Reliance Brothers Call Truce, Terminate 'Non-Compete' Agreements

---

Researched by Industrial Info Resources (Sugar Land, Texas)--In a May 23 press release, Mukesh Ambani's petrochemical, refining, oil and gas conglomerate Reliance Industries Limited (BSE:500325) (RIL) (Mumbai) announced that an agreement was approved and signed between RIL and certain companies belonging to Reliance ADA Group (Mumbai), which is spearheaded by Anil Ambani. By signing the agreement, the brothers ended a long-standing dispute that began as early as 2002, after the death of their father and Indian business tycoon Dhirubhai Ambani. The dispute culminated in the company being split between the brothers on June 18, 2005, with their mother Kokilaben Ambani acting as intermediary.

The agreement was signed between RIL and telecommunications company Reliance Communications Limited (BSE:532712) (Navi Mumbai, Maharashtra); infrastructure firm Reliance Infrastructure Limited (BSE:500390) (Mumbai); gas, coal and liquid fuel sourcing, supply and transportation company Reliance Natural Resources Limited (BSE:532709) (RNRL) (Navi Mumbai, Maharashtra); and financial service provider Reliance Capital Limited (BSE:500111) (Mumbai).

Approved by the boards of directors for RIL and the Reliance ADA Group companies, the agreement cancelled all previous "non-compete" arrangements that the companies had agreed to in January 2006 in regards to the new setup and re-organization of the Reliance Group. The companies simultaneously signed a new, less complicated, non-compete agreement singularly with regards to power generation via the gas-based route.

According to the press release, "the cancellation of the existing non-compete agreement will provide enhanced operational and financial flexibility to both groups, and greater ability to participate in high-growth sectors of the Indian economy, such as oil and gas, petrochemicals, telecommunications, power and financial services." Analysts expect the agreement to encourage both companies to invest more in the infrastructure and power sectors, with special emphasis on the ultra-mega-power projects--a series of power projects planned by the Indian government in a bid to meet its "power for all" goal by 2012.

However, as per the terms of the agreement, RIL will not foray into the gas-based power generation industry until March 31, 2022. According to the release, an "appropriate exception has been made in respect of RIL's captive gas-based power plants." With the peace reconciliation agreement, both brothers will see venues opening for them and will be able to compete in each other's respective business arenas, except for new gas-based businesses. The move may exterminate all possible chances for additional feuding between the two group companies in regards to anything concerning "scope and interpretation" of the obligations attached to the previously signed, non-compete agreement.

The two companies also stated that RIL and RNRL would go about concluding negotiations as soon as possible for the gas-supply arrangements from the Krishna-Godavari (KG) river basin, as per the recently passed judgment by the Supreme Court of India. Before the brothers split the company, RIL had discovered a 7 trillion-cubic-foot natural gas reserve in the KG basin near Visakhapatnam, off the coast of the south Indian state of Andhra Pradesh.

When the brothers split the company in 2005, a memorandum of understanding was signed between them, by virtue of which RIL would permit RNRL to source or buy gas from RIL, which would come from the KG basin, for 17 years at a price that was 44% lower than the threshold price established by the government.

However, Mukesh Ambani wanted the agreement annulled, and the conflict turned bitter when RNRL took RIL to court to uphold the memorandum of understanding. The matter was then taken to the Supreme Court, which ruled in favor of RIL in early May and ordered that terms of the agreement be renegotiated between the brothers by mid-June, with the new government price of $4.2 per million metric British Thermal Unit as the yardstick for negotiations.

Meanwhile LN Mittal-promoted global steel giant ArcelorMittal (NYSE:MT) (Luxembourg) is also planning to venture into the Indian power sector. Although capacity and location details of the plans are not yet available, it has been reported that the company will begin by setting up thermal power plants, and it would think about setting up gas-fired power plants as well. In response to media questions, a company spokesperson said that the company is looking to establish a team to construct captive power plants to support planned steel mills in the country. "Such power plants are expected to be built in Jharkhand, Orissa and in Karnataka, based on thermal coal linkages," the company official is quoted to have told reporters. However, these plans contrast starkly with the severe delays facing the company's two integrated steel mills planned in the country for an estimated $20 billion investment.

On the bright side, the company's planned power plants may support its ongoing 9 million-ton-per-year petroleum refinery project at Bhatinda, which is in the northern state of Punjab, due to be commissioned by 2011.

Meanwhile, Reliance Power is setting up a 4,000-MW, gas-based UMPP in Maharashtra at an investment of $3 billion. Its plans involve setting up two gas-based power plants with a total capacity of 10,280 MW. One of these is being set up at Dadri, Uttar Pradesh, with an installed capacity of 7,480 MW and at an expense of more than $5.3 million.

However, the company's planned 4,000-MW UMPP at Krishnapatnam, Andhra Pradesh, which is scheduled to be fully commissioned by 2015, is facing hurdles with land acquisition. It is expected to cost about $3.6 billion.

View Project Report - 89000744 89000761 89000972

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.