Essar Group’s Downfall Against Reliance’s Rise Has Lessons On India’s Private Sector

The passing of Shashi Ruia, who founded the Essar Group along with younger brother Ravi Ruia in the late 1960s brings back memories of Essar’s shadow corporate battle with Reliance Industries in the 1990s.

Both Reliance Industries & Essar Group were racing to build the first major private sector refinery projects in Jamnagar on the west coast of Gujarat.

As it happened, Reliance’s refinery was commissioned by early 2000, also the world’s largest grassroots refinery at the time.

Essar’s project was delayed, for among other reasons, by a cyclone which hit the west coast of India and Gujarat in mid 1998.

Essar’s refinery project then suffered a series of delays, leading to financing challenges as well. It finally started production in 2006 with a capacity of 7.5 million tonnes per annum.

By then, in some ways, the group’s fortunes had already begun to dip.

Interestingly, the same cyclone had a much lesser impact on Reliance’s refinery construction efforts. Reliance was able to pick up the pieces so to speak and resume construction for what was commissioned as a 27 million tonne refinery in early 2000 with the company saying it took just 36 months to build it.

Around that time, Reliance was going from textiles to petrochemicals to energy along with finance, Essar was going from shipping to oil exploration to to steel, mining, power and also finance and banking.

Arguably, the opportunities were many as sectors like oil and gas were opening up for the first time and many ambitious entrepreneurs and business houses were jumping in.

And yet, there was rivalry shaping up between Reliance and Essar as both began treading into each other’s zones.

In the mid 1990s onwards, Essar was actually housed in Maker IV in Nariman Point, south Mumbai.

If Maker IV sounds familiar, that is because it is.

Because Maker IV is where Reliance founder Dhirubhai Ambani once sat and his son Mukesh Ambani now sits.

It is still the headquarters for Reliance Industries. Essar subsequently moved out to its own building next to Mumbai's race course.

So the two groups were clearly stepping on each other's toes, in the elevators going up Maker IV if nowhere else.

Essar’s Momentary Rise

The challenge was not so much the market opportunity but access to finance at the time. Both companies were raising debt and equity from banks, financial institutions and the public and there was bound to be some friction, more likely when it came to debt since the lenders were only a handful.

This was during a time when policies on the private sector’s role in oil and gas — including the distribution of refinery products like petrol and diesel — were still evolving. Essar never really recovered from its cyclonic encounter. Its steel business predominantly located in Hazira, also in Gujarat, started accumulating debt.

Eventually, the Ruias sold Essar Oil in 2016 as a stressed asset to Rosneft, a Russian integrated energy giant, something like the Russian equivalent of an ONGC and IOC for around $13 billion. Strangely, Rosneft has no other presence in India before or after, at least in plant and machinery that I could see and the deal itself had heavy political overtones.

Meanwhile, Essar Steel was sold to Arcelor and Nippon Steel in 2019, bringing down the curtains on that too. The Essar Group continues to exist today, growing in areas outside India and in smaller ventures in India including green energy transportation but it is a much reduced version of the giant it was aiming to become in the early 2000s.

After Essar's momentary rise to become a challenger to Reliance, as India’s largest energy conglomerate, the field has been wide open for almost a decade or more.

A Niggling Concern

Till the arrival of the Adanis. The Adanis came from ports, once again in Gujarat and then moved onto energy, infrastructure, cement and construction, including airport assets and real estate. Reliance and the Adanis don’t seem to be overlapping much right now, except perhaps in news media which both own.

The avoiding of overlap may not be accidental and more because of careful design. Many overseas fund managers I meet often ask if businesses who go up against Reliance then or Adani today would survive.

The answer with Reliance is quite simple as there are several real life examples for everyone to see. Be it natural calamities or other misfortunes, most of Reliance’s key rivals have melted away or imploded over the years.

In the case of Adani, it would seem that there are areas like airport contracts or the mega Dharavi slum redevelopment project in north central Mumbai where potential rivals seem to take a step back, at least that’s how it appears from outside.

There is nothing that suggests the Adanis and Ambanis, the two largest conglomerates in adjacent businesses in energy, are faced off against each other. Nothing publicly at least.

But this is a niggling concern for most investors, how competitive and open are Indian markets really? Will they have to cherry pick sectors where the Adanis and Ambanis are not playing or is it fine to invest in companies ranged against them?

In the oil and gas sector, state-owned companies such as Indian Oil, Bharat Petroleum and ONGC have been able to stand their ground against Reliance. This suggests that some parts of the competitive economy are working as they should. Whether this would extend to private enterprises in other sectors as well is a question that awaits clarity.