While one can quibble over the attractiveness of the conversion price for Reliance Industries shareholders, the fact that the conversion has happened is heartening, because it considerably reduces the degree of uncertainty for them.

Role of the board

But this should not in any way deflect attention from the key issues highlighted on the corporate governance front on several occasions. As the debate over the need to strengthen governance norms in Corporate India continues to rage, certain aspects of the workings of the Reliance group have come to the fore:

Reigning over the services empire: Mr Anil Ambani, at the helm of Reliance Infocomm, Reliance Energy and Reliance Capital.

Shareholding in Reliance Infocomm: Until this controversy broke, shareholders were under the impression that Reliance Industries was the lead investor in Reliance Infocomm with a 45 per cent equity stake. This was also confirmed at the earnings presentation of Reliance Industries in April 2003.

As revelations tumbled out of the Anil Ambani camp through December 2004, it became obvious that Reliance Industries was actually holding only a 36 per cent equity stake in Reliance Infocomm. The 45 per cent stake of Reliance Industries was actually in another company, Reliance Communications Infrastructure, acting as a holding company for Reliance Infocomm with a majority stake of 65.3 per cent till early December 2004.

Though Rs 2,331 crore of the Rs 2,362 crore invested by Reliance Industries (as of March 31, 2003) in Reliance Infocomm was routed through Reliance Communications, the role of Reliance Communications in the telecom venture remained unclear to shareholders of Reliance Industries. . The cloud that surrounded Reliance Communications' role lifted only in end-December 2004, when the Reliance Industries board clarified that it had implemented the Infocomm initiative through two separate companies — Reliance Communications, for the infrastructure and data business, and Reliance Infocomm, for the voice business.

Controlling the cash cow: Mr Mukesh Ambani retains Reliance Industries and IPCL.

Shareholders of Reliance Industries will be able to unlock the full value of their holdings in Reliance Infocomm only if the complicated cross-holdings are unravelled before the settlement is firmed up. This alone will ensure that the Reliance Industries shareholders, who are to be given shares in the special purpose vehicle, derive the full benefit of the proposed demerger.

Preference share conversion terms: During 2003-04, Reliance Infocomm chose preference shares as an instrument to raise funds for the telecom venture.

Reliance Industries invested in 162 crore convertible preference shares of the face value of Re 1 (at a premium of Rs 49) aggregating Rs 8100 crore. No quarrels with that. As the Reliance Industries board explained in December 2004, the yield on preference shares at 8 per cent, which is tax-free, was higher than Reliance Industries cost of loan funds.

But the key questions that remain unanswered are: Why was the conversion price not decided at the time of the preference share issue? Second, even if it was left open-ended at the time of issue, why was the price not fixed in January 2004, when it became a full-blown CDMA mobile service provider? It would have resulted in the conversion price being much lower than the Rs 32 per share fixed recently, considering that it had six million subscribers in January 2004 compared with over 11 million now.

Finally, what were the terms for the conversion of preference shares considered by the Reliance Industries Board and what inputs did it consider? In end-December 2004, at the height of the squabble, the Reliance Industries Board had decided to constitute a Committee of six independent directors "to arrive at a fair price and determine the right timing for conversion". It had also indicated that this Committee might engage the services of valuer(s) of international repute.

But in the ten days since the settlement was announced, on June 18, the conversion terms for the preference shares have been made public. These have proved somewhat favourable to the shareholders of Reliance Industries. At the current conversion price of Rs 32 per share, the return for Reliance Industries (and its shareholders) that hold a 65.9 per cent equity in Reliance Infocomm will be 1.6 times their overall investment of Rs 10,462.5 crore.

On a comparable scale, the return on the promoters' investment works out to 2.6 times.

This shows that the returns for Reliance Industries shareholders would be higher, if as suggested by Mr Anil Ambani, the preference shares were converted at par, which would enhance Reliance Industries holding to 75 per cent.

It would be fair for shareholders to expect the Reliance Industries board to put the valuation parameters employed (including any valuer's report) in the public domain.

Disclosure of Treasury stock: Four companies — Reliance Chemicals, Reliance Aromatics, Reliance Energy and Project Development and Reliance Polyolefins — hold about 4.7 per cent of Reliance Industries equity as of March 31, 2005. These companies have been categorised as "Persons acting in concert" with the promoters. This equity stake was allotted to these companies in Reliance Industries as a result of theamalgamation of Reliance Petroleum.

As a part of the buyback announcement in January, Reliance Industries made a disclosure that "the economic benefits of Reliance Industries shares held by the four companies have always been for the benefit of Reliance Industries shareholders and remain so."

If the economic benefits of these shares belong to the shareholders, is it right to classify them as "Persons acting in concert" with the promoters, just because it was classified in the same category under Reliance Petroleum. If these shares rightfully belong to the shareholders, then they could be sold and distributed to them in the form of special dividends or cancelled by Reliance Industries.

Related party transactions

Related party transactions, involving transactions between the promoter group/top management with the companies they manage have been a common feature among Indian companies. And there is nothing wrong with that, as long as they are done on fair terms and proper disclosures are made to shareholders in an intelligible form.

In the case of Reliance, while the letter of the law has been upheld, the spirit appears to have been given the go-by. Take for instance:

Sweat equity disclosure: One of the allegations levelled in December 2004 was that in mid-2004, Mr Mukesh Ambani was allotted sweat equity amounting to 12 per cent in Reliance Infocomm at face value of Re 1 for Rs 50 crore. Even assuming the Reliance Industries board was aware of this transaction, it is a moot point whether this required a disclosure to Reliance Industries shareholders.

The sweat equity option exercised by Mr Mukesh Ambani in Reliance Infocomm was later cancelled.

This increased the Reliance Industries equity in Reliance Infocomm from 36 per cent to 42.4 per cent, before the preference share conversion came into effect.

Financial/operational risks: At different stages of the telecom venture, Reliance Infocomm had exposed the shareholders of Reliance Industries to financial and operational risks not disclosed to them. These ranged from:

Since Reliance Industries then held only a 45 per cent equity in Reliance Communications, instead of being a subsidiary, no disclosure was made.

The Reliance Industries board that considered these issues recently has reportedly said that no disclosures were necessary at that point as these were not related-party transactions.

Similarly, it also reported that the question of conflict of interest between the promoters and shareholders of Reliance Industries did not arise. This suggests that the group has adhered to the letter of the law, but what about the spirit?

Time to act now

For the Government and the regulator (SEBI and the Department of Company Affairs), the Reliance corporate governance saga calls for action on multiple fronts.

These agencies, which have been brushing off this settlement as an "ownership issue" resolved amicably among the brothers, will have to investigate this controversy in areas such as:

Role and quality of board of directors

Material event disclosure

Promoters' cross-holdings and web of investment companies

Related-party transactions detrimental to shareholders

Quality of disclosures in financial statements

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