GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  The allegations and counter-allegations continued to swirl inside me. Did RIL deliberately fail to give up large unexplored areas where it was supposed to dig wells in a unique form of a ‘land grab’ at the bottom of the ocean? Was the office of the CAG populated by a bunch of ignorant accountants who had no idea either about the challenges that deep sea gas exploration posed or the huge risks entailed in such activities? Or was the CAG performing its duties diligently as a Constitutional authority which investigates and ascertains if money— and resources—that belong to the people of India is not appropriated to benefit a privileged few? Was the CAG correct in asking RIL to provide more information about its operations and finances than what it was contractually obliged to? Was the body of government auditors asking a private company to disclose proprietary commercial secrets?

  Even more uncomfortable questions lurked in my mind that day. How powerful and influential is India’s richest man? Can he really decide who gets appointed to the post of minister of petroleum and natural gas in the Union Cabinet? Are such decisions not the prerogative of the prime minister of India? How insidious and how deep is the nexus between big business and politics?

  To seek answers to these and more questions, read on.

  —PGT

  1

  SIBLING STRIFE

  ‘People plaster mud over their faces because it makes their skin glow. InIndia’s corporate sector, when muck is flung by business tycoons at each otherand against their political mentors, one can only hope the mud-slingingwill bring about some good; some cleansing of the country’s crony capitalist system and some transparency in the working of the murky nexus betweenbig business and politics.’

  These ironical words were spoken during a private conversation by a senior executive who used to work for Reliance Industries Limited (RIL) now headed by Mukesh Ambani, the older of the two sons of the late Dhirubhai Ambani. It was October 2008 and I was were sitting in the office of this executive in the central part of New Delhi discussing what had prompted Dhirubhai’s younger son Anil to publicly lash out against not only his elder brother, Mukesh, but also against the government of India’s ministry of petroleum and natural gas (MoPNG) then headed by Murli Deora.

  It is rare, in India at least, for a corporate captain to publicly attack the government and a minister, especially one of cabinet rank, a position that makes him part of a select group of politically influential members of the council of ministers. Businessmen tend to be deferential to politicians in power, at least in public, even if they may privately express reservations about their actions or proclivities. In this instance, Deora was said to be particularly close to the late Dhirubhai Ambani, son of a schoolteacher from a nondescript village, Chorwad, in Gujarat in western India, who founded the Reliance industrial empire. Unlike most industrialists of his generation, Dhirubhai would openly flaunt his proximity to the then prime minister of India, Indira Gandhi. After she returned to power in the 1980 general elections, he shared a platform with her at a function held in a fancy hotel in the capital.

  Few could have imagined that Dhirubhai’s two sons would become arch rivals soon after his death in July 2002 and carve up the widely- diversified industrial group he had assiduously built from scratch.

  Mukesh had worked closely with his father to enable the group’s flagship company, RIL, to diversify from a textiles and synthetic fibres company to a manufacturer of petrochemicals of all kinds, and to become an important petroleum refiner, besides carving an important place in oil and gas exploration and production. The October 2012 issue of Forbes magazine lists Mukesh Ambani as the richest man in India and the nineteenth richest person in the world with a net worth of $21 billion, despite a $1.6 billion fall in the value of his assets over a year. Anil Ambani is listed a few notches down, eleventh position in India and 118 in the world with a net worth of $6 billion. Earlier in 2009, the same magazine had estimated Mukesh’s wealth to be $29 billion, making him Asia’s and India’s richest man and the world’s fourth most wealthy individual that year. A chemical engineer by training, Mukesh had dropped out of a Masters in Business Administration (MBA) course at Stanford University in the US (where he was, incidentally, a classmate of former Microsoft chief executive Steve Ballmer).

  Reliance group flagship RIL is one of the largest publicly traded companies in India in terms of market capitalisation (price of a share multiplied by the number of shares) and is the country’s second largest company by way of gross revenue after the public sector Indian Oil Corporation. It is India’s largest private sector company in terms of revenue and profit. In the financial year that ended on 31 March 2012, the company’s revenues stood at $76.2 billion and its total assets were valued at $64.2 billion. The company was ranked 99th in the ‘Global 500’ list compiled by Fortune magazine of the world’s biggest corporations for the year 2012. It employed more than 23,000 people.

  In many respects, the Ambani siblings had markedly different personalities: Mukesh, something of an introvert and his flamboyant younger brother Anil, evidently revelling in the limelight. Mukesh has, by and large, maintained a low profile in comparison to Anil, who is known to socialise regularly in the company of film personalities and politicians. This is not surprising as Anil’s wife, known earlier as Tina Munim, was once an actress in the Hindi film industry in Mumbai. Anil was the more visible face of the undivided Reliance group in public interactions with analysts and journalists, some of whom he would address by their first names to strike a note of familiarity.

  In 2009, Mukesh said he would take a hefty pay cut after prime minister Manmohan Singh commented adversely on conspicuous consumption and the ‘vulgar’ levels of salaries doled out to the Indian élite, including industrialists. Critics of the tycoon found his action hypocritical as Mukesh had in November 2007 gifted his wife Nita a fancy private jet on her forty-fourth birthday. It was alleged by the Indian government’s customs authorities that the Rs 231-crore (around $46 million at the prevalent exchange rate) Airbus A-319, with a plush master bedroom, fancy bathrooms, a bar and a business centre, had been imported by Reliance Commercial Dealers by evading taxes. Another Falcon aircraft was imported by the same company, and after show-cause notices were issued and both aircraft were seized by customs’ officials, an amount close to Rs 500 crore was shelled out as bond value together with bank guarantees worth Rs 100 crore which were paid by the company under protest.

  Mukesh also reportedly splurged huge amounts of money on a twenty-seven-storey home, a 570-feet-high structure called ‘Antilla’ on Altamount Road, a posh locality in south Mumbai, a city with the highest real estate values in India and, perhaps in the world as well in terms of purchasing power parity.

  In terms of ostentatious display of wealth, Anil was not far behind his older brother. Almost taking a cue from him, Anil bought a Rs 144 crore Bombardier aircraft, and was also served a notice by the customs’ authorities in 2007. His Global 5000 aircraft too was seized and provisionally released after payment of Rs 144 crore as bond value, which matched the value of the aircraft, and over Rs 36 crore as bank guarantee. The companies controlled by the Ambani brothers received these notices because these aircraft had been imported for commercial charter services (which attract zero duty) but were being allegedly operated for personal use (on which customs duty of around 25 per cent is levied). The Ambanis were not alone in this respect: similar notices were also issued to companies in the Tata group, the GMR group, and the Oberoi group, among others.

  Anil, apparently to gift his wife Tina something even more bountiful than the birthday gift presented by his brother to his wife, presented her with a luxury yacht named ‘Tian’ after the first two letters of both their names as a New Year’s gift in December 2008. The yacht was reportedly worth Rs 400 crore ($84 million), including the cost of refurbishing its interiors. Yet again, Anil’s company was slapped with a notice by the customs authorities for evasion of duty. Reliance Transport & Travels, whose associate had purchased the yacht, denied that an
y taxes had been evaded. The company claimed that no duty was due because the transaction had taken place overseas and the vessel could move in Indian and international waters.

  Anil, who boasts a degree in business management from another American business school, Wharton, currently heads the breakaway Anil Dhirubhai Ambani Group (ADAG) that has business interests in electricity generation and distribution, telecommunications, financial services, infrastructure development, and entertainment. His Reliance Entertainment struck a deal with Steven Spielberg’s DreamWorks and signed on ‘A’ list Hollywood stars such as George Clooney and Julia Roberts for film projects. Reportedly a teetotaller, he is a fitness fanatic who jogs regularly and often participates in marathon runs.

  As far as public postures went, Mukesh and Anil were apparently united for more than two years after their father’s death in July 2002. The tensions between the brothers were known only to insiders until in November 2004 when Mukesh publicly acknowledged that there were ‘ownership issues’ between the siblings. Thereafter, for the next seven months, there was a no-holds-barred airing of allegations and counter-allegations by senior employees owing allegiance to one or the other brother. During this period, stories detailing claims of corruption and misrepresentation, including Mukesh’s non-existent MBA degree from Stanford, were bandied about in the media. In June 2005, the warring brothers decided to temporarily bury the hatchet and signed a private settlement that was brokered by their mother, Kokilaben, and assisted by one of India’s leading bankers, notably K.V. Kamath, former head of ICICI (formerly Industrial Credit & Investment Corporation of India) Bank.

  The settlement was uneasy, and the truce, short-lived. The sniping between the siblings resumed in June 2008. Discussions between the Anil-led Reliance Communications and the South African telecommunications group MTN fell through after Mukesh raised the issue of ‘right of first refusal’ specified in the family compact on the sale of shares of the Indian company. Anil claimed that Mukesh was trying to bypass the ‘non-compete’ clause in the family agreement to get into such areas as power generation and airports, which had been reserved for 10 years for the younger sibling when the family assets were partitioned, through the stratagem of setting up special economic zones.

  This happened in full public glare, and key questions were raised in the context of the rivalry that became India’s most widely- publicised battle between two corporate captains who happened to be brothers. Why did Anil take on petroleum minister Murli Deora whose friendship with Mukesh and their deceased father Dhirubhai was well known? Was it a desperate attempt to salvage a major gas- fired power project that was to be set up by a company headed by Anil that would use gas from the KG basin and which seemed to be in danger of slipping out of his control? Why did Anil use his politician friends in the Samajwadi Party to raise a ruckus in Parliament about the government allegedly favouring Mukesh’s RIL through its policies by discriminating against a firm that he led?

  Before searching for answers to these questions amidst a maze of legalese and technical jargon, a clarification is necessary: the spat between the Ambani brothers could have been dismissed lightly as yet another instance of a private squabble between two rich businessmen had it not been for the fact that the dispute between them was intimately related to the utilisation and pricing of resources, in this case, natural gas that is the property of the people of India. It is not as if there has not been inter-corporate rivalry related to control over natural resources. For instance, the government was accused of favouring certain corporate entities in the allocation and pricing of electromagnetic spectrum used for mobile telecommunications in 2008. Four years later, the Comptroller and Auditor General (CAG) of India accused the government of allocating coal bearing acreages to specific companies in a non-transparent and arbitrary manner. However, the tussle to control gas from the KG basin was unique in the sense that the rivals were corporate conglomerates led by two brothers.

  On 7 May 2010, a judgement of the Supreme Court of India was delivered that went beyond the contractual dispute between the two companies headed by the Ambani brothers. While the verdict was widely interpreted as victory for Mukesh and defeat for Anil, the decision of the country’s apex court gave complete authority to the government to price, utilise, and distribute natural resources. As the broadest and most important issue in the legal case was the manner in which the nation’s gas reserves could and should be utilised, the court also delivered a stinging indictment of the policies of the Indian government. The dispute between the two oligarchs over the manner of utilisation and pricing of natural gas provides a big picture of the manner in which India’s post-1991 economic liberalisation programme degenerated into forms of crony capitalism.

  In 1999, the MoPNG announced a New Exploration Licensing Policy (NELP), under which a consortium (referred to as the ‘contractor’ in government documents), comprising RIL and its partner Niko Resources Limited of Canada, became the successful bidder for exploring deepwater block KG-DWN-98/3 (later christened the KG-D6 block; D6, for Dhirubhai 6). In April 2000, a production- sharing contract (PSC) was signed between the ministry and the contractor. In July 2002, Dhirubhai died without leaving a will. In October that year, substantial reserves of natural gas were discovered in the KG-D6 block. Two years later, in June 2004, RIL entered into an agreement with the Uttar Pradesh government to set up the ‘world’s largest gas-based power plant’ at Dadri, near Delhi, which would use KG gas that would be transported through pipelines across a distance of over 1,800 kilometres from Andhra Pradesh to Uttar Pradesh.

  For seven months between November 2004 and June 2005, the Ambani brothers fought a bitter battle in public, the genesis of which can be traced to Dhirubhai’s lifetime (detailed in the next chapter of this book.) After a ‘settlement’ between the warring brothers in June 2005, the Reliance business empire was partitioned: the Mukesh group acquired control over the gas exploration and extraction business while the Anil group acquired the power generation business. Mukesh also promised to supply gas for Anil’s Dadri power plant at a price of $2.34 (or around Rs 114) per million British thermal units (mBtu). The envisaged quantum of gas supply was to be 28 million standard cubic metres a day (mscmd) for a period of 17 years.

  In little or no time, the heads of RIL (Mukesh) and Reliance Natural Resources Limited (Anil) began bickering over whether Mukesh’s company would supply the gas at the agreed price. When RIL applied to the MoPNG for approval of a gas price of $2.34 per mBtu, the ministry refused to approve the price on the ground that it had the right to determine the price of a natural resource. Soon a legal battle ensued between the two brothers with the government later becoming a participant.

  In September 2007, an empowered group of ministers (EGoM) headed by Pranab Mukherjee (then minister for external affairs and now President of India, who had also been a close acquaintance of Dhirubhai) approved the price of RIL’s gas at $4.20 per mBtu, or nearly 80 per cent above the price of $2.34 per mBtu that had been agreed upon by the Ambani brothers. What transpired at the empowered group of ministers (EGoM) meeting and the controversy it generated will be subsequently elaborated, as well as lacunae in the government’s energy policy, particularly on the utilisation and pricing of natural gas.

  Over the next year and a half, the brothers quarrelled publicly, as well as in the Bombay High Court, over who should have access to KG gas and at what price. In March 2009, the petroleum ministry finalised gas allocation from the KG-D6 block for fertiliser and power companies, and for other users. Under this gas utilisation policy, Anil’s Dadri plant did not receive any allocation, the government stating that it would first take into account the judgement of the Bombay High Court where the two brothers were at that juncture embroiled in a legal face-off on the issue.

  On 15 June 2009, the Bombay High Court ruled in favour of RNRL (Anil), stating that RIL (Mukesh) should honour the June 2005 family agreement to supply gas at $2.34 per mBtu in accordance with the original terms of the contract and u
rged the two companies to arrive at a ‘suitable arrangement’ or to turn to their mother Kokilaben for arbitration. The judgement was evidently beneficial for RNRL but not RIL. The legal battle was far from over.

  On 3 July 2009, RNRL appealed to the Supreme Court to restrain RIL from supplying up to 40 mscmd of gas, as apportioned by the EGoM in accordance with its utilisation policy, to anyone other than itself. The following day, RIL filed a petition in the Supreme Court against the Bombay High Court judgement, which then posted the case for hearing on 20 July that year. On 18 July, the government chose to intervene by filing a special leave petition contending that natural gas is national property, that the government had sovereign rights over its use, and argued that the court ought to declare the July 2005 family agreement null and void. Later, on 1 September, the government was to amend its petition in the Supreme Court clarifying that it no longer wanted the family agreement to be declared null and void on the ground that it was a private agreement that was of no direct concern to the government while re-asserting its sovereign rights on the pricing and use of gas.

  The younger brother decided to aggressively hit out against his older sibling. For over six months from July 2009 onwards, Anil Ambani publicly accused the MoPNG of pandering to RIL’s ‘excessive greed’, accusing his older brother’s company of (among other things) ‘gold- plating’ the KG gas project to reap undue financial benefits, and the government of obliging RIL at the expense of RNRL, and the public sector National Thermal Power Corporation (NTPC), one of India’s biggest power-generating utilities, and others.1