Anil blocked Infocomm share conversion

Demanded proper valuation exercise.

The fight between the Ambani brothers, Mukesh and Anil, over the Reliance Industries investment in Reliance Infocomm began in late 2003, with Anil protesting strongly about the price at which Mukesh proposed to convert RIL's preference share investment in Infocomm into equity.

His protests effectively blocked the conversion, which he argued were not in RIL's interest. The RIL board three months later reduced his financial powers.

In November or December of 2003, Mukesh Ambani (chairman of both RIL and Infocomm) proposed that the preference shares with a face value of a rupee be converted into equity shares at Rs 50 per share with a face value of a rupee.

Four months later, in April, he raised this price to Rs 96.20 per share "" at exactly the time when Mukesh's own sweat equity was being issued at a rupee a share.

Thus, RIL was to pay Rs 8,100 crore for equity shares with a face value of Rs 84 crore, while in the same month its chairman would get equity of Rs 50 crore at par "" which the RIL board was not aware of.

The RIL conversion, if it had happened, would have taken its beneficial holding in Infocomm from 36 per cent to about 46 per cent of the increased capital "" ie, less than the majority, although it would have funded about 90 per cent of Infocomm's investment, provided financial guarantees and taken on much of the responsibility for even running the business.

Anil Ambani as a member of the RIL board, protested strongly at the conversion that was proposed, according to company sources. He demanded to know who had done any independent valuation of Reliance Infocomm in order to arrive at the proposed conversion price.

Anil also asked why the earlier conversion at Rs 50 per share had not gone through, and why a much higher conversion price was now proposed.

A senior Reliance group official, who is close to Mukesh Ambani, contested that Anil Ambani had blocked the conversion of preference shares.

He said: "Corporate procedures normally followed in such cases of conversion are that the company (here, Reliance Industries) appoints a valuer to fix the price of conversion. Nothing of that sort has happened." The official also said the conversion price was neither fixed at Rs 50 nor at Rs 96.20.

According to company law and normal practice, all investment decisions by a company have to be taken unanimously by its board of directors.

In the face of Anil Ambani's protests, the conversion of the preference shares held by RIL in Infocomm could not be converted into equity and may not even have been taken formally to the board for its consideration.

Company sources say that Anil Ambani also raised a series of questions regarding Infocomm, specifically who were its other shareholders, and the prices and other terms at which they had invested in Infocomm. It is reliably understood that he was given no answers.

However, three months after he raised these questions, the Reliance board decided to invest Mukesh with full financial powers and made Anil a member of a new investment committee, thus effectively reducing Anil's role in investment decisions.

One argument for changing the conversion price between December and April would be that the government had taken a series of decisions that helped Infocomm get around the controversies surrounding its business plans, and it managed to get a unified licence for its operations.

However, the conversion price even in November-December would have valued Infocomm at about Rs 20,000 crore. By April, that valuation had climbed to about Rs 40,000 crore.

At that valuation, Mukesh's exercise of his sweat equity option gave him shares valued at about Rs 4800 crore by paying Rs 50 crore to get 12 per cent of the company.