Mahabharata in Polyester

by McDonald, Hamish

  The rapid breakdown of the working relationship between Mukesh and Anil brought Kokilaben to the centre of things. Anil had quickly realised that Mukesh held nearly all the cards inside the company, but was it partly bluff? Family pressure offered him the best leverage with which to find out. By the end of December, Mukesh was being asked to show his main card: when and how had Dhirubhai handed him charge of the inner sanctum, the web of hundreds of companies ‘acting in concert’ to make family control of Reliance unassailable? He couldn’t, or for some reason wouldn’t, and was conceding too that he would abide by Kokilaben’s decision.

  After the showdown at the 27 December 2004 board meeting, Kokilaben had used family meetings the next day on Dhirubhai’s birth anniversary to sound everyone out about where to go. Mukesh and Anil were still not speaking to each other directly. The older brother wrote privately to Anil three times over these weeks (on 30 November, 7 December and 18 January) offering to meet and work out an arrangement. On 20 January Anil had replied that he would meet ‘only if there is an agenda and if all the family is present’ and was reported to have said: ‘We need two hands to clap, Mukeshbhai.’

  But a division of the empire was already being discussed in the media, with lawyers and accountants giving their views on how it might be done. There were suggestions that Anil had been offered the companies he already ran, Reliance Energy and Reliance Capital, plus some cash, to go away. If so, he wanted a much more even split.

  The problem was that so much of the group’s value was concentrated in the core business under Reliance Industries. Dividing it would immediately remove the synergies and tax advantages of vertical integration, not to mention running roughshod over the interests of other investors. To try to clarify and split the ownership of the investment company web was also problematic. Dhirubhai had designed the matrix to be as opaque and impenetrable as possible, partly to lower taxes and quite possibly to aid insider trading in Reliance shares, but also to make it difficult for the holding to be broken up. His confidence in it was enough for him to feel no need to make a will and to dissolve the Hindu Undivided Family status. There were non-core group companies that could be surrendered more easily, but the biggest of them, Reliance Infocomm, was acknowledged even by Anil to be the pet project of Mukesh. Was it yet ready to be weaned away from the cash-cow of the parent company?2 The day after the sad anniversary, Kokilaben called in one of the Mumbai financial community’s best brains, an elder with a long and close relationship with the family. K.V. Kamath, chairman and chief executive of the ICICI Bank, had, as a junior officer of the government lending institution, approved one of the earliest loans obtained by Dhirubhai. Behind a cloak of secrecy and denials, Kamath got to work on the valuations of the different Reliance arms and the way in which they could be divided.

  • • •

  Meanwhile, the feud was dragging down India’s rising image with international investors and reaching New Delhi, where both sons were putting their side of the story to senior leaders, including the Finance minister, P. Chidambaram, who said he had personally asked them ‘to settle their dispute within the four walls of their house, Sea Wind’. But the fraternal war continued and the casualties mounted.

  After his blast at the December board meeting, Anil sent a ‘note’ of no less than 500 pages to the other directors detailing what he saw as their failings of corporate governance and also sent a similar complaint focused on the buy-back to the Finance Ministry. The buy-back announcement had not mentioned that the Securities and Exchange Board of India was looking into trades made ahead of the announcement for possible insider trading and rigging. It hadn’t mentioned that SEBI was still looking into Gurumurthy’s complaint of three years earlier about the investment company matrix (although this was the first suggestion that SEBI had actually done anything about the Gurumurthy letter). Two ‘unknown persons’, Anil alleged, controlled this matrix, which he said held 29 per cent of Reliance shares – which would jump to 31 per cent with the help of shareholders’ money via the buy-back.

  As Sucheta Dalal noted, it was ‘probably the first time in Indian corporate history that a vice chairman and managing director has written to the government demanding a investigation against a company while he continues to hold important fiduciary positions in top management’. As well as remaining on the company payroll, Anil had been part of top management at least until July 2004 and had been the public face of Reliance, presenting its financial results to journalists and analysts. He had even accepted a clutch of good governance awards on the company’s behalf. ‘That is why the sudden activism on behalf of shareholders rings phoney, although it is in the public interest.’3

  In addition, an intriguing new aspect of the 2002 share issue by Reliance Infocomm had come to light in the Asian Age, which author Alam Srinivas listed in a general context as one of Anil’s preferred channels for leaks. While the cash-cow parent company was being milked at up to Rs 250 a share, three small and obscure investment companies with fictitious addresses in Delhi and directors who seemed to know nothing about their business were shown to have received a total 10 million Infocomm shares at one rupee par, all on the same day in September 2002. The newspaper traced their finance to ten other equally obscure shell companies in Delhi and found details for six of these. Their common address was used by a chartered accountant named Ashish Deora, who was close to the family of the former communications minister and BJP general secretary, Pramod Mahajan.

  Deora, it emerged, had helped Mahajan out of a tight spot while he held an earlier ministerial post. While he was Minister for Information and Broadcasting earlier in the Vajpayee government, the state television network Prasar Bharati had entered a deal with a production company owned by Mahajan’s wife and son whereby the company paid the broadcaster a fee to carry twenty-six episodes of a serial called Truck Dhina Dhin. The production house failed to pay all the fees and was left with an unpaid debt of Rs 65 million. In 2001 this was drawing unfavourable publicity and public interest litigation against Mahajan. Deora helped out via his internet company Indiaonline, which he had founded with Mahajan’s son-in-law. Indiaonline borrowed from the Industrial Development Bank of India, ostensibly to develop its network, and diverted part of the funds to paying off Rs 50 million of the production company’s debt.

  Reliance Infocomm said the shares had been allotted because of Deora’s great help in negotiating rights of way for its optical-fibre broadband cables around Mumbai and had been given under a lien related to performance from the 10 per cent of shares reserved for the company’s staff. This lien had yanked the shares back in December 2004 when Deora had failed to meet his targets. But why such a generous reward in the first place, and why was it rescinded when Anil started airing the Reliance Infocomm linen?

  Mahajan denied any connection, noting that the wireless in local-loop technology had been approved by his predecessor, Ram Vilas Paswan, and legitimised under the unified licences by his successor, Arun Shourie. All he had done for Reliance was authorising the stamp commemorating Dhirubhai. ‘If it’s a crime then I am ready to pay a price for it,’ he said.4 A public interest petition later taken up by the Supreme Court of India alleged that, if the newspaper reports were true, the shares had been allotted for the benefit of Mahajan or at his instance and deserved investigation as a corruption case.5

  • • •

  In addition, a rather more lowly scandal was hitting Reliance Infocomm. In September 2004 the telecom authorities found the company was cheating the government-owned telephone companies BSNL and MTNL of large amounts of revenue from international calls, and their new minister, Dayanidhi Maran, had told them to take the company on. Reliance had allegedly used computer software to generate thousands of fake telephone numbers to mask the caller line identification for overseas calls and show them as local calls – avoiding paying what was called an access deficit charge to BSNL or MTNL. The telecom regulator ordered Infocomm to repay the two state utilities the revenues lost, which they claim
ed to total some Rs 5 billion and imposed a penalty of Rs 1.5 billion.

  Reliance Infocomm lost its appeal to the Telecom Disputes Settlement and Appellate Tribunal on 4 March 2005, receiving devastating criticism from the bench for the ‘rerouting’ scam: ‘The method Reliance Infocomm employed to camouflage an international call was certainly unprincipled and, if we may say so, unscrupulous.’ By substituting fake numbers, the company had also put national security at risk. Infocomm had claimed that it kept records of the real numbers, which would have been furnished to intelligence agencies on request. But the judges said this was no use in an age of terrorism: ‘When the security agencies want to monitor a call immediately/simultaneously that will be the crucial time to take action and not to wait for the records to be called, by which time it may be too late. With the spectre of terrorism and other dangers looming all over, even a second’s delay could be disastrous.’6

  Infocomm paid the fine, without accepting the findings of the tribunal, and announcing it would appeal to the Supreme Court. But by then the Criminal Bureau of Investigation and a police serious-fraud unit were looking at the case for possible criminal offences, raiding call centres in Chennai and Hyderabad to collect records. By early May 2005, with arrests in Hyderabad and several South Indian cities, a CBI chief in Chennai said that the laying of charges was near and a ‘high official’ of Reliance Infocomm had masterminded the scam. On 4 May Mukesh went to see the Prime Minister, Manmohan Singh, to express his concern about the investigation.

  The flow of leaks intensified. Later that month, two newspapers got hold of an exchange of emails between senior executives of Reliance Infocomm and with Mukesh himself, which revealed an acute awareness that the rerouting exercise could be illegal and could rebound disastrously on the company, but that nevertheless it was decided to push the law to its limits and possibly suborn officials.

  In March 2004, just before Infocomm began pushing a cut-price scheme for non-resident Indians to call home, Akhil Gupta, the chief executive for corporate development at Infocomm, had emailed Mukesh:

  I have reservations regarding the 12 cents per minute to all phones and not just [Reliance phones]. Here is the way I see the scenario unfolding. Within seven to ten days of our commercial launch, BSNL will know. It will clearly be established that we are violating in spirit if not the law and avoiding paying ADC [access deficit charge] to BSNL or government. I will be surprised if TRAI [the Telecom Regulatory Authority of India]/other government agencies do not move to reverse this. If we have to reverse, how do we go back to consumers? We need to create a softer image of Rel Info in NRIs’ minds.

  Mukesh appears to have asked another of his close executive circle, Infocomm executive director Manoj Modi, to comment on Gupta’s reservations. Modi replied: ‘With reference to my email sent last week regarding concerns raised by Akhil Gupta I want to inform you that I have personally spoken to the regulator PB today and have convinced him of our intention. We are also ensuring that he’s taken good care of. Respectfully, MM.’

  Modi, said to be deeply religious and apt to consult horoscopes and celestial almanacs ahead of major decisions, evidently felt that the stars and the powers that be in Delhi were favourably aligned. In an earlier email to Mukesh, according to the leaks, Modi had also assured his boss: ‘The regulator could raise certain issues regarding rerouting of these calls and changing of caller ID. However, we are very confident that we will be able to handle the same using our good offices in the government and other agencies. I assure you there is no cause for concern, please allow us to go ahead with our project. The risk-to-benefit ratio is very high.’ The chairman of the regulator (TRAI), Pradip Baijail, said the emails were ‘a fraud’ and that he had not met Modi for a year and had never discussed the rerouting issue with him.

  Gupta continued to be worried. With his warning to Mukesh ignored, he offered to resign and hand over his role in the expatriate Indian marketing drive to Modi or another executive, B.D. Khurana. ‘I have three to four weeks before we go on vacation. I would assist the new sponsors during this time,’ Gupta offered.

  He was persuaded to stay on, with Modi taking responsibility for the regulatory and legal issues in India and Gupta handling the marketing effort in the United States. But when the rerouting was detected and put under investigation during September and October 2004, Gupta was disturbed to find that the rumour-mill was naming him as the mastermind behind it. In early December, as the ‘ownership issues’ conflict was escalating, Gupta emailed again to Mukesh:

  I have heard from several sources now that MM’s office is spreading rumours that [I] was responsible for deciding to modify the caller line identification and not pay ADC. As you can see from my previous e-mail, I had opposed it and put my warning in writing. I do not know what the motivations might be in the current environment. Would you please help in stopping this unethical nonsense from spreading and set the record straight. It is very painful to see us paying huge penalties, spoiling our name and the person responsible gets to blame someone else. What a shame.

  Shortly afterwards, Gupta resigned from Reliance and joined the American private investment fund Blackstone as its chief in India. Mukesh had now lost two members of his inner executive circle. Gupta had been a true insider, one of the few non-family members to live in the Sea Wind building. The defection of Amitabh Jhunjhunwala had become clear by then. He had resigned as Reliance treasurer and was suspected by the Mukesh camp of being the source of many leaks and the one who had tipped off the authorities about the rerouting tactic.7

  • • •

  In the background of all this, K.V. Kamath had been working on proposals for a settlement between Mukesh and Anil. He was aided in his calculation of corporate values by the Mumbai investment banker Nimesh Kampani, another of Dhirubhai’s old intimate friends and business backers. On 9 March 2005 he had delivered his suggestions to Kokilaben. While the brothers put up a barrage of leaks and rumour, they haggled over the details. Agreement was ready in the first week of June and, as hints of it leaked out, the Reliance share price gained steadily. Preceded by a flurry of trading late on Friday 17 June, which later led to calls for an insider-trading inquiry, the deal was announced the next day when Mumbai had settled into its weekend and the markets were closed. Instead of the normal corporate letterhead, it came on paper headed with the Hindi letter for the sacred sound ‘Om’ and giving the address as Sea Wind.

  With the blessings of Srinathji, I have today amicably resolved the issues between my two sons, Mukesh and Anil, keeping in mind the proud legacy of my husband, Dhirubhai Ambani. I am confident that both Mukesh and Anil will resolutely uphold the values of their father and work towards protecting and enhancing value for over three million shareholders of the Reliance Group, which has been the foundational principle on which my husband built India’s largest private sector enterprise. Mukesh will have the responsibility for Reliance Industries and IPCL while Anil will have responsibility for Reliance Infocomm, Reliance Energy and Reliance Capital. My husband’s foresight and vision and the values he stood for combined with my blessings will guide them to scale new heights.

  Kokilaben Ambani

  Less than three years after Dhirubhai’s death, his two heirs had divided the kingdom. But after the brawls of the previous eight months, India breathed a sigh of relief; at least its 15 or 20 million sharemarket investors did. The Sea Wind cloud hanging over India Inc. – the emerging industrial and knowledge economy that educated Indians knew was in them – had been dispelled. Both brothers could claim a victory. Mukesh had retained the core businesses and their mighty cash flows. But he had lost the business of the ‘future’, Reliance Infocomm, which he had created with a huge gamble.

  Anil walked away with Reliance Infocomm and two of the other businesses that provided the essential linkages of the future super-economy: electric power and financial services. Kokilaben did not mention it, but Anil was also promised Rs 45 billion – about $1 billion – in cash. There was a promi
se of gas supply from Krishna–Godavari to his Dadri power plant at a cheap price – or so Anil thought. And he was given the right to use the Reliance name and flame logo. There was a five year no-competition agreement.

  The next day Anil resigned his board positions at the parent company and announced the formation of his own outfit: the Anil Dhirubhai Ambani Group. On the evening of 20 June he and Tina went to dine in the most conspicuous restaurant in Mumbai, at the Taj Mahal Hotel near the Gateway of India. Then he went off to further pilgrimages, to Hindu holy places at Badrinath and Vaishnodevi.

  Mukesh, equally characteristically, disappeared from sight, attending the wedding of the daughter of his friend Anand Jain in Goa. The press releases from his headquarters were insisting that Reliance Industries remained India’s biggest private sector company by turnover, net profit and net worth. He had not resigned from his posts at Reliance Infocomm, and it was left unclear what Kokilaben had meant by ‘responsibility’ rather than control or ownership. How would be split be carried out? Sucheta Dalal, ‘What this means: Anil’s won a kingdom, now he needs to build fences and bridges’ and ‘Kiss and make-up time at Reliance’, Financial Express, 19–20 June 2005.8

  By the end of 2005, however, the group had a scheme of separation approved by a court, and during January and February 2006 the parent company carried out the demerger procedures, but with some testy public charges by Anil that it was dragging its feet. Eventually it floated four new emergent businesses: Reliance Capital Ventures, Reliance Communication Ventures, Reliance Energy Ventures and one that became Reliance Natural Resources. Anil and allied interests came out with stakes around 40 per cent, and 2.3 million existing Reliance shareholders were credited with proportionate allotments of shares in the new firms.9