How Reliable Is Reliance?

Cracks are showing in the Indian behemoth, and investors are fretting

On Nov. 16, just as India was sweeping up from Hindu New Year celebrations, the country's business community was set abuzz. Mukesh D. Ambani, chairman of petrochemicals giant Reliance Industries Ltd., told the local CNBC affiliate that Reliance faced "ownership issues." The statement seemed to confirm long-standing rumors of a growing rift between Ambani and his brother, Anil. The two took over the company two years ago, after their father, Reliance founder Dhirubhai Ambani, died without leaving a will.

Ambani's words roiled India, where Reliance is considered a proxy for the country's industry by foreign investors. Reliance Industries, the flagship, saw its stock fall by 3.4% in one day. The group's market capitalization dropped by $550 million, shaving a full percentage point off the benchmark Bombay Sensitive Index. Finally, on Nov. 22, Mukesh Ambani retracted his statement, saying he had been referring to future businesses, and that his father had "settled all ownership issues pertaining to Reliance within his lifetime." The stock had just begun to recover when M. L. Bhakta, a director of Reliance since 1977, announced his resignation from the board.

That left India awaiting more dramatic developments from behind the gates of the Ambani compound in south Bombay. The nation has been riveted by the signals of discontent in the mighty and secretive family. The question is whether this is a fraternal spat that can be patched over -- or the kind of dynastic struggle that could really damage the Reliance empire.

Over three decades, patriarch Dhirubhai Ambani -- who started out as a gas station attendant -- turned his textile company into a vast petrochemicals, energy, and telecom conglomerate. Dhirubhai and his sons were talented businessmen who produced for shareholders. Group sales for the year ended in March totaled $22.6 billion, while profits came in at a cool $1.4 billion, up from $1.2 billion the previous year. Reliance accounts for 6% of India's exports and 3.5% of its gross domestic product, and over the years the Reliance machine used its formidable clout in New Delhi to pave the way for its ambitions. Along the way, though, the family has made its share of enemies. "They don't overpower others by competing, but by crushing them," says Subramaniam Swamy, a former Indian Law Minister who has long been critical of Reliance. Neither Ambani brother returned calls or e-mails requesting interviews. Other company officials declined to comment on their behalf.


When the patriarch died in July, 2002, India wondered whether the brothers could fill their father's shoes. The family controls 33% of Reliance, and the brothers remain highly influential in New Delhi. Mukesh, 47, a chemical engineer, oversees the operations and strategy of the group and serves as chairman of Reliance Industries, a $17 billion oil, gas, and petrochemicals behemoth. Anil, 45, an MBA grad from the Wharton School, oversees power company Reliance Energy and serves as vice-chairman of Reliance Industries.

Despite pledges of unity, rumors of conflict surfaced almost at once. The public got a hint of a simmering family feud on Dec. 28, 2002, at the launch of cellular operator Reliance Infocomm. As Mukesh Ambani hobnobbed with industrialists and politicians at the company's 144-acre campus near Bombay, Anil was conspicuously absent. Insiders say he didn't like the direction the group's foray into telecom was taking, and that he had been edged out of important decisions. Mukesh was said to be displeased by his sibling's sudden entry into politics as a member of India's Parliament. Then in July, the board of Reliance Industries voted to give Mukesh the sole right to make all investment decisions -- effectively putting him in charge of future investments in Anil's businesses via various cross-holdings among the companies.

The stakes are high. Foreigners hold 30% of Reliance group stocks. Capital Group, Janus Funds, and the government of Singapore each own big chunks, and the companies' shares are a de rigueur holding for virtually every India investment fund. Reliance also has long been a local favorite; more than 3 million Indians own its shares. Returns on Reliance-linked companies have far outstripped the Sensex over the past decade.

What worries investors is that an ownership struggle could distract the brothers just as Reliance is embarking on an ambitious expansion. Reliance today has some $7.5 billion in projects planned, including a 3,740 megawatt power plant in the state of Uttar Pradesh backed by Anil Ambani. But there are cracks in the once-solid Reliance edifice: The plant, to open in mid-2006, was to be fed by natural gas from Reliance Industries. But in November, Mukesh told Web site Petrowatch that the company wouldn't be ready to pipe the gas until 2008.

Worse, Reliance Industries is seeing its umbrella of government protection fall away as India deregulates. For years its petroleum refining business had guaranteed buyers for its fuel at gas stations run by state-owned Bharat Petroleum, Hindustan Petroleum, and Indian Oil. In April, however, a longstanding agreement obligating those companies to buy nearly a third of Reliance's production was replaced with a deal under which they now buy about half that much, forcing Reliance to find other customers.

Now investors are asking what would happen if the Ambanis were to divide the business. The company's monopoly power would almost certainly be splintered -- though few believe the brothers would squander the influence they enjoy in New Delhi. Some say a split might even be beneficial. "For India, two Reliances are better than one," says Mahesh Jetmalani, an attorney who has faced off against Reliance in the past. "It will reduce the concentration of wealth and power in a single entity and family." If the company split, he suggests, the brothers might need to bring in more professional management and improve corporate governance. Dividing it would create an opening for foreign oil giants which might be interested in buying out one of the brothers. Bankers in Bombay say foreign players are watching the Reliance drama "very carefully."

For now, Mukesh Ambani appears to remain firmly in control, though insiders are steeling themselves for a court battle if a fight erupts. The brothers haven't spoken to each other since January, communicating only via e-mail, confidants say.

Meanwhile, some ordinary retail investors such as marine engineer Darius Banajee, 56, are hanging on to their Reliance shares, hoping "everything will be sorted out." Others, like Bombay broker Sunil Shah, are less sanguine: "Many Indian corporate houses have been ruined because of family feuds," he says. Investors are anxiously awaiting the next installment of the drama.

By Manjeet Kripalani in Bombay

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