The golden clause that let down Anil Ambani

Besides the diminished status of the family memorandum, the biggest factor contributing to Anil Ambani’s loss on Friday was the re-interpretation of a crucial clause in Reliance Industries’ production contract with the government.

Clause 21.6 of the production sharing contract (PSC) between Reliance Industries (RIL) and the government had turned out to be the most controversial, on which the entire Rs 52,000 crore case swung. It is called “Valuation of Natural Gas”.

According to the government and RIL, it dealt with pricing, rather than just valuation.

But, according to the Anil Ambani group, valuation meant just valuation. In other words, it specified how the government must ‘value’ the gas that RIL was otherwise free to dispose of as it deemed fit.

According to the Anil Ambani group, the clause begins by saying that “Gas, which is… flared with the approval of the Government or re-injected or sold to the Government… be ascribed a zero value.” This makes sense only if valuation means valuation for calculating government dues, rather than end selling price, as flared gas is not sold at all.

The government and RIL claimed the clause denied RIL any freedom to fix prices and therefore, the earlier prices offered by RIL were null and void.

While the earlier two courts, the company court and the Bombay High Court, sided with Anil Ambani group’s interpretation of the meaning of the clause, the Supreme Court sided with the government and RIL’s interpretation.

“As a matter of policy also, the Government must be free to determine the valuation formula as well as the price. Therefore, keeping these considerations in mind, the Government’s interpretation of the PSC as has been lucidly demonstrated by the learned Solicitor General is valid.

Thus the Government has the power to determine valuation as well as price for the purpose of the PSC,” the Supreme Court held, dealing the biggest blow to Anil Ambani group’s hopes.