Sucheta Dalal :Reliance board meet and shareholder value
Sucheta Dalal

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Reliance board meet and shareholder value  

Dec 27, 2004

Few in the Indian corporate world would deny (at least off-the-record), that there is nobody quite like Reliance when it comes to stealth warfare.

Whether it is tarnishing reputations, smearing rivals, blocking licenses or creating roadblocks — the corporate grapevine has attributed all this and more to the Ambanis. The targets are not limited to known rivals such as Nusli Wadia or the Essar group. In each case, the Ambanis prevailed and it added to the combination of fear and awe that the group evokes.  

Ironically, over the last month, the brothers have turned that deadly firepower, media clout, strategy and counter-stratagem against one another in a war with venom that has astonished corporate India. But for a powerful bull-run fuelled by foreign money, this war could have severely damaged capital market sentiment as well as the valuation of Reliance Industries Ltd (RIL). Instead, an amazing duel ensured that the Reliance price too remained unaffected. All of last week, we learnt of the dubious allotment of 12 per cent sweat equity in Reliance Infocomm to Mukesh Ambani through a series of smaller companies that seemed to merge and re-merge and obfuscate their trail with confusing name changes. The allotment threw up serious governance issues. The question of who can be allotted ‘sweat equity’ and under what circumstances is clearly a subject that needs to be debated and formalised, either by the J.J. Irani Committee set up by the Ministry of Company Affairs, or the Securities and Exchange Board of India (Sebi) or both.

We also learnt that Anil Ambani has dashed off a letter to the board of directors asking that these issues be discussed in detail. He also sought to repudiate the specific power granted to him by RIL to choose its nominees on the board of Reliance Energy Ltd (REL). This is after he had attempted to raise a storm a couple of weeks ago, by asking the RIL nominee directors to resign from the REL board during market hours; they were asked to stay on a day later. Despite the barrage of media leaks by the Anil camp, this action remains unexplained.

Meanwhile, Anil Ambani took off on yet another much-publicised excursion to seek divine blessings. The media reported that he would be accompanied by wife, his mother and sisters on a trip to the Giriraj temple on December 19. On the same evening however, Mrs. Kokilaben Ambani was seen dining at a five-star hotel in South Mumbai with Mukesh and his wife and one of the sisters. Should one say check and mate?

Monday, December 20 was to be another big day in the battle. That morning, many of us in the media received an unusual research report by a foreign brokerage firm CLSA Asia-Pacific Markets. Unusual because it was mainly a collation of media articles about the Reliance dispute, interspersed with excerpts from its own previous reports raising questions about ‘governance’ and disclosure issues at Reliance, especially Reliance Infocomm.

Apparently, it was brought out in such a hurry that the last page announces that ‘‘the document was not edited’’ in the ‘‘interest of timeliness’’. Was the hurried report part of a plan?

The same morning capital market circles were abuzz with the news about the resignation of RIL’s treasurer and Anil Ambani-confidant Amitabh Jhunjhunwala. The previous night, one of his relatives, a big market operator was heard saying at a family wedding that the price of RIL would crash below Rs 350 by mid-week. That would certainly have jolted the bull-run, except that something else also happened.

The day saw big sales by foreign funds, especially the Janus Fund, which apparently sold a whopping 67 lakh shares. Janus reportedly dumped one crore shares of Reliance, out of which around 25 lakh shares were apparently sold on Tuesday, December 21.

In fact, FIIs who have been net purchasers of anywhere between Rs 200 to Rs 400 crore of equity everyday last week and haven’t recorded negative day for months, were net sellers of Rs 50 crore only on Monday. If the share price remained unaffected by these developments, it was because of the surprise announcement by RIL that it had scheduled a board meeting for December 27 to consider a buyback of shares. It immediately triggered off rumours that the buyback price would be a premium to the closing price on Friday and the stock bounded up in the next three trading sessions. This round of the battle seems to have ended in a draw.

However, one question that hasn’t been asked or answered is this: market experts agree that RIL is undervalued in today’s bull market and that its share price has been constantly battered by the actions of the warring Ambani brothers. In other words, the Chairman and Vice-Chairman are solely responsible for destruction of shareholder value. Yet, company funds will finance a buyback to shore up shareholder value!

The big issue of ‘sweat equity’ remained. And Reliance’s ‘independent’ directors, who include eminent lawyers, chartered accountants and a former governor of India’s Central Bank, would have had their credibility dented if they hadn’t discussed this issue at the board meeting on December 27th. That possibility has been deftly averted with Mukesh Ambani’s surprise announcement to ‘renounce’ the 12 per cent sweat equity stake in Reliance Infocomm. It has taken some of the wind out of Anil’s sail. And market watchers believe that the board may do a repeat of the September 2004 meeting: hear him out, record his grievances and do nothing.

Is the war then headed for a ceasefire? Sources in leading banks and institutions say an angry Anil Ambani has been calling up their chairmen saying that ‘‘hundreds of other issues’’ will be raised in the coming days. He has also expressed apprehension to these people about his own future with the company. While these fears and threats may be exaggerated, a serious board meeting would have to discuss a few important issues other than the buyback. For instance, the board ought to recognise that RIL is a legal entity that is separate from the two brothers. So how does the company tolerate senior executive on its payroll carrying on a vicious campaign to ruin its image and shareholder value? A second issue worth considering is, if Reliance industries has a Rs 12,000 crore investment in Reliance Infocomm why isn’t it a subsidiary of RIL?  

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-- Sucheta Dalal