The Ambani armistice: What lies beneath?
The billionaire Ambanis are important for the govt, industry and the economy.
The billionaire Ambani brothers are hot newsmakers. They are important for the government, for the industry and for the economy.
So when reports of a truce between the industrialist brothers started pouring in, after a prolonged business rivalry of five years, it was not a surprise to see the business world in smiles. The Reliance Empire being the largest private sector conglomerate is instrumental is shaping the industrial environment in the country. So when the brothers have decided to patch up ties, the industrial fraternity has welcomed it heartily. Markets cheered the patch-up. Reliance shares soared on bourses.
The patch-up sounded very well. But one wonders what made it possible after years of acrimony?
Let us start from the very beginning….
The rags-to-riches business tycoon Dhirubhai Ambani founded Reliance and took it to public in 1977. By 2007, the Ambanis found themselves among the richest industrialists of the world.
Cracks in the empire started to appear after Dhirubhai’s death when the tussle for power overrode other things. Mukesh being the elder son became the chairman and managing director of Reliance Industries Ltd (RIL) and Anil was made its vice-chairman in 2002. The fissures which appeared in 2002 drew publicity in 2004 when Mukesh remarked to the media about “ownership issues” within RIL. In the same year, undivided Reliance’s board passed a resolution that redefined the powers of the managing directors. This was mainly aimed at clipping the powers of the younger brother and the news was leaked to the press. A furious Anil demanded to know why the same was not circulated before the resolution was passed as was the norm.
In 2006, the split got formalised with flagship RIL falling in Mukesh’s kitty. This included petrochemicals, oil and gas exploration, refining and textiles businesses. The Reliance-Anil Dhirubhai Ambani Group (R-ADAG) got telecoms, power, entertainment and financial services. Reliance Communications Ltd, Reliance Infrastructure Ltd, Reliance Capital Ltd, Reliance Natural Resources Ltd (RNRL) and Reliance Power Ltd were part of R-ADAG.
Since then the bitter fight between the brothers only worsened. Anil launched a legal fight against RIL, demanding cheap gas from its KG basin blocks. In a memorandum of understanding signed between the brothers in 2005, RIL had promised to supply gas to RNRL at USD 2.34 per unit. When Mukesh backed off from the promise, Anil moved court. On the other side, Mukesh used his “first refusal” right to block R-Com’s bid to merge with South Africa’s largest telecom firm MTN.
The truce came after the May 7 Supreme Court order, which said the 2005 MoU was not binding, and asked Anil and Mukesh to renegotiate for new gas price deal. Subsequent to this verdict, the two entities were directed to reach an agreement within six weeks of the day of the court judgement and approach a companies’ court within eight weeks.
Thereafter the ceasefire! The brothers have also decided to scrap all existing “non-compete” agreements, allowing either group to enter sectors that had earlier been reserved for one of them. Later, Anil said he would withdraw a Rs 10,000-crore defamation suit filed against Mukesh.
RNRL wants gas to power its proposed 7,800 MW electricity plant at Dadri in Uttar Pradesh. As per regulations, Anil can get access to gas from KG basin only for a power plant at Dadri in UP or Shahpur in Maharashtra. Under the new deal, RIL will sell gas to RNRL at a government approved rate for 10 years from 2012-22. Till then, RIL will not enter the gas-based power plant sector.
Is it a win-win situation for the two? The picture is still not clear. The sale agreement between the duo is yet to be sealed. The GUP or the Gas Utilisation Policy of the government is still taking its final shape. What is also noteworthy is the fact that RNRL hasn’t been categorised as a recipient under the Gas Utilisation Policy as yet. However, it has been said that 35% of the available gas will be reserved for independent power projects and it goes without saying that RNRL will have to a part of the list.
Mukesh’s RIL, which will sell gas to RNRL at a higher price fixed by the government, will rake in huge profits. Anil’s RNRL too would reek in good profits being the largest gas-fired power project at a single location in the world.
Hence, whatever may lie beneath the necessary peace, the cascading effects will likely be rewarding to all.