Sucheta Dalal :Cracks in the first family of business
Sucheta Dalal

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Cracks in the first family of business  

Nov 22, 2004



That there are problems between the Ambani brothers is not news, but Mukesh Ambani’s admission that there could be a change in the equity pattern of the Reliance group caused the share prices of Reliance companies to drift downwards. The flagship, Reliance Industries dropped 3.4 per cent to Rs 527.15 on Friday while other group scrips slipped a little too.

The market is clearly waiting and watching while the group itself wants to avoid an upheaval. Interestingly, although Mukesh Ambani insists that Reliance is a professionally-run group that is bigger than one or two individuals, the market perception is very different. Reliance companies are certainly packed with highly qualified and competent professionals, but they are not ‘‘professionally managed.’’

It is common knowledge that the brothers control all significant decisions, including the precise corporate equations with government, fellow industrialists, financiers and the media. A crack in the Reliance empire first became public when Anil Ambani and family famously stayed away from the launch of Reliance Infocomm Ltd (RIL). This, with all its warts and successes, is seen as Mukesh Ambani’s baby. Infocomm, however, remains attached to the parent company through a Rs 10,500 crore umbilical cord. As speculation about the rift mounted, Anil admitted to what he called ‘‘constructive tension’’ between the brothers, but denied talk of a split (FE, July 2003).

Gradually, Anil and his trusted executives took charge of Reliance Energy Ltd (REL) and Reliance Capital. On March 2004, we reported that although Reliance Infocomm used the legendary Dhirubhai Ambani as its mascot, only REL that sported the tag line ‘A Dhirubhai Ambani Enterprise.’ It was clear then that REL was building a separate identity.

But nobody knew how the giant flagship company, which encompasses the entire petroleum chain from oil prospecting to downstream petrochemicals and textiles would be split. Reliable sources had told us that a possible divide has been discussed in detail by the extended family. In the last couple of months, each sibling is understood to have put a close confidant in charge of sorting out details of the division. It is in this context that Mukesh Ambani’s media statement is significant.

The Ambani brothers are perfectly conscious of how many industrial empires in India have been torn apart by family squabbles. They openly discussed it with the media. They have always been proud of the fact that Reliance was a single company that opted for linear growth through far reaching forward and backward integration — as opposed to other unwieldy family-run conglomerates.

All that changed with their entry into power and Infocomm. These forays also marked the growing differences between the brothers. Sources close to the group insist that Mukesh is determined not to allow the group to split — he wants full control. Company insiders say that he went public with his comments only after briefing the Prime Minister and the Finance Minister about a possible division in shareholding.

All Indian industry houses have to ensure the support of banks and financial institutions in the carving up of their businesses. When the division of assets is amicable, bankers and institutions usually play a benign role. When the battle is messy, both sides use the media to air their grievances and settle scores, and politicise the issue. Sources who know the group claim that the entire family shareholding is held and controlled through a complex web of investment companies.

Although the patriarch Dhirubhai Ambani died intestate, he had a shrewd idea about the growing differences between his sons and was keen that the integrated empire wasn’t split up. He apparently expected the older sibling to take charge. Will this happen? Or will the family squabble debilitate the group?

A lot depends on whether Mukesh Ambani is able to convince his younger brother to give up control over the flagship and accept a hefty monetary settlement plus charge of REL and Reliance Capital. The younger Ambani is however understood to have demanded control over the Godavari gas fields, which have a linkage with his energy business. A tough stand by either side could lead to a breakdown in the mediation efforts by a corporate honcho and damage the group whose tentacles extend to a vast array of businesses.

Mukesh Ambani correctly told the CNBC correspondent last week that ‘‘ownership issues are ‘private’.’’ But the issue of control over a listed company is very much in the public domain and has a big impact on the stock price, employee morale, and confidence among suppliers, dealers, bankers and business partners.

Will the family holding of 46.67 per cent be splintered? If it is, control will vest with the brother who gets the backing of bankers, financial institution, overseas investors (who have a 23 per cent stake) and Indian retail investors. Since most leading banks are still in the public sector, the Ambani brothers have been working their political network for support. Every analyst quoted by the media has publicly maintained that Reliance is a financially solid company and they see little downside risk in the stock price, but privately they admit to worries.

Political sources, who look for other indicators have also come up with confused signals. On the face of it, a Congress government that is openly inimical to Anil Ambani’s friend Amar Singh of the Samajwadi Party would be expected to side with Mukesh Ambani.

However, some Congressmen have apparently been advising the party leadership that the quarrel between the brothers may be an excellent opportunity to separate the UP politicians from their powerful corporate friends. They point out that Anil Ambani is solely responsible for increasing the credibility of the Mulayam Singh government among industrialists and in persuading them to visit the state and consider investment plans there.

Will Anil Ambani put political convenience and business interests ahead of his friendships? Will it give him a chance at controlling the flagship company? Will a stubborn stance by both sides irrevocably rupture the business empire? A lot will depend on whether global financiers and banks are willing to back Anil Ambani separate growth aspirations as much as they backed the Reliance group. And only time will tell what will happen. There is also a fourth possibility. That the brothers are persuaded by their mother to bury their differences, work out a compromise and allow a dominant role to Mukesh Ambani as the new head of the family. Anything is possible.

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-- Sucheta Dalal



 



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