ROLLNO- 20DM011

Where Were the Board and Its Independent Directors?

What happened in India’s biggest private sector enterprise, Reliance Industries Ltd
(RIL), during the years 2005 and 2006, owing to the rivalry between the two sons of the
legendary Dhiruhai Ambani-Mukesh and Anil, led people to believe that everything
was not right in the governance of the organization. Let us briefly discuss the issues that
were thrown open by the episode.

Mrs. Kokilaben, mother of Mukesh and Anil, reportedly issued a note to inform the
media and public about the scheme of settlement after the demise of their father. How
could a decision as important as the restructuring or demerger of companies all publicly
held be taken by an individual? What role did the boards of different companies
involved in the issue play? While the investors, the government, the capital market
regulator, and the public were relieved that the spat between the brothers was amicably
settled, what led Mrs. Kokilaben as the head of the family, which at the time reportedly
held only 34 per cent of the shares in RIL (without disclosing the details of holding), to
assume that the demerger was in the interest of the remaining shareholders who
accounted for 66 per cent of the holding? (The subsequent annual report put the
promoter holding at 46.76 per cent, including the persons acting in concert.) Not even
once when the entire episode was enacted did the board of RIL show any signs of
exercising their power and authority as representing the interests of the larger group of
shareholders. It seems unfortunate that no shareholder (including institutional holders)
raised the question: ‘Where was the board?’ Anil Ambani might have become a worthy
whistle-blower on governance practices of family-managed companies by writing to the
Securities and Exchange Board of India (SEBI) on certain transactions that RIL and/or
its board or Mukesh entered into and the governance shortfalls therein, but could we
rightly say that he was passionate about corporate governance as he too failed to clear
the fog over the issue of 34 per cent holding of the family? The board of directors of
RIL had six independent directors (institutional nominees included) out of a total of
twelve. Why did it not occur to them that they have a fiduciary duty to shareholders to
ensure the future health of the company?
Q- In predominantly family-owned and managed companies, boards’ roles are limited
and the presence of independent directors is only for conformance to regulations.
Comment.

Ans- In 2002, their self-made father, the founder of Reliance Industries, died of a stroke.
The complicated part? He hadn’t written up a will. Naturally, the two brothers fought over
their father’s sizeable fortune and massive corporate holdings.

Finally, Mukesh and Anil’s mother Kokilaben brokered an agreement for the brothers,
demerging Reliance Industries so that Mukesh could take over the oil and chemical
portion of the company and Anil could take over the electricity and telecom arm of things.
The companies under Mukesh were known as Reliance Industries. The companies under
Anil were known as Reliance Anil Dhirubhai Ambani Group or Popularly the Reliance
Group. The split of assets also came with a non-competition clause. According to this, the
brothers were not allowed to venture into each other’s businesses for a decade.

Under the leadership of Mukesh Ambani, Reliance Industry slowly but steadily scaled
new heights. By 2007, it was the first Indian company to exceed $100 billion in market
capitalization.

Anil Ambani also saw immense growth in wealth in the initial stages. Anil Ambani began
his solo ride by investing in industries that provided quick returns. It goes without saying
that the risk was high too. In 2005, he bought Adlabs which got him into the
entertainment business and also, In 2006, the Reliance Group was formed and in less than
ten years became a market leader in several growth sectors including telecommunications,
generation, transmission and distribution of renewable and non-renewable sources of
power, national road highways, metro rail systems, cement, financial services, education,
healthcare, media and entertainment few years later in 2008, he signed a deal with Steven
Spielberg’s DreamWorks. The Film Lincoln produced by DreamWorks also won an
Oscar.

In 2008, Anil was the world’s 6th richest person with $42 billion in wealth. One of the
most notable investments was the Mumbai Metro project. By 2019 the valuation of the
defence company fell 90%. 2016 was also the year in which Mukesh Ambani’s Jio
entered the Telecomm industry. This catapulted RCom further into losses. By end of
2019, RCom had lost 98% of its valuation. This hit Anil hard as he held 66% of its stake.

As of March 2018, the Reliance group had a total debt of 1.7 lakh crore. This led to
affected his wealth and also his Rs 13,500 crore investment in Nippon the financial
segment. By 2019 things got so bad for Anil, that he was threatened with jail if he did not
pay dues to Ericson.

Anil Ambani was also summoned by the UK court where he was directed to repay 100
million loans from Chinese banks. He claimed in courts that he would not be able to pay
as his net worth was zero.
The court approved spit of assets in 2005 did not end the rivalry between the two
brothers. In 2008, Anil filed a defamation case against Mukesh suing him Rs 10,000
crores. This was due to an interview given by Mukesh to the NYTimes. Mukesh claimed
that the distinguishing factor of Reliance from its competitors was the intelligence agency
run by his brother which included a network of lobbyists and spies. They had infiltrated
New Delhi to find facts that may seem trivial and other vulnerabilities of the bureaucrats
to gain greater control.

The 2005 split of assets also included an agreement where Mukesh Ambani’s Reliance
Industries would supply his brother’s electricity generation segment fuel at $2.34 per
million British thermal units. This was agreed for a period of 17 years.

However, Reliance Industries began setting a different price. They sold fuel to the
Reliance group at $4.20 in 2009. The disagreement was dragged into the courts until the
government intervened. The government allegedly did so as the government also has a
share in the profits made by Mukesh. The cost of production to Reliance Industries was
only 1$.

Anil took the spat into the front pages of the Times of India. Here Anil Ambani placed an
advertisement accusing the Petroleum Ministry of favouring Reliance Industries. The Ad
campaign further intensified the feud between the two brothers. In the end, the ruling was
in favour of Mukesh.

The competition between the two brothers was not limited to business. When Mukesh had
bought a $52 million jet for his wife it was alleged that Anil bought his wife an $80
million yacht. The feud at this scale sounds bizarre as the brothers shared the same house
till 2012. When Mukesh moved out to his $ 1 billion Antilla, Anil was building one for
himself of the same value.

The Comptroller and Audit General of India alleged rigging in the auction mechanism for
the 4G license. InfoTel had acquired the license by bidding 5000 times its net worth.
InfoTel was then mysteriously sold to Reliance Industries.

Both the brothers have been accused of their proximity to politicians to gain an influential
role. PM Modi’s close proximity with Anil Ambani also is alleged to have a role in the
Rafale controversy which was later quashed by the courts.

In my study they have involved family members who are playing the role of directors
which led to this happens they should include some more directors from outside because
they can easily discus the problems for control the norms without included family’s
members who gives best advice in these kind of situation and give more loyalty to the
company.