Reliance on competition
Ambanis pact recognises that the market is where all corporate battles ought to play out...
The late Dhirubhai Ambani may have been a controversial figure to many shades of opinion during his lifetime,but let’s face it,he was the first Indian entrepreneur who truly believed that an Indian company could be world class and globally competitive. Almost every entrepreneur of his vintage had to be able to play the licence raj. The complexity and ridiculousness of rules and regulations made it impossible to do business in a normal fashion. But while other entrepreneurs were satisfied with playing the system and then simply hiding behind the protection offered by government policies,Dhirubhai Ambani had greater ambition. And so,while many inefficient entrepreneurs of his vintage simply faded away after liberalisation in 1991,Reliance only grew in strength. Dhirubhai was also the first entrepreneur who genuinely wanted to create wealth for a larger number of people than just his own family. Unsurprisingly he was the father of the equity cult in India at a time when stock markets had few takers.
That is the essence of the legacy that was inherited by Mukesh and Anil Ambani after Dhirubhai’s death in 2002. But the constant warring between the brothers,in the run-up to their formal split in 2006,and thereafter,has taken a toll on that legacy. The split up of the empire took an obvious toll on unified Reliance’s status,but the distractions of the personal battle between the two brothers would have shifted some of the focus away from making each of the two new companies world beaters in their own right. Needless to say,the feuding,particularly the high-profile battle over gas from the KG basin has imposed a heavy price on shareholders of both companies — the kind of value destruction that Dhirubhai is unlikely to have tolerated.
Viewed in this context,the signing of a truce between Mukesh and Anil Ambani on Sunday is a significant step in the restoration of the original Ambani legacy. It is actually much more than that,with impact on government policy,investment climate,stock markets and the Indian economy at large.
The centrepiece of the truce between the two brothers is an agreement to annul all the “non-compete” agreements signed by RIL and Reliance-ADAG at the time of their split in 2006. Now,both companies are free to operate in what until now was the other’s exclusive domain. There is one exception though: gas-based power generation will remain the domain of Anil Ambani’s ADAG until 2022. But otherwise,for example,RIL can now choose to enter telecom,financial services and power while Reliance-ADAG can enter the oil and gas and petrochemicals segment. Also,importantly,neither company can block the other’s investment plans by citing the right of first refusal agreement between the two.
At one level,it almost sounds ironic that there was ever a “non-compete” agreement between the two companies given the bitter rivalry and “competition” that has been on display in recent times. In effect,what the non-compete agreements restricted was any competition in the free market. What they did not restrict was competition on the exact terms and interpretation of the non-compete agreements. Those have been fought out in the corridors of the government policy establishment and in the courts. And we know very well from the long history of business in India,and indeed elsewhere,that when competition plays out in corridors or chambers rather than the marketplace,outcomes are hardly optimal. In Dhirubhai’s era,there was perhaps no other way,but almost 20 years after liberalisation,the market is where all corporate battles ought to play out.
The most public,high profile and damaging of all the differences between the companies was,of course,over supply of gas from RIL’s Krishna-Godavari basin bloc to RNRL’s gas-based power plants. The root of the dispute lay in a private MoU apparently signed at the time of separation in 2006. That MoU promised Anil Ambani’s RNRL a supply of gas from RIL at almost half the rate of the government determined price. RIL later refused to sell gas at below the government-determined price. The government supported RIL’s position. RNRL,of course,refused to accept either RIL’s or the government’s position. Plenty of accusations flew from all sides and the case went to the Supreme Court. The SC finally ruled in favour of RIL and the government and that put the matter to rest. But not without considerable collateral damage in the interim.
The stocks of both companies went through long periods of ups and downs. Given that the market capitalisation of the two groups is some 10 per cent of the total market capitalisation of BSE and NSE,what happens to the stock of these two companies matters to the health of the market overall. Neither company did service to its own shareholders or other participants in the stock market through their dispute.
The collateral damage from the warring brothers went beyond the market. The entire dispute over gas cast a serious shadow on the credibility of government policy in this crucial area. Gas is going to be an increasingly important and clean source of energy in the years to come. A transparent and credible atmosphere is critical to attract the kind of investment that is necessary to exploit the potential of gas fully. The ministry of petroleum and natural gas has had only limited success in previous auctions for exploration and licensing. The continuation of the Reliance dispute for a long period of time only made prospective investors more nervous.
Now,with the SC decision and truce between the Ambani brothers,there is a window of opportunity to clear the murk in the gas sector. The successful conclusion of the renegotiation of gas price between RIL and RNRL ordered by the SC will be a litmus test for the “cooperation” and “collaboration” now promised by the brothers as they try and bury the hatchet across the board.
The plain fact of the matter is that the Ambani brothers are too gifted a set of entrepreneurs to fritter away their energies targeting each other,or unnecessarily cranking the levers of government. Their considerable energies and talent would be better spent building the business empires they each own. If not for country,they should do so for Dhirubhai.
The writer is a senior editor with ‘The Financial Express’
dhiraj.nayyar@expressindia.com
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