Conventional wisdom has it that businesses collapse with the collapse of family structures. The ongoing war between the Ambani brothers has raised doubts over the future of Reliance. Will India’s largest private sector company Reliance Industries survive the ongoing family fight? Will RIL live to see the year ahead? I would like to stick my neck out and say, yes, Reliance will survive into the future although the future of the Ambani brothers as joint stakeholders and common inheritors of Dhirubhai Ambani’s legacy looks cloudy.
To understand Reliance Industries, we need to go beyond the apparent and look at how Dhirubhai structured India’s biggest institution-building initiative outside the government sector. Dhirubhai built Reliance on the ground-up approach, linking various manufacturing processes forward and backwards. Modern management jargon calls this ‘vertical integration’ where every manufacturing process is linked to the other in an integrated whole, yet, each is big enough to survive as an independent enterprise on its own. Right at the top of the chain, or the very bottom, depending on which way you look at it, is oil and gas production. At the other end is fabrics. In between rest 33 independent manufacturing processes that turn out everything from LPG, motor spirit, kerosene, naphtha, propylene, ethylene and butene to polyester chips, PSF, PFY, texturised dyed yarn, twisted dyed yarn and spun yarn. Had Dhirubhai wanted it, he could have settled for any one of these manufacturing processes and made money for himself. Instead, he knitted them into an elaborate web, each feeding off the other, and sustaining the other, to grow into an organic whole.
How did this chain that Dhirubhai built, help Reliance grow? Here’s how: If you look at Reliance’s product flow chart, most of its products are commodities that typically follow a cyclical price trend. This makes certain products reap huge profits during the boom time, and slump during a downturn. By getting so many products in the value chain, Dhirubhai insured Reliance against cyclical downfalls that regularly wounded so many other Indian commodity manufacturers. With Reliance, vertical integration ensured that a downturn in one segment was always offset by an upturn in another. This integration also helped Reliance save taxes on various inputs manufactured in-house. The merger of Reliance Petroleum with Reliance Industries saved thousands of crores of rupees in sales tax on various products and raw material streams flowing between the petrochemicals and petroleum divisions. All this resulted in huge topline growth year after year. And huge bottom-line growth to boot. At a compounded annual growth rate, RIL’s bottom line grew 26% every year for the past 25 years; its topline grew from Rs 120 crore 25 years ago to Rs 100,000 crore today. The company’s net worth too grew from Rs 30 crore to Rs 3,500 crore over the past 25 years. On the stock market, the RIL scrip posted an average annual return of 39%. This, in turn, brought huge dividends for Reliance shareholders, who add up to a quarter of all equity investors in the country.
Reliance’s giant-sized growth is unparalleled in Indian corporate history. But it’s worth taking note that Reliance is still relatively small compared with the true global giants. The company ranks among the top 150 global companies in terms of net profit, and among the top 450 in terms of sales. GE, GM, IBM, Sony, and even the Korean chaebols, Hyundai and LG are several times bigger. I believe that brothers Mukesh and Anil realise well what it means to carve up Reliance Industries at this stage between them. It will not only squander away what’s been built in the past but will stop them from growing in the future into a real-world beater. So, in a sense, the prospects of the Ambani brothers to rests in the future of Reliance itself.
Even RIL’s equity structure is such that it should restrain either brother from forcing a split. The promoters and persons acting in concert hold 46.67% equity in the company, the rest is held by domestic financial institutions, foreign institutional investors and retail investors.
Indications are that the final veto on all matters relating to the promoter's shares rests on the incumbent chairman, in this case, Mukesh. So he could block any move if Anil were to force a split. On the other hand, Anil could, in theory, mobilise the support of the financial institutions, FIIs and retail investors if Mukesh were to force a split. But then, such strategies are easier drawn than implemented.
So far, there has been no indication from either of the warring brothers that they want RIL split. The accusations are essentially over control and which brother has used the mother company’s resources to expand in the areas of telecom and energy. Ideally, should the brothers formally snap all family ties, I see them leading independent growth paths in the areas of telecom and energy with the least interference from each other. But they will be forced to leave Reliance Industries untouched.
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