Show of Ambani brotherly love won’t spare India Inc from clean-up

Mukesh Ambani may have saved Anil from prison time over unpaid debts, but corporate hunger for high leverage and risk is being reined in by the country’s authorities

Anil Ambani's rescue by elder brother Mukesh Ambani suggest that relation are improving between the two brothers. AFP   

Indian business tycoon Anil Ambani avoided a possible jail sentence because Mukesh Ambani, India's richest man, stepped in last week to bail out his younger brother. In the last-minute rescue, the elder Ambani came up with the $80 million (Dh293.6m) cash for his sibling's debt-laden telecom company, Reliance Communications.

The dues were owed to Ericsson for maintenance services to the telco. Had the Swedish company not been paid by Tuesday, Anil would have faced three months in prison, under the orders of the Indian Supreme Court.

Relations between the two brothers have been strained since their father and founder of Reliance Industries, Dhirubhai Ambani, died in 2002 without leaving a will. This resulted in a bitter public feud between the brothers, ultimately leading to the conglomerate being carved up between the two.

Their fortunes have vastly moved in the opposite trajectory over the years. In 2008, Anil was listed by Forbes as the world's sixth-wealthiest person but his net worth has plunged to about $300m from $31 billion as his empire ran into debts and losses, amid fierce competition in India's telecom sector.

Mukesh's net worth has soared to $53.5bn, according to the Bloomberg Billionaires Index, which estimates his fortune to have increased by almost 20 per cent this year to date.

The elder brother lending a helping hand may be a sign that relations between the two are now improving, but Anil's business remains in a precarious state, analysts say.

"Such a spectacular fall is unfortunate, but the imminent demise of Anil Ambani's business empire was well anticipated," says Rahul Agarwal, the director at Wealth Discovery, a financial services company in New Delhi. "The only surprising element is the speed with which all of it has unfolded."

Last month, Reliance Communications announced it was filing for bankruptcy after failing to sell assets to pay off its debts.

“Anil Ambani seems to be in a soup,” says Aditya Pratap, the founder of Aditya Pratap and Associates, a Mumbai law company.

“This is the beginning of a dark tunnel. All his fame and stature and yet financial troubles got the better of him.”

Mukesh’s gesture to use his wealth to help Anil financially in his hour of need did not go unappreciated.

Anil, in a statement, said, "sincere and heartfelt thanks to my respected elder brother, Mukesh, and [sister-in-law] Nita, for standing by me during these trying times". He said he was "grateful we have moved beyond the past" and was "touched with this gesture".

Satish Modh, the director at the VES Institute of Management Studies and Research in Mumbai, says that Anil’s downfall can largely be attributed to the “easy availability of loans” in India as the ambitious younger Ambani scion tried to expand his empire. Market conditions also played a significant role, he says.

“Anil Ambani is a victim of over-leveraging his assets and also his inability to cope with changing face of Indian market,” says Mr Modh. “His current businesses in telecom went through a sea change and he could not move fast enough. His investments in power could not give him returns as he expected. He invested too much in land and buildings and capital equipment, while leveraging on his ongoing business.”

The telecom business, Reliance Communications, “which was expected to be his cash cow turned into a loss-making proposition”, Mr Modh says.

Other companies under Anil’s conglomerate, Reliance Group, include Reliance Infrastructure, Reliance Defence and Reliance Capital.

Mukesh and Anil started out on what was essentially a level playing field when they inherited the family business following the death of Dhirubhai Ambani.

Often referred to as “the polyester king”, Dhirubhai founded the group as a textiles company, which grew to become one of India’s largest conglomerates.

In 2005, three years after their father's death, a demerger of the Reliance empire was approved, brokered by the mother, Kokilaben.

Mukesh got Reliance Industries, including oil and gas, petrochemicals and textiles operations, and Anil took over the telecom, media, financial services and power divisions. The way the business was divided up was considered to be a reflection of the brothers’ personalities.

Mukesh, known to have a more serious disposition, focused on the empire's traditional industries, while Anil was to dabble in the more glamorous but risky media and telecom sector. In his younger years, Anil acquired a reputation as a flamboyant character who enjoyed socialising with politicians and film stars.

The sectors in which the companies of each brother are involved have increasingly overlapped in recent years.

Most notably, Mukesh's Reliance Industries in 2016 launched Reliance Jio, coming into direct competition with his younger brother in the telecoms space. The new company, with promises of free calls for life and cut-price data deal, took the market by storm and changed the landscape of the sector. Jio rapidly attracted customers and triggered a fight for survival among the country's telecoms operators, leading to mergers and exits.

Jio has more than 280 million subscribers.

“Anil Ambani’s debt-driven growth in telecommunications, infrastructure and financial services has been hit by a combination of bad luck, poor management and stiff competition from rivals who are financially stronger,” says Mr Agarwal.

"Ironically, the competitor who has reshaped the telecom sector in India is none other than his elder brother, Mukesh."

Mr Agarwal says “it is also ironical that the company that catapulted him to the list of world richest is the same company that is now responsible for his financial travails”.

The case of Anil comes as the authorities in India are continuing to make efforts to crack down on the problem of defaults by large corporations, business houses and people. As a result, the country's banking sector is grappling with piles of bad loans.

“Anil’s fall from grace in little over a decade is a textbook case on how unbridled ambition, forays into non-core business domains, and that by taking unnecessary risk and huge amounts of leverage can bring down the biggest of business empires,” says Mr Agarwal.

The fact that Anil came so close to going to jail is considered to be a sign of progress by many observers in terms of how the Indian authorities are making efforts to ensure that high-profile borrowers do not escape justice. Years of hefty loans being issued in India without due diligence have done a lot of damage, analysts say.

“This is a pointer to a general shake-up in the market,” says Mr Pratap, adding that there could be more trouble in India for the companies unable to meet their financial obligations.

The government was widely criticised in 2016 when Kingfisher tycoon Vijay Mallya left the country, owing banks more than $1bn. India continues to fight to get Mr Mallya extradited from the United Kingdom to India.

The two Ambani families were seen mingling at the two recent high-profile weddings of Mukesh's son, Akash, this month, and his daughter Isha, in December.

However, analysts say that the mending of relations between the brothers could soon be put to another test.

“It cannot be ruled out that the elder brother would step in again and help his younger sibling through some strategic investments that will throw a much-needed lifeline which Anil truly needs at this time,” Mr Agarwal says.