Mohan Guruswamy
June 07, 2005

The JJ Irani Report on corporate governance comes on the heels of a reported settlement of the Ambani quarrels wherein the Mukesh Ambani faction gets the old Reliance group minus Reliance Energy and the financial services companies. Anil Ambani is to get control of Reliance Infocomm where he uncovered so many skullduggeries, in addition to Reliance Energy and Reliance Capital, which he currently heads. The Prime Minister has also been speaking of the need for more ethical and professional governance in the corporate sector. In the recent months Anil Ambani has also been a somewhat unlikely champion of ethical and good corporate governance. Adolf Hitler once said that adversity is the fire that forges character. We now increasingly see a god fearing and temple hopping Anil Ambani loudly espousing a cause whose time has been long overdue in coming and one hopes that the change in color is not just chameleonic.

Dr. Manmohan Singh knows better than most of us that the many issues raised by Anil Ambani, either directly or by carefully planted stories in the media, highlight corporate behavior that is now almost endemic in India. Clearly there is a much here in terms of an idea with immense potential to change not just how our corporations are managed but possibly how even the Indian political economy is managed? But as the Prime Minister he cannot take up for serious scrutiny or investigation all the acts of omission and commission specific to Mr. Mukesh Ambani or his narrow business interests. That would amount to taking sides or quite akin to what Vladimir Putin has done with Mikhail Khodorkovsky in Russia.

We may not approve of the manner in which Dhirubhai Ambani nailed together Reliance. That he didn't play by all the rules is well known, but nevertheless he created a world-class corporation that is now a prize national asset. Many of the world's great corporations have had similar robber baron origins. It can be debated whether if in a more perfect political economy Dhirubhai Ambani would have accomplished what he has left behind, the towering colossus that accounts for more than 5% of India's GNP? But that is now not even important. Dhirubhai played the system just the way the others did, but did it much better. He amassed the great personal wealth and power, in just the manner most other "entrepreneurs" did, but did it better.

How this was done is well known and we don't need to recall in detail how huge loans by state controlled financial institutions were channeled to unheard of companies which in turn bought equity in the very same company whose plant and machinery they were supposed to build. There were so many other ways too. Dhirubhai Ambani did not invent the games or even make the system. Things were well in place when he decided to pursue his ambitions. In pursuit of this he built only a giant private industrial enterprise, not as a conglomerate of diverse businesses, but as an almost perfect vertically integrated business. Only the foray into telecom strays from the upstream linkage with hydrocarbons.

Thus keeping the Reliance enterprises in exploration, refining, petrochemicals and energy together as one entity will ensure that India has one world league corporation, almost a mini Shell or Exxon. If any business can be spun off from this, it can only be Reliance Infocomm. Yet we hear that the Energy business is to be hived off from Reliance's hydrocarbon derived business tree and handed over to Anil Ambani on the basis of some valuation that obviously accords more weight to some vague notions of "equity" between the quarreling brothers rather than the interests of Reliance's shareholders and lenders.

Since the advent of the economic reforms, much has been made of improved corporate governance, rights of stakeholders, and protection to minority shareholders and upholding the sanctity of a corporation as a distinct entity, independent of promoters. Yet, there is a distinct possibility of India's largest private business being carved up between two brothers as if they were the only owners? This is not the division of a HUF or a family estate or business.

Consider some revealing facts. Press reports have estimates of the Reliance Group being valued in excess of Rs. 75,000 crores. It can be no body's case that the ownership credited to the Ambani family is their personal wealth accumulated from their post-tax earnings. From the papers made public by Rashid Alvi, a Congress MP, we know how these entities now "acting in concert with the promoters" came to hold so much equity. It was public money that got privatized. By no stretch of imagination is this personal or private wealth. In reality, it is not ownership but an ability to exercise control over entities that claim ownership.

A closer look raises questions, which if clearly answered, would have uncomfortable ramifications. For instance, almost a quarter of Reliance Industries Limited equity is held by a matrix of trusts, private investment companies and the like. It is now customary world over for beneficial ownership to be disclosed even for the opening of a bank account. Thus, if a company has a bank account and even if another company or trust owns the company, the beneficial owners have to be disclosed. Similarly, if the ownership were by a trust, the settler's identity would need to be disclosed. No member of the Ambani family has claimed beneficial ownership of this controlling matrix. Those who control voting rights, including the directors of these companies, also do not claim that they are the real owners. Beneficial ownership in fact must lie with the entity, which was the source of funds from which the investments were made. What we now have in effect is a situation, contrary to the law that a company cannot hold its own shares and by a clever use of corporate structuring, where Reliance Industries Limited substantially owns Reliance Industries Limited!

To conclusively establish this, all that Dr. Manmohan Singh needs to do is to refer it to the Minister of Company Affairs, who in turn can direct the Company Law Board to appoint independent directors on the matrix companies to unravel the maze. This is important since there are no claimants of beneficial ownership; therefore, the current directors of the matrix companies do not in reality represent the real owners.

The neutralization of this shareholding, which should be done, since it is really funded by the company itself, would leave the residual shareholders to decide on the company's actions. This will expose the tenuous basis of the control by the promoters from shareholding, which they do not own. Indian courts have again and again confirmed what the law provides, that a company is an entity on its own, independent of the promoters. If this is so, then no automatic rights flow to promoters to do with companies as they wish, in their own interests rather than that of the companies.

In the past, government's interference backed by the holding of Financial Institutions who acted at its behest, despite protestations that they were independent, led to decisions in business houses entirely in the interest of promoters who were considered owners not managers in public interest. In the case of the Modi Group, the then Finance Secretary was the arbiter of the so-called group settlement, and the then Chairman, IFCI was officially made the arbitrator. The consequences of that arbitrary division are now evident, as we see in the case of the other one time leading Delhi based business house, the Shriram Group. The Finance Secretary in question is now a director of Reliance Industries. That and the current speculation of Reliance's reorganization only indicate that little has changed with how India Inc. conducts its business. While minority shareholders have no way of protecting their rights and interests, institutional shareholders seem to only be acting in concert with the promoters, like the matrix companies.

Can we trust our expectations of a regime where good governance standards are institutionalized to the Foreign Financial Institutions, who have made significant investments but who also find the diversion of thousands of crores not exactly in the interest of the company? The size of their holdings gives them the ability to ensure an outcome that will be exclusively in the interests of the corporation and compliance with international standards of corporate ethics. But they wont act for they fear a closing of ranks of Indian business groups, even if action is initiated against any one of them, even if it is Reliance which so many will like to see go down. They are also vulnerable to governmental pressure. Thus they would not only fail in reforming governance, but will also lose if the markets were adversely influenced, resulting in declining values even in other companies. This leaves only the Prime Minister as our only hope.

If the emphasis of a settlement is only to ensure that Anil Ambani too must control a business that is as large as that controlled by Mukesh Ambani, then what has changed since the coming of Dr. Manmohan Singh or the recommendations made by the JJ Irani Committee? If despite disclosures of several thousand crores being invested in related companies, not in the interests of Reliance Industries Limited but evidently in the interests of the promoters, it is to be business as usual, then what has changed?