MODERN BROTHERS.
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An Old Tale of Two Modern Brothers
Once upon a time there was an ambitious young man named Mukesh Ambani who invested Rs 38,000 Crore to look for gas, deep on the ocean’s floor, off the turbulent coast of Andhra Pradesh. Some called him mad.
If ONGC, the government exploration company, had not found anything after wasting thousands of Crores of taxpayer’s money for decades, how could he risk his and his shareholder’s money in this reckless manner? What if nothing was found?
They did not know that Mukesh is one of life’s winners. Not only did he find the gas but the amount was beyond anyone’s wildest dreams. It was the biggest energy discovery in the world at the time. More impressive still, he has brought it into commercial production in half the normal time, thus, creating another world record. No wonder, he is a hero to millions. His breakthrough will reduce significantly the nation’s energy bill for importing oil and it reinforces our faith in private exploration. And there is still much more gas under the ocean floor, according to experts — Myanmar has also found gas at its end of the same ocean. Given the nation’s desperate need for energy, we must hurry and find it.
Mukesh Ambani has a younger, more flamboyant brother named Anil, who is also highly accomplished. But he has a different temperament — he loves glamour and power and cultivates politicians and film stars. In fact, he is married to one. All this does not go down well with his sober, older brother. After their father died, power passed on to Mukesh. Since he did not trust Anil, he ignored and marginalized him. Anil fought back. After a fearsome battle, their mother intervened and divided the business. We have a saying in India: “Haveli ki umar saath saal” which means the life of a business house is 60 years. After that the family splits up, usually in the third generation. But the Ambani brothers have split up in the second.
As part of the family division, Mukesh agreed to provide gas to a power plant which Anil intended to put up in Uttar Pradesh at a price of $2.34 per mmbtu. This was the price that Mukesh also agreed to supply NTPC, the mammoth government-owned power producer. Mukesh refuses to honour these contracts. He claims that the official price is $4.20, which is also closer to today’s market price (based on actual bids made in April 2007). The difference in the two prices is worth tens of thousands of Crores. So, a lot is at stake. Both the brothers, it seems to me, have a strong case, which is now before the Supreme Court, and i am glad i am not the judge.
Normally, a fight between two brothers should not matter to the nation. But it does in this case. The quantity of gas is so vast that it affects the nation’s finances. A lower energy price means lower inflation — it means a lower government subsidy to fertilizer and power plants. But a lower price also implies that the government will make a huge loss from its revenue sharing contract with Mukesh. Hence, the court has to bear in mind the interests of both the producers and the consumers of gas.
Whatever the outcome in the court, it is crucial that the image of India as a mature democracy with a rule of law is protected. Only then can we hope to attract investor-explorers in the future. They are all set to gamble vast sums without any certainty of finding the gas. They should at least have the comfort that they are dealing with a trustworthy government, which will not nationalize, nor change the rules of the game midway, and will uphold their contract. If the court judgement upholds the lower price, it will certainly dampen the spirits of investors. On the other hand, by upholding the prior contract between the brothers, the court will also send a positive signal to future investors that the rule of law prevails in India.
Investors are thus watching the government carefully. The state should not take sides in private conflicts. It should be neutral and fair. This is how trust is built. But last month Anil Ambani attacked Murli Deora, the petroleum minister, at the annual meeting of his company. He suggested that something smelled rotten — the government was favouring Mukesh. The suggestion of crony capitalism has shaken the confidence of investors. I cannot remember the last time when a businessman had the guts to publicly attack a cabinet minister. Businessmen have too much to lose — tax raids, denial of licenses and loans from public institutions. Why did Anil Ambani take this risk? Wait for the next episode.
