The market has gone ga-ga over the 1:1 bonus issue from Reliance Industries. But, as is usually the case, the bulls are salivating over ephemeral things. The real significance of Dhirubhai Ambani's showmanship at the company's recent annual general meeting was not the spectacular bonus, but the way in which he has given shareholder interests and global vision a new push.A bonus looks like a free gift of shares, but it is nothing of the kind. It is a mere book entry that changes the size of the share capital that is entitled to a dividend. It is not free, because shareholders already owns those funds anyway. At best, a bonus is just a positive signal about future earnings.

What makes Ambani's June 26 pitch to shareholders unique is its clear enunciation of the management's approach to shareholder wealth-how he plans to create it, grow it, and distribute it. Ambani plans to create wealth by establishing and maintaining Reliance's market leadership is all the areas it operates in; he will grow it by utilising the best in terms of technology and human resources; and he will distribute it through bonuses, a 25 per cent dividend payout policy, and capital appreciation -- if necessary, through share buybacks.

Critics may dismiss this as another gimmick, but that's mere carping. In his rise to the top, Ambani has made many enemies, he has angered analysts and investors by adopting less-than-transparent disclosure policies in the past, and he has sometimes treated shareholder wealth as a byproduct of his own ambitions. But all that is water under the bridge. What Ambani has done is relevant not only to Reliance, but the whole corporate world. It's not that companies have not done anything like this in the past. For example, a few years back, Great Eastern Shipping took a policy decision to issue rights shares only at par and announced a dividend payout policy something like Ambani's-as a percentage of net profits.

But the point one is trying to make is that smaller companies may often be more innovative, but it takes a big one like Reliance to shake up the marketplace. There are three areas in which the Ambani announcements of June 26 will make a difference. They are:

* Focus on return on net worth: One of the side-effects of the post-CCI world has been the artificial focus on earnings per share as opposed to the return on net worth-or shareholders' funds. While EPS is a good guide for non-shareholders to decide whether they want a part of the action in a company, for existing shareholders the real measure of management performance is the total return on their funds -- equity plus reserves. Ambani has rightly focussed on a 20 per cent return on shareholders' funds. This means he can be liberal with bonuses in future-as the multinationals are. If he can achieve 20 per cent over the next two or three years, Reliance shares will hit the stratosphere.

Focus on the right kind of globalisation: Thus far, shareholders of Indian companies have just been given grand words on globalisation. But few Indian companies understand globalisation the way Reliance does. Ask any corporate, and he might talk of globalisation as higher exports, an ability to access foreign capital and foreign tieups. True globalisation means global size, global reach and a capacity to hold on to the domestic market even after import tariffs are cut to the bone. It does not matter if you don't export one single product, but if you are truly global in size and efficiency of operations, you are global. That's the case with Reliance today. It does not export much in relation to its size, but it is global by virtue of its command of the Indian market in various products. The lesson for all Indian companies is that it is foolish to talk about conquering export markets if you cannot hold your own in the domestic market.

Focus on long term strategy: The key to Ambani's success is not his manipulative skills, but his truly strategic vision. In the late 1970s and early 1980s, there was opportunity in the Indian market, but not enough capital. Ambani decided that if he must grow, he would have to create his own source of unlimited capital. In the process he built the equity cult in India. In the mid-1980s, when other Indian industrialists were just beginning to spot the opportunities that Ambani saw 10 years back, he realised that his real competitors would come from abroad in future. To compete with them, he needed not only lots of capital, but cheap capital to build world-scale plants.

But how can capital be cheap when import duties are so high? Ambani had an answer: borrow huge amounts to buy high-cost machinery and then transfer this debt to the market by converting it to equity at high premiums. The result: low real costs of capital. Now, in the final phase of Reliance's evolution, Ambani knows that the Indian pond is too small for him. He knows that in a global sense, he is where he was in the late 1970s. He needs capital, lots of it, but only the global market can give this to him. The 1:1 bonus may thrill Indian shareholders, but the rest of the world is eagerly lapping up his corporate vision and shareholders' charter. In that sense, Ambani is already India's first true multinational.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.