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How will the Ambani war play out?
T N Ninan |
November 29, 2004
It is a fight that many in the corporate world had long forecast.
After all, it had been an open secret in Mumbai for at least a couple of years that the brothers Mukesh and Anil Ambani, both heirs and creators of the Reliance group, India's most impressive and ever-controversial business empire, had not been seeing eye to eye, and that an open rift was only a matter of time.
In the event, the floodgates were opened by a seemingly innocuous comment that Mukesh made to a TV channel on the sidelines of a conference by Steve Ballmer, the Microsoft chief executive officer.
Asked about the future of Reliance, he said it was a professionally managed company that was stronger than any one or two individuals, then added that there were some ownership issues but these were in the private, family domain.
That brief exchange took place on Tuesday. It was telecast only two days later, on Thursday, by which time Mukesh had gone abroad. One side in the battle that it has sparked off suggested through intermediaries that the whole thing had been pre-planned by Mukesh, which they say explains the unusual two-day delay between question and telecast.
Mukesh's men, on the other hand, point to the same delay and say they suspect an Anil plot because a Reliance-managed mutual fund (which Anil controls) had bought a stake in the same TV channel a few months ago.
"Mukesh walked into a trap that was set for him, and since then Anil's people who usually handle the media have used their contacts to drum up the whole issue," goes this version.
Whatever the truth, the battlelines had been drawn. But it quickly became clear that if this is going to be a battle for succession, the dice are heavily loaded in favour of Mukesh.
As the older brother and chairman of the company, he heads the company. In board-room skirmishes, the majority of the directors have backed Mukesh, despite Anil asking tough questions on a whole series of issues.
As for management control of the company, Mukesh has systematically reduced Anil's role in both marketing and finance (the two areas he used to look after), and put his own men in charge.
Then, in July he took away most of Anil's powers as managing director through a last-minute item introduced at the tail-end of a board meeting.
Anil was too surprised to protest on the spot, but raised questions later -- only to find the board backing Mukesh. Indeed, Anil's furious e-mails to company officials who technically reported to him as managing director, got him nowhere, signaling that power had indeed changed hands.
Even more important, Mukesh has control of the shareholding. Although the Ambani family controls over 46 per cent of the shares in Reliance Industries (the group's flagship), the family members hold very little (barely 5 per cent) in their individual capacities.
Another 7.5 per cent is held in the Petroleum Trust, which technically is controlled by trustees as eminent as the investment banker Nimesh Kampani and a representative of the auditing firm Haribhakti & Co.
In effect, though, the trust is expected to vote in favour of Mukesh, should there be a beauty contest between the brothers that is taken to the general body of shareholders.
Another 34 per cent of Reliance is not strictly promoter holding but owned by a clutch of investment companies that are characterised officially as 'persons acting in concert.'
This technical difference means that the family members do not directly own the shares in these companies (if they did, this too would become part of the 'promoter holding').
It is possible that the companies own one another, forming a closed financial loop that would have saved the Ambani family wealth tax in the days when there was a wealth tax on shares.
However, the directors of most of these companies are Reliance employees -- and that means they take voting and other decisions on the basis of instructions received from whoever is in charge at Reliance. That today means Mukesh.
In short, Mukesh therefore controls both the 7.5 per cent owned by Petroleum Trust as well as the 34 per cent owned by the investment companies.
In addition, he has the voting power on behalf of the 6 per cent of shares held in the form of global depository receipts overseas.
Add his personal holding and he directly commands a majority in the company, while Anil can hope at best to have his own votes (less than 2 per cent of the company) and the support of some of the foreign institutional investors (who own 22 per cent of Reliance).
With Mukesh controlling the shares, the board and the management, Anil Ambani will have to come up with some pretty neat stuff to make this anything like a serious fight for the succession. The factor that emerged in his support last week was the sympathy factor.
Once Mukesh declared that there was no ownership dispute in Reliance (meaning: Anil will get nothing other than what is already his), and that he was the boss and final authority within the company (conveyed by e-mail to the 1,00,000 group employees), many observers began wondering whether Anil as Dhirubhai Ambani's younger son would get pretty much nothing by way of inheritance: no shares and no say in the company.
The sympathies poured out even more for Anil when it was put out that Mukesh might simply have Anil removed as managing director, and perhaps even as director (though the latter would be difficult because both brothers are permanent directors of the company under the company's articles of association).
Worse, Anil could even be removed from the chairmanship of Reliance Energy by the simple device of the board of Reliance Industries withdrawing him as the parent company's nominee on the energy company's board.
If taken, these steps would drive Anil out of the Reliance Group altogether -- and there was no one in corporate circles who saw that as a fair outcome.
Indeed, the dramatic resignation mid-week of M L Bhakta, the company's legal brain and oldest director, seemed to signal the unease which many people who are sympathetic to the family felt about a one-sided end to the battle, and it took all of Mukesh's persuasive powers to get Bhakta to reconsider.
The equally dramatic resignation by six directors of Reliance Energy seemed a pre-emptive move by Anil to prevent their being recalled by Reliance Industries, which had nominated them in the first place.
In short, starting with few chips in his hand, Anil had created enough room for himself to play his hand.
Those speaking on behalf of Mukesh countered, meanwhile, that the stuff about Anil being thrown out on the street were wild fears far removed from reality, that Mukesh had absolutely no intention of disturbing a status quo that already suits him quite nicely, and that the issue was simply one of accepting that a company can have only one chairman and one leader.
As one of Mukesh's spokesmen said, "When the king is alive, there are two princes. When the king dies, one of the princes becomes king and the other stays a prince. Anil has to accept this. That's the only issue."
It is also argued in these circles that it is Mukesh who has built the company as Dhirubhai's chief lieutenant, whether it is the Patalganga petrochemical complex or the even bigger Hazira facility, not to speak of the massive Jamnagar refinery, all of which have been admired for their scale and complexity.
In comparison, these allies of Mukesh argue, Anil has contributed very little and has been busy running around with politicians like Amar Singh and mixing with film folk like Amitabh Bachchan.
This is of course a caricature of Anil's role, but the basic difference of opinion boils down to who has done how much for Reliance, in relative terms.
By the end of the week, there was speculation that Bhakta's resignation and the media blitz had prompted Mukesh to soften a bit, creating the room for intermediaries to start talking about an amicable settlement.
Among the various options, one that is quickly ruled out is a division of Reliance, which to anyone who cares about Dhirubhai's legacy is considered unthinkable.
Two other options are ruled out too: Anil cannot hope to displace Mukesh as Reliance boss, nor (after all that has happened) can the two brothers be expected to work together, given the history of their acrimony.
The only solution then is a financial one, whereby Anil gets enough money by way of a settlement, and control of Reliance Energy. As someone speaking on behalf of Anil said, "All that he wants is a fair settlement. And what is fair should be decided by the two brothers' mother, Kokilaben."
In practice, there could be some hard bargaining conducted by intermediaries, since the brothers seem barely able to speak to each other now. And if the negotiations fail, the next step will be a full-scale legal battle.
Anil Ambani has been preparing for that for quite some time, gathering information on all the investment companies that Mukesh now controls, with veiled allegations being aired that beneficial ownership has been changed after Dhirubhai's death.
Anil is also said to have been storing up ammunition for firing at what is seen as Mukesh's Achilles heel: Reliance Infocomm, the telecom company that has been the group's most ambitious venture since the building of the Jamnagar refinery.
Within the company in the last few months, Anil has objected to the massive investment made by Reliance Industries in the telecom company (more than Rs 13,000 crore -- Rs 130 billion -- at last count).
He has apparently raised issues of corporate governance, arguing that the transactions have not been at arm's length since Mukesh while being the Reliance chairman also owns 45 per cent of Infocomm.
Indeed, at one point Anil is said to have refused to sign Reliance Industries' last annual report and balance sheet because there was little or no financial information on Reliance Infocomm being given to the shareholders of Reliance Industries.
Anil is also said to have blocked a move by Mukesh to convert the Infocomm debentures held by Reliance, arguing that the conversion price was unfair to the parent company. Mukesh's move to take away Anil's control of the finance function in Reliance is said to have been in response to this criticism and questioning of the investment in Infocomm.
Responding to the charges, Mukesh's men say that Reliance's investment in the telecom company has multiplied in value, and that if Anil has any legal case about any issue regarding shareholding or anything else, he is welcome to go to the courts and try his luck.
The question by the weekend was therefore a simple one: would the two brothers be able to sort out matters through a financial settlement?If not, a full-scale legal war is on the cards, and that will test the positions that the warring brothers have taken in a conflict that sympathetic observers hope can still be called off before it is too late.