Post Graduate Programme for Certification in Entrepreneurship Management 2013-14 Group Project on

A study of the succession exercise in family business with particular reference to Ambani family
Submitted by:
Aditi Dadicch !A13004" Gouri Agar#a$ !A1302%" Pra&ash 'ingh !A1303(" )isha*h Agar#a$ !A13042"

+ntroduction, The Succession exercise of Ambani family is one of the world largest business dispute conducted in the Indian business fraternity. The gash that followed disastrous succession plan for the Reliance Industries Limited is one of the most significant & publici ed narrati!e in the Indian corporate sector. It concerns two immensely wealthy brother contesting control o!er the !ast empire. The long family dispute that followed the demise of the founder "hirubhai Ambani highlights the critical role of succession planning in large family businesses. Succession planning is critical in the promising mar#ets where the legal and institutional engagements regulating the corporate entities and the corporate go!ernance practices are still in the process of de!elopment. The dearth of a concrete succession plan is not exceptional among large business houses in India as obser!ed in the case of Reliance Industries. $owe!er% considering the mar#et si e of the Reliance saga the impact was much larger and beyond family dispute. &i!en the fact this was one of the biggest and most winning exchange traded conglomerates' the financial implications in terms of corporate !alue erosion and shareholder wealth destruction were enormous. The indecisi!e en!ironment after the death of "hirubhai in ())( has had negati!e implication for firm*s stoc# performance. This case also deals with the insinuations of the dispute for corporate ethics% !alue and persistence of efficient business practices. -he G$orious Past, Reliance Industry Limited was founded by late "hira+lal $irachand Ambani and was incorporated on ,ay -% ./01 as ,ynylon Limited in the State of 2arnata#a. Later during ./00 company had its head3uarters to the State of ,aharashtra and the company ac3uired the name 4Reliance Textile Industries Limited5. Soon after during ./-6 the company was renamed to Reliance Industries Limited 7RIL8. At that time the core business of RIL was to manufactured synthetic blended yarns and fabrics% yarn polyester% polyester filament% staple fibre chemicals and allied products% colour T9 glass shells and picture tubes. :irst time in ;o!ember ./00 the promoters of the company offered for sale e3uity shares to get the company listed on the stoc# <xchange at ,umbai. Soon after initial public offering in ./00% RIL had grown swiftly with the annual growth rate of (-= in sales and about 1(= in net profits. >ith the implementation of bac#wards integration strategy into the production of petrochemicals and the refining of crude oil% Reliance Industry Limited has grown significantly into !aried operations that extend o!er the exploration and production of oil and gas and the manufacture of petroleum products% polyester intermediates% polyester products% % polymer intermediates% plastics % synthetic textiles & chemicals and fabrics. ?y ())6% Reliance Industry Limited became the largest pri!ate sector conglomerate enterprise of India with a total gross turno!er ofRs.01.% @A) million and a net worth of Rs. A)A%)1) million. In ())6 company reported a net profit of Rs. 06%0() million. In terms of re!enue composition% Reliance Industry Limited attained @(= of its total re!enue from its mar#eting operations and petroleum refining% 1= from its other product groups and 16= from its petrochemicals business. >hile spawning @6= of re!enues from domestic mar#ets% the company also entered into export to o!er a hundred countries% including the Bnited States and China along with numerous <uropean countries.

RIL has two ma+or business segments% namely% Detroleum refining and mar#eting and Detrochemicals' Combined% the two segments contribute approximately /0= of re!enues and about /)= of the <?IT. The mar#et cap of the company is estimated at Rs /)%))) crore or BSE () billion. Its annual profits of o!er E.billion are higher than that of each of the ?ayer% Sony% ?an# of China and ,c"onald*s. >ith approximately 1.6 million shareholders% it is claimed that one of e!ery four in!estors in India is a Reliance shareholder. The company re!enues contributing appox 1.6= of India*s &"D% with exports of more than E(.6billion% which is 6= of the country*s &"D. The E((.@ billion conglomerate accounts for about @= of India*s mar#et capitali ation and forms about ..= of the ?ombay Stoc# <xchange*s Sensex index. Since .//-% when the exploration of oil and natural gas in India was opened for pri!ate participation% RIL has been a significant player with ())- being the target year for the start of commercial operations. Fust before the split% RIL entered the high potential telecommunications and electricity sectors that were% till recently% in public domain. -he 'uccession Conf$ict, .act .i$e In less than three decades% under leadership of Shri "hirubhai Ambani% Reliance &roup had grown into worldGclass company & accounted for 1 percent of India*s &"D. After the death of founder% as per $indu succession act% "hirubhai*s wife 2o#ilaben% two sons & two daughters inherited assets of the group. It seemed that "hirubhai Ambani% although seen as a shrewd operator in business deals% had left behind no will or plans for his successor. $e died intestate in Fuly ())(% thus lea!ing control of his empire in dispute between two of his sons ,u#esh and Anil. Later% when fissures between the relationships of the brothers surfaced% ,u#esh insisted that his father settled all ownership issues right before his death and so there wasn*t any confusion about leadership of company that would come to him thereafter. The message was con!eyed to RIL employees !ia an <Gmail that suggested ,u#esh was final authority on all matters concerning to Reliance. The fact that there was disputes between ,u#esh and Anil% became public on ;o!ember .0% ())A% when ,u#esh had admitted to a tele!ision reporter HThere are other issues li#e ownership issues which are in the pri!ate domain.H At the heart of the conf$ict, 4It is the control rather than the Hownership issuesH that appears to be at heart of dispute between Ambani brothers. The real issue of contention was who controls Reliance Industries. >hy was control o!er Reliance Industries !ery important for the brothersI It was ob!iously not merely to lead o!er affairs of Rs 06%)))Gcrore behemoth. >hat both the ,u#esh and Anil seem to be loo#ing for is its cash chest. The point is as it stri!es to execute ambitious plans to become a powerGhouse% Reliance <nergy 7and ,r Anil Ambani8 need increasing amount of cash to fund the pro+ects. And this is where Reliance Industries massi!e cash generating would come in !ery handy' the company is ma+ority e3uity holder of Reliance <nergy & classified as the promoter. :urther% Reliance tag would be crucial to raise funds from the mar#et% debt or e3uity% at good rates and !aluations. Therefore% control of Reliance Industries was critical to ,r. Anil AmbaniJs ambitious plan. :or ,r. ,u#esh Ambani% the story was slightly different where he has already tapped Reliance Industries cash chest to fund his telecom !enture. $e may ha!e% at worst% needed support for a year or two after which telecom business would be on its feet. ?ut during this

period he needed complete control of Reliance Industries to ma#e sure smooth flow of the in!estments to telecom company. ?esides% he also needed the support of flagship for his other !enture such as Reliance Life Sciences along with other new pro+ects that might come up in future.5 Ad/antage Mu&esh 0s Traditional !iews supports ,u#esh to lead empire when father dies as the elder son steps into the head of family role. Dersonal ownership sta#es of 1= share in RIL Although% the Ambani family controls o!er A6= of shares in Reliance Industries% indi!idual family members held only minimal holdings. In reality% an approximately 1A= of RIL shares were not technically promoter family holdings but was the sta#e maintained through a !ery complex web of around A)) of the In!estment companies that were characteri ed to be officially as Jpersons acting in concert*. &i!en that directors of these companies were RIL employees they where expected to !ote per instructions of head of the company & that was ,u#esh at that time. In effect% then% ,u#esh had held a !oting power o!er A..6= of shares% a !ery large proportion by any scenario. The RIL board and management endorsed ,u#esh as next head of the RIL

Ad!antage Anil*s 2nown as public symbol of Reliance Industries Limited >hile ,u#esh had an ad!antage of fa!ourable ownership structure & board & management support% Anil created a situation wherein he could not be treated in unfair manner. $e had appealed to board of RIL to resol!e issue in the best interest of shareholders. ?y pointing to wea#ness in go!ernance% lac# of transparency & poor shareholders right protections at RIL% he was able to garner the support of public% the regulatory authorities% the financial institutions% and a fairGminded board members of RIL. )e$iance--he 1ictim ,u#esh had ac#nowledged that there were no ownership disagreement in the Reliance family 7 meaning Anil will not get beyond what is already his*8% and that he was boss and final authority within company 7con!eyed by an eGmail to .%))%))) group employees8% many obser!er began wondering that whether Anil being "hirubhai AmbaniJs younger son would get any pretty much nothing by way of the inheritance: that is no shares and also no say in the company. The sympathies had poured out e!en more when it was cleared that ,u#esh might also simply ha!e Anil remo!ed as managing director% and also perhaps as director. The >orse% Anil can e!en be remo!ed from chairmanship of the Reliance <nergy by simple de!ice of board of Reliance Industries withdrawing him as parent companyJs nominee on energy companyJs board. If ta#en% steps would dri!e Anil out of Reliance &roup alto gether G and there was no one in corporate circle who saw that as an fair outcome. Indeed% dramatic resignation of , L ?ha#ta% companyJs legal brain and the oldest director% seemed to signal unease which many people who were sympathetic to family felt about an oneG sided end to the battle% and too# all of ,u#eshJs persuasi!e power to get ?ha#ta reconsider.

The e3ually dramatic resignation by six of directors of Reliance <nergy seemed as preGempti!e mo!e by Anil to pre!ent being recalled by Reliance Industries% which nominated them in first place. In short% starting with a few chips in hand% Anil had already created an enough room for himself to play his own hand. ,ar#et uncertainty about the RIL caused shareholders !alue loss. Kne estimate suggest that% 4>ith three millions in!estor% a family feud of Reliance concern more than Ambanis. Indeed% when fraternal dispute became public in ;o!ember% the Reliance lost nearly half billions dollar in mar#et capitali ation5. The Largest fall in share price of RIL $istoryG by .(.@= G 1millions nonGfamily member suffered. The Ambanis feud also had influence felt in the political circles. The Communist Darty 7CDI8 leader% &urudas "as gupta% had re3uested that federal go!ernment to inter!ene to resol!e the conflict as it ha!e ramifications beyond Ambani family. It was also pointed out that uncertainty that had already had impacted stoc# mar#et and small in!estors% might e!entually negati!ely impact inflow of foreign direct in!estment. 2o&i$a*en- -he Ar*iter As pressure from !arious sta#eholder increased & as both brothers reali ed that any delay in settlement will cost them more foregone assets and control% so there were significant effort on !arious planes helping reach a settlement. The legal battle for resol!ing issue were out of 3uestion% gi!en o!erwor#ed and the slow +udicial system of India. The urge to find out a 3uic# solution was reinforced by the souring relationships between brothers and the battle becoming public drama L seen to be hurting Reliance reputation and "hirubhais* legacy. ?y midG"ecember of ())A% in a tradition which is !ery uni3ue to India% ,u#esh & Anil had expressed desire to ha!e mother 2o#ilaben act as an arbiter to sol!e dispute. They both committed that they would be abide by whate!er the settlement terms 2o#ilaben proposes. To arri!e at settlement% that would ha!e in!ol!ed corporate restructuring of the ownership and control% the help of a well respected family friend% ,r. 2.9. 2amath% the Chairman of ICICI ?an#% was being sought. As 2o#ilaben too# on role of di!iding the spoils% she proposed a solution where the brothers would be 4separate but e3ual.5 This meant that the ,u#esh would retain the control o!er the :lagship Company Reliance Industries and the IDCL% while Anil will create a separate holding company to #eep his interests in the three entities car!ed out of the RIL% namely% the Reliance InfoCom% Reliance <nergy% and Reliance Capital. In addition% group assets were also di!ided on a 1):1):1):6:6 basis among two brothers% the mother and the two sisters respecti!ely. :or in!estors deal meant that gi!en that RIL & IDCL remain with ,u#esh% the synergy and the Complementarities ha!e not been lost. Kn other hand% separation of a nonG related business of Communication% finance% and energy from the RIL and IDCL% would actually unloc# the !alue for shareholders. >hen announced% deal was considered as fair in both the camps as ,u#esh got the cashGcows% Anil seemed to be pleased with the high growth opportunities in his businesses. In addition to separation of control of !arious entitie car!ed out from the RIL% the two brothers agreed upon the nonGcompete clause for next fi!e years. As per the deal terms% following exclusions were put in place:

A;IL: M Detroleum% Detroleum retail% Detrochemical along with the E. billion cash ,B2<S$: M ,edia & entertainment with some of exceptions M Airport infrastructures except those that might be incidental to any RIL group businesses M "istribution of the city gas in ,umbai and "elhi 345 G5- 34A-, Mu&esh Am*ani RIL Sales ;et Drofit ,2T Cap @@)6. 060( -106IDCL -.// 0-@ A).6 1(@( TKTAL 0A(6) -16-0001 0A110 Sales ;et Drofit ,2T Cap Assets RCL (/6 .)6 1).1 06@( Ani$ Am*ani R<L A.1) 6() .)/0A .(.1) RIC ) ) A)))) .())) TKTAL AA(6 @(6 61/-0 1.@/(

Assets 0.)06

Post Effect, The mar#ets reacted !ery fa!ourably to news of the settlement. The Sensex index of ,umbai Stoc# <xchange rise more than . percent. >hile shares of RIL rose by 6 percent% so as to close at @1) rupees. The companies being transferred to Anil% howe!er% gain significantly more. :or eg. Reliance <nergy rose to ..=% and Reliance Capital gained in nearly (6=. International in!estors also expressed their satisfaction o!er resolution of dispute. The Timeline of the Conflict: ())A: Fuly (0% Reliance board re+ect Anil AmbaniJs contention against redefinition of role of C,"% !iceGchairman and ," and director. ;o! .-: ,u#esh Ambani admit to unresol!ed Jownership issuesJ in the Reliance group. ;o! ./: ;ews appear that "hirubhai did not settle ownership and succession issue before his death. ;o! ((: ,u#esh reiterate that "hirubhai had settled control issue during his lifetime and ,u#esh% as C," is the final authority in matters pertaining to RIL.

;o! (6: In a show of sympathy to the Anil Ambani six directors of Reliance <nergyGappointed by RILG 3uit. ;o! (6: Anil expressed dissatisfaction o!er clause reGdefining ,u#eshJs powers in Fuly (0 RIL board meeting. "ec 6G@: Tal# of the settlement initiated. "ec -: Anil 3uestioned ownership claims of ,u#esh. "ec .): Contro!ersy o!er the ,u#esh*s .(= sta#e in InfoCom as sweat e3uity. "ec .6: Anil re3uest Reliance board meeting to discuss the issue. "ec (1: ,u#esh Ambani gi!e up sweat e3uity sta#e in Infocom. "ec (0: RIL bac# ,u#esh in the share buybac# decision. ())6 Fan 1: Anil accuse director Anand Fain of !ilificationing campaign & resigns from IDCL board. Fan 0: ,r. Chidambram% :inance ,inister of India% express desire for an amicable settlement of dispute. ,ar /: 2o#ilaben holds discussion about settlement with her sons. April (0: Anil Ambani refuse to sign RIL financial statements on the ground of lac# of transparency. Fune .-: Ambani brothers announced settlement of ownership and control dispute under guidance of their mother 2o#ilaben Ambani. ?ibliography: .. :amily >ar ?y &rant &ordon & ;igel ;icholson (. Succession in :amilyGowned ?usinesses: The Case of Reliance IndustriesGIndia by Fames A. &oodrich