Sunday, January 4, 2009

Why rely on Reliance?

The proposed Satyam-Maytas take over deal had recently brought the issue of corporate governance to the forefront. Shareholder resistance eventually aborted the deal. Otherwise a huge amount of cash from Satyam's coffer would have been transferred to the two debt-ridden Maytas companies, headed by the sons of Satyam Chairman Ramalinga Raju.

But Raju is a minor leaguer compared to the biggest flouter of all corporate governance norms - the Ambanis.  Many may think that I am a heretic, trying to run down the group that practically invented equity consciousness among Indian investors by selling company shares to the public at large.

Don't get me wrong. I have the greatest admiration for the late Dhirubhai - for his grand vision, foresight and sheer chutzpah that has made Reliance Industries the largest Indian private sector company by market capitalisation.

What a way to do it though! I won't get into how Dhirubhai learned the ropes of the synthetic yarn and petrochemicals businesses during his sojourn in Aden, and turned a textile trading business into the huge conglomerate that the Reliance group has become.

Neither do I want to discuss the veracity of the way he bent all the rules in the book by getting licences and clearances from various ministries through bribery and coercion that benefited the Reliance group at the cost of competitors.

But I still vividly remember the twin share issues of Reliance Polyethylene and Reliance Polypropylene back in the early 1990s. Huge snaking lines stretching for several hundred metres formed in front of banks accepting the IPO applications.

The prospectus had mentioned that neither company had acquired even the land for the projects, let alone any plant and machinery. Needless to say, a few years later both companies 'disappeared', sorry, merged with the parent group. Probably after all the tax breaks that could possibly be claimed had been claimed. To read more about how Companies Act rules were bent, read page 9 of this link.

Then there was the famous UTI deal. After alloting to themselves debentures convertible to shares at around Rs 150 per share - in a highly irregular deal - the Ambanis allotted the same debentures to UTI at convertible price of Rs 400 per share.

This deal caused huge controversy and eventually led to the ouster of UTI's chairman Mr Pherwani and the collapse of the first and most popular mutual fund of India, the US 64 scheme, that caused large losses to small investors. More details are available here and in this Sucheta Dalal column.

Worst of all is the case of Reliance Petroleum. Shares were first issued in 1993 with a promise of project completion within 36 months. The project was completed in 36 months - but in 1999. Absolutely nothing was done between 1993 and 1996 - other than enjoy the shareholders' cash! Two years later, RPL was merged with RIL after promising that the two companies will remain separate. Read why here.

Fast forward to 2006. There was another Reliance Petroleum share issue! How SEBI permitted this is beyond me. Read what the Hindu Business Line wrote about it here.

Now that the RPL Part II saga is coming to an end, is everything hunky-dory again for RIL? Isn't the current price attractive for entering this counter?

Far from it. Read this article in DNA Money. The next financial year, i.e. 2009-10 will be much worse for RIL. So, if I were you, I would stay away from any investment in RIL.

Personally, I stay away from any stock which has the word 'Reliance' in it. The Ambanis are just not trustworthy enough - not for my money any way.


Aks Seth said...

Nice post. Happy to meet someone on the net who also does not invest in Reliance. I do not invest in anything that has the Reliance and ICICI name.

LOL :)

-Aks Seth

Subhankar said...

Thanks, Aks.

I don't own ICICI either, but have a small stake in 3i Infotech as it has significant products business unlike most of the software biggies.

Alkesh said...

Nice Post, with lots of information

Forget about common man, so called MF managers are holding reliance. what about ppl investing MF?
The less you know is better, Otherwise tere is no good company which is growing at half rate of reliance. whatever grows faster, has wrong reasons.
I hope Infosys is not same.

Subhankar said...

Thanks Alkesh.

In terms of transparency of operations, Infy and Reliance are poles apart. Just goes to show that it takes all kinds to make the world, and size does matter!

Fund managers are constrained by the necessity to show short-term results. If they shun Reliance - the biggest private sector company - and their fund doesn't perform, they'll lose their job. If the fund does OK, but Reliance doesn't, no one will blame them.

Din said...

The third rule of investing in Stock Market. "Say No to Reliance"




Subhankar said...

Looks like both brothers have reached their respective levels of incompetency, Dinu.