The ownership issues at Reliance seem to have come to an end. What can investors expect from the settlement? Have all the issues been addressed? And finally, which of the brothers will be more successful in the long term?
The nation woke up on Saturday to the news of an amicable settlement to the Reliance family feud, a dispute which had captivated the nation and kept its over 3 million shareholders on tenterhooks. The quarrel between brothers Mukesh and Anil, the late founder's sons and heirs, for control over India's largest industrial group had led to under-performance of group stocks even as the stock markets tested new highs over the last one year.
The patch up was confirmed by a letter from family matriarch Kokilaben D Ambani to the media, in which she assigned 'responsibilities' of various businesses to the two brothers. Elder brother Mukesh would handle Reliance Industries and IPCL; and Anil would handle Reliance Infocomm, Reliance Energy and Reliance Capital.
The board of directors of Reliance Industries met on the same day and authorised a group of independent directors to deliberate on the restructuring of various businesses of the company and come up with a formal proposal which would satisfy all legal requirements.
Anil Ambani resigned as vice-chairman and managing director of Reliance Industries and over the weekend took over as the chairman of Reliance Energy. He also made a slew of announcements regarding the business plans of Reliance Energy and Reliance Capital.
Most noteworthy was the announcement of his own umbrella group, Anil Dhirubhai Ambani Enterprises, comprising Reliance Energy, Reliance Capital and Reliance Infocomm.
The markets seem to have approved the deal with Reliance Industries touching a new 52-week high early this morning. Reliance Energy has gained over 11 per cent while Reliance Capital gained almost 20 per cent.
Protecting minority shareholders
The details of the scheme still remain very sketchy. The letter from the family matriarch only mentions responsibilities; she has left it to the board of Reliance Industries to work out the details of the restructuring.
If the pronouncements of Anil Ambani over the weekend are anything to go by, an asset division on the lines of division of responsibilities is only a matter of time. He has given a distinct identity to his group and has announced further personal investment in Reliance Capital (Rs2,000 crore) and Reliance Energy (Rs1,000 crore).
Therefore, it seems very likely that a detailed plan for asset division has already been worked out and the job of Reliance's directors would be to give a formal shape to the deal. The move to go through a committee of independent directors would also convey the impression of having given some respect to principles of corporate governance.
Over the last few years, Reliance Industries has invested large amounts in other group companies, especially Reliance Infocomm which has received over Rs12,000 crore from Reliance Industries to fund its investments. The parent company holds sizeable investments in the telecom subsidiary in the form of convertible preference shares, apart from the equity investments. Upon conversion of these preference shares, Reliance Industries would hold a majority stake in Infocomm.
Minority shareholders of Reliance Industries have every right to benefit from the investments made in Infocomm. They would not benefit if the holdings are transferred to another company at book value of the investments as Reliance Industries would not see any gain from its investments. It is also important that Reliance Industries does not have any financial links with Infocomm or other Anil Ambani companies in future.
The only way to protect the interest of minority shareholders of Reliance Industries is to de-merge the company's investments in Reliance Infocomm, Reliance Energy and Reliance Capital into a separate investment company. The shareholding pattern of the new company should reflect the existing holding pattern of Reliance Industries. In other words, all Reliance Industries shareholders would get shares of the new company on a proportionate basis.
This new holding company should be listed on the exchanges. The stake of the Ambani family in the new company can be transferred to Anil while Mukesh would get the family stake in Reliance Industries to reflect the final asset division. Other family members, including the mother and her two daughters, can hold stakes in both Reliance Industries and the new holding companies as per their wish.
Reliance Infocomm should raise its own resources, by raising debt or issuing fresh equity, to settle its liabilities to Reliance Industries. Other companies Reliance Energy and Reliance Capital should also do the same.
This way, both brothers would get controlling interests in their respective fiefdoms while minority shareholders in Reliance Industries would hold shares in the restructured Reliance Industries and the new holding company of the Anil Ambani group.
Corporate governance issues
It was a bit disappointing to see the finance minister making a statement to the effect that everything between the brothers had been settled and there was no need for any regulatory investigation. All the specific issues of corporate governance raised by the Anil Ambani camp in the months preceding the settlement still remain unaddressed and, therefore, continue to be relevant.
The most important issue is, of course, the shareholding pattern of Reliance Infocomm. There is no doubt that without that the brand image and cash flows of Reliance Industries, the telecom venture would not have been a success. Therefore, it is only natural that the parent company should hold a majority stake, if not full ownership, of the telecom subsidiary.
At present, Reliance Industries has only a minority stake in Infocomm. If the convertible preference shares issued by Infocomm are converted into equity shares, Reliance Industries would hold a majority stake. However, the conversion date or conversion price of the preference shares are not known. What was the promoters' contribution to the business success of Infocomm, for them to deserve such a large stake in the company?
The issue of transfer of IPCL shares by a subsidiary of Reliance Capital to other group companies at par value is also significant. So are the maze of holding companies with highly opaque ownership structures and the charges of inappropriate personal business interests of some of the directors.
These must be investigated by the concerned agencies rather than brushing them under the carpet and claiming, "All's well that ends well".
Whoever among the two brothers emerges better in the long term, there is one definite winner from this episode - the Indian economy. Over the next decade or so, we could see the emergence of two separate industrial groups which could equal, or even, overshadow the present day Reliance empire in size and influence over the economy. And both brothers now have the opportunity to individually repeat their late father's illustrious track record.
Hopefully the new empires would be more transparent with high governance standards to avoid another showdown after two decades by another generation of Ambanis!
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Ambani has won?