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Can Dassault Keep Up Its Partnership with Reliance Naval for Rafale?

In the euphoria over the ‘Surgical Strike 2.0’, the small matter of Rafale purchases appear to have suddenly gone off the media radar. In spite of the Supreme Court initiating contempt of court proceedings against Anil Ambani, there is hardly talk about its likely impact on his credibility and his company’s subsequent ability to do business with global aircraft manufacturers.

The fact of the matter is that Anil Ambani has four weeks to extricate himself from a jail term by paying up Rs.453 crore to creditors. But, it’s not about the payout anymore… it is about credibility, not just his own, but for the sake of the multi-crore deal for manufacturing Rafale fighter jets under license from Dassault.

The story of the junior scion of India’s top business house has been narrated in some detail following the Supreme Court’s ruling on cases involving default by Reliance Infocomm where the judges held him guilty of dishonoring a payment contract with Swedish telecom giant Ericsson. That they asked him to pay up or face a jail term should be reason enough for savvy enterprises to sidle away from prior commitments. But Dassault has been silent for now.

However, there could be more trouble coming Ambani junior’s way. Amongst other lenders who have outstanding debt to the tune of Rs 10,500 crore against him is the IDBI Bank, which moved the National Company Law Tribunal (NCLT) at Ahmedabad against Reliance Naval and Engineering Ltd, formerly Reliance Defense and Engineering Ltd. The case has not come up for hearing as on date.

Reports suggest that lenders are now hoping that a bunch of petitions filed against the RBI’s circular last year tightening the norms for debt restructuring and resolution would go their way. The All India Bank Officers’ Confederation had approached the Apex Court last year seeking to quash the RBI circular while claiming that the new rules would result in a loss of Rs 1 Lakh Crore and threaten the viability of the banks.

The Shipyard Association of India had also petitioned the court on the same grounds and is awaiting the hearing scheduled in March. It is worth a mention that Reliance Naval and Engineering is a member of this association and debtors are worried about company which reported losses to the tune of Rs 956 crore on a turnover of Rs 335 crore in FY 2018.

The question is whether Dassault would feel comfortable doing business with a company that’s facing cases both in the courts as well as at the debt tribunal. Of course, there is also the fact that Reliance Naval hasn’t been in top form ever since it was acquired by the Anil Dhirubhai Ambani Group (ADAG) in March 2015.

The company, formed after ADA Group bought controlling stake in Pipavav Shipyard Ltd, was the first corporate entity in India to be given clearance to build warships and other vessels for the Indian Navy after it went public in 2009. However, things soured within 2-3 years, and shipbuilding orders receded. In December last, the company announced that limited shipbuilding orders and delays in other defense orders were causing financial constraints in operations, an erosion of net worth and secured lenders calling their loans.

Interestingly, this narrative appears to run true to form for Anil Ambani, who split the family business in 2006 and went on a high-debt expansion program from which he is still to recover. Reliance Infocomm went for 3G spectrum when 4G was just around the corner and preferred to hold on to CDMA when GSM was the buzz. The last nail came in the form of elder brother Mukesh Ambani’s Reliance Jio reneging on a commitment to buy the former’s infrastructure.

The fact remains that Anil has dabbled with several businesses and come up short. His foray into media and entertainment after acquiring Adlabs from Manmohan Shetty is well documented. From owning 700 multiplex screens across the country, Reliance Media Works ended up selling them to Kerala-based Carnival Films to stave off disaster in a short time.

They repeated this story with the infrastructure business. Having bagged the prestigious Delhi Metro Airport Express in 2011 for a 30-year timeframe, Reliance Infra pulled out two years later citing unviability. It is another matter that Reliance Infra and Reliance Power accumulated massive debt to the tune of Rs 25,000 crore by 2017. Recent reports indicate that things are looking up, though rating agencies continue to look askance.

The question now is whether Reliance Naval and Engineering can hold off its debtors; will the courts refuse to dilute the RBI circular of last year? The chances are that the latter might prove to be the deciding factor for Anil Ambani.

As for Dassault, they might just see the value of keeping the Rafale orders in abeyance.

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