Just Another Family Business

by Salil Tripathi

Indians love melodrama, and for the past two months, India’s biggest business group, Reliance, has provided them with plenty of it. Brothers Mukesh and Anil Ambani, who took the reins of the sprawling empire after their father Dhirubhai’s death in 2002, are engaged in a bitter, public wrangle over the control of the trillion-rupee ($22.6 billion) conglomerate, which accounts for 6% of India’s market capitalization and constitutes 10.7% of the Bombay Stock Exchange’s Sensitivity Index.

With three million investors, a family feud in Reliance concerns more than the Ambanis. Indeed, when the fraternal dispute became public in November, Reliance lost nearly half a billion dollars in market capitalization.

To observers of Asian business, the Ambani dispute is not surprising. In many family businesses, once the founding patriarch weakens or passes away, the children squabble over the assets, often bringing down the structure with them. Some destroy the group’s value, some lose control, and others bicker.

But the Ambani brothers, investors were told, understood that the whole was bigger than its parts. If Mukesh, 47, established the world’s biggest refinery in Jamnagar, Anil, 45, marketed the company effectively to investment banks and international institutional investors at a time when India was an unknown quantity.

So when the Ambani feud became public, initially the markets slumped. It was assumed that a dispute between its chairman (Mukesh) and its vice-chairman (Anil), would have repercussions for the entire economy, because the industries that they dominated had a powerful footprint on the country’s infrastructure. Reliance accounts for 6% of India’s exports and 3.5% of its gross domestic product, making the Reliance scrip a proxy for the Indian economy.

Moreover, many investors in Reliance are emotionally attached to the company. During its heyday, Dhirubhai Ambani held his annual general meetings in a sports stadium, where he was greeted like a deity. And why not? In his book, socialism was an aberration, since he like many Hindus worshipped Lakshmi, the goddess of wealth. Would his sons now destroy that wealth?

Slowly, unflattering stories started trickling out. Friends of Mukesh let it be known that Anil had little time for business, particularly after he joined politics. (Last year, in a surprising move, Anil became a member of the Rajya Sabha, India’s upper house of parliament, where his candidacy was backed by the controversial Uttar Pradesh leader Mulayam Singh Yadav’s Samajwadi (socialist) Party.) Friends of Anil say discussion about Anil’s political leanings is a sideshow; he is a victim of a scheming elder brother depriving him of his rights. Anil even went for a well-publicized pilgrimage to Tirupathi Temple, one of the holiest Hindu shrines.

At one time, such dramatic gestures would have helped. In the early 1990s, small investors accounted for some 40% of Reliance’s shareholders; today, they account for less than 13%. Institutional investors (including foreign funds) control nearly 30% of Reliance. The Ambani family has relatively small holdings in their name, which means that whoever controls dozens of opaque trading and holding companies that own some 30% of Reliance, controls the group.

Little is known about these entities, some of which are shell companies. The intricate structure is not like a top-down pyramid, nor an elaborate web. It is more like a matrix, at the center of which, it now appears, is Mukesh. If indeed Mukesh has secured control of those investment vehicles, then Anil’s chances of asserting control are severely hampered.

The matter may still reach Indian courts, which may then have to untangle the complex web. But settling disputes through the courts can take a long time in India, and it may force disclosure of information that both brothers prefer to keep private. With that in mind, mediators of all stripes have stepped in. Some, like the respected head of an Indian financial institution, can play a useful role; some are voyeurs and free-lance politicians; and others are brought in because of their alleged spiritual powers, in this case the Ambani family guru. In a twist making life imitate Bollywood art, one newspaper has even called on the brothers to settle the dispute by appointing their mother, Kokilaben, as the chairman.

But the markets are smarter. Testifying to the growing maturity of the Indian economy, investors have shrugged off the dispute. Reliance’s shares have fallen since the crisis, but Indian stocks, now buoyed by outsourcing, information technology, pharmaceuticals, and export-oriented companies, have risen 15% since the feud became public.

That is a good thing for India. But it does not diminish the importance of the Reliance saga, both in itself, for what it tells us about the role of families in modern business, and what it reveals about the conglomerate as a business model.

The Ambani dispute is hardly the first feud within an Asian family-controlled conglomerate. But through the years, Reliance has tried to differentiate itself by convincing the markets that it is not from that mold. Mukesh and Anil had gone to leading universities and assembled teams of highly skilled professionals, executing complex projects, always on time. While institutional investors have always had concerns about the group’s transparency, in particular its frequent calls on the capital markets which diluted equity, Reliance has been able to silence its critics by consistently rewarding its investors.

Strategic focus, cost leadership, competitive advantage: These are terms straight out of Michael Porter’s textbooks on competitive strategy. Reliance was, until recently, one of the few conglomerates in emerging markets which could claim to be implementing such a strategy successfully. Even though government permits and licenses sheltered the group from its competitors, the Ambanis were focused on three things.

First, they picked the right licenses. Their interests did not range from tea to telecommunications; rather, they had executed a well-planned vertical integration strategy. Second, they built to scales unheard of in Indian business. And third, they stuck to their knitting.

There was sound logic here: The further away Reliance was from downstream markets, the less likely it was to face elastic demand. When it operated downstream, it ruthlessly eliminated rivals, by means that were fair and dodgy. When it went upstream, Reliance chose industries to ensure that its main competitors were state-owned Indian companies. Such rivals were not exactly efficient, and being state-owned, they were more likely to remain protected. This made those sectors of the Indian economy the last to be liberalized, which benefited Reliance as well.

In contrast to Reliance’s strategic forays, some Asian conglomerates made opportunistic investments during the boom years of 1993-1997, when their currencies were stable, borrowing dollars was cheap, and China was opening up, with Vietnam, Cambodia and Burma not far behind. Asian family businesses chose to grow horizontally into unrelated areas when capital flowed freely from international lenders.

The weaknesses of such a strategy became apparent during the Asian crisis: When capital got scarce, demand for transparency increased, and as interest rates rose it became difficult for some conglomerates to sustain all their businesses. The conditions that nurtured those conglomerates evaporated as liquidity tightened and state control weakened.

However, while Reliance remained focused on its “knitting” till the late 1990s, as Dhirubhai’s health declined—he had suffered a stroke in the 1980s—the sons began looking for new opportunities. Things began to fall apart; the center could not hold. Mukesh wanted to set up the world’s largest mobile telecommunications network in India. Anil’s interests lay in energy and finance. All may be sound business propositions. But whether Reliance should run them is a different question.

The first inkling of sibling rivalry came when Anil skipped the launch of Reliance’s cellular phone business, Mukesh’s pet project. While Reliance’s mobile phones are becoming ubiquitous in many parts of India, the venture has guzzled cash. That business is privately held, but the publicly listed flagship has invested huge amounts in it. Arguably, it remains afloat because of the listed company’s backing. Anil has raised questions about the lack of transparency in that investment and in Mukesh receiving a chunk of shares at cost, a deal Mukesh has subsequently canceled. All of which points to potential corporate governance lapses.

Foreign investors have noted the changes. CLSA Asset Management has expressed concern over “lack of transparency, board independence, and relatively lower corporate-governance rankings.” Standard & Poor’s, the credit rating agency, believes Reliance’s newer businesses may suffer more, and has hinted that it might review Reliance’s credit rating (currently BB).

Janus-faced Reliance has personified the best and worst traits of Indian entrepreneurship. At its best, it is a Porter case study, a technology leader and a world-class firm that capitalizes on economies of scale. At its worst, it is like an East Asian empire built on guanxi. Mukesh is efficient and ruthless. Anil has the wiles and the charm.

What makes it a fascinating company is that like the brothers, Reliance contains elements of both the good and bad traits. The technology it chose was vastly superior. But instead of letting the market decide that, Reliance creatively utilized and manipulated loopholes in Indian laws so that its revenue streams remained uninterrupted and its profitability stayed high. Its rivals’ revenues deteriorated as they were crippled by duties, if not by a slump in demand.

That’s fascinating as the plot of a novel. But the real lessons here are quite mundane. What the Reliance dispute has revealed is exactly what the Asian crisis taught us about family-run conglomerates: Even when performance is high, there is an urgent need for higher standards of corporate disclosure and governance.

An exceptional family may have launched Reliance, but it is no longer the property of a family. Clearer rules must govern how the group’s cash resources are invested in new businesses, particularly those in which the promoters have a stake.
There are conflicts of interest. The investment companies that effectively control Reliance remain shrouded in deep mystery. They change their names, and their relationship with one another, without any known reason. As the layer of intermediary companies thickens, it becomes harder for the shareholders of the listed company to trace the ownership pattern. Why?

Dhirubhai Ambani used to take justified pride in having established the equity cult in India, and Reliance has, in the past, won awards for corporate governance. The murky details that have emerged in the past few weeks may convince some observers of exactly what the group strenuously tried to deny: that, in the end, Reliance is just another Asian family business.