Whatever happens in the course of India?s biggest corporate battle, the India story in terms of market sentiments is unlikely to get affected big time. This bears restating. The scale of the dispute is massive and unprecedented for India. The two Ambani brothers account for 10.76% of the Indian market capitalisation as on July 28, 2009. But markets are not and for quite some time will not judge the big story on this fight.
This should be of comfort to the government, as the obvious broker in the dispute (mind you, the government still needs to move fast), as well as to a large swathe of Indians who have their fortunes tied up with either one of the brothers or at least with the capital markets. For the government, which is now deeply involved in the dispute and is also keen to push economic recovery, a domino effect of the Ambani fight on the overall investment climate would have been problematic.
Why do we think investor sentiment will be unaffected largely? Don?t go by first cut marco reactions. That is, don?t make too much of the fact that on Wednesday, at the BSE, the bellwether Sensex lost 1.03% to close at 15,173.46. Or that the rupee lost 0.5% to close at 48.425/dollar.
But Asia directed funds are unlikely to prune their portfolios on the news of this battle. These funds largely build their India portfolio on the basis of the MSCI Asia Pacific Index, in which list Reliance Industries Limited (RIL) does not figure. This means there is no immediate provocation for them to ease their holdings.
RIL stock has been under pressure since Friday, but that?s because it reported a sharper than expected decline in its gross refining margins. The dip in the margins made several fund managers correct their price target for the stock. All these happened before Tuesday when Anil Ambani made the now famous speech, accusing RIL of corporate greed.
Now, look closer at what happened in the markets on Wednesday. The RIL stock gained 1.20% at the NSE and was one of the Nifty gainers. Across the divide the RNRL stock too was a gainer by 1.45%, on a day when the markets went down. Obviously a million people think these stocks have value going forward. This is the nub of the story as far as the market perception goes.
In the stand off between the brothers, one of the first salvo was fired by the Anil Ambani owned Reliance Energy in 2006, which complained that RIL?s plan to set up a 2,000-mw power plant and an international cargo airport in a special economic zone in Haryana violating their non-compete agreement.
In 2008, RIL returned the favour. Anil Ambani planning to sell his majority stake in Reliance Infocomm to MTN, had to cancel the deal after RIL waved the first right of refusal on its face. Investment managers across the world, warming up to the India story of corporates with deep pockets out in the market, were suddenly made aware of the bad vibes between the brothers. Subsequently this has been clearly spelt out in several strategy reports about India from them. The way to read this is that strong fundamentals remain the big story but over a longer term, quick dispute resolution will be a plus, especially when investors think of sectors where one of the brothers is a player.
This is the nuanced point that has to be understood about the dramatic fight between two Forbes-listed Indian industrialists. What the fight is about is really the issue, not who are fighting, even given all the media excitement generated by speeches and other forms of intervention from the two brothers? well-organised camps.
Cue for the government: sort out the dispute fast. Natural gas, if effectively harnessed, can wipe out India?s massive energy shortage. This joyous prospect simply cannot be left hostage to the prospect of an eventual settlement of the clash between the brothers. The demand for gas, as per a Planning Commission estimate is expected to grow at 11.7% CAGR by 2011-12. Of the $250 billion of investment possible in the petroleum and energy sector, $37 billion is needed just to refine, market and build the gas transportation network by 2012, says an estimate by the Investment Commission.
Already investments in 18 power plants, fertiliser plants and city gas distribution plans are on hold as the fight over the pricing of gas plays out. These numbers are obviously too big for the economy to idle over. So from this point of view the government needs to bring the parties to the negotiating table to sort out the dispute, hopefully aided by a clear legal verdict.
So when you watch the Ambani fight as it develops, keep an eye on the most boring party: the sarkar. The government has said gas is a national asset. It should live up to its word.
subhomoy.bhattacharjee @expressindia.com