The mysterious decline of Reliance Industries

India Dispatch: It is estimated that one in four Indian investors hold Reliance Industries stock - but it may be losing its appeal.

Reliance Industries is struggling to realise its expansion plans that depend on the vagaries of government policy. Abhijit Bhatlekar / Bloomberg News

Reliance Industries, led by Mukesh Ambani, India's wealthiest man, was last week dethroned as the country's most valued company by the state-owned Coal India.

Reliance's share price has fallen nearly 28 per cent since the beginning of this year, significantly higher than the 15 per cent fall recorded by the Bombay Stock Exchange benchmark Sensex amid the growing global economic uncertainty.

The loss of investor confidence in the company - founded in the 1950s by the late Dhirubhai Ambani, who introduced India to the equity culture, drawing the savings of millions of middle-class Indians to the Reliance stock - has baffled financial analysts around the country.

The US$55 billion (Dh202.01bn) conglomerate - now run by Dhirubhai's eldest son Mukesh, ranked ninth in this year's Forbes global rich list, with a personal fortune of $27bn - reported its highest quarterly profits yet last month.

The company, which has interests in energy, refining and petrochemicals, recorded a 17 per cent rise in profits to 56.61bn rupees (Dh4.53bn) in the quarter ending in June, boosted by the strong performance of its refining business.

Last month, the government approved BP's $7.2bn purchase of 30 per cent of Reliance's stake in about two dozen oil and gas units along India's east coast. It was hailed as one of the largest direct investments in India since the country embraced economic liberalisation in the early 1990s. The company is largely debt-free and has a growing cash pile exceeding $9bn.

Family-run conglomerates such as Reliance, which dominate India's business landscape, are the backbone of the economy, contributing 60 to 70 per cent of the country's GDP.

As its share value rose from less than 20 rupees in 1991 to about 1,600 rupees in the beginning of 2008, investors flocked to the Reliance stock like bees to honey. It is estimated that more than 3.5 million Indians - one in every four investors - are Reliance share-holders.

But its share value has since fallen to about 727 rupees as the company struggles to realise its ambitious expansion plans that depend to a large extent on the vagaries of government policy.

Reliance's deal with BP was caught up in bureaucratic wrangles for months before final clearance came from the government.

In March, Mr Ambani announced his company's entry into the country's lucrative financial services market by declaring a joint venture with DE Shaw, a $20bn global investment management firm.

The decision also highlighted the company's intention to procure a government licence to enter India's highly regulated but immensely profitable banking segment.

Pranab Mukherjee, the finance minister, proposed last year to issue banking licences, a key reform to promote financial inclusion in a country where the majority of the population does not have access to formal banking. But it is not clear when the reform will be approved.

Because of excessive government control and a lack of transparency in policy formulation, "the big boys of business are looking overseas", Deepak Parekh, the chairman of the national mortgage and banking giant HDFC, warned last year. "It's a sorry state of affairs."

But Mr Ambani says he is not eyeing oversees acquisitions and remains committed to India.

"Our cash flows give us the unparalleled opportunity to allocate capital to higher-margin resource plays in leading markets around the world," he said recently. "We remain committed towards investing in India and have commenced the investment programme in our [businesses]."

Many analysts also point out that several of the company's investment plans remain shrouded in a veil of secrecy, fuelling anxiety among investors.

In June, Reliance said it had approved a 48bn rupees deal to purchase 95 per cent of Infotel Broadband Services, the only company to have won spectrum allocation for fourth-generation mobile broadband services in a government auction.

The deal will "usher in a wireless broadband revolution in both the urban and the rural areas all across the country", the company said. But how that goal will be achieved remains unclear as the company has not divulged to investors a business plan to make inroads in the country's crowded and highly competitive telecommunications market.

Reliance did not respond to requests for comment.