Ambani deal raises awkward questions
End of family feud leaves doubt about the health of Indian capitalism
India's richest man has one more thing to celebrate. Last month, billionaire Mukesh Ambani bought various telecoms assets from his younger brother Anil, at fire-sale prices. The deal ended one of Asia's longest corporate quarrels, handing Mukesh Ambani a satisfying family victory and humiliating his brother in the process.
Yet, while the episode is a clear success for India's most prominent capitalist, it still raises troubling questions about the state of Indian capitalism. The country has shown it can churn out plenty of wealthy tycoons like Mukesh Ambani, but far fewer of the well-run, globally competitive companies it needs to develop economically.
The brothers' feud dates back to 2005, when the duo split up Reliance, the conglomerate they inherited following the death of their father. Dhirubhai Ambani divided India. A man from modest beginnings, many admired his rag-to-riches rise to become the most prominent Indian industrialist of his day. Others thought him a devious crony capitalist. Either way, after his death, his sons began a bad-tempered succession battle that divided India's business scene for years.
Telecoms lay at the heart of their wrangling. Anil Ambani won the family's mobile arm during the divorce, along with various infrastructure and power assets. Mukesh Ambani took oil refining and petrochemicals, although he hankered after a return to telecoms too. After a lengthy hiatus and more than $30 billion of investment, in 2016 he finally launched Reliance Jio, a new consumer mobile division of Reliance Industries, his main listed conglomerate.
In December, Jio spent roughly $4 billion to buy an assortment of telecoms spectrum and towers from Anil Ambani's ailing Reliance Communications. RCom had long struggled with ballooning debts, a problem it shared with many of the billionaire's other businesses. The younger tycoon had little choice: In November, various of his creditors, including China Development Bank, effectively gave him a choice between sale or bankruptcy.
Anil Ambani's downfall would have been humbling, even had he not been brought low by his own brother. When the two men split over a decade ago, it looked as if the younger could emerge the stronger, as his businesses initially grew rapidly. But over the last decade his empire has fallen into a sorry state. Loss-making RCom alone carried net debts of roughly $7 billion at the end of financial year ending in March 2017.
Yet for India, Anil Ambani's undoing is heartening. It proves that even politically connected billionaires cannot prosper in the absence of skilled management and attractive products. India's telecoms market is cut-throat, with RCom having faced competition from India's Bharti Airtel and Britain's Vodafone, as well as brother Mukesh. Ultimately, RCom ran its business and finances badly, and its billionaire owner suffered the consequences.
India still suffers problems of cronyism, despite a drop-off in the grand corruption scandals that dogged the country in the years prior to the election of Prime Minister Narendra Modi in 2014. But the Ambanis' history since 2005 hints at the limits of Indian cronyism . The duo's divorce in 2005 provided a kind of natural experiment, given they were handed companies of broadly equal value. If Indian business was indeed a rigged game, both should have succeeded. That one did not is a sign that, for all its rough edges, the country's market economy often works as it should.
But the triumph of Mukesh Ambani is far from an unalloyed victory for the healthy development of the Indian economy. His fraternal success caps a heady year, in which Jio rapidly added 140 million customers, albeit initially by offering its services for free. The tycoon also invested heavily in his refining and petrochemicals operations, which generate much of the cash he then sank into telecoms.
This huge investment will take many years to deliver a serious return, if indeed it ever does. But , outside shareholders are still impressed: Reliance Industries stock rose by about three quarters during the last year. There is talk of a blockbuster flotation for Jio. Ambani's personal fortune also continues to rise: At last count, Forbes put it at $42.5 billion, making him not just India's richest man, but Asia's as well.
Mukesh Ambani's spending spree is the exception rather than the rule among his fellow tycoons, at a time when India badly needs corporate investment. Despite Modi's efforts, private sector capital expenditure is in the doldrums. Many industrialists are struggling with excessive debts and unfriendly regulations. Few are investing serious sums, and none with Ambani's boldness and scale.
Mukesh Ambani cannot be faulted if his fellow industrialists lack dynamism or resources. But while India needs investment, it also needs open markets, fair competition and companies with high standards of governance -- and here the record of its preeminent tycoon is more problematic.
Jio's rivals complain that Ambani's business is competing unfairly, slashing prices and running huge losses by cross-subsidizing from his other businesses. Some of this is overplayed. Reliance says with justification that its price-cutting benefits consumers. Ambani also does not enjoy a monopoly in any of his various operations. Although his business is huge - Reliance Industries' market capitalization is now roughly 6 trillion rupees ($94 billion) -- there is no obvious case to break it up.
Yet Ambani's critics also complain that he often benefits from regulatory concessions, including rule changes about how his Jio division could use its telecoms spectrum. Reliance denied wrongdoing, but in 2015, for instance, India's government auditor claimed the company had enjoyed a 34-billion-rupee windfall after the telecoms department let it to run voice calls over spectrum that had originally been auctioned for data use only.
Most problematic, though, is Reliance Industries' own culture of poor governance. Ambani's board is filled with pliant family loyalists, including his own wife. His listed company is linked to a host of smaller unlisted businesses through an opaque web of related-party transactions. These seem carefully designed to make it hard for fund managers and analysts, as well as competitors, to understand the company's finances. Potential investors might also pause to consider Mukesh Ambani's attitude towards minority shareholders, were Jio to move towards a flotation.
As India grows, Ambani's business, and his personal fortune, look set to grow along with it. This ought to be good for the country: India needs more large, global enterprises if it is to achieve its economic potential. But it also needs businesses with world-class governance operating in fair and open markets. Here Reliance falls far short, as does Modi's government, which has done little to push regulators to knock companies like Reliance into shape. Mukesh Ambani provided the rescue package his brother so badly needed. But he is far from the answer to what ails India.
James Crabtree is an associate professor of practice at the Lee Kuan Yew School of Public Policy at the National University of Singapore, and a former Mumbai bureau chief for the Financial Times. His book on India, "The Billionaire Raj," will be published in mid-2018.