RIL could transform into a holding company says CreditSights

• Currently, RIL is both a holding company as well as an operating company across business verticals.
• Its retail and telecom IPO plans, listing of Jio Financial Services and plans to unlock value in the O2C business indicate that RIl aims to become a holding company, the report says.
• Each of Ambani siblings heading a distinct business can lead to disagreements at the group level, it adds.
• Mukesh Ambani is expected to remain as emeritus board member after his retirement in five years.
  

The telecom to retail conglomerate Reliance Industries could eventually transform into a holding company — which holds majority stakes in entities that operate major business verticals — says a report by CreditSights.

Currently, RIL is both a holding company as well as an operating company across business verticals. While oils-to-chemicals (O2C) and upstream oil and gas segments are wholly owned and held directly under RIL, telecom, retail and new energy segments are held under unlisted operating companies.

RIL’s path to completely becoming a holding company is indicated by the fact that the management promised the listing of retail and telecom business in five years, in 2019. Moreover, Reliance Retail recently brought in a large investor like Qatar Investment Authority which plowed in ₹8,278 crore. The move, along with the recent listing of Jio Financial services – as a value unlocking strategy in play for this 65-year-old group.

RIL was previously exploring plans to hive-off its O2C (oil to chemical) business into a standalone unit with Saudi Aramco taking a 20% stake in the new unit. “While such plans were postponed indefinitely in November 2021 owing to valuation disagreements amid the Covid-19 pandemic, we believe this again hints at the new holdco structure that RIL is working towards,” the report says.

Is holdco a good idea?

There are advantages as well as disadvantages that come with RIL becoming a holding company , says CreditSights which is Fitch Solutions company.

“We believe such a structure would facilitate a clearer distinction between each divisions’ assets and cash flows, unlock stakeholder value, open more diverse funding channels, demarcate capital allocation and facilitate closer oversight since each listed vertical will have its own set of diverse shareholders and possibly Board of Directors,” the report said.

On the flip side, in a holdco structure, RIL and its debt/ bonds would become structurally subordinated to any additional debt assumed at the operating subsidiaries. Structural subordination determines the order in which subsidiary-level claims are repaid relative to claims held at the or holding company level of the operating subsidiary.

“It will become more reliant on dividend upstreaming to service its debts,” the report said. It might also bring other complications.

“The group’s organizational structure will also become more complicated, and cash dividend leakage to public shareholders will rise given the listed status of the operating entities, resulting in lower dividend income for RIL,” CreditSights says.

Added to that, if business entities are listed and operate as standalone operating units, it could raise doubts over potential related-party transactions including inter-company lending.

It’s all in the family

The report also gave a thumbs up to Mukesh Ambani’s plan to groom and guide his three children into the business instead of an abrupt exit. That would have disrupted operations and RIL’s performance, it says.

Isha Ambani is now heading Reliance Retail and her twin Akash Ambani is heading Reliance Jio Infocomm. The youngest of the family, Anant Ambani is in charge of the new energy business. The current allocation of business divisions is logical from a credential perspective, the report adds.

Akash Ambani and Isha Ambani have been on the board of directors of both Jio and Reliance Retail since October 2014. Isha Ambani graduated from Yale University, while Akash Ambani and Anant Ambani graduated from Brown University – both Ivy league schools.

Feuds from the past

CreditSights believes that both of them have the right educational qualifications and exposure to these businesses. Anant Ambani is in charge of the nascent new energy business where none of the siblings has enough experience on account of it being a new venture.

“We also like that each sibling sits on multiple boards of Reliance’s key verticals, which allows for greater exposure and understanding of the broader business,” CreditSights says. While each of RIL’s next-generation leaders will likely have distinct, defined leadership roles in his/her assigned vertical, they could have divided opinions over certain decisions probably at the group level, it adds.

“This could potentially result in reputational and operational risks. We draw parallels to the public feud between RIL’s current chairman and CEO Mukesh Ambani and his younger brother Anil Ambani, which began in 2002 (after the demise of their father and founder of RIL, Dhirubhai Ambani) owing to disagreements over RIL’s management and ownership and lasted for over a decade,” the report said.

It also expects Mukesh Ambani to remain as an emeritus board member after his retirement in five years.

Seeing such precedence and being cognizant that RIL’s future leadership will likely involve three persons (versus two in the past), we remain watchful of potentially disruptive disputes between the senior management/shareholders of business divisions, but with the proposed structure, that is what Mukesh Ambani aims to avoid, CreditSights says.

It also believes that RIL will remain a family owned/controlled company after Mukesh Ambani hands over the reins of the individual businesses to his children.

“One possible arrangement could be to create a trust, owned and controlled jointly by (Mukesh) Ambani, the three siblings and their family members; with RIL managed by a professional management team,” the report adds.