RIL-RNRL: How do legal, sector experts read the verdict?

In a severe blow to the Anil Ambani group seeking cheap gas from Reliance Industries, the Supreme Court ruled that the government will have the last word on pricing.The three-judge bench of the apex court, headed by Chief Justice KG Balakrishnan, ruled in favour of Reliance Industries. The court held that the government’s production sharing contract (PSC) was supreme and hence the Ambani family MoU was not binding.

The court also directed Reliance Industries Limited (RIL) to initiate negotiations with Reliance Natural Resources Limited (RNRL) within six weeks to arrive at a sale agreement within the framework of government policy. The PSC dictates a price of USD 4.2 per mmBtu while RNRL wanted gas at USD 2.34 per mmBtu.

In an interview with CNBC-TV18, Hitesh Jain, Partner, ALMT Legal; Pradip Baijal, Former Disinvestment Secretary and Former Power Secretary; RS Pandey, Former Petroleum Secretary gave their perspective on the Supreme Court’s judgement.

Here is a verbatim transcript of the interview.

Q: This is much as you expected that the Supreme Court will uphold the gas utilization policy will uphold the production sharing contract and that will win Supreme Court so pretty much according to expected lines as far as your are concerned?

Jain: As I am reading the judgement in greater detail it is on expected lines. The legal position as regards binding efficacy of the MOU was very clear. There was a previous judgement of the Supreme Court which the Supreme Court has relied in the Rangarajan case that private arrangements arrived between the shareholders are not binding upon the company. So that is also on expected lines.

As regards NTPC, also this judgement is not going to affect because that has been left to the EGoM and the government. So the judgement according to me is on the expected lines.

Q: The Supreme Court has asked both parties to actually to go back and renegotiate and come back within a period of 6-8 weeks and put together a new re-negotiated pact. The Supreme Court in its order says the tenure of such contracts cannot be such that it initiates a development plan as approved by the government therefore the GSMA and the GSPA entered into with RNRL should fix the price, quantity and tenure in accordance with the production sharing contract. So what room really then is there for renegotiation how do you see this re-negotiation roadmap because Harish Salve the Reliance counsel himself is unsure?

Jain: The guidelines have been laid down by the Supreme Court. As far as RNRL is concerned they would look at two guidelines which has been observed by the Supreme Court.

First is interest of RNRL shareholders as reflected in the MoU and the second is overriding public interest.

It is possible on the ground that to promote the industry, to promote the power sector – some concession has to be made in terms of price and if the parties arrive at a unanimous decision and the government feels that it is in the overall public interest that the industry has to promote it then there can be some room of manoeuvering. There are so many grounds on which as enumerated one can really look at the negotiating table.

Q: What have you made of the verdict particularly that it restores the sanctity of the fact that the government is the sole owner of the gas and that government policy overrides any private contract?

Baijal: It’s a very powerful judgment which says that private arrangement or a family arrangement or a MOU cannot overtake public policy.

It is very important that public policy rules over such arrangements.

Q: Has the verdict in that sense brought in the much needed clarity that the government is not just the owner of the gas but also has the power to decide on pricing? Do you think the government stands vindicated today at the end of this battle?

Pandey: Yes. The honorable Supreme Court after saying that the government is the owner of the gas, they have also said that the production sharing contract overrides all other private arrangements including the MoU which was the subject matter of the case.

Under the PSC, the government has the right to fix a pricing formula, government has the right to have a gas utilization policy and all these have been upheld by the court. So this clarifies doubts, if there had been any, in the government’s mind there was no doubt at all, but there were lurking doubts here and there. So that has been set at rest and the position is very clear.

Q: Mohan Parasaran has said that the case as far as NTPC is concerned is different. This is what we were discussing even yesterday on how this judgment is actually going to impact the current battle thats on in the Bombay High Court between Reliance and NTPCL, what Parasaran clearly suggesting that the yard stick there is different because NTPC is in instrumentality of the state. The profits will actually go to the government and hence this should be treated differently. What are your comments on that?

Jain: NTPC can derive a support from the judgment because the judgment clearly states it is the government who is the owner of the property. Now NTPC being a government arm, it gives a right to the government to discriminate and give a concession to NTPC. The government can justify such concessions, the government can justify that this is not a discrimination and NTPC being an own entity, the government can say that if we are selling to our own arm, we are entitled in public interest to sell at a reduced price also.

So even if the government fix that for the private purchasers, the price will be x and for the government entities it will be lesser, the government will be right in doing so.

Q: Could a different set of yardsticks be used as far as the issue with NTPC is concerned and from a government’s stand point what could be the changed situation?

Baijal: It is absolutely correct that the instrumentality of the government can be charged a concessional price. But it creates a plethora of problems in regulation. After all when you liberalized the private sector companies which entered the telecom network or the gas network, they have to have a level playing field with the public sector company.

So if you come up with a thesis later that the public sector companies have to be given a concession in the price then it will lead to a number of questions and perhaps a determination later. And their par price will also be different if they get the sources cheaper. That will be a very difficult arrangement to sustain in the long run.

Q: Just a point about what the Supreme Court has asked the brothers to do. It has asked them to go back and renegotiate the contract. To your mind what could be the scope for renegotiation?

Pandey: We have really not applied our mind to that. We were not really concerned about what the two private corporates would be doing amongst themselves. But it’s a good thing if they could sort out their dispute through renegotiation then there is nothing like that.

In fact this was one of the options given by the Bombay High court also. If you look at it carefully there were four options and the last two options were about having a new set of agreements or asking for damages etc.

So I really do not know how the renegotiation will be done because I have not gone into the entire dispute. But this is a window through which they can sort out their differences and that is welcome.

Q: We have already heard Anil Ambani saying that they are not looking at filing an review petition at least at this point in time. But what is their thinking going to be to your mind because clearly the family MoU was the basis, the foundation of the division of assets between the 2 brothers. Clearly the gas agreement between the 2 as part of that family MOU was done at a certain valuation. Now that does not stand any more. It puts into question the division of assets per say so. What would you think could be the thinking as we enter into this renegotiation as part of this larger family MoU which even Harish Salve says the court is up held could perhaps be the guiding principles?

Jain: As one reads the judgment in detail, it becomes clearer and clearer. The judgment explicitly states that the court cannot rewrite the scheme of merger again and that the court cannot rewrite the MoU.

Secondly, the Supreme Court in expressed word has also observed that it is the discretion of the EGoM and under the PSC for the government to decide the pricing issue. So one thing the Supreme Court has clearly left that no courts in future can get into this aspect of fixing the price because the Supreme Court said that we do not have an expertise to come to a suitable arrangement or fix the price. It is the prerogative of the government.

With these two clear guidelines when they sit on the negotiating table, one is clearly aware about what his rights are there in the future. Therefore one can see that the Supreme Court has paved the way for parties to sit together and come to the negotiating table.

Q: What the court has also said is that it is high time that the government actually puts a suitable utilization policy, a suitable gas policy in place. Now Mr Jain has already talking about the fact that the court doesn’t want to intervene in future it’s going to be left to the government, its going to be left to the Empowered Group of Ministers. There was a question on whether it should be retrospective or not retrospective, the court has clearly delivered its verdict on that front. We have already heard from our sources that in the past fortnight or so Reliance Industries has asked the government or stated that even USD 4.32 or even USD 6 is not viable anymore. So how do you actually expect now the government to approach the entire issue of pricing a national asset like gas?

Baijal: These are very complex issues. The prices of gas change the world over. We import gas, we import other sources of energy, we import naphtha. Now to say that the Indian indigenous price for some reason will be very different is not sustainable. You can’t have a very low indigenous price and a high import price because that would lead to a situation where the importers will get a much higher price and the indigenous producer will get a smaller price, which will inhibit his ability to invest further in getting resources in India.

And that is very important that the price should be fixed by the government. But the production sharing contract very clearly says that it should be based on commercial principles, and that is what the government has done.

Now as the volatility increases or as the problems increase or as you find resources which are very expensive to explore but yet you see that the world prices have gone up maybe the government will have to take a view. That is precisely what the honorable Supreme Court has said that we leave it in the area of government and the government and the experts will sit down together and decide on these issues. These issues cannot be sorted out very quickly they will need a lot of deliberation.

Q: There is a stipulated period between which these two brothers have to actually arrive at a renegotiative pact. This is only in the well known speculation. If in deep they cannot arrive at a renegotiative pact by that time what then is the future course of action or what then happens really to where things stand?

Jain: According to me, six or eight weeks cannot be sacrosanct if the parties need 12 weeks or 2 months or 3 months and if the parties think that they are closer to the settlement, they can try and explore in the extended time.

In view of the guidelines, the parties would try to achieve the settlement as expeditiously as possible or wait for the settlement. If the settlement is not possible then the court said that you have to come with a suitable arrangement and go back to the company court. So then the parties will be back to the courts.

Source : Money Control

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