Business deals

The story of Mukesh Ambani's loss-making private firm that just got public banks to restructure its loans

Loss-making Reliance Gas Transportation Infrastructure has been the beneficiary of favourable decisions by the government and banks.

A loss-making company controlled by India's richest man, Mukesh Ambani, who heads the country's biggest private corporate entity, Reliance Industries Limited, has successfully managed to reschedule repayments of its loans to banks. Reliance Gas Transportation Infrastructure Limited, the closely-held firm whose shares are not listed on stock exchanges, has a colourful and controverisal past.

According to a story broken by Dev Chatterjee in the Business Standard on June 12, this is the first time a company in the Reliance group led by Mukesh Ambani has sought and obtained rescheduling of loans extended to it by Indian public-sector banks.

RGTIL's losses for the financial year that ended on March 31, 2015, stood at Rs 436 crore on an income of Rs 1,357 crore. In the previous year, the company's losses were nearly eight times higher at Rs 3,403 crore on a slightly higher income of Rs 1,412 crore. The company's debt was above Rs 16,000 crore at the end of March.

RGTIL has stated that it had received a sanction from nationalised banks to repay the principal loan amount outstanding by 2030-’31 instead of 2019-’20. Such a rescheduling is considered most generous.

Closely held company

Why did this company seek and obtain a new schedule for repaying the loans it had received from a consortium of banks? And what is the role of this particular firm in the bigger affairs of RIL, India's biggest private corporate entity, and its associates?

RGTIL is a company in which Mukesh Ambani holds a personal stake is 42.5%. Being a closely-held private company, its accounts are not part of the financial statements that are disclosed by RIL, which is a widely-held company whose shares are listed on stock exchanges. Yet this company plays an important role in the activities of the wider business empire controlled by the Ambani family.

RGTIL owns and operates a nearly 1,400-kilometre-long natural gas transportation pipeline from Kakinada in Andhra Pradesh to Bharuch in Gujarat that passes through four states including Karnataka and Maharashtra.

The company's losses are apparently on account of a sharp fall in production from the D6 block in the Krishna-Godavari basin in the Bay of Bengal, where a company controlled by the Reliance group has been contracted by the government to explore and extract natural gas. The decline in gas output has, in turn, led to significant decline in the utilisation of the pipeline's capacity.

In 1999, when RIL obtained the rights to explore the D6 block, it was estimated that gas output would be in the region of 40 million metric standard cubic metres a day. This figure was subsequently doubled and the pipeline that was built to transport the gas assumed gas production would be 80 mmscmd.

These estimates seemed reasonable when in March 2010 gas production reached nearly 70 mmscmd and RIL crowed about its achievement. However, gas output started dipping thereafter.

Falling output

In 2010-’11, production averaged less than 56 mmscmd and in the following year, gas output dropped below 43 mmscmd. Worse was to follow. In 2012-’13, production shrunk to 26 mmscmd and by December 2014, the average output of gas from the KG-D6 block had come down to a meagre 10 mmscmd, an eighth of the amount had been envisaged.

Reliance group spokespersons claimed the fall in gas production was on account of "natural" and "unanticipated" factors, whereas others – including the Comptroller and Auditor General of India and a Parliamentary committee – were sceptical about their explanation.

They contended that output had been "deliberately" suppressed in anticipation of higher prices of gas which are administered by the government. RIL protested.

Over the last three years, the Ministry of Petroleum and Natural Gas has levied penalties on the contracting company led by RIL,  disallowing it from recovering costs incurred to the extent of nearly $ 2.4 billion (or around Rs 15,000 crores at the prevailing exchange rate). The company again protested.

A number of petitions on these and related issues are currently under adjudication in the Supreme Court. In addition, arbitration proceedings are proceeding concurrently.

The drastic fall in gas production has not merely adversely affected the fortunes of RGTIL. Power plants which were set up to use the gas are operating way below their installed capacities. According to a December 2013 report of a Parliamentary committee, power projects with investments of Rs 40,000 crore are "stranded" because of non-availability of gas.

In March, the Union cabinet approved a plan to subsidise imported liquefied natural gas to help these stranded projects.

Intense battle

RGTIL was created in March 2003 as a 100% subsidiary of RIL. In August 2004, RGTIL was granted approval by the Ministry of Petroleum and Natural Gas to build a pipeline to transport gas from Kakinada to Bharuch.

Between November 2004 and June 2005, the Ambani brothers Mukesh and Anil fought a bitter battle in public over control of the assets of the businesses of the family.

On April 21, 2005, an unusual development took place. For a paltry sum of Rs 500,000, RGTIL was taken out of the ambit of RIL and converted into an "independent" company controlled entirely by Mukesh Ambani.

The way this was done presents a typical case study of how Ambani family members structure their personal assets, using a slew of companies with extremely complicated cross-holdings – that is, shares held by a clutch of corporate entities in one another – with loyal employees and associates acting as directors in these firms.

The story of RGTIL then took an interesting turn, The Union budget for 2009-’10, announced by Pranab Mukherjee, who was the finance minister at the time (and is now President of India) on July 6, 2009, inserted Section 35AD in the Income Tax Act, 1961, to allow 100% of the capital expenditure incurred on setting up and operating a natural gas or a crude oil pipeline as a tax deduction in the very first year of operation.

This was the only business of its kind in India in which the entire capital expenditure incurred was allowed to be treated as revenue expenditure in the first year of operation. The estimated benefit to RGTIL was a staggering Rs 20,000 crore.

Deal is investigated

Four years later, in 2013, a report was drafted by the Serious Fraud Investigation Office  in the Ministry of Corporate Affairs investigating the manner in which firms in the Reliance group had sought to control a company which controlled the NewsX television channel.

The draft report, which was presented in the Supreme Court on November 11 that year by lawyer Prashant Bhushan as an annexure to a public interest litigation petition, alleged that there had been a "fraudulent" set of transactions linked to corporate entities controlled by lobbyist Niira Radia, a Mauritius-based associate of multinational investment firm New Silk Route (whose founders included Rajat Gupta and Raj Rajaratnam who were been found guilty of insider trading charges in the United States) and RGTIL.

The Serious Fraud Investigation Office draft report claims that the RIL chief quietly and without any disclosure "stripped RGTIL from RIL and converted into his personal property at a meagre price" through a "maze of private companies" that enabled India's richest man to "convert" a wholly-owned subsidiary of the country's largest private corporate entity into his "personal property" in a "classic manoeuvre".

RGTIL also figures among the firms involved in the so-called Biometrix case. In 2013, the Enforcement Directorate in the Ministry of Finance (which is responsible for enforcing the Foreign Exchange Management Act and the Prevention of Money Laundering Act) wrote to the Reserve Bank of India seeking its advice on the legality or otherwise of a loan of Rs 6,530.36 crore ($1.62 billion) by an overseas branch of ICICI Bank to a Singapore-based company called Biometrix Corporation that later returned to the country allegedly as foreign direct investment through the issuance of financial instruments in four Reliance group companies, including RGTIL.

The range of transactions relating to this company underscores its importance to the sprawling business empire of India's richest man.

The writer is a journalist, educator and documentary film-maker. He is the lead author of Gas Wars: Crony Capitalism and the Ambanis.

Discuss the story on Facebook here.

We welcome your comments at letters@scroll.in.
Sponsored Content  BY 

As India turns 70, London School of Economics asks some provocative questions

Is India ready to become a global superpower?

Meaningful changes have always been driven by the right, but inconvenient questions. As India completes 70 years of its sovereign journey, we could do two things – celebrate, pay our token tributes and move on, or take the time to reflect and assess if our course needs correction. The ‘India @ 70: LSE India Summit’, the annual flagship summit of the LSE (London School of Economics) South Asia Centre, is posing some fundamental but complex questions that define our future direction as a nation. Through an honest debate – built on new research, applied knowledge and ground realities – with an eclectic mix of thought leaders and industry stalwarts, this summit hopes to create a thought-provoking discourse.

From how relevant (or irrelevant) is our constitutional framework, to how we can beat the global one-upmanship games, from how sincere are business houses in their social responsibility endeavours to why water is so crucial to our very existence as a strong nation, these are some crucial questions that the event will throw up and face head-on, even as it commemorates the 70th anniversary of India’s independence.

Is it time to re-look at constitution and citizenship in India?

The Constitution of India is fundamental to the country’s identity as a democratic power. But notwithstanding its historical authority, is it perhaps time to examine its relevance? The Constitution was drafted at a time when independent India was still a young entity. So granting overwhelming powers to the government may have helped during the early years. But in the current times, they may prove to be more discriminatory than egalitarian. Our constitution borrowed laws from other countries and continues to retain them, while the origin countries have updated them since then. So, do we need a complete overhaul of the constitution? An expert panel led by Dr Mukulika Banerjee of LSE, including political and economic commentator S Gurumurthy, Madhav Khosla of Columbia University, Niraja Gopal Jayal of JNU, Chintan Chandrachud the author of the book Balanced Constitutionalism and sociologist, legal researcher and Director of Council for Social Development Kalpana Kannabiran will seek answers to this.

Is CSR simply forced philanthropy?

While India pioneered the mandatory minimum CSR spend, has it succeeded in driving impact? Corporate social responsibility has many dynamics at play. Are CSR initiatives mere tokenism for compliance? Despite government guidelines and directives, are CSR activities well-thought out initiatives, which are monitored and measured for impact? The CSR stipulations have also spawned the proliferation of ambiguous NGOs. The session, ‘Does forced philanthropy work – CSR in India?” will raise these questions of intent, ethics and integrity. It will be moderated by Professor Harry Barkema and have industry veterans such as Mukund Rajan (Chairman, Tata Council for Community Initiatives), Onkar S Kanwar (Chairman and CEO, Apollo Tyres), Anu Aga (former Chairman, Thermax) and Rahul Bajaj (Chairman, Bajaj Group) on the panel.

Can India punch above its weight to be considered on par with other super-powers?

At 70, can India mobilize its strengths and galvanize into the role of a serious power player on the global stage? The question is related to the whole new perception of India as a dominant power in South Asia rather than as a Third World country, enabled by our foreign policies, defense strategies and a buoyant economy. The country’s status abroad is key in its emergence as a heavyweight but the foreign service officers’ cadre no longer draws top talent. Is India equipped right for its aspirations? The ‘India Abroad: From Third World to Regional Power’ panel will explore India’s foreign policy with Ashley Tellis, Meera Shankar (Former Foreign Secretary), Kanwal Sibal (Former Foreign Secretary), Jayant Prasad and Rakesh Sood.

Are we under-estimating how critical water is in India’s race ahead?

At no other time has water as a natural resource assumed such a big significance. Studies estimate that by 2025 the country will become ‘water–stressed’. While water has been the bone of contention between states and controlling access to water, a source for political power, has water security received the due attention in economic policies and development plans? Relevant to the central issue of water security is also the issue of ‘virtual water’. Virtual water corresponds to the water content (used) in goods and services, bulk of which is in food grains. Through food grain exports, India is a large virtual net exporter of water. In 2014-15, just through export of rice, India exported 10 trillion litres of virtual water. With India’s water security looking grim, are we making the right economic choices? Acclaimed author and academic from the Institute of Economic Growth, Delhi, Amita Bavisar will moderate the session ‘Does India need virtual water?’

Delve into this rich confluence of ideas and more at the ‘India @ 70: LSE India Summit’, presented by Apollo Tyres in association with the British Council and organized by Teamworks Arts during March 29-31, 2017 at the India Habitat Centre, New Delhi. To catch ‘India @ 70’ live online, register here.

At the venue, you could also visit the Partition Museum. Dedicated to the memory of one of the most conflict-ridden chapters in our country’s history, the museum will exhibit a unique archive of rare photographs, letters, press reports and audio recordings from The Partition Museum, Amritsar.

This article was produced by the Scroll marketing team on behalf of Teamwork Arts and not by the Scroll editorial team.