Supreme Court sends Ambani brothers back to the table

The Supreme Court on Friday ruled in favour of Mukesh Ambani’s Reliance Industries Ltd (RIL) and the Union government in the dispute over gas from the Krishna Godavari basin off the Andhra Pradesh coast. In doing so, the court made it clear the government alone is the ultimate owner of all natural resources in the country.

The court said RIL can sell gas to Anil Ambani’s Reliance Natural Resources Ltd (RNRL) at the government-set price of $4.2 per million metric British thermal units, which is nearly double what a 2005 Ambani family agreement had set — $2.34. The court asked the two factions to renegotiate the gas supply agreement within six weeks.

A bench comprising chief justice KG Balakrishnan, and justices P Sathasivam and B Sudershan Reddy overturned the earlier judgments of the Bombay high court and the company court that the government’s right to price a resource like natural gas was compromised through its contract with RIL. “Natural resources must always be used in the interests of the country, and not private interests,” the judges said.

Interestingly, the Anil Ambani welcomed the judgment and said he looked forward to “expeditious and successful renegotiations with RIL to secure gas supply for his group’s power plants”. Despite the younger Ambani’s projected optimism, other segments of the ruling is likely to make it nearly impossible to reach an agreement with RIL for power supply.

For example, the ruling very clearly spells out all the policies that the government put in place after the two sides entered the original supply agreement in 2006 will applicable to the two firms as well. In other words, the government’s gas utilisation policy, formulated in 2007-08, clearly spells out that future gas plants, such as Anil Ambani’s, come much lower down in the pecking order compared with existing plants.

According to the new judgment, the price, buyer, etc, are to be decided by the government, rather than RIL, making any negotiations with the Mukesh Ambani group infructuous.

The two groups have been directed to place the result of their negotiations before the company court within 14 weeks.

While the earlier verdicts had upheld RIL’s right to sell gas at any price to Anil Ambani as long as it did not impact the government’s revenues, the Supreme Court held otherwise. The judges ruled that though the government had been forced by circumstances to involve private partners in exploration, it still retained ultimate control over pricing and beneficiaries.

“The Constitution envisages exploration, extraction and supply of gas to be within the domain of governmental functions. Due to shortage of funds and technical know-how, the government has privatised such activities through the mechanism provided under the PSC. It would have been ideal for the PSUs to handle such projects exclusively. Nevertheless, even if private parties are employed for such purposes, they must be accountable to the constitutional set-up,” chief justice Balakrishnan and justice Sathasivam, who made up a majority on the bench, ruled.

Justice Reddy, in a separate, minority verdict, gave very similar reasons for allowing RIL to charge a higher price.

“It’s a relief,” said Taina Erajuuri, a fund manager with Helsinki-based Fim Asset Management. “Of course it’s not completely over. They still have to negotiate, which is what they should’ve done in the first place.”

The dispute contributed to the unease of international energy companies over the lack of clarity in India’s production sharing contracts between the government and explorers that govern pricing and revenue sharing from oil and gas blocks.

Even after today’s ruling “if I were advising a client, I would tell them, ‘keep your eyes wide open and try to agree the tightest commercial terms possible and have a very clear dispute mechanism,’’ said Kamal Shah, a London-based lawyer with Stephenson Harwood, who specialises in international arbitration. — With Bloomberg inputs