Dhirubhai Ambani and Reliance

7/29/2019 Dhirubhai Ambani and Reliance

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Dhirubhai Ambani and Reliance

(Case Study)

"Our dreams have to be bigger. Our ambition higher. Our commitment deeper. And our efforts

greater. This is my dream for Reliance and for India."

- Dhirubhai Ambani.

"The country has lost an iconic proof of what an ordinary Indian fired by the spirit

of enterprise and driven by determination, can achieve in his own lifetime. Not onlydid Ambani build a large and diversified business conglomerate but also inspired many

first generation entrepreneurs with his success."

- Atal Bihari Vajpayee, Prime Minister, Republic of India.

"Dhirubhai built an empire that is rock solid and he will always remain an icon."

- Kumar Mangalam Birla, Chairman, Aditya Vikram Birla Group.

The Death of an Icon

The 6th of July 2002 was a black day in the Indian corporate history. The Founder

and Chairman of the Reliance group of Industries (Reliance), Dhirajlal Hirachand Ambani

(Dhirubhai) died after a 13 day battle for survival. A perfect combination

of entrepreneurship and leadership, Dhirubhai transformed Reliance from a company

with a turnover of Rs 640 million in 1976, to one with a turnover of Rs 620 billion in

2002. Starting with a small textile mill in Naroda, in 1966, Dhirubhai took Reliance into

various areas like petrochemicals, polyester filament yarn, oil and gas exploration and

production, refining and marketing of petroleum, textiles, power, telecom services,

information management and financial services (Refer Exhibit I for Reliance Group

of Companies).Dhirubhai never followed the textbook style of management. Instead, he

evolved a unique style, which combined the American style of entrepreneurship, with the


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Japanese focus on the latest technology. And to this, he added the innate shrewdness of a

Gujarati businessman. Analysts feel that he was a perfect manager of time, money and

men and exhibited a passion to find solutions to problems. Dhirubhai started Reliance at

a time when most companies in India were owned by the government, and the private

players were given step-motherly treatment by the government while offering licenses and

permits. Similarly, when most Indian business houses depended on government owned

financial institutions for funds, Dhirubhai raised capital from the public by offering shares

of his companies

Dhirubhai was born on December 28, 1932, to Hirachand Govardhandas Ambani

and Jamunaben Hirachand Ambani. He was the middle of five children, three boys and twogirls(Refer Exhibit II for the Dhirubhai family tree). His father was a local school teacher in

a village called Chorwad in the Junagadh district of Gujarat. After his matriculation in 1949,

Dhirubhai left for Aden, (now in Yemen) at the young age of 17. His first job was to fill gas

and collect money at a Shell petrol station, earning Rs 300 a month. Within a few years, he

rose to the position of a sales manager (Refer Exhibit III for Chronology of Events) in the

same company. After working for eight years in Aden, Dhirubhai decided to come back to

India and start something on his own. On December 31, 1958, he came back to Mumbai and

started the Reliance Commercial Corporation (RCC) with a borrowed capital of Rs.15, 000.

RCC was mainly involved in exporting commodities like ginger, cardamom, pepper,

turmeric, and cashew nut. Using his connections in Aden, he exported a wide range

of commodities to Aden. Aden, being a free port attracted lot of exports. In the mid

1960s, the Government of India (GoI) introduced an export promotion scheme under which

the earnings from the export of rayon fabrics could be used for the import of nylon fiber.

This attracted Dhirubhai's attention and he decided to switch from spices to

textiles. In1966, he set up a spinning mill at Naroda 20 kms from Ahmedabad with

borrowed funds of Rs 2, 80,000 and registered it (Reliance Textile Industries) as a

powerloom unit with a paid up capital of Rs 150,000. Another program, the High Unit Value

Scheme introduced by the Govt. of India in 1971 gave tremendous boost to Reliance

textiles. The scheme allowed the import of polyester filament yarn against the export of


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nylon fabrics. RCC was benefited the most from this scheme and its exports constituted

more than60% of exports under this scheme. There were rumors that the scheme was

solely devised for Dhirubhai. Dhirubhai strongly denied the allegations saying that Reliance

cannot be blamed for taking advantage of the scheme 'when others kept their eyes shut.' He

said "I do not consider myself cleverer than my colleagues in the industry. If there was a

very large margin of profit, why did they not take advantage of it?" When the High Unit

Value scheme ended in 1978, Dhirubhai focused his attention on the domestic market.

During this time, Reliance Textiles was not a very well known name in the domestic

market. His first priority was to establish the Vimalbrand, under which Reliance Textiles

sold its fabrics in India. An advertising programme was launched to facilitate its entry into

the domestic market.

Dhirubhai knew that a strong brand image was crucial for winning the consumer's

confidence. To achieve this objective, Reliance tried to emphasize the superior quality of its

fabric in all its advertisements. Besides this, Dhirubhai also took steps to develop an

efficient distribution system for Vimalas he found that the existing marketing channels were

inadequate and inefficient. However, things were not that easy. When Reliance entered the

domestic market, it faced lot of resistance from the traditional cloth merchants, as their

loyalties lay with the older mills. Confronted with this situation, Dhirubhai decided to move

away from the traditional wholesale trade and open his showrooms to tap new markets. He

appointed several agents from non-textile backgrounds for the same. Dhirubhai adopted

the concept of company stores from its main competitor, Bombay Dyeing (Refer Exhibit IV),

and pursued it on a grand scale. Dhirubhai toured the entire country intensively, offering

franchises to shareholders.

Dhirubhai promised that Reliance would provide financial and advertising support.In his search for high volumes, Dhirubhai identified a new market - the non-metro urban

segment. By 1980, Reliance fabrics were available all over India through 20 company

owned retail outlets, over 1000 franchised outlets, and over 20,000 retail stores. To

strengthen his position further, Dhirubhai decided to integrate backwards and produce

fibers. He planned to set up a polyester filament yarn (PFY) manufacturing plant at


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Patalganga. Dhirubhai started work on the plant in 1981. He wanted to make it a world-

class plant equipped with the best machinery and having the best faculties. The technology

for the production of PFY was sourced from USA's Du Pont De Nemours. However,

Dhirubhai did not want to make Du Pont an equity partner. He felt that when technology

was easily available in the international markets, it was not necessary to enter into a 51

%equity partnership with a foreign company. In spite of the demand for PFY being 6000

tons per annum (TPA), Dhirubhai built a 10000tpa plant with a built-in expansion

provision of 15000 TPA.

Dhirubhai's biggest contribution to the nation was the development of an equity

culture. Having understood the psychology of the Indian capital markets and the mindset

of Indian investors, he was instrumental in introducing the equity culture in India.

Dhirubhai gave importance to the small investor and his contributions, and by doing so, he

involved millions of middle class investors. Reliance went public in 1977 and had its first

annual general meeting (AGM) in 1977. Reliance Industries had 58000 investors in

1977. So large was Reliance's investor base that at times executives had to go to small

cities, with the share certificates, annual reports and other such correspondence, as

personal luggage, and post them locally. Reliance holds the record for bringing out the

single largest domestic issue of more than Rs21 billion in convertible bonds for Reliance

Petroleum in 1993. The market capitalization of Reliance was Rs 1.2 billion in 1980, which

rose to Rs. 9.96 billion in 1990, and shot up to96.2 billion in 1995, making Dhirubhai one of

the richest men in the world. The end of the High Unit Value scheme of 1978 brought about

a dip in the profits of Reliance.

In spite of this, Dhirubhai declared a dividend of 27 %. Whenever Reliance needed

money to fund its expansion purposes, Dhirubhai opted for a public issue. From 1979 to1982, Reliance brought out several issues for different purposes like: financing a worsted

spinning mill, modernizing its already existing textile mill, financing a PFY plant, and

to overcome the bear syndicate crisis respectively. The 1979 issue of Reliance introduced

an innovative financial instrument, the partially convertible debentures. However

Dhirubhai found it difficult to get permission from the controller of special issues.


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Dhirubhai argued that this instrument would give investors a guaranteed return and

capital appreciation. He lobbied the government until it accepted the concept. This issue

was oversubscribed 6 times and soon convertible debentures (both partial and whole)

became instruments of choice.

The 1982 issue generated Rs 500 million. It was the biggest issue in those days.

In 1982, Dhirubhai faced threat from a Calcutta based bear syndicate. The bear syndicate

sold 1.1million Reliance shares worth Rs 160 million on March 18, 1982. This was all a part

of their short selling strategy wherein they planned to buy the same shares at a later stage

for cheaper rates, making considerable profits.

The Stock Market Adventure:

However, the bear syndicate seemed to have undermined Dhirubhai Ambani's

capabilities. When the bear syndicate sold Reliance's shares in bulk, Dhirubhai's loyal

brokers bought back all the shares, which led to an increase in the share price. The buying

took place for 3consecutive days and forced the scrip to go up. For the purpose, a new

company called the "Friends of Reliance Association" was registered because according

to the then Indian stock market regulations, a company could not buy back its shares. It

bought 857,000 shares out of the total 1.1 million shares sold by Reliance. After this

incident, Ambani was only waiting for an opportunity to take revenge on the bear

syndicate. The association which bought the shares, sought delivery on 30 April 1982, a

Friday.But as the bear syndicate did not have the shares it asked for more time, which the

association refused and demanded a Rs 50 badlacharge. The Bombay Stock Exchange had

to be closed down owing to the situation. The exchange authorities tried in vain to bring

about a compromise between the two parties. And then began the panic buying of Relianceshares and the share prices soared to an all time high. By May 10 th, the crisis ended.

Dhirubhai finally succeeded in taming the bulls.


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Corporate Battles of Dhirubhai Ambani:

Despite his unprecedented corporate velour, some corporate bigwigs considered

Ambani to be a manipulator. Critics accused him of using the "more than the usual" ways of

obtaining licenses, getting quick approvals for public issues and capital goods imports, and

of getting policies formulated in favor of Reliance. Dhirubhai and Reliance were accused

of manipulating tariffs to suit their needs and outsmart their rivals.He was considered to be a symbol of all that was wrong with the Indian economy.

It is said that Ambani used his connections with key politicians and bureaucrats to obtain

licenses and approvals for projects. He is also said to have induced government

intervention by offering bribes and using other forms of lobbying prevalent in the US.

Reliance was known to engage politicians, journalists, and others to increase its sphere of

influence. Some business men described Reliance as "an out of control monster, a bubble

that would burst any moment." However, not all analysts would agree to that. They felt

that Dhirubhai was quick to recognize and exploit opportunities. Dhirubhai believed that

"business is nothing but a web of relationships and obligations."Keeping this principle in

mind, Dhirubhai managed to create favorable centers in all the important areas among

the bureaucrats, the ruling politicians, as well as the media. These were the areas where

power vested.

Dhirubhai was of the opinion that business was not all about ethics and morality; it

was about expansion and success. His amazing ability to use the state and its policies to his

advantage was responsible for the expansion of Reliance. Be it licenses, foreign exchanges

or quotas, he always succeeded in making the best out of most difficult situations. However,

his immense success earned him a number of enemies. The fight between Nusli Wadia, theBombay Dyeing chief and Dhirubhai is well known in the Indian business circles. Both of

them were adept in using their business and political connections to suit their ends. During

the Janata Party rule (1977- 1979), Nusli Wadia obtained the permission to build a

60000 TPA di-methyl terephtalate (DMT) plant. However, before his letter of intent

could be converted into a license, the government changed and when the Congress


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government came to power, his license was being delayed (until 1981) with one pretext or

the other. This was the same time when Dhirubhai obtained license to build a PTA plant.

Dhirubhai was also contemplating on building a Paraxylene facility. All this infuriated Nusli

Wadia and marked the beginning of one of the major battles in the history of Indian

business which lasted for several years. In the 80s, Ramnath Goenka, (Goenka) the

proprietor of the Indian Express Group which was into news publication, had often tried to

act as a mediator and solve the conflict between the two corporate giants; but in vain.

Goenka backed Nusli Wadia. He considered the latter his son and at times, urged Dhirubhai

to bring the rivalry to an end.

Even though Dhirubhai promised to do so, he continued his fight with Wadia and

Goenka felt betrayed. Soon, Goenka turned against Dhirubhai and launched a series of press

campaigns against Reliance. Goenka always promised Dhirubhai that he would put an end

to the campaigns being held against him in the press. But the very next moment, he would

scheme another plot against him. The assaults did not stop even when Dhirubhai was

hospitalized after his first stroke in1986. Newspapers, magazines and weekend tabloids

continually attacked Dhirubhai. To counter these attacks, a few weeks later, Reliance issued

15 advertisements in leading newspapers of the country including the Indian Express. The

advertisements contained key statements like "concern for truth", "allegiance to ethics",

and "commitment to growth". Goenka formulated a fresh assault issuing a statement that

Reliance had smuggled extra machines into the country, and therefore had excess

built capacity. This resulted in a show cause notice from the customs, and a duty and

penalty claim of Rs.1.19 billion on Reliance. In spite of all these attacks, Dhirubhai never

failed to retain public confidence. Slowly, tables started turning against Goenka. In

September 1987, there was a nationwide raid on the Express group, and a number of cases

were filed against it. Dhirubhai was victorious for once. After Goenka's death in 1991, hisson, Vivek Goenka took over. But he did not see much sense in lobbying against Dhirubhai

and this brought to an end the big battle.


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Political Battles of Dhirubhai Ambani:

Dhirubhai maintained good relations with Mrs. Indira Gandhi and obtained several

licenses and permissions during her prime ministership. However, after her assassination

in 1984, her son Rajiv Gandhi became the prime minister, and things changed drastically. In

May1985, Vishwanath Pratap Singh (V. P. Singh), the Finance Minister in Rajiv Gandhi's

cabinet, decided to shift PTA imports from the open general license (OGL) category to the

limited permissible list.

This could be the beginning of a new problem for Reliance as it solely depended

upon PTA imports for its PFY plant. Dhirubhai sniffed the news about the imminent change

and moved very fast. Between May 27th

29th, he tied up with a host of banks, like the

Bombay branches of the Standard Chartered Bank, Socit Gnrale and the State Bank of

India, the Canara Bank and the Banque Indosuez to issue letters of credit for almost a year's

supply of PTA, which was approximately 60,000 tones. These banks issued LCs worth 1.1

billion.

The last LC was opened just a few hours before the government announced the

changed policy. The Finance Minister was not too happy with Dhirubhai and the result was

a 50 percent import duty on PTA. This further nullified Dhirubhai's gains. In June 1986,

Reliance was considering the conversion of its non-convertible debentures into convertible

ones for the second time. This would help improve the company's debt equity ratio, reduce

the outflow of interest, and increase the inflow of funds. But V P Singh was against it. But

once V.P Singh was transferred from the Finance Ministry to the Defence Ministry, the

conversion of the debentures into shares was permitted and the pending licenses were

cleared. October 1986 turned out to be quite favorable for Reliance. The debentureconversion move proved highly beneficial. A secret meeting between Dhirubhai and Rajiv

Gandhi seemed to trigger off a series of decisions in favour of Reliance. Some more pending

licenses were cleared. The customs levy of Rs 3 on each kilogram of PTA was abolished, and

the Patal Ganga complex was granted refinery status thus, enabling it to pay a low level of

excise duties for raw materials like naphtha.


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Reliance without Dhirubhai:

In 2002, the Reliance group with a turnover of Rs 620 billion, assets worth Rs

564.85billion, and a work force of over 85,000 people accounted for 5% of the Central

Government's total revenue. It contributed 3 % of India's GDP, 5 % of the total exports, and

9 % of the GoI's indirect tax revenues. Reliance also accounted for 25 % of India's total

private sector profits. Reliance secured nearly 10 % of the profits of the entire corporate

sector in India. Moreover, one out of every four investors was a shareholder of Reliance.

Reliance acquired IPCL, the Indian petrochemical giant. This acquisition gave Reliance a

sound footing in the global petrochemicals market. By 2004, it plans to take over more than

35 % of the global market. This would make Reliance the 11th largest polymer producer in

the world. With the amalgamation of RPL with RIL, Reliance became the only company in

the world to have fully integrated world scale operations in oil and gas exploration and

production, refining and marketing, petrochemicals, power and textiles.

Presently Reliance enjoys global ranking in all major businesses and its shares lead

the domestic market. According to the global Fortune 500 rankings, Reliance ranks

amongst the top 200 companies in terms of net profit, amongst the top 300 in terms of net

worth, amongst the top 425 in terms of total assets, and amongst the top 500 in terms of

sales.

Reliance Mobile, the new venture of Reliance provides cellular telephony services in

13Indian states, and Reliance Basic holds the license to provide fixed line telecom services

in the state of Gujarat. With the launch of Reliance Infocomm, Reliance has taken another

major step in its continuous search for growth and excellence. It was Dhirubhai's dream to

provide information technology and communication facilities to the common man, ataffordable prices. The Infocomm revolution will cover thousands of villages across the

country by 2003. Reliance Power intends to pursue opportunities in the power sector with

an objective to achieve over 10,000 MW in the next decade. With Reliance General

Insurance and Reliance Life Insurance, the group has also entered into the insurance sector.

Dhirubhai's entrepreneurial abilities enabled Reliance to progress on the roads to success


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both in the licensing era as well as in the era of liberalization, privatization and

globalization. He faced the toughest battles with the toughest of politicians and bureaucrats

and was eventually successful in gaining a victory over all his political and corporate rivals.

His business ideologies have been praised and are being emulated the world over (Refer

Exhibit VI, for Management Mantras of Dhirubhai and Exhibit VII for achievements of

Dhirubhai).Some skeptics believe that Reliance would no longer be the same after

Dhirubhai.

The extraordinary growth of the company was based on the vision, energy and

lobbying power of Dhirubhai as well as the willingness and ability of the Indian

government to promote its expansion. The competition now is with major multinational

players whose ability to influence governments in various ways is well known. Right from

the time he suffered his first stroke in 1986; Dhirubhai groomed his sons Mukesh and

Anil Ambani to take care of the day-to-day operations of Reliance. It was from Dhirubhai

that his sons imbibed the quality to think big. Mukesh's skills were quite evident from his

successful management of the Patalganga and Jamnagar projects and Anil was adept at the

finances. Despite their elite education, their most important training came from Dhirubhai.

He provided them with a strategic vision. His sons always considered themselves as co

builders rather than inheritors of Reliance. Dhirubhai's words way back in 1993 reflected

the immense confidence he restored in his sons, "Reliance can now run without me." After

his demise, Mukesh was appointed the Chairman and Managing Director of the Reliance

group while Anil became the Vice Chairman. It remains to be seen whether Reliance will

maintain its lead and growth over large multinationals in years to come.

Dhirubhai Ambani and Reliance

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