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The Really Fine Print

The holding pattern of RIL group companies is a virtual matrix. Here's a crack at it.<a href=pti_coverage.asp?gid=249 target=_blank> Updates</a>

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The Really Fine Print
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The ‘Real’ Matrix
Florentine Trading :
Madhuban Merchandise:
Yangtse Trading :
Tresta Trading :
Amur Trading :
Velocity Trading : 
Ornate Traders:
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It's become a joke among the advisors to the two feuding camps. For, the two Ambani brothers, Mukesh and Anil, have hardened their positions to the point that a deal seems impossible. On Thursday, Mukesh's camp said he's ready for a split, but ownership of the flagship—and the most profitable—Reliance Industries Ltd (RIL) is not negotiable. The opposition camp challenged this saying that Anil is a permanent director in RIL and can't be removed easily. And, as long as he's there, he can scuttle RIL's investment plans since they have to be unanimously passed by its board. So, Mukesh will have to live with Anil, whether he likes it or not.

So what do the hapless advisors on both sides do? Indulge in some black humour even as they try to give that spin to all the news. "Dhirubhai didn't want Anil to run—run marathons, run away from the group's flagship RIL, and keep running for life," quips one. Ambani jokes are the flavour of the cocktail circuit. Try this tired take-off on classic Hindi film Deewar: Anil to Mukesh: "Mere paas maa hai (I've mother with me)." Mukesh: "Mere paas maal hai (I've got the moolah)."

But it's also become a game. Anil's camp leaks information about wrongdoings in Mukesh's baby Reliance Infocomm. The elder brother counterattacks violently with allegations against Anil, or aggressively with a clarification. And so it goes. On and on. The issue's so murky even the advisors are confused. "That story in that newspaper was planted by me," says one proudly. "No, no, it wasn't us, it was the other camp," says his colleague in another city. The bluffs are at so many different levels that one feels the players themselves have been subsumed by the game. There's no truth here, only consequences.

Of course, the biggest and the most complex issue seething at the core of the feud is the holding pattern of the Reliance group companies—the way in which hundreds of investment firms in Mumbai and Ahmedabad hold the bulk of the family stake in RIL which, in turn, holds majority or substantial stakes in publicly-known firms like Reliance Infocomm, Reliance Energy, ipcl and Reliance Capital. Poring through records at the office of the registrar of companies, collecting information from key sources, and accessing data lying in Mumbai's income tax offices, here's the truth that Outlook has learnt about the firms that control RIL.

Truth No 1: Whatever you have heard till now is false.

The structure is not pyramidal—if you control the few firms at the top, you don't control the remaining ones. It's not a web—there aren't one (or few) key firm(s) at the centre, whose authority spreads outwards. It's not even a maze that only a few can understand. The pattern is a complex and interwoven matrix. Like in the film The Matrix, there are things that one sees, feels, observes—but they are not real. Behind this so-called reality is the virtual matrix—the non-transparent structure—which allows family members to exercise power over the group. Each entity in the matrix is interconnected to others so closely that it's impossible to change it; unless you replace the software with a new one or majorly tamper with the original.

And now, the bombshell.

We reckon it was in 1998-99 that people close to the family began to change the software running the matrix dramatically. Slowly, steadily, they shifted authority from the father to his elder son, Mukesh. That's important since it means that the transformation started while Dhirubhai was still alive—a claim made by Mukesh three weeks ago that ownership issues were decided during his father's lifetime. But we believe that the work was completed only in 2003—over a year after "Papa's" death in July 2002—and that's when the then-secret battle between the two brothers turned vitriolic.Who were these people? What did they do? And what does the existing structure look like?

Take the third question first.There are 14 firms that own over 1 per cent stake each in RIL. Their names—Sanchayita Mercantile, Reliance Enterprises, Tresta Trading, Yangtse Trading, Amur Trading, among others—are on RIL's website (www.ril.com). They are linked to each other, and to firms that are not known, many of which could be be shells or benamis. They are bonded together through common promoters or principal shareholders, or through stakes held in one another—what's called "trade investments". An example of the connections between the privileged 14 (see graphic "The 'Real' Matrix"): the owners of Florentine Trading, which owns 1.87 per cent in RIL, include Tresta and Yangtse. Velocity Trading, which owns 1.76 per cent in RIL, also owns stakes in Tresta, Yangtse and Amur. And Ornate Traders (1.4 per cent in RIL) has investments in Reliance Enterprises that owns 2.26 per cent in RIL. At the same time, the owners of the "14" include little-known firms such as Avada Trading, Deep Mercantile, and Tridhara Investment. The 14 firms also have stakes in the same and other closely-held entities like Chaitanya Commercials, Akshar Traders and Eminent Commercials. Many of the firms, which are in the private domain, have stakes in RIL and some of the 14 that own big chunks in the flagship. Eminent Commercials, for instance, owns stakes in RIL, Yangtse and Velocity. They also have complex holdings among one another (see graphic "The Virtual Matrix"): Avada Trading has investments in Arundhati Traders, Chaitanya and Deep, but its owners include these three firms too. Chaitanya has stakes in Arundhati, Avada and Deep; the latter three also figure among Chaitanya's promoters' list. All the above names have holdings in RIL.

Over a week ago, CNBC-TV18 (and several Delhi-based newspapers) claimed that a firm called Dirdh Commercials "held the key to RIL's ownership". That whosoever controlled Dirdh, controlled the web, maze or the pyramid. The fact is that the structure is a matrix; every firm is linked to every other—father or son firm. Dirdh's promoters include Arundhati, Avada, Chaitanya and Deep. This is how the Reliance group is owned—very shadowly.

It's a matrix as evolved as the one Keanu Reeves fought against, and it seems to have taken Mukesh Ambani five years to make a new one out of it. Among the things that were done was to create links between firms that were earlier subsidiaries of Reliance Capital, whose ceo is Mukesh's closest friend Anand Jain, and some of the 14 that have over 1 per cent stake in RIL. For instance, in 1999, firms like Reliance Research & Management, Reliance Safe Vaults & Securities (now Amur) and Reliance Stockholding—all three were Reliance Capital's subsidiaries—took up stakes in Florentine and Velocity. In turn, Velocity holds stakes in the three of the above firms.

In the case of Madhuban Merchandise, which has 1.74 per cent in RIL, the ownership was shifted from directors like Prabhakaran Menon and Ajay Patodia to Terene Fibers. (The two were, however, made directors in another important firm, Dirdh). Sources say that Terene Fibers is linked to Mukesh's group as it owns the land which houses the headquarters of Reliance Infocomm—Dhirubhai Ambani Knowledge City. Even some of the old directors of many of these firms were changed. Probably as they owed allegiance to Dhirubhai, or their loyalty to Mukesh was not foolproof. One of them was Laxmidas Merchant, who was on the board of both Florentine and Velocity.

Sources contend that Merchant was RIL's controller of accounts and a Dhirubhai hand; he became Florentine's director in 1992, and was replaced in February 1998. In that month, Arjun Betkekar (a group employee) and Ayakad Subramaniam (RIL's accountant) became directors, but Betkekar's shares in Florentine were transferred to Tridhara and Reliance Research in 1999.In the case of Madhuban, Devang Shah, an agent of RIL, became director in March 2000, but resigned in December 2003.There are other former Reliance Capital accountants associated with many firms—Navin Chand Jhaveri is a director in Amur and Dilip Modi is in Deep. What's important here is that a number of investment firms, which played a crucial role in RIL's strategy in the mid-1990s, lost their sheen.

Example. Firms like Trishna Investments and Lavanya Holdings that had huge stakes in RIL, and were used to pick up a substantial holding in l&t, were discarded. In the early 1990s, the Ambanis had prepared a gameplan to take over this professionally managed engineering giant. But details about these became public in 1995-96 due to media focus during the share-switching controversy. It was probably then that Dhirubhai decided to change the ownership structure in RIL also to hide it. Around the same time, Dhirubhai suffered his second paralytic stroke and gave the job to Mukesh. But, alleges the Anil camp, Mukesh used the opportunity to create a new matrix that would allow him to take control of the Ambani group. Over time, he got into a situation where no one could question his authority. So when Anil raised doubts about RIL's investments in Reliance Infocomm, and Mukesh felt peeved about his brother's entry into politics, there were few options but to part ways. Anil didn't realise one thing: that Mukesh held all the ownership aces, jokers, even the remaining cards!

Mukesh learnt well from his father.

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