Let National interest prevail...
As the Ambani brothers fight over the gas pricing issue, Supreme court judgement rules in favour of the government

The tussle between the Ambani Brothers over the gas pricing that rolled up to the Supreme Court has been in the limelight recently. There were numerous issues involved in the whole ‘fight’, which also included feuding and ego clashes between the brothers. Issues of gas pricing, family agreements, the memorandum of understanding signed during the de-merging of the Ambani business empire, the case with NTPC etc were all entangled making the whole issue complex. To understand the issue, let us try to untangle the mess and understand each issue separately. For that, it is important to start from the beginning.

The Krishna Godavari Deltaic region in Andhra Pradesh is one of the largest natural gas reserves in India. The Government of India, under its New Exploration and licensing Policy (NELP), offered several identified blocks of gas fields to private operators on lease for exploration and production. Under the NELP, private operators sign a Production Sharing Contract (PSC) with the government, which sets out the terms and conditions under which they operate their lease, including the share of revenues that would accrue to the government. Reliance India limited (RIL) won the rights of 12 such blocks including Block D6 (which happens to be at the heart of the controversy) in 2000 when it was still a unified company. It was still a unified company when in 2003, RIL announced that its subsidiary Reliance Energy limited (REL) would be setting up a gas based power plant in Dadri, Uttar Pradesh based on gas supplies from the KG D6 fields.

However, as a result of the succession spat between the brothers, Reliance India limited was split up between them. While Mukesh Ambani retained rights over the oil and gas business, younger brother, Anil Ambani controlled the power business. As a part of the division of the group, RIL was de-merged and Reliance Natural Resources LTD (RNRL) was formed to act as a conduit for the gas from the KG basin to REL. All shareholders of RIL were given share holdings in RNRL, but Mukesh Ambani’s holdings were substituted by Anil Ambani’s rights, and RNRL became a part of the latter’s newly formed Anil Dhirubhai Ambani Group (ADAG).

Given the split, the two companies needed to sign an agreement for the gas supply from KG D6 to the Dadri project.

In an unrelated development, the National Thermal Power Corporation (NTPC) had invited global bids for supplying gas for its purpose in 2003 to which RIL had originally bid. NTPC in 2004 had informed RIL that the latter had won the bid at the price quote of $2.34/ per mmbtu (million metric British thermal units) and had issued a letter of intent. This supply too was to come from the KG D6 block of RIL. When the MoU was being signed between the two brothers, this price was taken as a base price and the agreement was signed. Matters got a bit complicated after this, as parallel developments occurred that complicated the following.

The problem started as the RIL NTPC deal itself faced tribulations. Subsequently NTPC filed a case against RIL in December 2005 over the issue and it is still subjudiced.

In 2007, RIL called for bids for its gas supply from various gas users like power and fertilizer companies and arrived at a price of $4.2/ mmbtu. Since under the PSC of the NELP signed with the government, RIL had to take approval from the government about the price it can sell the extracted resource, it sent the same for approval. Given that things were already heated up by then with both RNRL and NTPC having filed cases against RIL, this pricing issue was given high importance and an Empowered Group of Ministers’ panel was set up for the same. The Government endorsed this price of $4.2/mmbtu for gas extracted from KG D6. This forms the basis of claims of RIL, and it has been seeking the same rate from RNRL and NTPC for its supplies as well.

While Anil Ambani has claimed that not supplying gas at the rate set by the MoU amounts to breach of contract; Mukesh Ambani claimed that given that the NTPC deal itself was not finalized, the price quoted by RIL to NTPC cannot be taken as a benchmark as it was in time of signing the MoU. To further complicate matters, since the NTPC deal is still subjudiced, technically there is no agreement price between RIL and NTPC that can serve as a benchmark. In such a scenario, the Government determined price of $4.2/mmbtu as the official price of gas extracted from KG D6, and everyone seeking to buy gas from RIL, including RNRL must pay at the same rate. It also stated that prices of gases have increased since 2005 rates, and hence it was not possible to supply at 2005 quoted prices.

Last year, while passing its judgment on the RNRL RIL case, the Mumbai High Court had called up Mukesh Ambani to explain why the family MoU should not be considered valid and had in effect almost endorsed Anil Ambani’s claim to supplies at $2.34/mmbtu. The Bombay HC finally passed an order that RIL must renegotiate a deal with RNRL that would make suitable arrangements for supply of gas. It also added that the basis for such an arrangement must be the scheme of de-merger agreed between the brothers in 2005. NTPC jumped at this decision and bolstered its claims for supplies at the same price. Incidentally, the NTPC RIL case too was pending in the Mumbai High Court. However, this caused a conflict with the Government pricing approved by the EGoM!

It was perhaps ego that then forced Anil Ambani to refuse renegotiating as suggested by Mumbai High Court, even at the MoU prices. He filed a case in the Supreme Court seeking supplies at the MoU rate, with no rooms for renegotiating. However, the apex court's judgment came as a big blow to him.

The Supreme Court has refused to entertain the MoU between the two brothers! The logic given by the court is that this agreement was a private affair between two brothers and their mother, and was not even made public to thousands of stock-holders of both the companies. Moreover, the gas resource in question is not a private property to be shared amongst the members of the Ambani family. The natural resource belongs to the nation at large and RIL has just been given a lease to extract the same. In cases of pricing, the Government’s decisions would supersede under the PSC clause. The Supreme Court has asked the two companies to renegotiate. It said that a suitable arrangement must not be suitable only for RIL, but also for shareholders of RNRL and RIL's obligation to look after it.
This judgment by the Supreme Court does not put an end to all the complications. The judgment on the NTPC RIL case is still pending and it is being categorically stated that this judgment has no bearing on it. A newer agreement is still to be finalized between the Ambani brothers. However, what this judgment does give is a reality check. Natural resources of the country belong to the nation and operating leases do not make private operators owners of the same. Two people cannot fight to decide rights over a resource that belongs to 100 million!