AMBANI DEAL INSIDE STORY…

Saurabh Shukla couldn't help but notice the sudden closure of the green, blue and white Reliance
Infocomm customer service centre last week.

Like hundreds of executives who work out of the Kamla Mill Complex, a sprawling office complex in mid-
town Mumbai [ Images ], the 40-year-old advertising executive was familiar with the bustling service
centre, where some of his colleagues paid their telephone bills even till last month.

But all of a sudden, the centre has been shuttered and the 80-odd service agents who worked there
have been shifted to another location in uptown Mumbai -- at just a two-week notice.

Shukla may not know it, but there's a good reason for the hurry: the building where the centre was
located belongs to Anand Jain. A trusted family friend, Jain was the person whom Reliance vice
chairman Anil Ambani [ Images ] had targeted in his media campaign, accusing him of creating a rift
between him and his brother, Reliance chairman Mukesh.

This may be a small sideshow in the larger-than-life battle between the Ambani brothers. But yet again,
it is evidence that a settlement between the two is now imminent.

As Businessworld reported recently, Anil is all set to take charge of Reliance Infocomm. He has already
begun sounding out senior telecom executives in the industry to be a part of his new-look team.

How the possible settlement will work

Step 1: Split the Ambani family stake in RIL [ Get Quote ] in the
30:30:40 ratio among the two brothers and Kokilaben. Anil
Ambani to relinquish control to Mukesh, who gets full control of
Reliance Industries' core oil and gas business.

Step 2: Create a special purpose vehicle to house RIL's stake

in Reliance Energy [ Get Quote ] and Reliance Capital [ Get
Quote ]. Anil Ambani to continue heading the two firms.

Step 3: In lieu of Anil giving up control in RIL, Mukesh Ambani [

Images ] transfers part of his 45% stake in Infocomm to Anil, who
now gets to run the venture.

But before the younger Ambani moves onto his brother's turf, a big clean-up exercise is on to quickly
remove any embarrassing linkages. The closure of the Kamla Mill service centre is one such.

For more than a month now, Mukesh's confidants, Manoj Modi and Anand Jain, have both vacated their
second floor offices in 'I' Block at the Dhirubhai Ambani [ Images ] Knowledge Centre (DAKC) in Navi
Mumbai and moved to the Reliance Industries headquarters in Maker Chamber IV.

Even as the final settlement is awaited, there is now endless speculation on how the Ambanis will carve
up the sprawling Rs 99,000-crore (Rs 990 billion) empire. It is certain that Mukesh will control the
flagship Reliance Industries (RIL), while Anil gets to run Reliance Energy, Reliance Capital and also
own Reliance Infocomm.

But while the broad division of assets now seems somewhat clear, the intricate details of how the
complex deal will be spun are still cloaked in secrecy. And that's the real story.

After all, as they say, the devil's in the detail. Businessworld spoke to a range of Reliance employees,
analysts, corporate lawyers and chartered accountants to piece together a sketch of how the complex
deal can be struck.

One finding that emerged straightaway from these detailed conversations is that a clear division of
assets, as suggested in media reports (especially of the investments that RIL holds in Reliance Energy
and Reliance Capital, or even a split in RIL) is ruled out.

Instead, ICICI Bank [ Get Quote ] CEO K V Kamath [ Images ], who is advising the Ambani family, is
likely to recommend a simple, transparent way -- as opposed to a strategic sale -- to define control and
ownership for the two brothers.

In other words, he will choose a path that will be easy for the Reliance group to sell to shareholders,
regulators and the investing public at large.

Before getting into how that can be done, let's explore the reasons why an actual division of assets is so
tricky.

One, the flagship Reliance Industries' competitive advantage comes from its vertically integrated
structure. So, unless the synergies of upstream oil exploration and downstream petrochemicals
business continue to exist, RIL's future is threatened.

Besides, splitting RIL could seriously affect investor confidence in the Reliance group. "RIL is India's [
Images ] largest publicly listed company. They cannot split it according to their whims and fancies,"
asserts an equity analyst at a foreign broking house.

Two, hiving off RIL's investments in two companies -- 43.68 per cent in Reliance Energy (REL) and
47.20 per cent in Reliance Capital (RCL) to Anil -- is equally difficult. Even the Reliance group
companies issued a denial to that effect to the stock exchanges last week.

The reason is simple: if RIL were to sell its stake in REL and RCL, at present valuations, the buyer
would have to cough up nearly Rs 8,000 crore (Rs 80 billion) in cash to buy that stake.

Further, according to the existing rules of the Securities and Exchange Board of India, the buyer would
also have to make an open offer to buy a further 20 per cent stake in the two companies at an additional
cost of Rs 4,000 crore (Rs 40 billion). Raising such large amounts of cash is out of the question.

Even if the Ambanis were in a position to do so, it would immediately alert the taxman. That also
explains why Mukesh cannot buy out Anil's stake in RIL, which would need similar amounts of cash.
Finally, cutting off the umbilical cord that connects Reliance Energy to RIL could prove detrimental.
Energy is a huge growth avenue for the group, but it would continue to require investment from RIL's
huge cash flows.

So how do you then carry out a separation that is equitable to both parties? Any division of the empire
could be equitable if it is based on two important parameters: total free cash flows and market valuation.

At nearly Rs 11,777 crore (Rs 117.77 billion) a year, RIL accounts for more than 70 per cent of the free
cash flows of the group. It also contributes 86 per cent of the group's market valuation.

Apart from the huge pitfalls involved in splitting Reliance Industries, there's one good reason why the
Ambani family would be loath to give up ownership of their 34 per cent stake in RIL. Every year, RIL
gives them a tax-free dividend of Rs 250 crore (Rs 2.5 billion).

So far, the Ambani family's stake in Reliance is held through a web of over 400 investment companies,
whose ownership is not clearly defined. As the head of the family, Mukesh Ambani exercises control
over these companies and the dividend income goes into a family pool account from which expenses
are drawn.

The brothers have been withdrawing from the pool based on an unwritten understanding between them.

As the brothers and their wives seek to run their families separately, Kamath is likely to propose that the
ownership now be properly defined. That means splitting the family's stake proportionately, so that each
of them receives his share of the dividend.

Just as Businessworld had reported in its cover story, Showdown At Maker IV (10 January, 2005 ), the
formula is likely to be 30:30:40.

In other words, 30 per cent of the dividend will go to Mukesh, 30 per cent to Anil, and 40 per cent to their
mother Kokilaben. Ten per cent of the mother's share could, in turn, be split between the two Ambani
daughters. After her death, her 30 per cent share would be divided between Anil and Mukesh.

But while ownership may rest with the family, Mukesh will be allowed full control of the family's stake.
Anil and the rest of the family will sign away their voting rights in favour of Mukesh.

At current market prices, Anil's 10.2 per cent stake in RIL would be worth about Rs 7,500 crore (Rs 75
billion).

So what does Anil gain from the deal? How should he be compensated for giving up control of RIL?

There are two possible approaches. As explained earlier, there is little scope to delink RIL's stake in
REL and RCL. Instead, Anil is likely to be given full operational control of the companies that he has run
in the past.

According to insiders as well as merchant bankers, RIL will have a new holding structure: it will create a
special purpose vehicle (SPV) in the form of a wholly owned subsidiary company, which will hold the
investments in REL and RCL.
As a representative of RIL, Anil will get to control the board of the SPV and run the two companies
independently. To compensate Anil for relinquishing control of RIL, Mukesh will let go of his pet project,
Reliance Infocomm.

As an unlisted company, it is easier to transfer stake without regulators raising questions. Of course,
inside DAKC, Infocomm employees are still coming to terms with Mukesh's decision to hand over
control of his pet project. "Obviously, he has chosen his head over his heart," says a senior Reliance
employee.

Earlier, global investment bank Merrill Lynch had valued Infocomm at $13.7 billion (approximately Rs
58,000 crore).

Even though Mukesh owns 45 per cent of Infocomm, it is believed that the stake was bought using the
family's funds. Anil had contested that half of Mukesh's share should effectively belong to him. If
Mukesh finally accepts that contention, he could hand over part of his own 22.5 per cent stake over and
above Anil's 22.5 per cent to give his brother control of Reliance Infocomm.

If Mukesh's full stake is transferred, it would mean that he pays a 'control premium' of Rs 13,500 crore
(Rs 135 billion).

Whatever be the final settlement, in the end, it will be small price to pay for bringing the curtain down on
one of the most acrimonious family feuds in Indian corporate history.

NEW DELHI: Reliance Industries chief Mukesh Ambani has capped his salary for the
second straight year at Rs 15 crore, less than half of
what he is
eligible to draw, while rest of the RIL top brass got a
pay hike in FY'10.

"The Chairman and Managing Director's

compensation has been set at Rs 15 crore as against
Rs 39.36 crore that he is eligible as per the
shareholders' approval, reflecting his desire to set a
personal example for moderation in managerial
compensation levels," RIL has told its shareholders.
ET ranking: India's Top 100 CEOs
ET ranking: India's most powerful CEOs
The remuneration for 2009-10 fiscal to Mukesh
Most powerful women leaders Ambani, the country's richest person with a net
worth of $29 billion and fourth wealthiest in the world as per Forbes magazine, is still
higher than any other director of Reliance Industries.

But, all the existing executive directors of the company saw their pay packages
increase from the levels in 2008-09, as per the latest annual report to the shareholders.

PMS Prasad, who played a crucial role in RIL's legal battle with Anil Ambani group
and became executive director in August last year, saw his remuneration rise to Rs
1.53 crore.
The company's total managerial remuneration rose to Rs 40.90 crore in 2009-10, from
Rs 38.21 crore, while commission paid to non-executive directors fell from Rs 1.89
crore to Rs 1.75 crore.

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The payment to key management personnel included Rs 15 crore to Mukesh,

unchanged from Rs 15 crore in previous year, Rs 11.14 crore each to Nikhil Meswani
and Hital R Meswani (up from Rs 10.93 crore to each of them in 2008-09).

The remuneration paid to H S Kohli declined from Rs 1.35 crore to Rs 1.32 crore, but
he is no more associated with the company and resigned on May 16, 2010. The
remuneration rose from nil to Rs 77 lakh to another former director R Ravimohan,
who passed away on December 28, 2009.

The company has appointed Pawan Kumar Kapil as an additional director, following
Kohli's resignation, with Rs 50 lakh as salary and Rs 75 lakh towards perquisites and
allowances per annum.

At a time when there was a raging debate on right-sizing of CEO salaries, RIL
announced in October last year that Mukesh Ambani would take a pay cut as a result
of which his pay package dropped to Rs Rs 15 crore for 2008-09 fiscal from over Rs
44 crore in 2007-08. Mukesh Ambani was the top-paid executive in India during
2007-08.

Days before Ambani's decision, Corporate Affairs Minister Salman Khurshid had
advised the industry to shun "vulgar" salaries and Planning Commission Deputy
Chairman Montek Singh Ahluwalia had also agreed that there should be no "indecent"
compensation.

At that time, the company had also decided to adopt the capped structure method of
deciding executive compensation in RIL, instead of pegging it as a percentage of net
profit.

As per RIL's latest annual report, the company paid higher amounts to its key
managerial personnel in terms of salaries, perquisites and allowances, provident and
superannuation fund contributions and gratuity provisions, but cut down heavily on
commission payments.

The company paid total managerial salaries of Rs 7.42 crore in 2009-10, up from Rs
1.34 crore in previous year, perquisites and allowances of Rs 5.57 crore (up from Rs
1.66 crore), commissions of Rs 19.94 crore (down from Rs 34.23 crore).

Towards leave salary/encashments, RIL paid Rs 55 lakh (unchanged), contribution to

provident fund and superannuation fund of Rs 1.06 crore (up from Rs 36 lakh) and
gratuity provision of Rs 6.36 crore (up from Rs 7 lakh).

Mukesh's pay included Rs 4.16 crore as salary, Rs 60 lakh as perquisites and

allowances, Rs 5.60 crore of retiral benefits and Rs 4.64 crore as commission.