about, one relates to the dispute relating to "who's the
owner and therefore who controls 29 per cent of the shareholding
reportedly held through a web of investment companies." Another one is
about "corporate governance issues relating to how independent the
board is and whether the interests of the minority shareholders have
been compromised." It continues with stating that "Reliance's
corporate governance rankings have always been on the lower quartile,
and lack of transparency and doubts about board independence have
always been known.However, wide publicity of these issues is something
new."

We have only a few questions to ask CLSA, other FIIs, domestic
institutions and board members. Wasn't it your job to publicise these
issues earlier in a similarly strong manner? Wasn't it your job to
warn retail investors and small shareholders about these doubts?
Wasn't it your job to ensure that investors don't lose their money on
the bourses? Wasn't it...? Well, actually forget it. We don't expect
you to do these things—now or ever again in the case of other groups.
Nice to have known you.

Alam Srinivas, Charubala Annuncio & Saumya Roy with reports from
Suveen Sinha and Gauri Bhatia