Blot thickens

Mukesh and Anil Ambani are having a tough time answering regulators over alleged business irregularities. Stock prices of their companies have plummeted. For the first time in the history of Reliance, there is a major confidence crisis in the brand name. “The Ambani image has taken a beating,” said Arun Kejriwal, founder, KRIS Research. “They are known for their political connections, but these connections have cost their reputation, brand name and investor confidence. [ father] Dhirubhai Ambani also got things done, but stayed away from politics.”

Anil’s Reliance Communications (RCom) has been hit by a report on the 2G spectrum scam from the Comptroller and Auditor General. It all began with the leaking of tapes of Niira Radia, a corporate lobbyist, who was allegedly involved in granting 2G spectrum and licences. The CAG found that the 2G spectrum allocation had caused a loss of l.76 lakh crore to the government. The CBI charge sheeted three executives of Reliance ADAG (Anil Dhirubhai Ambani Group) for floating Swan Telecom as a front company for get ting 2G licence.

The three name dare Gautam Doshi, group managing director, Reliance ADAG, Surendra Pipara, senior vice president, Reliance Communications, and Han Nair, senior vice-president, Reliance AIIAG. Doshi and Nair have been charged with deliberately taking a circuitous route to transfer money from Reliance to Swan, via companies like Tiger Traders, to conceal the link. And, along with Pipara, they allegedly misrepresented facts.

The CBI’s status report to the Supreme Cot filed on September 29 said it had no evidence of Anil’s direct involvement in the transfer of funds. But critics wonder if the funds could have been transferred without the chairman’s approval.

Critics feel Anil should have stayed away from politics. “He may have saved himself from the CBI, but stains have appeared on his credentials,” said a fund manager who sold his ADAG stocks recently. “He ripped off investor money during the Reliance

Power IPO, but that had been forgot ten. This is an indelible blot on the man and his company, which lacks corporate governance.”

Hardly had the 2G bubble burst when the CAG opened another can of worms for Anil’s group. It sought replies from the power ministry on the alleged diversion of surplus coal from Reliance Power’s Sasan project to its Chitrangi project, both in Madhya Pradesh.

In August 2008, an empowered group of ministers had approved the company’s proposal for diversion of coal. “The decision to permit use of incremental coal does not cause any loss to the exchequer, nor does it con for any undue benefit to the company, and no commercial conditions were changed subsequent to the award of projects to R-Power,” said a Reliance Power spokesperson.

Reliance-watchers feel the situation would not have arisen if the brothers had not sparred. “Mukesh’s excess cash could have been deployed in Anil’s cash-starved businesses,” said an analyst. It is rumoured that Mukesh may buy out some of his younger brother’s businesses.

Regulatory issues apart, Reliance Communications has a debt of around  32,000 crore. Its net profit has been plunging over the last two quarters and average revenue per user (ARPU) is one of the lowest in the industry. RCom has slipped behind Bharti Airtel, Vodaf one Essar and Idea Cellular in terms of ARPUs and minutes of usage.

Anil is desperate to sell stake in Reliance Infratel to reduce the debt. He is also reportedly trying to sell stakes in asset management and general insurance verticals.

RCom’s stock prices have nose- dived by more than 60 per cent after 2G proceedings began. On November

2, it was trading at 82.05, down from its 52-week high of 186.45, while Reliance Power was trading at 96.95, down from a high of 191.

The elder sibling’s situation is not very different. India’s “most valuable company", Reliance Industries Ltd (RIL), came under CAG scrutiny for violating terms of contract in exploring gas fields in the Krishna- Godavari basin. The CAG report said both the government and RIL ignored the production-sharing contract, allowing the company to ‘hoard exploitation acreage’. The company has writ ten to Public Accounts Committee chairman Murli Manohar Joshi saying it was not given enough time to respond and the CAG did not consider its response.

RIL has also been battling lower gas production from the KG-D6 basin. Production declined 6 per cent to 45.7mmscmd (million metric standard cubic metres per day) from the targeted peak of 80mmscmd. Also, Mukesh’s retail business is yet to pick up. “Though they are not saying so openly, RIL has been waiting for gas prices to be revised before it revamps production from the basin," said an investment banker who was involved in one of the mergers. “The partnership with BP will provide the technical expertise.”

RIL’s stock has seen significant value erosion over the last few months. On November 2, it was trading at 878, down from the 52-week high of 1,187.

“Reliance, under Dhirubhai and later his sons, always operated a lit- tie differently,” said Sucheta Dalal, managing editor, Moneylife, and co author of The Scam: Who Won, Who Lost, Who Got Away. “The family worked with a set of extremely close confidants and trusted lieutenants. Managers reported to this inner coterie, which had powers, but never signed any documents. This ensured that investigation agencies found it difficult to target the inner circle directly.”

The solution for Reliance seems to lie in its cash balance. The Mukesh owned behemoth has a balance of 61,490 crore or $12.6 billion, which gives it enough room to overcome the crisis. With the government under pressure on corruption issues and Lokpal, its stand on the Ambani empire remains to be seen. As one analyst said, “If we are going in for mid-term polls, the issue will be resolved sooner." (The Week)