Monday, May 24, 2010

Brothers Try to Make Money not War

Mumbai: Estranged Ambani brothers Mukesh and Anil took a significant step towards ending a bitter feud by announcing, on Sunday, the scrapping of all but one of the non-compete agreements contained in the 2005 demerger scheme of the undivided Reliance Industries (RIL).The move is expected to be a prelude for the two to announce a way of sharing the natural gas assets currently owned by Mukesh Ambani’s RIL.
On Sunday, Mukesh Ambani, 53, and Anil Ambani, 50, the world’srichest siblings, said they were ending accords completed in January 2006 that barred them from competing across their business interests.
They were “hopeful and confident” of creating an environment of “harmony and co-operation” between their groups, the two said in separate statements.
The cancellation of the non-compete agreements, under which the companies undertook not to work in the same sector, would give greater “operational and financial” flexibility to both groups.
Theoretically, this will allow RIL to enter the telecommunications and financial services sector, while the Anil Dhirubhai Ambani group (ADAG) can now enter the petrochemicals sector.
Both groups, however, agreed that RIL will not enter the gas-based power generation business until March 31, 2022, other than for its captive gas-based power plants.
“[The cancellation of non-compete pact] will eliminate any room for any further disputes between the two on matters relating to the scope and interpretation of the non-compete obligations,” the groups said in separate but similarly-worded statements. 
The move is likely to need the approval of the company court of Mumbai, which sanctioned the demerger scheme.
The brothers have been at loggerheads for close to seven years, starting soon after the death of their father Dhirubhai Ambani in 2002. A settlement, in the form of a memorandum of understanding and a demerger scheme, was reached three years later.
Under the 2005 agreement to split the Reliance group, Mukesh kept the petrochemicals, oil and gas units along with the flagship company, Reliance Industries. Anil got newer businesses such as power, telecommunications, financial services and entertainment. Both retained rights to the Reliance name.
The scheme, however, soon turned unworkable after the government made it impossible for RIL to sell its gas to the Anil-led group as envisaged -- through a 17-year supply contract at 2003 prices.
The only other way, by directly transferring part of the gas assets in favour of the Anil Ambani group, too, would not have worked because of the non-compete agreement. The agreement, a part of the demerger process, reserves oil and gas for the elder brother only.
Earlier on May 8, the Supreme Court directed the two brothers to implement the gas supply agreement in a manner that did not conflict with government policy - this meant that RIL has no right to promise gas to anyone and all allocation is done by a group of ministers.
The non-compete policy and the associated ‘rights of first refusal’ also prevented the two group companies from taking full advantage of the opportunities thrown up by the booming economy.
For example, Mukesh Ambani has so far had to stand by and watch as the telecom and financial sectors have boomed in the last few years; their battle over the price of natural gas from RIL assets halted plans for ADAG’s Dadri power plant in Uttar Pradesh; also, a merger between ADAG’s Reliance Communications and South Africa’s MTN was scuttled after Mukesh Ambani said he had the first right to buy shares in his brother’s company.
Mukesh Ambani is also learnt to have big ambitions in the infrastructure sector, arguably one of the fastest growing sectors in India, but Anil Ambani has already established his presence there through Reliance Infrastructure.
The two sides indicated that a new gas deal was on the cards. “RIL and Reliance Natural Resources Ltd (RNRL) will expeditiously negotiate gas supply arrangements in ccordance with the orders of the Supreme Court. We hope to conclude these negotiations very soon,” the statements said.
Experts too seem to concur that the deal is part of a larger plan of action between the brothers. “This is part of an overall matrix [of understanding]… what has come out is only part of it,” said Hemant Sahai, managing partner of corporate law firm Hemant Sahai Associates.
He said a conventional gas supply agreement between the two groups is unlikely. “It will be difficult for the parties, on a private basis, to decide how the gas is going to be divided up,” he said, pointing to the recent Supreme Court judgment which upheld the government’s contention that RIL had no right to enter into supply agreements and the decision who will buy and who will sell will be decided by the government.
- With inputs from Bloomberg, Reuters & AFP

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