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The Reliance quandary

November 27, 2004

There is a tide in the affairs of companies, which, taken at the flood, leads on to fortune. This is the growth phase when focused and sensible leadership is absolutely vital.

If the wrong decisions are taken at that stage, the company will sink; given the right decisions, volumes will multiply.

Reliance Infocomm is at that critical stage and so is Reliance Energy. Both companies are going through a process of massive investment and expansion with lots of long-gestation, capital-intensive projects on the agenda.

Also critical is the fact that  both "Energy" and "Infocomm" are in businesses which require them to service large retail and semi-retail customer bases.

At the same time as the companies are absorbing new technological processes, they are having to transform their service delivery paradigms completely. Neither has got this process down pat yet. Anecdotal evidence suggests that there have been plenty of complaints from customers.

Reliance Industries itself is in the process of developing an upstream exploration profile -- given the company's embedded skills, that is perhaps easier to tackle.

Reliance Industries needs to raise capital for vast investment and it also needs to "manage" government policies related to the energy sector. The Ambani Group flagship has plenty of experience and an impressive record at performing both tasks.

But given that the businesses are all in a growth phase, the leadership dispute has  frightening business implications. The professionalism of the group's executives, or the siblings, is not in dispute.

But some things inevitably happen during a corporate power struggle. Top executives tend to polarise into several factions, once one accounts for the cautious fence-sitters.

These factions cease to communicate effectively with each other and restrict inter-factional communications to the bare minimum. Critical decisions are postponed or turned into debating points.

This can hurt even a stable, mature business and it can destroy a nascent growth company completely. Both Energy and to a greater extent, Infocomm face big-time competition.

Neither has reached the stage where respective plans can simply be put on hold for a year or two while the power struggle works itself out. Given a hiatus in activity, rivals will take over critical marketshare and the businesses may not be able to fight their way back.

That's why one can't cheerfully put a "buy" recommendation on the group's listed  companies and wait for the DNA issue to play out. Stock prices will drop as the struggle plays out.

Quite a lot of that drop will be caused by blind panic but rational analysis also suggests that there will be a negative business impact. Quantifying that impact and translating it into market valuations is difficult.

The status of the unlisted entity that is reportedly at the root of the dispute, Reliance Infocomm, has the potential to cause even more trouble. The expected spin-off into a separate listed entity now has a big question-mark attached to it.

There cannot be an IPO without an acceptable resolution of promoters' stakes and a clarification of the management structure of the telecom business. Without the possibility of an immediate IPO, the valuation of Reliance Industries as a holding company is notional. So all we can do is wait and watch.

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