Ambani Aftermath

After spending the weekend in Goa to attend close associate Anand Jain’s daughter’s wedding, Mukesh, 48, made it a point to spend a couple of hours personally overseeing preparations before the reception at Mumbai’s Taj Hotel.

The significance wasn’t lost on anyone: Anand Jain’s exit from the IPCL board was part of the final settlement, with Anil refusing to back down on the issue. Family was being redefined.

As for Anil, 46, after visiting a baking Tirupati on a thanksgiving trip, he hit the ground running. Bankers and financial institutions, media, government, presentations by consultants…‘‘He knows the goodwill will last only for a couple of months, then the questions will begin,’’ says an associate.

After announcing his vision for Reliance Infocomm today in Navi Mumbai’s Dhirubhai Ambani Knowledge Centre (DAKC), the younger Ambani plans a punishing schedule to meet CEOs and see Infocomm’s operations in all parts of the country.

For all three companies in his stable—Reliance Energy, Reliance Capital and Infocomm—his first task is to quickly set up top-notch operational teams to deliver in fast-growing but constantly changing and tough, consumer-focused markets.

And he has to do this without the financial umbrella of the erstwhile, unified Rs 100,000 Reliance Group.

Mukesh, on the other hand, will have to take the oil-to-chemicals giant through a new, exciting phase. Apart from extensive work in the exploration business, Reliance will have its hands full retailing petroproducts. In the absence of any diversifications, he, however, will be expected to come out with the Next Big Idea.

And even if he is toying with the idea of investing Rs 30,000 crore in a retail business, the elder brother—as is his wont—is not confirming it.

Both brothers probably know that in the years to come they will be benchmarked not only against each other but with their legendary father who built India’s biggest corporate empire from nothing. ‘‘Dhirubhai once said that India needs more than 100 Dhirubhais. The stakes are higher now. Both will have to prove that they are capable of making their father’s dream true,’’ says an Ambani watcher.

The Questions Remain
INDIA’S most fierce succession battle may have come to an end, but the settlement announced last week by the Reliance group has generated more questions than answers for its investors and for the financial institutions which ploughed funds into the group.

‘‘In spite of stringent corporate governance norms, at present there are not many answers,’’ says D R Dogra, executive director of Care Ratings. ‘‘For example, Reliance investors still don’t know how they will get back their Rs 8,100 crore that has been invested in Infocomm, which has been handed over to Anil.’’

The good news is that the management risk is now over and both the groups are set for a takeoff stage without each other, says Dogra. Now that the broad parameters of the settlement have been formalised, various issues like taxation and legal paperwork will follow.

‘‘What’s important is that the brothers have agreed on the contours of the businesses they will be responsible for. The tax issues and other legal issues are just formalities,’’ says a relieved Shailesh Haribhakti, chartered accountant and independent director on board of Reliance group firm IPCL.

But corporate lawyers say many questions still remain unanswered:

• If any cash component was given to Anil by Mukesh, will it attract any tax?

• How will Mukesh arrange for huge funds to buy Anil’s stake in Reliance?

• Demerger of Reliance’s telecom and power businesses will be subject to stamp duties. What steps have been taken in this regard?

• How will the cross-holdings be untangled? Will it attract Sebi’s takeover code norms?

• How will RIL get back its Rs 8,100 crore investment in Reliance Infocomm, in the form of preference shares?

According to the agreement between the brothers, the Reliance investments in infocomm and power will be demerged into a separate holding company which will be headed by Anil Ambani. Reliance shareholders are expected to get shares in the new company as per their present stake in the flagship company.

Though Anil—in his post-settlement press conference—did talk about a demerged entity from Reliance Industries, both brothers did not give any indication of the final shape and structure of the demerged entity.

Lawyers say the entire exercise of valuation and demerger can take almost six to 10 months as all the assets of the group, including real estate, have to be taken into account. Says Y P Trivedi, an independent director on the board of Reliance Industries: ‘‘We are expected to prepare our report and present it to the board in the next few months.’’ Trivedi is not committing on how much time the final demerger report will take.

‘‘It will be something like L&T’s demerger of its cement divisor,’’ says a corporate lawyer. ‘‘There will not be any tax implication if the equity in the holding company is distributed among existing shareholders of RIL,’’ he added. Besides, the demerger of RIL’s stake in Anil’s three companies is treated as a ‘transfer of business.’

The only problem could be Reliance Infocomm, which is an unlisted entity. Any transfer involving shares of the company would attract tax at a basic rate of 30 per cent on the capital gains.

THE AGGREGATORS

SWEAT EQUITY RIL chairman Mukesh Ambani gets 12 per cent sweat equity of Infocomm for Rs 50 crore, while RIL, which invested Rs 12,000 crore directly and indirectly, has only 7.5 per cent. Even though Mukesh returned his stake to the company, who decided on this allotment? RIL INVESTMENT RIL’s Rs 8,100-crore preference share investment in Infocomm yielded just over Rs 16 crore annual return. Reliance paid a premium of Rs 49 per Re 1 shares, while other investors—like Ashish Deora, linked to BJP leader Pramod Mahajan— got them at par. OFF-BALANCESHEET DEAL Reliance Infocomm parked almost Rs 3,500 crore in receivables in an off-balancesheet deal with a group firm Smart Entrepreneur Solutions Pvt Ltd to avoid showing bad debts. Story continues below this ad RCIL STAKE It was always presumed that Reliance Communications Infrastructure Ltd (RCIL)—a holding company of Reliance Infocomm, into which RIL had invested money—was an Ambani-owned company. Actually it was owned by Mukesh and Nita Ambani. NO DISCLOSURES Anil did not sign Reliance’s annual accounts owing to absence of relevant details and disclosure on major issues, including related-party transactions, asset disposals etc. CONFLICT OF INTEREST Anand Jain, a close associate of Mukesh Ambani, who holds various key positions in the group (like director of IPCL) was also a distributor of some products. Why did Reliance not disclose this?

Ratings On Hold
Not surprisingly, with so many questions remaining unanswered, rating firms like Moody’s have put on hold its review for a possible upgrade of its ‘Ba2’ stamp on RIL until the financial implications of a settlement in the group become clear. Standard & Poor’s has also asked for more financial details before altering its ‘stable’ outlook for Reliance Industries.

While the stock markets have given a big thumbs up to the Reliance settlement (see box), with the Sensex crossing the magical 7,000 point mark, no one knows how the markets will behave tomorrow.

The Reliance fracas, however, has revealed the chinks in the armour of Indian regulators. In spite of stringent corporate governance norms, listing agreements and company laws, the regulators preferred to sleep through the entire seven-month-long drama. Till date, not a single complaint by Anil Ambani has seen any action by the regulators.

Anil has already made it clear that he will not withdraw complaints as it is a ‘one-way street’ and ‘the ball is in the court of the government’. Anyone who has followed Reliance and its networking skills knows where that ball is going to lie.

Back on Dalal Street’s radar
GEORGE MATHEW
IN the warm afterglow of the settlement, investor wealth in Reliance Industries—which shot up almost 11 per cent in a week—has soared by Rs 7,000 crore. Anil-group firms Reliance Capital shot up by 40 per cent and Reliance Energy by 10 per cent in the period.

Many foreign funds and local investors avoided Reliance group shares during the tussle between the Ambani brothers. When the Sensex rose from 6,400 levels to 6,900, these stocks stagnated around November 2004 levels. ‘‘After the settlement, the market unlocked the potential in these shares,’’ says Pratip Bhavnani, an NSE broker and high net worth investor.

Many Dalal Street bulls believe that Reliance companies still have a lot of steam left. These companies provided the trigger for the Sensex to cross the 7,000 level.

Says Ambareesh Baliga, vice-president, Karvy Stock Broking, ‘‘RIL is trading at Rs 650 and should hover around it for the next two weeks. From the time of the settlement, the FIIs have started buying into the scrip.’’

Adds the promoter of a leading broking firm, ‘‘Once the Ambanis announce the final settlement details, Reliance stocks will find their true levels. For now, there’s uncertainty about nitty-gritties of the split.’’

Punters feel the final chapter in the Reliance saga has not been written yet. RIL and REL—the flagships of Mukesh and Anil respectively—are fundamentally strong companies and considered a must in the portfolios of funds. ‘‘Both RIL and REL have many expansion plans. I won’t be surprised if these stocks cross Rs 1,000 in the next one year,’’ says the leading broker.

Also eagerly awaited is the listing of Reliance Infocomm through a mega IPO—now almost a certainty—as a fallout of the split. The market-cap of the Anil empire is expected to go up three times from the current levels after the listing of Infocomm.

The re-rating of a leaner and fitter RIL—which has over 3 million shareholders—is also expected to be over in the next six months after the cross-holdings are entangled and investments are sold to the Anil group.

For now, Reliance is once again back as an investor favourite.