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January 5, 2006 4:21 pm

Sibling rivalry splits open the Reliance empire

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The demerger of Reliance Industries is entering the final straight with plans this month to launch and list four holding companies that will absorb units of the original group, and to re-rate the rump of what was India’s largest private company.

Central to the process will be a unique exercise in price discovery. At 8 am on January 18, two hours before trading normally begins, India’s two main markets will for 60 minutes trade only the demerged Reliance Industries stock.

The aim of the exercise, without precedent in any major global equities market, say analysts, is to determine a fair value for the rump Reliance Industries, which under the demerger retains its core refining and petrochemicals assets but loses two listed companies and a telecoms unit.

The exercise is also designed to avoid creating market upheaval – the old Reliance Industries is the largest single constituent of the Bombay Stock Exchange Sensitive Index of Top 30 shares.

The restructuring affects millions of small investors with direct exposure to the stock via mutual funds, and others with outstanding futures and options positions in India’s most widely owned company.

The re-rating will also have an impact on foreign funds, which in 2005 invested a record $10bn into the domestic share market powering a 40 per cent rise in the benchmark index in the year ending December.

Global funds that peg performance against an index may, for example, reduce their exposure to Reliance Industries if its index-weighting is lowered. Conversely, they may lift allocations for the listed demerged assets, notably for Infocomm, Reliance’s telecom unit, Infocomm, the country’s second largest mobile-services operator with 12m subscribers.

A lower weighting in domestic indices may also affect Reliance Industries’ position in indices such as the MSCI emerging markets free index, an influential tool used by foreign funds.

“Anyone with a position in India has an exposure to Reliance. We had concerns that the break-up would hurt minority shareholders but the price discovery process is being done responsibly,” says Jon Thorn, who manages Hong Kong-based India Capital Fund, which owns Reliance stock.

The new pricing for Reliance Industries, whose stock-price swelled 71.16 per cent in 2005, will also have an impact on derivatives trading, where Reliance contracts are among the top five traded stocks. In the past three weeks, investors have built up large positions for short-term gains.

The hope is that the volume-weighted average price achieved on January 18, the level at which Reliance Industries will re-enter normal trading, will lead to an adjustment in the pricing of forward contracts and bring them back into parity with the cash markets.

“The aim is achieve an unadulterated price, ensuring that the impact of demerger is appropriately reflected in the futures and options market. Otherwise, we’d have a cash market reflecting the demerged entity and an F/O market reflecting the pre-demerger Reliance – that would hurt investors who hold Reliance contracts,” says Ranganath Char, who heads regulatory affairs at of Enam Financial Consultants in Mumbai.

The complicated exercise is being undertaken as a result of differences between Mukesh and Anil Ambani, the brothers whose family controls Reliance.

Under the demerger, Reliance Industries will remain under the control of Mukesh Ambani with three main assets: the refining and petrochemicals unit; an exploration and production division; and an investment portfolio made up of treasury stock and a 46 per cent stake in IPCL, a privatised petrochemicals unit.

Anil Ambani takes control of Reliance Capital, Reliance Energy and Reliance Infocomm, which will be grouped under his newly-formed Anil Dhirubhai Ambani Enterprises umbrella.

As part of the restructuring, four new holding companies have been formed to facilitate the transfer of assets, via share swaps. The process will ensure Reliance Industries would cease to have a holding in any company belonging to ADAE.

Two of these companies will be listed, possibly in February, through a reverse merger with their corresponding operating companies in ADAE.

Under this process, Reliance Capital and Reliance Energy will merge with their holding companies, Reliance Capital Ventures and Reliance Energy Ventures.

Global Fuel Management Services, a minor gas trading unit of ADAE, will also be listed.

”The key to the value of the demerged basket lies in Infocomm,” says Enam Securities, which values the telecom company at $10bn, based on a comparison with market leader, Bharti Tele-Ventures.

Observers say the new companies, notably Infocomm, will be a significant addition to India’s modest basket of large blue-chip companies at a time when foreign investors are scrambling to grab such assets.

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