We should begin with some disclaimers. The market caps of the two Ambani business groups as on May 21, 2010, were about 10% of the total market of the BSE and NSE. Seven of the 13 sectoral indices the BSE Web site daily tracks are less than this figure. So it will be facile to dismiss the happenings concerning RIL and the ADAG as just family drama.
As a drama, it was often sordid. But it has impacted a large segment of the shareholders, the economy and even the polity since 2006, when the tussle between the brothers became public. So the overriding feeling this Monday is that it is all over, at least from the first reading of the document of agreement. The stock markets often use the word relief rally. The jump in the market indices is one of those.
To a section of the economy, which is broadly the fixed income group and often privileged, this close connection of the Ambani dispute with the stock markets is what justified their apprehensions. What they basically forget is that the Indian share market has been a source of income generation for a large section of the middle class, often for those from the lower segment. For those investors, the RIL scrip, just like Infosys and Wipro, has been one of those on which they could bank at any time of crisis.
If one counts the number of ways middle-class India has found prosperity in the last decade and more, the movement of these chips in the stock market have to be rated high in that list.
There are enough tales to convince anyone that the continued strong performance of these stocks has made lakhs of people withdraw from the post office deposits into the market. A mapping of the annual trend in small savings investment and the stock markets over the past decade will bear out this story.
The discord of 2006 was hated by the investors for having broken that covenant. Of course, the scrips, too, would have lost in the financial chill of 2008, but the losses got exacerbated. It sort of reached nadir when the debut of Reliance Power from the ADAG stable tanked massively on listing. It will be difficult to say that Sunday?s agreement will take the stocks back to the salubrious days of yore, but there will be much calmer waters from now on.
The larger story for India from the prolonged squabble was very troubling. You cannot have the leaders of the two top ranked business empires of an economy either sitting on uninvested cash pile or spending it in court battles, when the economy is drastically looking for investments to address a $1 trillion infrastructure shortage. This is impossible to reconcile.
What the Sunday agreement between the ADAG and the RIL does is to take away the monkey riding on their shoulder. Over the last one year, almost every institutional investor has marked the hostility between the two groups as an irritant.
The logic was clear. For any investment plans made by either of the group, the right of first refusal from the other meant it could play a spoilsport by threatening to take the first one to a court for any tie-ups. This is the equivalent of batting with one arm tied.
The withdrawal of this right will now help the two groups to raise funds at better rates. No doubt RIL, headed by Mukesh Ambani, is heavily cash rich and so this is not a germane factor in its calculations. For the ADAG, however, the relief is clear. There are no cash cows among the group?s companies. But it plans to invest heavily, especially in power?about 20,000 mw?which translates into an investment requirement of at least Rs 80,000 crore. That order of funding can be difficult to service if the ratings for the group imply a higher degree of risk and therefore interest rates.
Some of these factors must have led the two brothers to the signing table on Sunday, just a fortnight after the Supreme Court brought to an end their court battle on how to share the natural gas that the elder brother has begun to mine from the offshore fields in India?s eastern seacoast.
The final takeaway from the agreement is a valuable lesson in division of family property. India has the largest percentage of its private sector turnover originating from family business. The 2006 MoU detailing the terms of the split in the Ambani family was at that time considered a major improvement on the squabbles that accompanied division of business empires in other families, but as subsequent events showed, even this fell short. It fell short on the count of transparency. The new agreement is a transparent document that ends the role of the MoU for all practical purposes and most importantly has been ratified by the two boards. A plan of business between two companies cannot be hostage to an unpublished document even to courts. The agreement brings an end to this saga and as we remarked earlier, has all the ingredients to become the role model for other family businesses, too.
subhomoy.bhattacharjee@expressindia.com