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Ambani brothers' gas dispute ups India investment risks

The wrangle over an energy deal between India's billionaire Ambani brothers has highlighted the risks inherent in an economy dominated by big family businesses and spurred calls for the government to intervene.

business Updated: Jul 15, 2009 13:01 IST

The wrangle over an energy deal between India's billionaire Ambani brothers has highlighted the risks inherent in an economy dominated by big family businesses and spurred calls for the government to intervene.

The latest dispute between the feuding brothers could discourage investment in India's energy sector as the country scrambles to shore up its energy security.

It also tests governance standards for a nation that ranks a lowly 180 when it comes to enforcing contracts on the World Bank's index on ease of doing business. Only Benin ranks worse.

The near-three-year battle between India's top conglomerate Reliance Industries, headed by Mukesh Ambani, 52, and Reliance Natural Resources, led by estranged brother Anil, 50, will be heard in India's Supreme Court on July 20.

The two sides are fighting over terms of a gas-supply agreement struck when the Reliance empire was split in 2005. The Bombay High Court ruled last month that Reliance Industries should supply gas to Reliance Natural at nearly half the price it had set in an interim order in January.

The gas in dispute comes from the vast Krishna Godavari (KG) basin, and some in India have said terms of access to such a crucial resource in an energy-starved country should not be left in private hands.

"If a private MOU (memorandum of understanding) can involve something that belongs in the public domain, it gives the sense that large corporations can bend rules and influence policy -- that's surely got to be the biggest political risk," said Seema Desai, an analyst at risk consultancy Eurasia Group in London.

The government has largely been silent, which could make investors wary, said strategist Arun Kejriwal at KRIS Research.

"It sends a message that the law is different for different people. This is not trivial, it is a matter of national interest," said Kejriwal.

The chief minister of the state of Andhra Pradesh, where the KG basin is located, has also called for New Delhi to step in.

"The dispute over sharing of gas is not an issue to be settled by their mother. It is for the Centre (central government) to decide who should get the gas at what price," YS Rajasekhar said on Sunday, according to a national daily.

Family business

Big business families in India, as in many other countries, have long played an outsized role in the broader economy and have used political patronage to smooth their way. Some analysts say that too much is at stake now for the government to stay silent.

"The government's call is important ... the verdict could have an impact on the gas-allocation policy as it is likely to impact the flow of gas to priority sectors going ahead," Angel Broking wrote in a recent client note.

Macquarie estimates the proposed oil and gas production from just 4 percent of the KG-D6 block and Cairn Energy's <CAIL.BO> Rajasthan block could add $20 billion to India's GDP, cut its oil imports by 23 percent and add $59 billion in government profit-sharing and taxes.

Disputes like this "may dissuade future exploration and exploitation of India's mammoth upstream potential," it said.

This is not the first time that a fight between two of the wealthiest men in the world has grabbed newspaper headlines and sparked debate about the balance of power in corporate India. Mukesh was ranked 7th by Forbes in its list of global billionaires in March, with a net worth of $19.5 billion. Anil was at No. 34 on the list, with a net worth of $10.1 billion.

Reliance Industries last year cited a first right of refusal clause in the agreement to sink a bid by Anil Ambani's Reliance Communications <RLCM.BO> for a merger with South Africa's MTN.

The details of the family settlement, which was brokered by the Ambanis' mother, have not been made public, and at least a dozen issues still need resolution, analysts say, ranging from properties to shares in companies.

But some expect the rule of law to ultimately prevail.

"Family disputes among corporate houses in India, and the world over, are not new," said Manoj Vohra, director of the Economist Intelligence Unit in India.

"The rule of law in India is better than in several developing economies. Opportunities are massive and fundamental in nature and unlikely to be clouded by this slugfest."