Sucheta Dalal :Ambani brothers: Governance deficit
Sucheta Dalal

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Ambani brothers: Governance deficit  

June 20, 2011

Shareholders of both Ambani groups are paying the price for the far-from-glorious reputation of their companies

Sucheta Dalal

Corporate governance enthusiasts finally have a meaningful case study in how both Ambani groups are paying a price for their far-from-glorious reputation. Even the Mukesh Ambani group, with its huge financial muscle, big vision and project implementation prowess, hasn’t quite convinced serious investors that it can be trusted. This is reflected in its sadly sagging stock price. The Anil Ambani group is yet to recover from a series of disasters—the Reliance Power IPO (initial public offering) fiasco (its shares trade at one-fourth the offer price), the Rs50 crore consent order filed with SEBI (Securities and Exchange Board of India) with curbs on fund raising and, more recently, its involvement in the 2G scam. The impact of reputational damage is most obvious in Reliance Mutual Fund (RMF). Our mutual fund survey in an earlier issue (Moneylife, 19th May) revealed that people’s perception of the fund house significantly trails the consistently good performance of its schemes. This is startling when compared with HDFC Mutual Fund which enjoys a reputation premium far in excess of the performance gap between the two fund houses.

It is the same with the Mukesh Ambani-controlled flagship, Reliance Industries Ltd (RIL), which has an insider trading investigation looming over it and is seen as arm-twisting the government over gas pricing. Even the promise of ‘next wave’ value creation and transformation through a Rs50,000-crore investment in broadband revolution hasn’t enthused investors. RIL made a stunning entry into this segment by acquiring a 95% stake in Infotel Broadband, after it had bagged 22 circles in the auction for broadband wireless access (BWA). Sources say that like with Reliance Infocomm, which was Mukesh Ambani’s dream project, the broadband rollout will be combined with extremely low-priced tablet devices that the company plans to purchase in bulk. There is talk of a 650-town rollout in the first year, with free voice (nationally) and Internet access. (This, however, may fall foul of the competition rules).

Clearly, investors are not impressed. Its stock price has been stagnating for several years and foreign institutional investors (FIIs) are steadily reducing their holding, despite Reliance’s massive weightage in all stock indices. FII holding has dropped over the years from a high of around 23% to 17% in the past five years.

Ironically, even positive moves, like Mukesh Ambani’s decision to cap his salary at Rs15 crore and forgo a massive Rs23.75 crore, were quickly drowned out by comments like Ratan Tata’s reflections to The Times, London, on his billion dollar high-rise home, towering above the slums of Mumbai. At the height of the war between the Ambani siblings, Mukesh’s close aides used to say that he is determined to do business differently—but clearly the group is still struggling to get there.

 


-- Sucheta Dalal



 



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