GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  Even when Dhirubhai was alive, Mukesh was seen as the ‘builder’ while Anil was the ‘financier’. Anil realised that Reliance could no longer grow in the way it had during the 1970s, 1980s, and part of the 1990s, when investors had been successfully wooed by Dhirubhai with fantastic returns on their shares, while government-controlled financial institutions and banks (with more than a little prodding from political bosses) fully backed the exponential growth of the Reliance group with generous access to long-term loans for capital investments as well as short-term working capital. By the new millennium, Anil decided that the group would have to access funds from across the world to sustain its growth momentum.

  He could seduce global finance managers with his suave spiel. At this point, however, Anil was also clearly deeply hurt because he felt his older brother had undermined his contribution to the growth of the undivided group. He thought his contribution was far greater than those of Mukesh’s cronies who, he believed, were being given greater importance than they deserved. The wedge between the siblings was deepening and this was apparent to insiders even between 1999 and 2001 when Dhirubhai was still around. Senior employees of the group had got divided into factions; those belonging to the Mukesh camp were more than a bit wary of those in the pro-Anil camp. The big question that remains unanswered till today is why Dhirubhai chose not to write his will. He passed away intestate. Dhirubhai knew only too well that his sons were not getting along with each other. What could he then have done to keep them from breaking up his industrial empire? In March 2002, months before his death, a mega-merger was announced between RIL, which manufactured petrochemicals, synthetic fibres, and textiles, and Reliance Petroleum, which owned the Jamnagar oil refinery. It was the biggest merger of its kind in India’s corporate history. Dhirubhai presumably believed that it would be next to impossible to divide the Reliance group that had now become consolidated into one monolithic entity. He thought institutional and individual investors would strongly resist a split. If the new merged entity remained intact, there would be nothing to divide, for the combined revenues of other group firms (such as Reliance Energy, IPCL and Reliance Capital) would be relatively small. Moreover, he reckoned that the future of new ventures like telecommunications would be largely dependent on funds from RIL. He hoped his sons would not be able to partition the group he had built, even if they wanted to do so.

  Instead of a will, what Dhirubhai left behind was a deed of partition (dated 31 July 1999) which led to the division of the Dhirubhai Hirachand Ambani Hindu Undivided Family (HUF)2. As the assets of the HUF comprised the personal assets of the family, Dhirubhai believed the deed of partition would not be used to partition the larger business assets of the group among members of his family. The business entities were, in fact, controlled and owned through a complex chain of hundreds of privately-owned firms, as is the case with many business families in India. The absence of a will, Dhirubhai thought, would avert a division of assets, given the holding structure of the conglomerate, and he believed that the family would not need to reveal the names of its closely-held investment firms.

  Dhirubhai certainly must have hoped his sons would stick together, and that Mukesh would accommodate Anil’s interests. That was his logic behind promoting Mukesh as the vice-chairman of RIL and allowing him to set up Reliance Infocomm on his own. He hoped his sons, despite their differences, would carve up areas for themselves without breaking up the group. As events transpired, Dhirubhai’s hopes were just that: hopes. Within a few months of his death on 6 July 2002, representatives of the two Ambani scions were sitting across a table in closed-door meetings, discussing the modalities of a possible split. The fissures began deepening.

  Anil believed that Mukesh was using cash from the publicly-listed RIL (to the extent of over Rs 12,000 crore) to finance his personal telecom venture, Reliance Infocomm. More importantly, this was being done in a manner that would lead to his friends and loyalists reaping huge profits. It was clear to Anil that this was a case of shareholders’ money being used to fund personal acquisitions. While RIL was ‘forced’ to pay a premium to purchase shares in Reliance Infocomm, Mukesh and his friends got them for virtually free as will be detailed shortly. As the worth of the telecom project rose with services being launched, the value of personal stakes would multiply hundreds of times.

  For example, RIL got 900 million shares in Reliance Communications India Limited (RCIL), one of the major shareholders of Reliance Infocomm, at an average price of Rs 26 per share. In one specific transaction, RIL paid Rs 2,250 crore for 90 million shares or an average price of Rs 250 per share. Mukesh was allotted 12 per cent sweat equity in Reliance Infocomm (not RCIL) at Re 1 per share, Manoj Modi got 30 million shares and, in September 2002, three unknown firms, Prerna Auto, Softnet Traders & Consultants, and Fairever Traders & Consultants, received another 10 million shares—all of them at Re 1 per share. By 2005, the notional value of each of these shares had risen by proportions estimated to be somewhere between 70 times and 120 times the original price at which these had been allotted—it is difficult to determine a precise value for these shares as Reliance Infocomm was a closely-held company and its shares were not listed on stock exchanges.

  Anil discovered a connection between the three ‘dummy’ firms and persons close to the late leader of the BJP, Pramod Mahajan, who was telecom minister in the BJP-led National Democratic Alliance (NDA) government in New Delhi. It was found that Prerna Auto’s owner, Lalit Goyal, was close to Sudhanshu Mittal, a close confidante of Mahajan, and a businessman-politician who headed the BJP’s election campaign in Jharkhand in 2004. There was a link between another firm, Fairever Traders, and Global E-Serve, one of whose directors was Ashish Deora (no relation of former Union minister Murli Deora), who was also a director of IOL Broadband together with V. Ramanand Rao, Mahajan’s son-in-law.

  When these nuggets of information found their way into newspapers, including the Asian Age, unnamed spokespersons of the Mukesh faction told journalists that Ashish Deora was the ‘real’ recipient of 10 million shares given to the three firms as he ‘had prior expertise and experience in obtaining building permissions... in Greater Mumbai’. A formal statement added that ‘RIC agreed to compensate Mr Ashish Deora by way of a nominal compensation per building upfront and the remaining via appreciation on equity shares of RIC to be sold to him or his nominees….’ Prerna Auto, Softnet Traders and Fairever Traders were supposed to be firms nominated by Deora to receive the shares.

  Reliance Infocomm took back these shares after the controversy broke out. By naming Deora, the company sought to distance itself from Mahajan, as did Ashish Deora himself. He told journalists that it was ‘quite unfair’ to drag Mahajan’s name into the episode as he had ‘nothing to do with my company’s operations…. When Rao and I set up the company, we had no political connections or ambitions…. I’m caught in the crossfire…’

  Mahajan told India Today (2 February 2005):

  I solemnly affirm that my wife Rekha, my son Rahul, my daughter Poonam and my son-in-law (V. Ramanand) Anand Rao have not got any shares [of Reliance Infocomm] or pecuniary benefits. If someone wants to insinuate that my friends’ shares are mine then by this logic any politician can be accused of wrongdoing.

  To silence his critics, Mukesh returned the 12 per cent sweat equity too. However, his friends, like AJ, maintained that there was nothing wrong in that transaction as the world over, and in India, promoters regularly allot sweat equity to themselves.3 A grouse that Anil had against Mukesh was the involvement of the latter’s wife, Nita, in business decisions. Nita had by then begun handling the advertising and branding activities of Reliance Infocomm entailing oversight of sizeable budgets. This was unacceptable to Anil. He had kept his own wife Tina away from the family’s businesses and wanted Mukesh to do the same. He may have apprehended that Nita could one day be inducted on to the board of directors of RIL. For Anil, these fears, real or imagined, paled into insignificance when the real shock came. He realised tha
t Mukesh was planning to marginalise him.

  Mukesh’s strategy was to rework the complex shareholding pattern of RIL that was controlled through a maze of investment companies. His cronies were to occupy key directorial positions in these investment companies. He also decided to clip Anil’s powers as RIL’s vice-chairman and managing director. Mukesh’s game-plan became clear on 27 July 2004. At noon that Tuesday, RIL held a regular meeting at Reliance Centre, Walchand Hirachand Marg, Ballard Estate, in downtown Mumbai. The main agenda of the meeting seemed harmless. The four items on the supplementary agenda appeared trivial: approve an appointment, make a minuscule investment in Reliance Brazil, approve the minutes of a meeting of the finance committee, and approve the constitution of a health, safety, and environment committee. The proverbial devil, however, dwelt in the details. The fourth item had a supplementary agenda item. The Annexure A attached to Item No. 4 read:

  As hitherto, the Vice Chairman and Managing Director will perform the duties as Vice Chairman and Managing Director with regard to all the work of the Company and Shri Anil Ambani as Vice Chairman and Managing Director will manage and superintend such business and carry out the orders and directions given by the Board from time to time in all respects and conform to and comply with all such directions and regulations as may from time to time be given and made by the Board and his functions will be under the overall authority of the Chairman and Managing Director (emphasis ours).

  The message was as direct as it could be. Henceforth, Anil would have no independent decision-making powers. He would henceforth take his orders from his older brother. What hurt Anil was the surreptitious manner in which he was sought to be stripped of his powers. He recalled the time when, after Dhirubhai’s death, he had wanted their mother Kokilaben to become RIL’s chairperson, a move that was opposed by Mukesh, who said it might not go down well with international institutional investors. Anil remembered that he had been ignored when the formal launch of Reliance Infocomm’s services had taken place.

  Mukesh perceived his brother as not much of a businessman but more of a socialite who was unwilling to put in long hours of work. What irked Mukesh in particular was Anil’s proximity to particular politicians, notably Amar Singh and Mulayam Singh Yadav of the Samajwadi Party. Whereas their father too was close to important politicians, in particular, former prime minister Indira Gandhi, Mukesh was far from comfortable with Anil’s association with these two politicians. Therefore, when, on 16 June 2004, Anil filed his nomination papers from Lucknow to contest as an independent candidate for the Rajya Sabha, the upper house of India’s Parliament, Mukesh was shocked.

  The photographs that were splashed across newspapers the following day hardly pleased him. One depicted Jaya Bachchan (wife of Amitabh Bachchan who filed her nomination papers the same day) flanked by another actor (who became an MP), Jayaprada, and Mulayam Singh; behind them all stood Anil. Another photograph showed Anil filing his papers, surrounded by wife Tina, Jaya, Jayaprada, and the maverick owner of the Uttar Pradesh-based Sahara group, Subroto Roy. A third picture had Anil touching the feet of BJP leader and former Union minister for human resource development Murli Manohar Joshi.

  The rift between the siblings continued to widen. One apparent point of tension lay in the answer to the question: Who was richer? One view is that Mukesh was not particularly happy that he was constantly described in the media as the richest man in India. On 12 October 2007, at RIL’s annual general meeting of shareholders, Mukesh had said:

  There have been several reports in the media about my personal wealth. Frankly I am amused with these reports because I never thought of myself in these terms. Nor have I worked in any way for these epithets. The money you accumulate merely gives you an opportunity to make a difference.

  Mukesh was said to be unhappy when Anil had to disclose the value of his assets to the Election Commission as is mandatory for any candidate who wants to become a MP. Anil stated that he owned jewellery worth Rs 27.21 crore, that Tina owned ornaments worth another Rs 65 crore, that together, the couple had other investments worth Rs 160 crore, and that he personally owned other assets valued at Rs 90 crore. In other words, the couple was personally worth almost Rs 350 crore, according to the affidavit filed by Anil to the Election Commission.4

  Mukesh perceived Anil’s ambition to become an MP as disastrous for the business interests of the Reliance group. The Samajwadi Party was then at loggerheads with the Congress that had returned to power in May 2004 as the leading political party in the ruling United Progressive Alliance coalition with the outside support of the Communists. More importantly for Mukesh, Reliance Infocomm was embroiled in a legal battle with the government. The company had been accused of showing long-distance phone calls originating from the US as local calls. The method was allegedly ingenious. The company simply routed the US calls to its own back-end sites in India and then re-routed them to local destinations through the network of the public sector Bharat Sanchar Nigam Limited (BSNL) or through its own network. BSNL, which charged a higher fee from operators using its network for routing international calls, was informed that it was re-routing local calls. The strategy resulted in huge savings for Reliance Infocomm as it paid BSNL the much lower rate applicable to local calls. (The case was finally settled in 2005 after Reliance Infocomm was asked by the Supreme Court to pay Rs 180 crore to BSNL, including penalties.)

  Mukesh was also said to be displeased with Anil’s ambitious diversification plans: including the privatisation and modernisation of airports in Delhi and Mumbai, and the establishment of a major power generation project in Uttar Pradesh using gas from the Krishna-Godavari basin. In December 2003, the Uttar Pradesh Power Corporation announced that RIL wished to set up a gas-based power project with an installed capacity between 2,000 and 3,000 megawatts (MW) in the state at Dadri (near the national capital, New Delhi) entailing an investment of Rs 8,000 crore. On 27 January 2004, Anil provided more details about the power project. He said that the gas for the project would come from RIL’s gas discoveries in the KG basin and that RIL would play a ‘meaningful role in the development of … basic and extremely important infrastructure in the country’.

  Mukesh thought Anil had jumped the gun. He had, in fact, forced the Dadri power project on RIL. This was because it was only on 29 January, two days after Anil’s announcement, that the RIL board formally announced that it had decided ‘to invest Rs 5,000 crore in [power] generation, transmission and distribution projects of Reliance Energy’. Mukesh felt that the project in Uttar Pradesh had been envisaged only because Anil had been cajoled into doing so by Amar Singh and his then political mentor Mulayam Singh Yadav. Just as sources close to Anil had alleged that his older brother had placed personal interests before the interests of the Reliance group, those in the Mukesh camp now argued that this was exactly what Anil wanted to do by setting up the Dadri power project.

  Relations between the brothers had reached breaking point. Although the Times of India had earlier suggested in a front-page report that relations between two siblings in charge of a major business group had become strained, without naming Reliance or the Ambanis, the animosity finally became publicly known on 18 November 2004. That day, on the sidelines of a business seminar organised by the television channel CNBC-TV 18, Mukesh said that there were ‘ownership issues’ in the Reliance group but that these were in the private domain. For those in the know, this was a clear indicator that there was an internal power struggle within the family to control the group. In this case, Mukesh could have ‘ownership’ issues only with his younger brother, Anil. No one seemed quite sure why Mukesh had to make a public admission about his differences with his brother . Why did he say what he did when he did?

  One theory is that Mukesh was rattled by an embarrassing ‘personal’ disclosure made by the Microsoft CEO, Steve Ballmer, at the meeting a few minutes earlier. During his speech of welcome to the Microsoft head, the Ambani brother sang Ballmer’s praises:

  Steve and I were part of
the same class at the Stanford University School of Business. Steve went on to configure one of the greatest innovation-led enterprises of all times, Microsoft. I came back to India to help my father build Reliance, virtually from nothing to a $23-billion corporation with global standing today.

  Ballmer responded with a revelation: ‘I want to put in one piece of information that Mukesh left out of his very wonderful and kind introduction.’ He then rhetorically sought Mukesh’s permission: ‘I hope he won’t mind.’ And he proceeded with a startling fact: ‘But in our class in Stanford Business School, there were exactly two people who dropped out at the end of the first year, me and Mukesh.’

  This was a shocker for those present at the meeting. For decades, the world had believed that Mukesh was an MBA graduate from Stanford. Prominently mentioned in Reliance’s official documents was Mukesh’s curriculum vitae in the group’s various loan application papers and in communications with Indian and global stock market regulators. Now Ballmer had disclosed that Mukesh was a dropout who had never completed his MBA course at Stanford. Eyewitnesses contend that Mukesh seemed upset and that he walked out of the gathering within minutes. When he was stopped by the CNBC television journalist, he blurted out that there were ‘ownership issues’ within the Reliance group.

  A few days later, Mukesh retracted his statement by claiming that there were, in fact, no ownership issues and that Dhirubhai had resolved them during his lifetime. What Mukesh meant was that his late father had ‘resolved’ these ownership issues in his favour and that Mukesh was indeed the legitimate heir to Dhirubhai’s legacy. But by then the rivalry was out in the open. The media went to town. An open war had been declared, and this was fought largely through the media. This was an area in which Anil had an upper hand and the skills of his master media manager, Tony Jesudasan, came in very handy at this point. Fighting with his back to the wall, Mukesh had to ensure that the government did not act against him as Anil’s confidantes exposed one murky detail after another about Mukesh’s links with politicians, about his attempts at alleged personal aggrandisement out of funds belonging to the publicly-owned RIL, and about issues relating to corporate governance. Several skeletons tumbled out, among them was the attempt to use gas from the KG basin for the proposed power plant at Dadri.