Anatomy Of A Split

• Anil's desire for a 50:50 split in businesses is nearly impossible, unless he can pressure Mukesh to spin off a few divisions out of RIL and give them to him.
• Anil is unlikely to get RIL; Mukesh will not give up control over the flagship that constitutes a major proportion of revenues, assets and cash flows; he will also not agree to any vertical or other split in RIL.
• Mukesh will not give up Reliance Infocomm; Anil may not want it as the telecom venture's fortunes depend on financial help from RIL
• So, any split has to be an unfair one to Anil; unless he can force Mukesh to give up RIL, a few divisions of RIL and/or Reliance Infocomm (with a legal deal to help it financially); this is very unlikely

Anil's Formula

• Divide the wealth in flagship RIL between family members; 30% each to Mukesh, Anil, mother Kokilaben and 5% each to the two sisters
• Ensure that the group's businesses are divided "fairly and equitably"—in a 50:50 ratio or something similar
• Legally split the group so that there are no future issues about ownership or management; both brothers should have full control over their respective portions
• None of the brothers will be on board of firms run by the other one; so Mukesh and Anil go their own way
• Two leaders are better than one, two groups are better than one; market valuation of sum of parts will be more than that of one group

Mukesh's Formula

• Family wealth in flagship RIL can be divided as per the wishes of the mother; but obviously he should get a share at least equal to Anil
• RIL can't be split and he is clearly in control of the group's cash cow; even RIL's board has backed the elder brother; RIL can't go to Anil
• No questions about who's in charge at Reliance Infocomm; this was always Mukesh's baby; even Dhirubhai never sat on its board while he was alive
• Any division will have to deal with other entities—Reliance Energy, Reliance Capital, IPCL, etc; Anil can be given these plus some cash to pursue new projects; a legal agreement will ensure flow of funds from RIL to Anil's ventures

But first, a caveat. Whatever you may have read and seen last week in the media, the road to any amicable resolution at Reliance still makes a difficult mountain stretch in high monsoon seem like an autobahn at noon. Outlook details out exactly why this is so. Why it’s so maddeningly difficult for the two brothers, Mukesh and Anil, to thrash out a partition deal. Why the duo find it hard to climb down from the positions they have taken in their respective blueprints for a "fair" legal separation.

December 28, 2004. That’s a crucial date, and not just because it happens to be the late Dhirubhai’s birth anniversary. It was on that Tuesday that seven members of the Ambani family—mother Kokilaben, the two brothers, two sisters (Dipti and Nina) and their husbands (Raj Salgaocar and Shyam Kothari)—were reported to have worked out a deal so that Mukesh and Anil could go their separate ways. Anil was exuberant as the specifics worked out in his favour. "The mother worked out the formula which she thought was fair and equitable," says a family source.But within hours after the news was flashed by a TV channel on January 6, 2005, the Anil camp itself was either unsure of or smokescreening the details. One of Anil’s advisors said the story was correct but the numbers were wrong. Another denied any knowledge of the meeting.

However, by Saturday (January 8), they were singing the same tune: that a deal had been finalised to apportion the family stake in the group’s flagship, RIL, in a certain ratio, and divide the operating businesses nearly equally between the two brothers (see graphic). Moreover, there would be a clear-cut legal divide between ownership and management of the two new mini-mega groups that will be carved out of Reliance’s sprawling Rs 1,00,000-crore empire. But then, by January 13, they were not too sure: "Only the broad parameters have been decided till now.But a process has been started to value the group assets and the family’s wealth. Once that’s done, the family will sit down and decide the micro modalities of the division."

What was interesting was the reaction from Mukesh. His camp went ballistic. "Reports of a deal are without any foundation. This is smoke without any fire at all. There was no meeting on December 28, there was no agreement, there was no deal," says the exceptionally media-shy Anand Jain, Mukesh’s closest aide, in an exclusive chat with Outlook. He leans forward and asks, "Tell me why he (Anil) is spreading wrong news.Because I’m confused." And proceeds to answer it anyway: "Probably they’re only trying to find a new twist every week to keep journalists busy."

As We Prodded members of Mukesh’s A-team, we got more questions highlighting seeming discrepancies in the Anil camp’s "deal meeting" story.If the meeting had been held that December Tuesday, why did Anil resign from his two posts in group company IPCL the next week? And while resigning, why did he rant about Anand Jain, who he termed the ‘Shakuni’ in the Reliance group, and say that it was below his dignity to serve on the same board as Jain? Did he not know there’s a cooling-off period during such negotiations, when no party is supposed to talk about it until the deal is signed and sealed? Why did Anil’s camp go public with the formula? If there was a meeting, how can Anil claim he talks to Mukesh through the mother, and not directly? And how can there be an agreement if the brothers are not even talking to each other?

We turned to Anil for answers. The agreement, he communicates, was devised by ICICI Bank CEO K.V. Kamath, who has been advising them for the last 12 months in his personal capacity. Kamath was aided by the two sons-in-law, Salgaocar and Kothari, who helped the mother resolve the dispute (Kamath has denied any involvement with the Ambanis; Anil’s reaction: what else do you expect him to do?). But while Mukesh’s A-team claims confusion about Anil talking about "a meeting that never happened", Anil’s B-team (comprising two people) say they’re baffled at the former’s denial of the deal. Why are they lying? They ask, and answer: It’s posturing to extract the best deal; one that will go in Mukesh’s favour. Also, can they deny the family was together at their Seawind residence on December 28? (The counter to this is that the family was together on Dhirubhai’s anniversary, but nothing was discussed.)

The missiles fired by Anil against Jain were to manipulate the media to expose the till-now publicly invisible Jain, so that Mukesh doesn’t depend on him anymore. "Both Anil and the mother believe that the mess can be sorted out in weeks, if not days, if Mukesh’s advisors like Jain and Manoj Modi (see Outlook article All The Boss’ Men, January 17) are not around," says a family source. He adds that the mother has joked several times that Jain & Co should be sent on a cruise to Alaska so that the family can reach some closure on the dispute.When Anil commented that an Alaska cruise only lasts a couple of weeks, the mother, according to Outlook’s source, replied: "Then we can ask them to take the same cruise thrice." Jain is adamant that he’ll not leave Mukesh because of these attacks.

After the December 28 "meeting", whose occurrence remains in curious existential limbo, Anil’s other objective was to use the media to prepare grounds for the split. In the week after the "meeting", Anil issued a release detailing his designations to clarify he was not involved in Reliance Capital and that he was Reliance Energy CEO only at the behest of the parent RIL, which has nearly 42 per cent stake in the power company.

Anil’s motive for these moves also appears to be to keep his options open on the group companies that may come his way once the nitty-gritty of the deal are finalised.He doesn’t want to be saddled with the logic that he should only get the firms he’s seen to be running at this point in time. He doesn’t want to be seen as being in control of any group companies, only as vice-chairman and joint MD of the parent RIL. Another interesting fact in the same direction, according to Anil’s camp: IPCL’s notice about Anil’s resignation to the stock exchanges says that he has tendered the letter to Mukesh with a request to accept his resignation. Does it sound like resignation if he’s only requesting Mukesh to accept it, and not actually saying he wants to resign?

Like December 2004, November 2002 is another month that’s critical in this saga. It was then that serious behind-closed-doors bargaining began to divide the group assets and family wealth among the two warring brothers. The chief negotiators were Anand Jain (representing Mukesh), and Anil, and his close advisor Amitabh Jhunjhunwala.Since then, the positions have only hardened. Sensitive issues, instead of being ironed out, have only got tangled further. In the beginning, Anil was told he should exit from RIL, take Reliance Energy and Reliance Capital, and accept cash to chalk out his own empire. Mukesh would be the owner of the bulk of the family’s stake in RIL and continue running both RIL and Reliance Infocomm.

But Anil put his foot down. Since the late Dhirubhai did not leave a will, he felt the family’s wealth in RIL should be divided equitably among family members. There was no way he would let Mukesh walk away with the entire booty. Over time, this issue was resolved—the Ambanis’ RIL holdings (46.67 per cent held directly and indirectly) would be divided in a certain ratio (see graphic). But then Anil wanted a commitment from RIL that it would be willing to finance his future dream projects in power and financial services. And he refused to get out of RIL.

That peeved Mukesh who thought a deal was in its final stages. And the negotiations went off the rails. Anil began to believe that he would be left with nothing as Mukesh controls the family stake in RIL and manages RIL and Reliance Infocomm, which together constitute 90 per cent of the group’s revenues. When Mukesh made his move to wrest decision-making powers in RIL through a board resolution in July 2004, Anil decided to fight back. By raising relevant questions about ownership, corporate governance and messy state of affairs in Reliance Infocomm.

As Things Stand, both sides are stuck with their own formulae to divide the operating businesses, although there seems little problem in slicing the family stake in RIL. Anil prefers a 50:50 break-up in terms of either assets, revenues or cash flows.(Ideally, he would like any separation to be done on the basis of the group’s cash flows, since RIL constitutes almost 95 per cent of that figure). Also, he wants clarity and legal stamp on issues like current ownership/management and future inheritance.

"This can be done easily.A few businesses can be spun off from RIL and transferred to Anil; he can be given other companies, and RIL’s holdings in firms that go to Anil can either be transferred to separate firms or demerged and distributed to RIL’s investors in the same ratio as existing holding pattern," says a family source. What he means by the demerger is that RIL shareholders can own that stake directly in Reliance Energy in the same proportion as the existing RIL shareholding pattern. So, since RIL holds 42 per cent in Reliance Energy, the Ambani family, which owns 46.67 per cent in RIL, gets 19.60 per cent (or 46.67 per cent of 42 per cent) which can be transferred to Anil through a new set of investment companies.

But there’s a catch, and a critical one. The Mukesh side does not want to let go of either RIL or Reliance Infocomm. "Who runs RIL? Mukesh. Who controls the flagship? Mukesh. Who’s the RIL board supporting? Mukesh.Who’s the chairman and final authority in RIL? Mukesh. Who has set up large RIL projects? Mukesh. So, how can he give it to Anil? There’s no question of spinning off a few RIL divisions since the board has categorically stated that the parent company will continue as an integrated energy company," explains a Mukesh aide. Anil, however, feels that RIL is plagued with a market disease called "conglomerate discount". Since it is operating in several diverse areas—like gas exploration and telecom—the stockmarket doesn’t quite understand its mechanics. And that’s why the RIL stock has underperformed the Sensex, especially in the last two years.Therefore, RIL shedding a few components may not be such a bad idea.

A study in the US, covering a 25-year period ended 1988, found that stocks of spun-off companies outperformed their industry peers and the Standard & Poor 500 (the New York Stock Exchange Index) by about 10 per cent per year in their first three years of independence.The parent companies also managed to do quite well—outperforming their competitors in the same sectors by over 6 per cent on an annual basis during the same three-year period. In India, the best example has been the recent hiving off of the cement division by L&T. The spinoff unlocked L&T’s market value and the stock rose 75 per cent from Rs 500 to Rs 875. UltraTech Cemco, the new cement firm that was carved out, now quotes at Rs 295.

But such studies may be misleading because the spinoffs they consider were done for rational, business reasons; these acts of restructuring were aimed at sharpening the focus of the companies’ businesses, and not to settle personal feuds between promoters. But the one truth, says a Mumbai-based investment analyst, is that spinoffs or a partition of the Reliance group may result in more accountability and transparency as both factions try to prove their integrity. Mukesh disagrees since he feels RIL’s operations are transparent enough and there’s no point in dismembering it.

And there’s no way Mukesh will allow Reliance Infocomm to go to Anil. "Only the elder brother has been involved in the telecom venture since its inception in 1999. Remember that before Dhirubhai’s death, all three (Dhirubhai, Mukesh and Anil) used to be on group companies’ boards in some form or the other. But, in Infocomm’s case, only Mukesh was on its board. Even Dhirubhai wasn’t there. So, how can Mukesh give it to Anil?" questions the same aide. In this case, even Anil may not be keen on Infocomm since the future of the loss-making firm depends on help from RIL and the RIL-Infocomm linkages are difficult to break.

The Mukesh camp is clear that the elder brother can give everything other than RIL and Infocomm to Anil, apart from free cash that will help Anil pursue his projects. "He can take Reliance Energy, Reliance Capital, other financial services operations like mutual funds, IPCL and cash that will be offered to him through a legally binding agreement.But he has to forget about RIL and Infocomm," says a family source. But will Anil accept it? If push comes to shove, and the mother agrees to it, he may settle for a lower share than he would ideally want. As his spokesperson says, "Anil Ambani will abide by all decisions that are taken by his respected mother Kokilaben." Of course, what he leaves unsaid is that until that happens, he’ll continue to fight for an equal share of the empire.

The posturing we see today is typical negotiating ploy in any war. When things start progressing towards any agreement, and some movement is made towards that end, harden your stance to get the best deal. Only this time, Anil seems to have disclosed too many of his cards. How many more he has up his sleeve will be known if things don’t go his way in the series of group companies’ board meetings slated this week. "Then he’ll reveal some new ammunition to fight another series of battles," says a family source.But will these, or their counters, fall into the category of truths, half-truths or lies?

By Alam Srinivas with Charubala Annuncio in Mumbai