Sucheta Dalal :What is settled about the Ambani settlement?
Sucheta Dalal

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What is settled about the Ambani settlement?  

June 30, 2005


By Sucheta Dalal


What a week! After a relatively slow climb towards the 7000 market, the Sensex blazed past this psychological benchmark in the first two days this week.


The trigger is attributed to the Ambani settlement and it certainly caused all Reliance scrips to soar—especially those of companies controlled by Anil Ambani, namely Reliance Capital and Reliance Energy.


Ambani junior, whose group is going to be called ADA Enterprises, clearly has a lot of catching up to do with brother Mukesh. While Reliance Industries Ltd. (RIL) now under the older brother’s sole control has been continuously raising new money, Anil Ambani has been entirely focused on fighting for his inheritance.


But the day that a settlement was announced, Anil went to the press with his own resource raising plans, after a quick visit to the Tirupathi Temple. Well, raising more funds than their companies have needed is a part of the Reliance DNA (the genetic kind not to be mistaken for a soon to be launched newspaper). So Anil too is making up for lost time by unveiling a set of dazzling projects and major resource raising plans to fund them. 


He also announced an open offer to buy shares in Reliance Capital, within a day of the settlement. He said he was pumping his own money into the company at premium to market price (that day). And the open offer was at a price of Rs 231 while the post-settlement spike in Reliance Capital had already taken the scrip to Rs 290. This means that the open-offer is at a huge discount to a galloping market.


Since Ambani junior has a fair degree of expertise in capital markets and investor sentiment, our question is, does he really expect investors to deliver shares in the open offer? Or, does he expect the share price to drop below the offer price after the initial euphoria and then attract investors?


Or, does he anticipate a third scenario, where an unknown bunch of investors are waiting to offer their shares in an open offer and suddenly the Ambani holding goes up overnight? After all, this has happened before with BSES Limited, the power generation and distribution utility, which is now Reliance Energy. It also happened in IPCL.


There is another question that one would like to ask Anil Ambani in connection with the spike in Reliance shares and that relates to the furore he had kicked up in connection with the buyback offer announced by the Mukesh faction in Reliance Industries.


The sharp spurt in Reliance group share prices after the settlement is proof that prices were depressed mainly because of the war between the brothers. More so because of the series of allegations that Anil Ambani was levelling against his broker Mukesh, his close associates and their business practices.


Many of the allegations are probably true and Anil has lobbied very hard with all government agencies to get them to investigate his charges. All these charges of unethical practices and bad governance are still being investigated and if there is no pressure to meddle with the investigation, may well be proved.


The question then is, had Reliance Group shares languished during the war because Anil Ambani as in insider (he was Vice Chairman and Managing Director then, even if his powers were slyly curtailed) was damaging the company? Or were the share prices depressed because investors were concerned at the revelation of dubious business practices?


The sharp, post settlement price rise provides the answer; and it is simple and straight-forward. The Reliance family of shareholders has always been unconcerned about ethical issues, or they would not even have backed the Group patriarch Dhirubhai Ambani, who was a lot more upfront about the constraints of doing business in the license-permit Raj and his brand of solutions.  Reliance shareholders backed the group, not because it was an epitome of good governance but because the Ambani family always found a way to keep growing and this had a way of rewarding shareholders.


Consequently, if prices were depressed when Anil kept up his barrage of allegations, it was solely because investors feared that the brothers would destroy their business by inviting regulatory action and investigation that could extend deep into the past.


If this is the mind of the average Reliance investor, then wasn’t Anil Ambani harming their interests when he objected vociferously to the share buyback announced in a few months ago?


On the other hand, if this is not true, then the share price ought not to be moving up even after the division of ‘responsibility’ between the brothers was announced. After all, prudent investors, who were concerned about issues of management, control, good governance and corporate ethics, would have demanded immediate information on the valuation of the group companies and the implications to each group company when the shareholding is unravelled to provide separate control to both brothers.


But wait. There is yet another way to explain the extent of the spurt in Reliance Group shares, especially one half of it. And that is best said in Anil Ambani’s own words –“there is more to it (the price movement) than meets the eye”.


(This article first appeared in Divvya Bhaskar on June 17,2005 in Gujarati)



-- Sucheta Dalal