Ambanis bury hatchet, scrap non-compete deal

Written by fe Bureau | Updated: Jun 1 2010, 02:01am hrs
Indias two largest business groups, the Ambani brothers on Sunday have decided to free each other from the non-compete agreement they signed in 2006, unlocking value for their investments and creating a far higher level of competition for the other industrial groups.

The agreement signed on Sunday between Reliance Industries Ltd (RIL) led by elder brother Mukesh and the Reliance Anil Dhirubhai Ambani Group (ADAG) will open up new avenues of growth for both the groups, besides facilitating greater operational flexibilities. In case of ADAG, the agreement would come in handy to raise the much-needed funds for their massive investment plans, by selling stakes in group companies. RIL can now conceivably enter telecom, power and financial services- three potentially high growth areas where it has hitherto faced an entry bar, owing to 2006 separation agreements or MoU signed by the two.

The surprising decision comes just a fortnight after the Supreme Court gave its judgement on a bruising fight between the two groups, principally on the pricing of natural gas from RIL owned off shore fields for use in ADAGs power plants. While several ministers in the UPA government have publicly urged the two brothers to resolve their differences, the valuations of the groups made by investment banks had also worsened as a result of the spat, making the cost of money higher for them.

As a result of the new agreement the MoU signed by them and never made public almost loses its relevance. The relations between the two groups will now be far more transparent, guided by the straight forward public agreement that bars Mukesh Ambani from setting up gas-based power plants till March 31, 2022. It also moves them a big step closer to a possible eventual rapprochement.

They also vowed to create an overall environment of harmony, co-operation and collaboration between the two groups. Besides, Sundays agreement also says that RIL and ADAGs Reliance Natural Resources Ltd (RNRL), would expeditiously negotiate fresh gas supply arrangements, as per the May 7 Supreme Court order, and hoped to conclude the negotiations very soon.

Though on the face of it the scrapping of the non-compete agreement removes the scope of conflicts between the two brothers, many analysts are still unwilling to bet on a friendly re-union of the brothers. Says noted Supreme Court lawyer HP Ranina: Fresh issues could crop up. It would be some time before the implications of the new non-compete deal for gas-based power generation are fully known.

According to market analyst S P Tulsian, Sundays agreement is hugely positive for RIL. RIL has huge cash surplus that can now be utilized for getting into areas like thermal power and telecom. It does not make sense for RIL to restrict itself to oil and gas. I see Anil now concentrating on gas-based power projects, he told Fe. He also ruled out the scope for fresh conflicts between the two brothers and even saw the possibility of an eventual merger of the two groups as and when their newer businesses grow.