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Reliance settlement: ownership issue remains

Statement speaks only about the responsibilities of the brothers in group companies


Shareholders will now benefit by the unlocking of value in the group companies promoted by Reliance Industries.



HAPPIER TIMES: The Ambani brothers after they took control of the Reliance group in 2002 in a smooth succession.

THE LONG-DRAWN battle for Reliance is not yet over. Despite the truce declared between Mukesh and Anil Ambani, with their "responsibilities" being divided, the dispute between the brothers over "ownership issues" may remain. While the unlocked shareholder value has definitely benefited the company's investors, corporate governance issues connected with Reliance remain unexamined.

The settlement announced by Kokilaben Ambani, the late Dhirubhai Ambani's wife, speaks only about the responsibilities of the two brothers in different group companies.

Her statement offers no clarity about the group's ownership structure, or the relative holdings of her sons. When "ownership issues" of a public limited company come up for discussion, the protection of the company's investors demands paramount attention. The issue also assumes importance because public money is involved in the structure and operations of the company. Here, public money can bear two meanings: first, the money of retail investors and institutions; and second, the money invested by banks and other financial institutions to fund Reliance projects.

Split with a difference

Such a scenario is no different, in essence, from other family partitions witnessed in the corporate sector in the last two decades, including the division of the Modi Group during the late 1980s and early 1990s, the Mafatlal Group split in 1987, and the parting of ways within the Walchand Hirachand group in the early 1990s.

While these splits typically took place in the third generation of the industrial families in question, given that a company takes a long duration to grow, Reliance seems to have come to the critical threshold of a break-up within the first generation itself (the `first' generation because, as Anil Ambani put it in his celebrated email of November 30, 2004, he and Mukesh were `co-creators' of Reliance with their father, rather than merely his `inheritors').

There is another significant difference in the Reliance split. The splitting-up of responsibilities was sensible and sane, unlike the splits in other family-run companies that have come apart. Evidence: the division of assets between the two sons of the founder has unlocked value for all categories of Reliance equity shareholders — small, medium and large.

And so the legacy of Dhirubhai Ambani continues to flourish: "More wealth for more shareholders." All these years, Reliance Industries Ltd has been the promoter, and made investments in new businesses. The underlying value of these businesses is reflected on the stock market, the most suitable benchmark for the valuation of businesses. A company may promote businesses, but if it remains embedded in the promoting company, the value also remains embedded.

Hence the partition between the two brothers and the resultant decision to transfer all Reliance Industries holdings in Reliance Energy (55 per cent), Reliance Capital (47 per cent) and Reliance Infocomm (45 per cent) into a holding company to be listed on the exchanges has meant that all Reliance shareholders will now benefit by the unlocking of value in these companies whose original promoter was Reliance Industries Ltd.

Intricate web

The cornerstone of the Reliance separation was the principle of give-and-take: It is rather an emotional for Mukesh to give up Infocomm which he had created from scratch. Anil, too, has given up his positions in Reliance Industries that was built up by his father.

When news of the Ambani infighting first broke, many observers wondered why the late Dhirubhai, ever an astute man, had left no will.

The promoters' stake in RIL stands at 34 per cent. The two brothers own 5 per cent proportionately, or the family owns a little over 5 per cent.

The balance 29 per cent of shareholding lies with persons acting in concert with the management or is held through an intricately woven web of companies.

This web includes a number of investment companies through which the family owns the promoters' and associated companies' stake in RIL. Clearly, an astute man would avoid writing a will in such a complex situation.

Now, if Mr. Mukesh Ambani officially claims ownership of these investment firms, which are technically in the "private domain", this would run counter to the claims made by Reliance's promoters some years ago. At that time, they had reportedly disclaimed any connection with these firms, in statements made before the capital market regulator, the Department of Company Affairs and Income-tax Department, during investigations relating to the switching of shares in the 1990s. Today, these disclaimed "ownership issues in the private domain" have returned to haunt the heirs.

While the Reliance shareholding pattern and disclosure practices must be investigated, as also demanded by Mr. Anil Ambani from the Securities and Exchange Board of India (SEBI), it is equally necessary to inquire into the role of public banks and other financial institutions, which have supported the group with huge public funds without any real knowledge of its complete investment and shareholding patterns. While launching his new holding company, Anil Dhirubhai Ambani Enterprises, the younger Ambani declined to withdraw complaints filed by him on corporate governance in the Reliance Group with the Government and regulatory authorities over the past seven months. "I have done my fiduciary duties and it is for the regulatory authorities to decide," he had said. As the capital market regulator has noted on several occasions, transparency and corporate governance have always been a grey area in the Indian corporate world.

Thus, the role of the capital market regulator, SEBI, becomes crucial in the Reliance case.

While a court battle between the brothers may be ruled out, given the complex and controversial shareholding pattern mentioned above, SEBI must step in to protect the interests of Reliance shareholders by investigating whether the group has followed the corporate governance and disclosure norms. A resolution of this wrangle would probably also involve an impartial valuation of the assets of its public companies: RIL, REL, Reliance Capital Ltd (RCL), and their subsidiaries (such as Reliance Infocomm) and their associates.

Oommen A. Ninan
in Mumbai

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