Reliance Industries DBG

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Kannan Ramaswamy Ramaswamy

Reliance Industries: Indu stries: An Indian Family Family Business Comes of Age in Global Energy and Petrochemicals Reliance Relianc e provokes extreme reactions in India. Either you are pro-Reliance pro-Relian ce or anti-Reliance. anti-Rel iance. There is nothing in between. To many, God is a poor second cousin to Dhirubhai Ambani, the chairman of Reliance Industries Ltd (RIL). To others, the Ambanis typify the seamy side of big business: fxing import quotas, pre-empting licences, and switching share certifcates. Amidst such extremes, public drama, recrimination, recriminat ion, and bitter controversies, controver sies, RIL has built up huge capacities at extremely competitive costs and become a force to reckon with in petrochemicals. Shivanand Kanavi, “Playing to Win,” Win,” Business Business India July 14-27, 1997. ,

Mukesh Ambani, Chairman and Managing Director of Reliance Industries Limited (RIL), had much to be proud of after announcing the quarterly financial results of RIL in July 2011. The company had beaten market expectations and posted its best-ever quarter, riding the wave of resurgent refining margins. The newly commissioned Jamnagar 2 complex that made RIL the world’s world’s largest refiner (using a measure measure of both volume and complexity) had started to pay rich dividends. In unveiling the results for the year earlier, Mukesh had declared his intent to double the value of RIL from $80 billion to $160 billion by 2020, no mean feat for an Indian company that until recently was largely unknown outside India. (Exhibits 1 and 2 provide a financial snapshot of RIL, and Exhibit 3 offers comparisons with industry performance benchmarks.) RIL accounted for close to 15% of India’ India’s exports and 6% of overall market capitalization in the country. It was the single most widely held company in the country with an extraordinary track record of doubling profit every three years through most of its history. It was the world’s largest producer of polyester fiber and yarn. It accounted for 25% of the world’s most complex refining capacity, and had become the largest global producer of clean fuels in a single location. In some ways, these were also the worst of times for the leaders of RIL. In July 2011, the Central Bureau of Investigation (CBI) reported that RIL was among a group of six firms allegedly involved in a scheme that set out to bribe the Director General of Hydrocarbons (DGH), a government-appointed officer responsible for managing India’ India’s hydrocarbon resources. It was believed that, in return, the office of the DGH had approved a near quadrupling of RIL R IL’’s capital expenditure at its D6 block in the K-G basin from $2.3 billion to $8.8 billion, thus setting back the government’s government’s claim on royalties and profits by several years. 1 Despite the stellar performance of RIL in the first quarter of 2011, the markets declared that the numbers did not provide any indication that the company had sorted out its production problems in its D-6 field (K-G basin offshore), its primary resource basin. RIL shares closed down 6.6% over the week after it announced its stellar earnings results. In late July, a Canadian investment banking company released a report titled “Brothers in Arms: Misappropriating a Fortune” Fortune”2 about how the two Ambani brothers had colluded to defraud stockholders, an allegation that was incendiary and raised the ugly specter of the filial battles that had decimated the company in 2005/06.

Reliance Industries: The Genesis Reliance was the creation of a visionary entrepreneur, Dhirubhai Ambani. A man of very humble beginnings from India’s India’s western state of Gujarat, Ambani grew up in a household of four children. His father was a schoolCopyright © 2012 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor Kannan Ramaswamy for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

This document is authorized for use only in Dr. Lilac Nachum's Doing Business in a Global World - 12192016 course at School of Inspired Leadership, from December 2016 t o June 2017.

teacher at the local village school. In his late teens, Dhirubhai left India for Aden in search of a job, following in the footsteps of his elder brother, who had found work in the British Crown Colony in Yemen. He found an opening as a clerk at an affiliate of Burmah Shell and moved through several jobs, including station attendant, dispatch clerk, and manager of its petroleum filling station in Aden. His stay in Aden primed him for a career in trading. Given Aden’s prominence as an entrepôt port, Ambani had ample exposure to the realities of trading profits and the dynamics of intermediary markets. He had leveraged many such ventures, ranging from buying Yemeni rials that were minted in silver and melting them down into ingots for sale to London bullion traders, to trading commodities such as rice. In late 1958, Dhirubhai uprooted his young family from Aden and established a foothold on the urban fringes of Bombay. He set up a general trading company called Reliance Commercial Corporation with a meager capital of Rs.15,000 (approximately $3,150 in 1960), that, too, borrowed. Parlaying his connections in Aden, mostly friends and relatives, the company traded commodities ranging from spices to sugar and everything in between. Reliance switched its attention from spices to yarn trading on the heels of a change in government policy in the early 1960s. The government announced a new scheme under which yarn traders who exported rayon fabric would be allowed to import nylon fiber under very favorable terms. Soon, Dhirubhai found himself pounding the streets of Bombay selling synthetic yarn to textile manufacturers. Realizing that he had very little to differentiate himself from other yarn traders, he embarked on a vertical integration strategy and managed to borrow a modest sum of Rs. 280,000 (approximately $44,000 at the time) to establish a new spinning mill at Naroda in Gujarat. In commenting on his motivations for launching the spinning mill venture, Dhirubhai observed, “My desire was motivated by the fact that we were not able to produce and supply a quality fabric to the export market. If I had a ready product, then I would not be at the mercy of other units in the industry, and I could ensure the quality of products myself.”3 The focus on quality and the desire for control of the value chain were only two of the early drivers of Reliance’s strategy. Dhirubhai was already distinguishing himself in key operational areas. For example, the new spinning mill that Reliance built was roughly one-tenth the cost of a similar mill that was acquired by Reliance competitor Aditya Birla Group. In short order, Reliance Commercial Corporation changed its name to Reliance Textile Industries, and in its very first year, it employed 70 workers and generated sales of Rs. 90 million (roughly $12 million) and a profit of Rs. 1.3 million (roughly $175,000). When the company went public in 1977, it had racked up sales of Rs. 700 million (roughly $80 million) and profits of Rs. 43.3 million (roughly $5 million). This initial foray into spinning provided the opening for Reliance to enter the manufacture of synthetic yarn fabrics based on polyester filament yarn (PFY) and polyester staple fiber (PSF). Like many of its initial integration attempts, this one was also born from changes in government policy that presented new oppor tunities. The government had announced a new scheme under which companies that exported synthetic fabrics would be allowed preferential imports of PFY and PSF. Reliance had consistently reinvested its earnings to modernize its mills over the years. It had an unwavering focus on adopting the best technology at the quickest pace possible. A World Bank team that visited Indian mills in the early 1970s singled out Reliance as the only spinning mill that warranted the stamp of excellence based on developed country standards. Despite its public ownership, Reliance seldom declared dividends, preferring to grow its business instead. The investments were targeted at two key drivers; namely, capacity increases and technology acquisition. Indu Sheth, a former manager at Reliance during the growth years, observed, “Our expansion was dictated by the exigencies of the export markets. When there was a very high demand in the international market for texturized and crimped fabrics, we decided to import texturizing machinery. The import entitlements that we were permitted against exports enabled us to import the most sophisticated and latest technology from abroad.”4 With constant augmentation of manufacturing capacity fuelled by export demand, Reliance accounted for over 70% of all synthetic fabric exports during the period when export incentives were in place for such a strategy. Sales had doubled every two years for the entire decade from 1970 to 1980, no mean feat for a newcomer. Reliance was, however, not ready to rest on its laurels. Dhirubhai observed, “Once I had successfully put up a textile mill, I decided I must have a world-scale, fully integrated plant. All I wanted was to be competitive with countries like Japan, Taiwan, Korea.”5 The evolution to global scale required bold moves heretofore unseen by competitors in India, and marked a quantum leap in terms of Reliance’s growth trajectory. 2

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Patalganga—The Next Step in Vertical Integration By 1980, demand for polyester fabrics had far exceeded expectations. Consequently, the demand for raw material, polyester filament yarn, also skyrocketed. Given the capacity constraints for manufacturing PFY, the government opened the doors to private competition. Reliance was in a pool of 48 other companies that applied for manufacturing licenses. Most of the companies were accomplished heavyweights, but when the dust settled, Reliance was one of the few granted a license. Industry watchers were stunned that a relative newcomer had won a license when established players were left out in the cold. Reminiscing about the success of Reliance in later years, Dhirubhai remarked, “Between my past, the present, and the future, there is one common factor: relationship and trust. This is the foundation of our growth.” The ability to nurture relationships at all levels of government was indeed a very crucial source of competitive advantage that Dhirubhai had carefully nourished. He observed, “The most important external environment is the government of India. Selling the idea is the most important thing, and for that I’d meet anybody in the government. I am willing to salaam6 anyone. One thing you won’t find in me is ego.” He frequently highlighted his humble beginnings and went out of his way to build connections with low-paid civil servants and clerks. This sense of modesty endeared him to very powerful sources of power, ranging all the way to ministers and industry leaders. It was widely believed that Reliance, through its informal social network within key government departments, was often privy to policy deliberations even ahead of the press. Reliance chose Patalganga, a sleepy little village in the state of Maharashtra in western India, for its PFY venture. The land acquired by Reliance for the project was about 20 times larger than what the actual plant required. Dhirubhai’s vision called for the most modern technology available so that the cost per unit of production could be globally competitive. Speaking of his conviction regarding Reliance’s ability to compete on the world stage, Dhirubhai observed, “I was a major buyer of this product all over the world, and I was observing what was going on—not only with producers in India, but also abroad. I went to a major company in the West and saw how inefficient they were. People were not working, were having long lunch hours. The bosses, too, were not committed, and the cost of all these inefficiencies was loaded on to the product and was being passed on to me. I knew we could manage the business a lot better, make more money than them, and yet supply better and cheaper products to our mills.”7 The manufacture of polyester was a complicated process involving either PTA (purified terepthalic acid) or DMT (dimethyl terepthalate) as base feedstock reacted with MEG (monoethylene glycol). Reliance was not favorably disposed toward entering into a joint venture to secure the needed technology, and instead approached DuPont, the chemical giant in the U.S., for the acquisition of the technology. “Technology is available for the asking in the international bazaar, so why do I need to make a foreign company my partner and give them 51%?” asked Dhirubhai.8 He relied on his son, Mukesh Ambani, a chemical engineer by training, to head up the execution team. Mukesh, 24 years old at the time, was asked to discontinue his MBA studies at Stanford and return home to supervise the Patalganga project. Mukesh had to learn very quickly since he had hardly any hands-on experience despite his degree in chemical engineering. He had some support from established and experienced managers within the company, but the core team was quite small to begin with. Insisting on adopting professional standards, he ensured that every new recruit was professionally qualified, experienced, and vetted professionally as well. He abhorred India’s obsession with bureaucratic systems and structures and sought to infuse more U.S.-centric thinking in terms of day-to-day management. He insisted on face-to-face communications and meetings within the project team, and this dictate covered all contractors as well. In a remarkable departure from customary practice, Mukesh did not always vote in favor of awarding contracts to companies that bid the lowest. In many instances the winning bids were two or three times the cost of the lowest bids. Instead, they were primarily chosen on the basis of their execution records. Time was deemed far more precious, and Reliance wanted to execute the project ahead of schedule. The Patalganga project was completed in 18 months and was producing PFY in 1982. This was indeed a major accomplishment. Richard Chinman, the International Business Director of DuPont at that time, remarked that it would have taken at least 26 months for the same project to go on line in any developed country.

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The rapid pace of execution had its roots in two emerging areas of project discipline that Reliance considered its forte—the ability to quantify the tasks involved in a complex project, and the ability to command massive resources to ensure that the tasks were saturated with resources. K. K. Malhotra, then head of manufacturing, observed, “We put in the largest amount of resources that the task can absorb, without people tripping over each other. If I had all the time in the world, I would optimize. But, given my opportunity cost of lost production, it almost does not matter how much it costs, because if I can get the production going earlier, I always come out ahead. Only when you put the value of time in the equation do you get sound economics, and then saturation almost always makes sense.”9

From PFY to PTA: The Next Steps in the Chain The logical next step in the chain was to manufacture PTA, a key input raw material in the production of polyester. Since local capacity was inadequate, India had to import a significant amount of the material. In setting up a plant for manufacturing PTA, Reliance sought to not only supply its internal demand, but also fill orders for its competitors who were engaged in producing polyester. These vertical integration strategies, however, called for enormous capital outlays. Dhirubhai was fuelled by his own vision of an integrated empire, coupled with some very real tax benefits. Reliance had always been a zero tax company, and had managed to plow back all its earnings into capital projects that could be used for tax credits. Although the government changed tax laws in 1983 to ensure that all companies paid taxes on at least 30% of their profits, Reliance changed its accounting practice to soften this impact. It began to capitalize interest on its long-term debt for the entire period of the contracted debt, thus negating the tax impact. It had raised enormous sums of money through the equity market and had pushed the envelope with respect to innovation with financial instruments. For example, it issued nonconvertible debentures (a long-term bond) that it then asserted it could convert into shares, despite the blatant disparity in the underlying principles governing these instruments. It was able to convince the Ministry of Finance, which approved this surprising scheme. Reliance came out ahead on this scheme because its interest costs were roughly 13.5%, and even the most generous dividend on its equity shares was very small compared to the debt servicing costs it would have incurred. It later became a key vehicle for raising additional capital at Reliance. Much of this new financing approach could be traced to Mukesh’s younger brother Anil, who had joined the company as Co-CEO (along with Mukesh) after completing his MBA at Wharton. In late 1985, Reliance found itself mired in several controversies and scandals, execution setbacks, and a general wave of bad news. It found itself embroiled in a “loan-for-shares” scandal. National banks were accused of colluding with RIL by lending it money against hypothecation of its nonconvertible debentures. The loans were made out to firms that were alleged to be front companies for RIL. Although it was not illegal for banks to loan money against shares, the appearance of impropriety was enough to fuel a witch-hunt. The loans were ostensibly advanced under the implicit premise that RIL would once again tread the well-worn path by converting its “nonconvertible” debentures into shares. The government struck down this ploy and started an investigation of the banks, which resulted in the Reserve Bank of India recalling the loans that had been made to the company under the scheme. Meanwhile, the PTA plant was plagued with problems and was one year behind schedule—a rare blemish on RIL’s execution record. In early 1986, Dhirubhai Ambani suffered a stroke and was partially paralyzed. As a result of all these setbacks, RIL saw its operating profits fall by 80% between 1985 and 1986. In December 1986, with their backs against the wall, RIL leaders pushed ahead to seek new sources of capital now that the government was no longer willing to accede to the innovative schemes that RIL had been able to get by in the past. In a remarkable move, the company decided to go to the capital market with a convertible offering, widely seen as a referendum on the company. The offer, valued at Rs. 5 billion (US$400 million) was oversubscribed seven times and set a record for new issues in India. The PTA plant was commissioned in 1987.

From Chemicals to Oil Refining and Beyond: The Decade of the 1990s The dawn of the 1990s heralded the ascent of the Ambani brothers to the helm of Reliance Industries. The brothers did not waste any time in accelerating the growth that their father had established. In 1993, Reliance came out with India’s biggest IPO, valued roughly at $270 million at that time. That very year, the company 4

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was listed on the Luxembourg exchange as a GDR (Global Depository Receipt), thus becoming one of the first Indian companies to secure capital beyond the country’s borders. The Reliance empire began to expand in multiple directions with new plants coming up in Hazira, Patalganga, and Jamnagar. Much of the backward integration along the polyester filament yarn-textile chain was accomplished in Patalganga through new capabilities to manufacture LAB (linear alkyl benzene) and paraxylene, an input for manufacturing PTA. In 1992, a new complex for manufacturing monoethylene glycol, polyvinyl chloride, ethylene oxide, and subsequently high-density polyethylene was established in Hazira. This plant was the product of very careful planning and forecasting of the global price environments for feedstock and end products. The complex was designed with flexibility in mind. It was capable of switching from manufacturing HDPE to LLDPE on very short notice, while allowing multiple feedstock such as LNG, naphtha, or gas liquids, thus giving it a versatile range of options to suit prevailing fuel price conditions. The goal was to be able to respond to market changes very quickly. Exhibits 4 and 5 provide a comprehensive picture of RIL’s vertical integration strategies. In 1997, when the government of India concluded that it did not have the necessary funds to invest in meeting India’s energy needs, Reliance announced plans to build India’s most modern petroleum refining plant in Jamnagar in the state of Gujarat. Built in a record time of three years, the refinery was established at a cost of $6 billion and came on line in 1999. Spread over 5,000 acres, the complex included the refinery, plans for petrochemicals facilities, power generation plants, India’s largest private port, and the world’s second largest oil port. In one fell swoop, RIL had set in motion a carefully crafted strategy for competing to win in the energy business. Comprising two trains and a Nelson complexity index 10 of 11.3, the refinery could handle heavy crudes that typically sold at a discount, thus allowing for better refining margins. Hital Meswani, Reliance Executive Director and Ambani cousin, observed, “[Our] strategy was scoffed at in some circles because refineries had an historic return on capital of only 6% to 8%, while cost of capital at the time was 12%. We chose to swim against the tide. As the process was unfolding, it was obvious we had to depend on productivity and efficiency to get adequate return and market confidence.” 11 The refinery was capable of processing 80 varieties of crude oil, allowing it the flexibility to determine its input slate. “With a push of the button, if gasoline shoots up in price, we can go back and make gasoline. We created an elephant that would not only dance, it would fly.”12 By 2000, Reliance commissioned the petrochemicals facilities that included the world’s largest polyester plant (capacity of 1.4 million tpa) and a polypropylene plant (0.6 million tpa). The integration across the refinery and its petrochemicals complex was indeed the envy of its competitors. Although many other companies and investment consortia announced plans to set up competing refining plants, most did not reach fruition. For example, the joint venture between Hindustan Petroleum and ExxonMobil for setting up a refinery in Punjab fell through in 1999 when ExxonMobil pulled out of the venture. 13 The company felt that the plant would be unviable in light of the Reliance refinery at Jamnagar. The complex at Jamnagar reflected the foresight of RIL’s management and synthesized the critical lessons learned from operations in the petrochemicals end at Patalganga. Right from conception, Reliance focused on integration as a key advantage. For example, the contracts for the entire technology package for the first phase were awarded to Universal Oil Products (UOP), a Honeywell company. When asked why such a decision was made, Mukesh Ambani observed, “Large benefits are going to come from clever feed stock and heat integration. That can only happen when the right hand knows what the left hand is doing.” 14 This design thinking really paid off because every output from the complex, both end products and intermediates, could be used as either feedstock for higher value added petrochemicals or as fuel to generate heat that could be used in other parts of the process. Estimates at the time indicated that no more than 0.2% of the outputs from the refinery would be wasted, an astounding feat given the 5% global average for refineries. Global EPC powerhouse Bechtel and several leading Indian contractors executed the project flawlessly. The plant was completed well ahead of the time estimates that had been established. By 2004, Reliance topped the charts in terms of best operating costs, manpower cost, maintenance cost, and plant utilization in Shell’s benchmarking survey. 15 That same year, Platts, an industry-benchmarking group, voted Reliance as the top petrochemicals company globally. Despite the outstanding successes that the company TB0303

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had achieved, there was no denying the big price that Mukesh had to pay personally for the achievement. His relationship with his brother had been on the rocks since 2002 due to disputes over ownership and control of RIL’s future.

The Challenges of Family Ownership and Control Dhirubhai Ambani passed away after a prolonged illness in July 2002. He had infused his sons with the entrepreneurial fire and drive to take the organization forward. At the time of his death, Reliance was set up as an organization with two major lines of activity; namely, telecommunications and petrochemicals. Typical of any other family-controlled business group, the company had several unrelated appendages ranging from advertising and media to retail. With a turnover of roughly $14 billion and assets of $13 billion, the company was already among India’s largest. It was probably the country’s most widely held as well with over 3.5 million stockholders, of which a substantial chunk represented individual retail investors. Unfortunately, despite the size of the organization and its nontrivial impact on the Indian economy, the founder Dhirubhai did not leave behind a will setting forth a process to handle the transfer of ownership and control of the company. Mukesh Ambani assured the investing public that he would take charge as the Chairman and Managing Director of the company, while his brother Anil would serve as Vice Chairman and Managing Director. The daughters, Nina and Deepti, who had married into large business families themselves, did not assume any operational role at the company. A spokesperson for Mukesh at that time observed, “When the king is alive, there are two princes. When the king dies, one of the princes becomes king and the other stays a prince. Anil has to accept this. That is the only issue.”16 Anil, the younger of the two brothers, had a Wharton education, coupled with a fairly long stint in finance and public relations at Reliance. He was responsible for leading the company in several financial innovations ranging from issuing global depositary receipts (a first for an Indian firm) to a 100-year Yankee bond and several convertible instruments in between. He had largely been the front-end of the company, often appearing in the business press and in society circles. He had married a film actress, a match that was frowned upon by the family, including his parents and brother. Thus, while Mukesh presented a unified front to the public, there seemed to have been some hot spots in the relationship between the brothers. By November 2004, the divisions between the brothers came into focus in a CNBC interview when Mukesh mentioned that there were some “ownership issues” that had surfaced between himself and Anil. There were subsequent allegations from the rival camps, ranging from blatant disregard for company law with respect to board decisions, to subterfuge, spying, and much more. Each camp had its own high-powered media relations group and fierce loyalists from the extended family that included many cousins, nephews. It was reported that in July 2004, Mukesh had called for a meeting of the Board, where he succeeded in passing a resolution abridging the powers of his brother, even though his brother was present at that same meeting. (See Exhibit 6 for an e-mail exchange between the brothers relating to this event.) By July 2005, the rancor had worsened into petty fighting and finger pointing. Reliance shares plummeted, given the uncertainty about the succession plans, especially with Anil openly contesting his brother’s position as the head of the company. Anil had sent a 500-page note on the lack of transparency and adequate corporate governance mechanisms to the board. He had become a member of the Rajya Sabha (the Upper House in the Indian parliamentary system) and was hoping to use some of his political muscle to hammer out a deal with his brother. The corporate holding structure of the company gave Mukesh an inside advantage. Although the Ambani family controlled over 45% of the shares, individual family members held very little of the company. Close to 34% of the shares were held using an arrangement known in Indian legal parlance as “persons acting in concert,” a unique holding structure permitted by the Indian Companies Act. In reality, this holding was funneled through a mysterious web of over 400 individual firms, most of which were beholden to Mukesh as the Chairman of the Board and family scion. He also held sway over 6% held as GDRs (Global Depositary Receipts), and an additional 3% representing his individual holdings. In effect, he had enough votes to silence Anil if he so desired.

“When elephants fight, it is the grass that suffers.” (Kikuyu Proverb) The common shareholders, three million strong, were left to bear the brunt of the feud between the brothers. One analyst observed, “With three million investors, a family feud in Reliance concerns more than the Ambanis. Indeed, when the fraternal dispute became public in November, Reliance lost nearly half a billion dollars in market 6

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capitalization.”17 The feud had raised concerns at the highest levels including the office of the Prime Minister of the country. It was feared that the battle could dampen the flow of foreign investments, incite worker violence, and damage shareholder rights of a sizable population of stockholders. Legal recourse was out of the question because India’s archaic court system was overburdened with cases with little prospect of quick judgments. The brothers proposed that they will seek the help of their mother in fashioning a suitable solution to the impasse and that they would accept her solution as binding. Ms. Kokilaben, the mother, decided to create two separate but equal business domains and suggested that the holdings be split 30/30/30/5/5. The mother and two brothers got 30% each and the daughters 5% each. The flagship company Reliance Industries Ltd. was to be controlled by Mukesh. It included almost the entire petrochemicals business and the budding oil and gas investments. Anil got three pieces of the empire; namely, Reliance Infocom, the telecommunications company; Reliance Capital; and Reliance Energy, a company that was involved in generation and distribution of electricity. The brothers also agreed to a noncompete agreement undertaking that they would not enter each other’s business domains. The markets welcomed the news of the settlement but did so disproportionately by giving a bigger boost to companies that fell under the purview of the younger brother, Anil. See Exhibits 7 and 8 for historical data on RIL shareholding and membership of the Board of Directors.

Mukesh Ambani: Business and Management Philosophy Widely viewed as a change-maker at Reliance, Mukesh made his mark very early in RIL’s history. When he returned from the U.S. to assist his father with the petrochemicals plant in Patalganga, he proceeded to dismantle the feudal style of management that was pervasive at the company. “Experts came in with their notebooks on which they had written down all the process conditions, temperatures, pressures, and carried these readings back with them. It was all a feudal style. If we had accepted that style, we would not have grown. It was simply not a scalable model. We tried to create an open environment. In today’s language, we created SOPs and SOCs (Standard Operating Procedures, and Standard Operating Conditions) so that everybody was on the same page. We wanted an organization where everybody contributes.” 18 However, despite the sweeping changes he introduced to professionalize the ranks of the company, the closest confidantes and trusted lieutenants continued to come from the family and from a small circle of long-standing friends; for example, cousins and some of his undergraduate classmates. Mukesh, like his father, believed in the power of scale as a competitive weapon. He had always favored large-scale facilities, most of them exceeding total installed capacity in India, and at times even exceeding pro jected home demand. This had bred a culture that was outward focused, relying on global markets rather than sheltered markets at home. “We were clear that we had to be internationally competitive and were passionate about building competencies that were the best in the world, even when the tariffs were very high. It was an obsession with me to beat the Taiwanese and the Koreans who dominated the polyester business in the 1970s.” 19 This thinking had led Reliance to build facilities that were among the largest in the world in many product lines such as polyester. Reliance had always favored buying the best technology available at any cost instead of economizing for subpar technologies or partial solutions like many of its competitors had attempted to do. For example, when its competitors were negotiating with DuPont for technology licenses in the range of $0.5 to $1 million, Reliance stepped in and offered $5 million because they felt it would be worth the op portunity to work with the best company in that field globally. Once the deals were signed, Mukesh made sure that the project had many young engineers assigned to it because the intent was to capture the knowledge early in their careers and give them a quantum leap in terms of potential future growth. “One of my biggest obsessions today is that senior people must give bright 25-year-olds the opportunity to contribute meaningfully,” 20 said Mukesh. The company took on a distinct U.S. bias under Mukesh’s leadership. Explaining this preference, he observed, “My reference points were U.S. companies. We were hugely influenced by large U.S. chemical companies, especially DuPont. It was a very open company and we could take advantage of their learning. The U.S. is also a very open society. I could go to the U.S. Association of Chemical Engineers and get the standards, data, etc. It was not the Internet age, but it was easy. It sometimes cost us money to buy what we needed, but the investment was worth it to put the right thought process in place.” 21 TB0303

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In building its talent pool, the company had emphasized a global view by attracting professionals among the overseas Indians who wanted to return home, seasoned professionals from leading competitors in the U.S. and Europe, as well as the cream of the crop from India’s prestigious engineering colleges. It had established a foundation at the Wharton School of Business to help underprivileged Indians earn an MBA there and return to join the ranks of RIL managers. One of the central themes emphasized by Mukesh Ambani at the 2010 meeting of shareholders related to the transformation of human resources at RIL. The company had a mandate to build a world-class human resources organization that would attract a much younger workforce (2010 average workforce age was 41 years), nurture and develop talent with an eye on innovation, and leverage human capital through time-tested principles around performance management and transparency, rewards and recognition, and effective succession planning. Along with the emphasis on Standard Operating Processes and Standard Operating Controls, Mukesh accentuated the safety culture of the company. Under his stewardship, the company had imbibed much of its early safety culture from the likes of Bechtel and DuPont, RIL partners on various initiatives. It had built on this focus by explicitly choosing suppliers and contractors who had a reputation for safety. It sought the assistance of DuPont and Shell to perform external audits of its safety performance on an annual basis. It deployed a comprehensive Health, Safety, and Environment Management System (HSE-MS) covering all areas of its operations, and launched an annual reporting system in 2004. The annual reports, akin to those issued by global corporations, offered information on RIL performance along crucial dimensions of occupational safety, training and development of its employees, its social commitments, and its environmental performance track record. Reporting guidelines established by international bodies such as the safety standards of the British Council of Safety and the American Society of Training and Development were adopted. The company had consistently won awards for its safety performance and safety innovations from these global institutions, as well as local bodies such as the Institute of Engineers, Indian Merchant’s Chamber, Ministry of Petroleum. Exhibit 9 provides historical data on occupational safety performance of RIL.

Oil and Gas Ventures: The E &P Story In 1999, the Government of India announced the first round of auctions allowing private companies to enter oil exploration. This was a momentous decision since the oil sector had always been entirely under government control. Reliance and its partner, Niko Resources of Canada, jointly bid for some of the blocks in the Krishna Godavari basin off India’s east coast and hit it big in 2002 when it discovered the largest gas field that year globally, and the largest find in India in three decades. By 2007, it had reported over 20 finds of various sizes, mostly in gas, and had started developing and commercializing over a dozen finds. The first major find in the K-G basin (D6) was commercialized in a record period of just over six years, compared to global averages of nine or 10 years. Production from this site was roughly 20,000 barrels of oil per day and about 60 million cubic meters of gas per day. Reliance was active offshore in the Arabian Sea off India’s west coast as well. It had commercialized production in the Panna-Mukti and Tapti fields that were in close proximity to its petrochemicals and refining operations. Reliance was also holding leases on five coal bed methane blocks that were in the early stages. Analysts estimated that the E&P portfolio of the company contributed roughly 25%-30% of overall EBITDA for the company. With the successful commencement of production of oil and gas from multiple properties within India, Reliance seemed set to complete the entire value chain from crude oil and gas all the way through higher value added petrochemicals and textile products. Although the integration model originally envisioned by Dhirubhai Ambani had come to fruition, Mukesh had a slightly different view on the integration approach. He believed that it made better sense to operate the company’s upstream holdings as a distinctly different business entity from its downstream ventures. “The way we run our businesses is that all our businesses are independent, and upstream is a completely new business.” 22 Downstream refineries did not expect to refine Reliance crude. Given the relatively larger volume of gas in its E&P portfolio, Reliance was keen on selling its crude oil at the highest prices possible, given its superior quality, and buying challenged crudes at a discount for its downstream operations. Maintaining a separation between upstream and downstream operations also had some important allied benefits in decision-making. One analyst observed, “Reliance is known for being relentlessly efficient in executing projects. A decision on whether to go forward with a refining venture required round-the-clock attention from engineers for about three weeks. Approving a venture half that size in Texas took Royal Dutch Shell Plc. and 8

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Saudi Aramco three years. Reliance’s efforts to produce oil and gas have been executed equally quickly. While exploration powerhouses like Shell and ExxonMobil take about 9 to 12 years to complete a fast-track deep-water project, Reliance’s latest block came on line in just six years.” 23 By 2010, the case involving the supply of gas to Reliance Energy went all the way to India’s Supreme Court. The case was decided in favor of RIL giving Mukesh a shot in the arm in the battle against his brother. There was a brief rapprochement between the brothers leading to the verdict, and immediately thereafter pre-existing noncompete agreements were dissolved. This gave Mukesh and RIL the opening to enter telecommunications and the power generation sectors. By mid-2010, RIL had begun making strong waves about entering both these areas. Telecommunications had long been a pet project for Mukesh, although the pursuit of such interests was bound to be exorbitantly expensive, given the evolution and competitive intensity that the Indian market reflected. RIL had already acquired substantial interests in hotels through its partial purchase of East India Hotels. It had concluded a JV agreement with investment powerhouse D.E. Shaw of the U.S. to enter into retail finance in India, and was rumored to be considering banking as a next move.24

A Challenging Future Beckons Mukesh Ambani’s Reliance was riding on the wave of euphoria after commencement of operations at the second phase of the new refinery at Jamnagar as 2010 got off to a start. Termed an “intelligent repeat” by Hital Meswani, Reliance Executive Director, the new facility was another world-beating operation with the most modern technology. With a Nelson Complexity Index of 14, this facility was among the most sophisticated in the world, capable of processing some of the most challenged sour crudes. It also included the world’s largest alkylation unit, under license from ExxonMobil, allowing it to refine gasoline that could meet Euro-IV standards, thus opening the prospect of leveraging its export capabilities. The refinery itself was built in record time of 36 months (global average is between 60-80 months) at an estimated cost that was about 50% of what it would cost to build an equivalent refinery elsewhere. Adjusted for refining complexity, the capital cost per complexity barrel per day was estimated at $665 compared to the global average of $2,600. 25 Having already achieved very high capacity utilization rates in its first refinery (~98.5% versus regional Asia-Pacific average of 83.5%), the prowess of Reliance in operating efficiency and capital discipline could now be leveraged on a much larger scale. While the company had been historically able to achieve a significant margin differential compared to the Singapore complex refineries, these differentials were expected to increase further with the new refinery addition. The new Jamnagar facility was geared to a much higher proportion of middle distillates (HSD ~40%) and value added products such as propylenes and alkylates, products for which demand seemed to be promising. In early 2010, the government took the first firm steps to dismantle the subsidy regime that had crippled much of the downstream businesses. Having decontrolled the crude oil end of the chain, relaxing price controls on the output side was sure to introduce new competitive vigor. Reliance already had a chain of 1,700 gas stations that it was looking to re-energize amid rumors that foreign players were also looking to enter. The commissioning of Jamnagar-2 cemented the reputation of Reliance as a company that had leapfrogged in areas of project execution. The construction of the project involved Bechtel and a group of Indian contractors. The project was conceived at a time when the entire engineering, fabrication, and construction business was at its peak. There were numerous challenges in staffing as a consequence of the tight conditions. However, RIL was unrelenting in its insistence on a very tight timeline. As Sanjay Mashruwala, President and Projects Director at that time, observed, “Executing a project of this magnitude under the given situation and demanding schedule was a challenge.”26 The project was a massive undertaking with a project plan that surprised even the lead contractor, Bechtel. It had to rethink several of its own processes to bring the project to fruition since it involved complexities never before witnessed in the industry. It called for more than 10 million hours of design work, 4 million cubic meters of concrete, 18,000 Km of electrical cabling, 15,000 Km of instrumentation cabling, 20,000 Km of piping, and over 250 Km of roads alone. Bechtel set up a dedicated, custom-built communication network to connect its engineers in London, Houston, Fredrick, Toronto, Shanghai, and New Delhi in a virtual office that allowed for quick exchange of engineering drawings and time-sensitive data that was vital in meeting the aggressive schedule. Integration across the subcontractors called for modification to the software systems, enabling smooth handoffs from each of the key players located in different places across the globe. Scott Johnson, the program manager for the project, observed, “We placed orders for $3.5 billion worth of materials, TB0303

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including over 4,000 pieces of equipment, and a lot of this we bought before engineering was complete so that we could lock in supplies ahead of shortages we could see coming. In some cases, we bought first and designed later around what we bought. But that’s part of keeping to the schedule.” 27 Reliance built a training center at Jamnagar to train an estimated 8,000 welders, 5,000 carpenters, and 5,000 pipe fitters to ensure that it would not be hampered by skilled labor shortages.28 Bechtel trained an army of RIL engineers at its facilities worldwide to help operate and maintain the refining complex. When the unit was commissioned in late 2009, Solomon Associates, the global refining benchmarking company, placed it in the top quartile of all refineries globally in terms of capital and operating efficiencies. The Oil and Gas Journal observed, “The Jamnagar Refinery Complex heralds the way refineries would be built in the future—large in scale, technically complex, integrated with petrochemicals and power generation, besides being environmentally friendly.”29 On the E&P front, the news was a mixed bag. After announcing its record first quarter results, RIL shares suffered an embarrassing decline because the company did not hit its targets with respect to both production and operating margins at its premier D6 field. The deep-water technology involved seemed to be posing nettlesome problems. Perhaps the biggest source of solace for RIL was its recently concluded joint venture with BP. It had decided to invite BP to jointly prospect and develop a sizable portion of its acreage (30% stake in 23 fields), including D6, off the Indian coast. BP paid a handsome $7.2 billion for the stake. Given its record of success in deep-water, albeit tempered by its recent history in the Gulf of Mexico, there was much anticipation of what this alliance might bring. Although some segments of the oil and gas business had started to show signs of recovery from the global economic crisis by 2010, there were still clear pressures of excess capacity in some pockets such as petrochemicals. (See Exhibits 10 and 11 for demand–supply projections for key chemicals.) Interestingly, however, RIL had announced at its shareholders meeting that it was planning to invest $9 billion to increase its polyester capacity, possibly the largest capacity addition ever in that subsegment. This was in line with RIL’s desire to create adequate capacity that would help it to establish a continued competitive presence in the Asia Pacific region that was witnessing significant growth. Along similar lines, RIL was adding 1.4 million tons of capacity for paraxylene production at Jamnagar, in addition to building one of the largest coke gasification plants in the world. It had signed a joint venture agreement with SIBUR, Russia’s largest petrochemicals company, for manufacturing synthetic rubber at its facilities in Jamnagar. Since India was a net importer of rubber, RIL was bound to find the joint venture lucrative. External pressures were already building to thwart some of RIL’s plans. The government of Saudi Arabia, for example, was leaning on the Indian government to remove the anti-dumping duty on polypropylene, a key chemical manufactured by RIL, which controlled 70% of the market locally. With declining government support favoring RIL, it remained to be seen how such pressures would affect the bottom line. The company had ventured overseas in its quest for new discoveries of oil and gas. Its portfolio contained 13 blocks in six countries, ranging from Yemen to Peru and Australia and Colombia. In April 2010, Reliance signed a joint venture agreement with Atlas Energy, a U.S. company, to access assets in the Marcellus Shale region located in the northeastern U.S. It expected that this deal would offer access to resource potential estimated at 13.3 tcf. It also signed another joint venture agreement with Carrizo, another U.S. firm, to acquire a 60% interest in Marcellus Shale acreage in Central and Northeast Pennsylvania. This deal would provide Reliance access to another two tcf. By investing in natural gas rather than heavy crude, Reliance appeared to be aspiring for a niche global major status. Touting its environmentally friendly image, Mukesh Ambani had remarked, “Natural gas is a 21st century hydrocarbon,” implying a possible focus for future E&P growth.30 Although many of its future capital projects involved direct links with its core petroleum business, over the years RIL had shown a preference for unrelated diversification as well. Telecommunications, power generation, and hotels were three areas that were gaining currency as investment alternatives within the company by 2010. RIL had mounted a successful bid to acquire a significant equity stake in East India Hotels, a company that owned many flagship properties that had consistently won global awards fo r luxury travel. Only time would tell whether these ventures would be able to tangibly increase the enterprise value of the firm. The downside risk of distracting RIL from its evolving prowess in oil, gas, and petrochemicals was nonetheless real. The globalization of RIL, seemingly the next horizon for the company, looked tenuous. Although the company had made some profitable forays within the familiar orbit of emerging market countries in the region, 10

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such as Indonesia and within East Africa (e.g., Kenya, Tanzania, Uganda), it had still not established a signature project overseas. Its acquisition of GAPCO in 2007, the Tanzanian gasoline retail chain, was promoted as a strategic investment that would allow RIL to sell its fuels in the future. However, the company had not shored up its presence in that region since. Its acquisition of Trevira, the German polyester producer, in 2004 was once heralded as the first global entry for RIL, signaling many more such acquisitions in the future. In 2009, five years after the acquisition, Trevira filed for bankruptcy, citing difficulties in competing effectively with the high-cost structure that German labor laws necessitated. In late 2009, RIL made a bold bid to acquire LyondellBasell, the Dutch refining and chemicals company, for $14.5 billion. The offer was rejected by the Board of Lyondell, which instead opted to present an alternative reorganization plan to emerge from bankruptcy. Given the sparse record of successful globalization, it remained to be seen if the phenomenal advantages that Reliance had built upon in India could be transported to foreign markets with equal success. (See Exhibit 12 for a snapshot of the global footprint of RIL.) Midway through 2011, it was clear that moving into the next decade, Mukesh Ambani and RIL faced formidable challenges. Would RIL be able to sustain its competitive ability in light of the new capacities emerging the Middle East? How would RIL compete against Chinese players that had access to a low-cost base? Would it be able to parlay its E&P position to become a niche player in the emerging shale gas plays? Would it be able to double enterprise value through diversification? Only time would tell.

Endnotes 1

Ray, S. G. 2011.” CBI Closes in on Oil Regulator.” India Today. July 16. Monga, N. 2011. “Brothers in Arms: Misappropriating a Fortune.” Veritas Investment Research. July. 3 Piramal, G. 1996. Business Maharajahs. New Delhi, India: Penguin Books. 4 Ibid. 5 Ibid. 6 To salute or genuect. 7 Ibid. 8 Ibid. 9 Ibid. 2

10

The Nelson complexity index measures the value addition potential of key pieces of refining equipment based on factors such the range of input crudes that the plant can refine. Higher numbers indicate ability to process more complex, sour, and heavy crudes into higher value added products. They also indicate cost and investment intensity associated with the refinery. 11

“The House that Reliance Industries Built.” 2005. Knowledge@Emory. June 1. http://knowledge.wharton.upenn. edu/article.cfm?articleid=1187. 12 Ibid. 13 Ranjan, A. 1999. “Bleak Prospects Force Exxon to Walk Out of HPCL Bhatinda Renery Plan.” Financial Express. February 20. 14 Kanavi, S. 1997. “Reliance Story: Playing to Win.” Business India. July 14-27. 15 “Reliance Jamnagar Renery Tops in Shell Ranking for Energy and Loss Performance.” Financial Express. January 13, 2004. 16 Ninan, T. N. 2004. “How Will the Ambani War Play Out?” Business Standard . November 29. 17 Tripathi.S. 2005. “Just Another Family Business.” The Far Eastern Economic Review. January 22. 18 Dalal, S. 2008. “Mukesh Ambani: A Rare Interview to MoneyLife.” www.suchetadalal.com. August 11. 19 Ibid. 20 Ibid. 21 Ibid. 22 Ibid. 23 Ibid. 24 Ray, S. G., and Surendar, T. 2011. “Mukesh Ambani Superstar.” India Today. March 14. 25 “Reliance Jamnagar Renery Will Cost Half That of Others.” 2008. Indo-Asian News Service. June 11. 26 “Vision that Redened Global Rening.” Oil & Gas Journal , June 11. 27 Kreilling, J. 2007. “Global Endeavor: How Bechtel Has Created a Worldwide Team to Help Build a Huge New Renery in India.” Bechtel Briefs. 28 Kumar, A. C. 2007. “Gujarati Grandeur.” ICIS Chemical Business. July. 29 “Vision that Redened Global Rening.” 30 Resnick-Ault, J. 2008. “Focus: Reliance Races Upstream to E&P; No Integration Plans.” Dow Jones International News. September 23.

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Exhibit 1. Reliance Industries Limited—Financial Statistics Income Statement (All

dollar amounts in millions except per share amounts.) 2010

Revenue Costs of Goods Sold Gross Profit Gross Profit Margin SG&A Expense Operating Income Operating Margin Nonoperating Income Income Before Taxes Income Taxes Net Income After Taxes

2009

Total Net Income Net Pro fit Margin

5,424.5 12.0 0%

Annual Bal ance Sheet (All

Cash Inventories Other Current Assets Total Curre nt Assets Net Fixed Asse ts Other Noncurrent Assets Total Asse ts

2008

2007

2006

45,250.6 28,989.6 34,369.0 26,189.9 18,589.3 37,628.5 23,655.8 26,390.7 19,772.6 14,140.5 7,622.1 5,333.8 7,978.2 6,417.3 4,448.7 16.84% 18.40% 23.20% 24.50% 23.90% -1,2 41.2 1,568.2 1,347.9 1,381.8 4,146.5 -21,211.7 5,382.1 3,211.3 2,015.9 9.20% -- 15.70% 12.30% 10.80% 1,76 5.9 24,637.2 384.4 160.4 452.4 6,369.8 3,425.5 5,766.5 3,371.7 2,468.3 945.3 559.5 874.0 -592.1 364.8 5,42 4.5 2,86 6.0 4,89 2.5 3,963.9 2,103.5 2,866.0 9.90 %

4,892.5 2,779.6 2,103.5 14.20 % 10.6 0% 11.3 0%

dollar amounts in millions except per share amounts.)

3,085.2 4,359.7 1,121.2 445.9 5 85.8 7,638.8 3,855.0 4,793.0 2,867.4 2,316.3 4,625.0 3,046.9 6,988.9 4,311.0 2,699.4 15,348.9 11,261.6 12,903.1 7,624.3 5,601.5 39,361.7 33,830.7 28,254.2 21,384.6 14,320.6 2,912.2 2,080.3 2,687.7 1,500.6 1,767.4 57,622.8 47,172.6 43,845.0 30,509.5 21,689.5

Acco unts Payable Other Current Liabilities Total Current Liabilities Other Noncurrent Liabilities Total Liabilities

-1.4 2.3 1.9 1.7 9,458.3 7,450.3 6,730.5 4,660.0 2,880.1 9,458.3 7,451.8 6,732.8 4,661.9 2,881.8 16,720.4 16,449.4 14,658.7 9,355.8 7,280.2 26,178.6 23,901.1 21,391.5 14,017.7 10,162.0

Common Stock Equity Total Equity Shares Outstanding (mil.)

31,444.1 31,444.1 2 ,9 78 .0

23,271.5 22,453.5 16,491.8 11,527.6 23,271.5 22,453.5 16,491.8 11,527.6 2 ,9 78 .0 2 ,9 78 .0 2 ,9 78 .0 2 ,9 78 .0

Source: Hoover’s.

Exhibit 2. Segmental Composition of RIL Revenues* Metric Sales % of total Assets % of total EBIT % of total ROS ROA

Petrochemicals 2010 2009 2008 22.99 34.63 36.21 17.65 20.21 23.13 42.32 37.30 37.87 15.42 13.264 14.424 18.87 13.968 17.703

2010 69.88 39.16 29.66 3.556 5.961

Refining 2009 66.45 35.77 52.46 9.7216 11.1

2008 2010 65.92 5.19 42.86 22.20 54.83 25.46 11.47 41.102 13.83 9.0264

E&P 2009 2.37 23.41 11.44 59.5 3.698

2008 1.97 16.47 8.03 56.22 5.271

*Numbers do not add up to 100% due to rounding. Sales are computed as a % of Net Turnover (i.e., gross revenues less intra-company transfers). Source: Company.

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Exhibit 3. Reliance Industries V. Competitors (2009-2010) Metric Gross Profit Margin Net Profit Margin Return on Equity Return on Assets ROIC P/E Ratio Dividends per share

Reliance 16.29% 11.11% 18.6% 9.7% 18.6% 12.74 6.50

Industry Median 12.11% -1.16% -4.8% -2.1% -3.3% 18.76 0.80

Market Median 28.77% 5.53% 10.1% 1.5% 4.4% 26.67 0.20

Source: Hoover’s

Exhibit 4. Key Milestones in the Backward Integration Sequence of Reliance Industries

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Exhibit 5. RIL’s Integrated Product Flows

Source: Company.

14

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Exhibit 6. Text of Anil Ambani’s letter to Mukesh Ambani Sir, Sub: Item No. 17 of the Draft Minutes of the Board Meeting of Reliance Industries Ltd (RIL) held on 27 July 2004 I wish to express certain views on the draft Minutes of the Board Meeting of 27 July 2004, as circulated along with the agenda papers for the Board meeting today. Item No. 17 deals with a very substantive matter concerning, inter alia, the redefinition of the powers and authorities of RIL’s Chairman and Managing Director, the Vice Chairman and Managing Director, and Executive Directors. I have expressed my views on this subject, through 9 communications exchanged with the Chairman, and RIL’s Secretarial Department, within a span of just 3 days starting from 27 July 2004, the date of the last Board meeting (copies enclosed). In my communications, I have stated to the Chairman and RIL’s Secretarial Department that Item No. 17 in the draft minutes has not been correctly recorded. Further, in my 2 communications on 29 July 2004 and 30 July 2004, I have requested the Chairman to keep this item in abeyance, for the following reasons: (i) Item No. 17 was introduced through a supplementary agenda at the end of the last Board meeting, without proper and due notice. (ii) The supplementary agenda was introduced without my knowledge and/or consent, and keeping me completely in the dark. This is contrary to all past practice, whereby supplementary agenda items, like the main agenda, have always been pre-circulated, pre-discussed and pre-agreed between the 2 Managing Directors, before any Board meeting. (iii) This is all the more surprising, as I have subsequently learnt that some of the other RIL Directors, and several RIL employees, had been taken into confidence on the supplementary agenda, and the contents and objectives of the same, while I, as VC&MD, was not even informed of the same! (iv) In fact, some of the other RIL directors, to whom I later spoke, expressed surprise that I was not aware of this supplementary agenda item, and had not even been consulted on the same. They said they had simply assumed that, in accordance with past practice, whatever had come to the Board had been pre-discussed and pre-agreed between the 2 Managing Directors. (v) The supplementary agenda item had a misleading title, which suggested the same was essentially concerned with formation of a Health, Safety and Environment Committee. The clubbing together of a very substantive proposal on redefinition of the powers of the Managing Directors, etc. with this unrelated subject of the HSE Committee, obscured the real purpose of the agenda item, and prevented a proper appreciation of the consequences thereof. (vi) The relevant proposals on the substantial redefinition of the powers of the Managing Directors were available only in fine print in an Annexure, while the supplementary agenda note itself was completely silent on this aspect. This prevented Board members a proper opportunity to appreciate the consequences of the proposed changes. (vii) There were no discussions or deliberations at the Board meeting, on this very substantial matter relating to the redefinition of the powers and authorities of the Managing Directors, as incorrectly stated in the minutes. The only discussion on this supplementary agenda item was in relation to the composition of a Health, Safety and Environment Committee (which discussion also lasted for barely about 2 minutes). (viii) Specifically, the proposed redefinition of powers of the Managing Directors, reflected a substantial and material variation of the equation as has existed in RIL for the past more than 2 decades, and this clearly required intensive discussion and consideration of the Board of Directors, based on full facts and circumstances being presented to the Board. None of this has happened. (ix) The issue of variation of powers of the Managing Directors, Executive Directors, and committees of directors, is a matter of great importance, vitally affecting the corporate governance structure of the company, and impacting its various stakeholders, including investors, banks, financial institutions, lenders, employees, and others, besides having consequences on diverse agreements to which the company is a party. These ramifications were neither discussed nor thought through at the Board meeting. (x) The minutes incorrectly state that after discussions, all Directors (other than the CMD, who did not participate) unanimously approved of the resolution. The fact is that there were no discussions, and there was no vote, and the question of the resolution being passed unanimously thus does not arise. (xi) The incorrectness of the minutes is evident from the fact that even I am supposed to have voted in favour of the proposed resolution. Clearly, I as VC&MD, would not vote for the prejudicial variation of my existing authorities and powers!

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(xii) I have also been legally advised that the proposed redefinition of powers of the Managing Directors is not in accordance with law, and is in conflict with the provisions of the Companies Act, 1956, the Memorandum and Articles of Association of our company, and the Agreements approved by the shareholders for appointment of the Managing Directors. (xiii) In addition, I regret to state that there was unseemly and unprecedented haste shown in preparation of the draft minutes, and obtaining of confirmations from the other directors, on the date of the Board meeting itself, before even showing the draft minutes to me, the VC&MD of the company! (xiv) The draft minutes were not sent to me till 2 days after the Board meeting i.e. the evening of 29 July 2004, a full 48 hours after other Directors had already received the same. This too was done, only after my calls to K. Sethuraman and my e-mails addressed to the CMD and the Secretarial Department. (xv) The above was all contrary to past practice, followed without interruption in our company for the past more than 10 years, whereby draft minutes of Board meetings are prepared about 20 to 30 days (sometimes more) after the Board meeting and first circulated to the 2 Managing Directors for confirmation, and only after receiving such confirmation, the same are sent to other Directors for approval (illustrative details enclosed in the Annexure) (xvi) It is also evident that the draft minutes were kept prepared in advance of the Board meeting, because there was no adequate time for the Secretarial Department to prepare the draft after the conclusion of the meeting, and obtain signatures of several directors on the same day! (xvii) Similarly, for all past Board meetings, the draft minutes have been prepared and circulated to the Managing Directors, and to other Board members, by Mr. K. Sethuraman, Secretarial Department. In another departure from this usual practice, the draft minutes, in the present case, were circulated by Mr. Vinod Ambani - something that has not been done in the past! In view of all the above, I had spoken to a few of the Directors on 30 July 2004, and thereafter, and expressed to them my deep concern at this unhappy turn of events, and the sad reflection it represents of how we are seeking to preserve, and carry forward the legacy and past tradition of our beloved founder Chairman, Dhirubhai Ambani. Regrettably, nearly 3 months, almost 90 days, after my second e-mail to the CMD, and my personal discussions with several directors, and their interventions in turn with the CMD, I have not received any acknowledgement, much less any response, from him to my aforesaid e-mails. Instead, it has been communicated to me on the CMD’s behalf that the matter is final, and cannot be altered. RIL is India’s largest private sector company, and now a Fortune Global 500 company, and the country, the people, and the community have high expectations from us. We have over 35 lakh shareholders. Leading domestic and international institutional investors are our important stakeholders. The entire banking and financial community has large exposures to our company. We make the largest contribution to the national exchequer as a single corporate. It is my firm view that RIL should abide by the highest standards of corporate governance, and this should first be reflected at proceedings of our Board of Directors. We have had more than 8 Board meetings and 2 AGMs in the past 2 years, after our founder Chairman, Dhirubhai Ambani left for his heavenly abode, and all matters have been pre-agreed between the 2 Managing Directors by mutual discussion and consent. In keeping with this past practice, I propose that item no. 17 of the minutes be kept in abeyance, till we have had a full discussion, and have decided the forward path on a mutually agreed basis. However, if this is not acceptable to the Chairman, my views, as above, on this subject, may kindly be placed on record, and taken into consideration by the Board. Yours faithfully Anil D. Ambani

Encl: As Above Copy to: Shri Vinod Ambani, President and Company Secretary, RIL Source: The Economic Times , November 26, 2004.

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Exhibit 7. Shareholding Pattern at RIL (2002-2011) Category Promoters and persons acting in concert* % Institutional Investors % Foreign Investors % Others (including Public) %

2001 43.24 14.98 17.34 24.45

2002 43.77 13.43 18.69 24.10

2003 46.52 13.11 14.65 25.72

2004 46.67 8.77 22.63 21.93

2005 46.76 8.12 21.55 23.57

2006 47.90 7.50 21.35 23.25

2011 44.72 10.78 17.37 27.13

*According to the SEBI (Securities and Exchange Board of India) persons acting in concert (PACs) are individual(s)/company(ies)/ any other legal entity(ies) who are acting together for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding whether formal or informal. Acting in concert would imply cooperation, coordination for acquisition of voting rights or control. This cooperation/coordinated approach may either be direct or indirect. Source: SEBI Filings and Company Annual Reports.

Exhibit 8. Board Membership at RIL (2002-2011) Name Mukesh Ambani

2002 Remarks Chairman and MD

Anil Ambani

Name Mukesh Ambani



Vice Chairman and MD Executive Director (Cousin) Executive Director (Cousin)

Nikhil Meswani

H.S. Kohli

RIL Executive

R. Ambani

Brother of Dhirubhai Ambani

R. Ambani

Brother of Dhirubhai Ambani

U. Mahesh Rao

Institutional Investor Nominee Brother of Dhirubhai Ambani Close friend of Dhirubhai Ambani

Mansingh Bhakta

Mansingh Bhakta Yogendra P. Trivedi

M.P. Modi*

Close friend of Dhirubhai Ambani Close friend of Dhirubhai Ambani Unaffiliated

M.P. Modi*

Close friend of Dhirubhai Ambani Close friend of Dhirubhai Ambani Unaffiliated

S. Venkitaramanan *

Unaffiliated

S. Venkitaramanan*

Unaffiliated

Prof. Ashok Misra

Unaffiliated

Prof. Ashok Misra

Unaffiliated

Prof. Dipak Jain

Unaffiliated

Prof. Dipak Jain P.M.S. Prasad Pawan Kumar Dr. D.V. Kapur*

Unaffiliated RIL Executive RIL Executive Unaffiliated

Nikhil Meswani Hital Meswani

R. Ambani Mansingh Bhakta T. Ramesh Pai Yogendra P. Trivedi Dr. D.V. Kapur * M.P. Modi* S. Venkitaramanan *

Close friend of Dhirubhai Ambani Close friend of Dhirubhai Ambani Unaffiliated Unaffiliated Unaffiliated

Hital Meswani H.S. Kohli

Yogendra P. Trivedi

Executive Director (Cousin) Executive Director (Cousin) RIL Executive

Name Mukesh Ambani

Nikhil Meswani Hital Meswani H.S. Kohli

Executive Director (Cousin) Executive Director (Cousin) RIL Executive

*Served in a senior capacity in a governmental position. Source: Company documents and case author research.

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Exhibit 9. Occupational Safety Performance at RIL* Safety Indicator Number of Injuries TRIR # OSHA TRIR average @ Number of lost days Lost days/100 employees Manhours worked (million) Number of fatalities

2009-10 51 0.07 0.90 8,079 11.02 146.68 3

2008-09 123 0.20 1.00 11,886 19.11 124.36 8

2007-08 100 0.17 1.10 3,338 5.63 118.60 1

2006-07 128 0.26 1.30 3,418 6.94 98.53 9

2005-06 116 0.22 1.40 2,826 5.47 103.36 2

2004-05 138 0.29 1.40 3,332 7.06 94.43 7

*

As per global reporting practice, the number of lost days does not include fatalities. In 2008-09, the scope of injuries was expanded to include injuries and loss days of construction workers in steady-state operations. As per Indian regulations, each fatality is equivalent to 6,000 lost days. # Total Recordable Incident Rate @ OSHA average nonfatal injury incidence rate/100 employees reported by OSHA in “ Industry illness and injury statistics ” (Petroleum Refineries) collected on an annual basis. http://www.bls.gov/iif/oshsum.htm#10Summary%20 Tables. Source: Sustainability Report . Reliance Industries Ltd. 2009-2010.

Exhibit 10. Global Product Demand, and Installed Manufacturing Capacities

Product Polypropylene Polyethylene Ethylene Propylene PVC Benzene Polybutadiene Rubber Butadiene Linear Alkyl Benzene Polyester Staple Fiber Polyester Filament yarn PTA MEG Paraxylene

Global Demand (MMT) 44.4 66.0 115.0 71.2 32.4 37 2.2 9.4 3.0

20.0 3.3 17 22

Global Capacity (MMT) 55.5 84.0 145.0 100 45 58

India Demand (MMT)

11 3.45

0.11

1.80 1.68

0.80 1.90 21 28

1.4 2.0

Reliance Capacity (MT) 2,685,200

1,883,400 759,800 625,000 730,000 74,000 419,000 182,400 741,612 822,275 2,050,000 733,400 1,856,000

Reliance Production (MT) 2,398,598 1,057,906

28,095 624,018 662,254 72,894 162,813 627,857 796,033 610,787 301,509 514,938

Source: CMAI, and Company data.

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Exhibit 11. Global Ethylene Capacity Additions in 2010 Region NE Asia NE Asia SE Asia SE Asia India Middle East NE Asia SE Asia Middle East TOTAL

Company Panjini Ethylene Sinopec/Sabic PTT Polyethylene Shell Chemical Indian Oil RLOC ZRCC MOC Morvind PC

Capacity (‘000 KTA) 450 1000 1000 800 857 1300 1000 900 500 7,807

Source: CMAI, and Company data.

Exhibit 12. RIL’s Global Footprint in 2011

Source: S. G. Ray and T. Surendar. 2011. “Mukesh Ambani Superstar,” India Today , March 14.

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Reliance Industries DBG

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