Reliance Industries Ltd, which has invested about Rs 12,000 crore (Rs 120 billion) in Reliance Infocomm, has only a 37 per cent stake in the company at present.

Other investors, including the RIL chairman Mukesh Ambani, who are said to have invested much less in totality, have a higher equity shareholding in the infocom venture, equal to 63 per cent of the company.

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The Reliance 'ownership issue'

In the ongoing war between the Ambani brothers (Mukesh and Anil) who are both managing directors of Reliance Industries, one of the thorny issues that have cropped up is said to be whether these investment terms are fair to RIL and its shareholders.

The bulk of the differential exposure is explained by RIL's investment of Rs 8,100 crore (Rs 81 billion) in Infocomm, in the form of preference shares, which have a face value of Re 1 but an issue price of Rs 50 (the balance being share premium).

The result is that the 10 per cent dividend on these preference shares gives RIL an annual dividend of just over Rs 16 crore (Rs 160 million) on an investment of Rs 8,100 crore (Rs 81 billion), or 0.2 per cent.

The preference shares are locked in for 10 years and can be converted into equity, but the conversion price is not agreed on. There is a redemption price stated in case the conversion does not take place (Rs 102 for each debenture sold at Rs 50).

In other words, the money doubles in a decade, giving RIL an annual 7 per cent yield on the preference shares. This is over and above the dividend of 0.2 per cent on the issue price.

If the preference shares are converted at the redemption price of Rs 102, RIL will get equity with a face value of just under Rs 80 crore (Rs 800 million) -- which will apparently give it only a minority interest in Reliance Infocomm, although RIL has been the biggest investor in Reliance Infocomm.

A senior RIL executive close to Mukesh Ambani confirmed the dividend figure of Rs 16 crore (Rs 160 million), and in a subsequent telephone conversation pointed out that the company was also entitled to the redemption premium. He contested the 37 per cent figure for the RIL holding in Reliance Infocomm and maintained that RIL's holding was 45 per cent.

Anil Ambani is believed to have made these investments in preference shares, one of the main issues on which he would like to ask questions, and has talked of both corporate governance and the issue of whether the investment decisions are arm's length transactions, since Mukesh Ambani is both the RIL chairman and the promoter of Reliance Infocomm.

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 crore (Rs 31 million).

Usually reliable sources said the 27.5 per cent investment would have been at a price totalling between Rs 150 crore (Rs 1.5 billion) and Rs 200 crore (Rs 2 billion).

The third way in which RIL has invested in Reliance Infocomm is through a 45 per cent holding in a company called Reliance Communications Infrastructure, for which it paid Rs 2,330 crore (Rs 23.3 billion).

The balance 55 per cent in this firm is once again owned by Mukesh Ambani and other investors. It is not known how much was paid for the balance 55 per cent. Reliance Communications Infrastructure owns 65 per cent of Reliance Infocomm and is described as the holding company for Reliance Infocomm.

Sources close to Mukesh Ambani have maintained in the past the equity share price has been the same for all investors in Reliance Infocomm, and that the RIL investment has already multiplied in value, so that RIL shareholders have no reason to be unhappy.

But critics argued that the bulk of the investment made by RIL in Reliance Infocomm is in low-yield securities with a long lock-in period, and with an undecided conversion price.

Some other investment companies and trusts have also bought preference shares at different points of time, on what appear to be broadly comparable terms, but the sums involved are much less than in the case of RIL.

The critics also argued that since RIL is the largest investor in Reliance Infocomm, the company would have stood to benefit more by putting all the money in the form of equity.