Reliance saga: The unanswered questions

A recent forwarded e-mail with the subject 'What education does', went like this: "A poor, ill-educated man created a multi-billion dollar, Fortune 500 company called Reliance Industries. Two business graduates from the top B-Schools, Stanford and Wharton, are busy breaking it up. That's education."

The fact that all was not well between Mukesh and Anil, the late Dhirubhai Ambani's sons, first came into the public domain, on November 17, 2004, when Mukesh, admitted to a television reporter "There are other issues like ownership issues which are in the private domain."

Many Family owned business enterprise (FOBEs) do not operate smoothly once the baton is passed from the first generation to the second.

Prof. Pulin Garg, believed that it was natural for FOBEs to split. He used to say 'Haweli ki umar saatth saal' (An FOBE lasts sixty years).

A research conducted by the US life insurance company Mass Mutual in the late nineties suggested that 67% of the FOBEs split after the second generation takes over, with the proportion increasing to 90% by the time third generation comes in.

The Indian business scenario is littered with examples of FOBEs splitting once they enter the second and the third generations. The splitting of FOBEs has become even more common since the late 90s.

Given these facts, the problems at Reliance Industries, India's largest private sector company, should not have come as a surprise. Splits in FOBEs are at times inevitable because of the owner manager pattern of FOBEs in India.

As the family grows, all the male scions want a business of their own. But there is only so much to share. As Gurucharan Das says in his book, India Unbound, "In a sense the life in joint families is like life under socialism. They do not work in the long run as socialism does not work. Joint families require strict equality, because human beings are unequal and need material incentives to perform, joint families break down." This explains the situation at Reliance Industries to a great extent.

In the wee hours of June 17, 2005, exactly seven months since Mukesh first admitted to there being ownership issues, the warring brothers reached an agreement, in the presence of their mother Kokilaben Ambani.

At 5.00 a.m., Kokilaben's statement announcing the settlement between the warring brothers was released to the media. Since then realms of newsprint has been spent on arguing which brother got the better deal.

News stories with titles like 'Anil Ambani, The Comeback Kid', 'Is Anil Ambani the real winner?' seem to suggest that Anil has managed to get a good deal. Anil keeps Reliance Energy Ltd. (REL) and Reliance Capital Ltd. (RCL), the two companies whose operations he oversees.

And on top of that he has managed to get Reliance Infocomm as well, a company which was his brother Mukesh's baby and something Anil has clearly stayed away from since its inception.

Anil is also expected to get around Rs 12,000 crore in the form of cash, real estate and other assets. Other than this there is a non-compete agreement for five years between the brothers.

Earlier, even though Anil was running REL and RCL, he was answerable to Mukesh, as Reliance Industries Ltd (RIL) holds 45% stake in REL and 47% stake in RCL.

So any major decision needed the approval of the Chairman of RIL, Mukesh Ambani. Further the Hindu succession laws gave Mukesh, the elder son, the right to run RIL as he chose to and Anil had to follow him.

Anil could legally separate from his brother Mukesh pressing for his share of the Ambani family's stake in RIL. For this Anil would have to approach the civil courts to untangle the family's stake held through a web of investment companies.

And this could have taken a lot of time given the speed at which our courts work. Given all this, Anil hasn't got a bad deal after all.

But bigger questions remain unanswered.

Anil had made charges of poor corporate governance in the way Reliance Infocomm shares were allotted. He had run a sustained campaign accusing Mukesh and his cronies of giving RIL shareholders a bad deal. RIL had bought Reliance Infocomm shares at Rs 250 each for its part of the stake in Infocomm, whereas, Mukesh and his cohorts had bought Infocomm shares at Re 1 each.

Now that Anil has taken over as the chairman of Reliance Infocomm, will these charges be investigated or given a quiet burial? The responses from the Finance Minister P Chidambaram and Company Affairs Minister Prem Chand Gupta when quizzed on this matter have been tepid, which means that investigations might not happen at all and things as usual might be put on the backburner.

Also another important issue that needs clarification is whether Reliance Infocomm debt will continue to be on the Reliance Industries balance sheet even after the spin off.

Further, the statement issued by Kokilaben, says, "Mukesh will have responsibility for Reliance Industries and IPCL, while Anil will have responsibility for Reliance Infocomm, Reliance Energy and Reliance Capital." What remains unanswered is the fact why the word 'responsibility' has been used instead of the world ownership?

There seems to be a lack of transparency in the issue. Let's remember the fact that listed companies are involved in this case of transfer of ownership. And the fact that more than 3 millions shareholders are involved, calls for some information sharing on part of the family.

In closing

The splits in the FOBEs reduce the combined group advantage to raise money or to negotiate common purchases. But the split is not always bad. Often after a split, there are two diamonds of great value.

In few cases, where FOBEs have split logically and along industry lines, which is the case with Reliance as well, the spilt has worked. The three-way split in the Bhai Mohan Singh group between the late Parvinder Singh (Ranbaxy), Analjit Singh (Max India) and Manjit Singh (Montari industries) proves the above argument.

So this split might actually lead to the Indian business having two big conglomerates instead of one.

The biggest question though still remains. Now with brothers' having their own companies to manage will they stop getting at each other's throat. As the Economist magazine aptly put it, "But will the sibling rivalry end now that the two boys have their own toys?" Well your guess is as good as mine.