HEART OF THE MATTER

Who owns thegas anyway?

Under Article 297 of theConstitution, the Union ofIndia owns petroleumoccurring in its naturalstate in the territorialwaters and the continentalshelf of India

Contentious issues:

Govt claims RIL is only acontractor and doesn’t ownthe gas that it commerciallyexploits

The production sharingcontract between the govtand RIL provides forrecovery of all costs beforesharing ‘profit petroleum’

Anil Ambani side claims RIL’sshare of profit petroleumbelongs to the MukeshAmbani company. Govthas nothing to do with howRIL’s share is soldand to whom after it hasreceived all its dues

Change of strategy:

Govt move to declare theMoU between Ambanibrothers as null and voidpotentially undermines allthe arguments in the highcourt till date

Govt wants to become aparty to the case; in thehigh court it was only anintervener with a limited role

Two verdicts – one by thecompany judge and theother by the division benchof the high court – havegone in Anil Ambani’sfavour. Neither deniesRNRL the right to thegas from KG-D6.

Potential fallout:

Other private players such asCairn Energy may besubjected to the sameconditions when oil startsflowing from the Rajasthanfields later this year

Supreme Court decision onthe ownership of gas couldhave a bearing on theauction of oil and gas blocksin the eighth round of biddingthat is imminent

Mumbai, July 19: The government has created a potentially piquant situation by demanding that the Supreme Court declare the memorandum of understanding (MoU) reached between the Ambani brothers in 2005 as “null and void”.

If the apex court accepts the demand, the demerger of the Reliance group itself could be called into question because the MoU was the bedrock agreement on the basis of which Dhirubhai Ambani’s empire was formally carved up in January 2006.

It could also spark another ferocious bout of litigation between the Ambani brothers who are honour bound not to invade each other’s territories or lines of business for at least 10 years.

The MoU is a private document within the Ambani family and was reached on June 18, 2005, when matriarch Kokilaben Ambani intervened to thrash out a settlement between the warring siblings.

The document was not produced in October 2005 when Reliance Industries sought Bombay High Court’s approval for the scheme of arrangement that had been devised to split the Reliance group.

Back in June, the division bench of the high court said: “The memorandum of understanding between the two brothers … was an integral part of the scheme (of arrangement).”

Earlier, in his verdict delivered in October 2007, company judge Anoop Mohta noted: “Based on the MoU, both the brothers and the officials of RIL and other group companies … exchanged correspondence, e-mails and held conferences and meetings to implement the MoU and to resolve the disputes by moving a scheme of arrangement. Accordingly, RIL and other companies decided to move Bombay High Court for the sanction of the scheme of demerger.”

Although the MoU wasn’t produced in court, the correspondence between the two sides were part of the court records and the provisions of MoU had been worked into the scheme of arrangement.

When the court approved the scheme of arrangement in December 2005, it was clearly on the basis of the MoU and the depositions made under it. The demerger had also been cleared by the ministry of corporate affairs.

Portions of the MoU – especially those provisions that pertained to the understanding on gas supply from the Krishna-Godavari basin – were eventually produced before a division bench of Bombay High Court late last year.

To negate the MoU now would amount to a negation of the demerger itself, creating a climate of uncertainty for the two groups led by Mukesh and Anil Ambani and their large body of shareholders.

More importantly, neither of the Ambani brothers has repudiated the MoU till date.

Legal quibble

The only quibble is whether the terms of an agreement between the two brothers will extend to the boards and managements of listed companies that have no access to the private document and are not apparently aware of its full contents.

This is the line of argument that the Mukesh Ambani side has consistently taken. RIL has also relied on a large body of case law to argue that since RNRL isn’t a party to the MoU, it could not try and seek comfort from it.

Relying on a number of verdicts in similar cases in the past, RIL also argued that RNRL hadn’t changed its articles of association to incorporate the terms and conditions that were spelt out in the MoU.

Govt strategy

It is important to understand why the government wants the apex court to declare the MoU as null and void.

First and foremost, the two major verdicts in this case – the first by the company judge of Bombay High Court in October 2007 and the second by the division bench of the same court in June this year – have upheld the fact that the MoU has a “binding effect” on both companies – RIL and RNRL – after the scheme of demerger was sanctioned in December 2005.

If it can nix the MoU itself, the government can persuade the court to uphold its right to decide who should receive gas supplies and at what price.

The ploy seems to be to deny RNRL any gas – and this is clearly evident from the tenor of the government’s affidavit filed on Friday which said the top priority would be to meet the requirements of the fertiliser plants and then the existing power producers along with a few LPG producers.

Since the Anil Ambani group doesn’t have a power project in place to receive the gas, why should its claim be entertained at all?

The Anil Ambani camp has argued that without an assured supply of gas at a viable price, nobody would be ready to provide funds for the Rs 20,000-crore power project at Dadri in Uttar Pradesh.

The government is certainly playing hardball. It wants the Supreme Court to allow it to become a party to the case. Remember, that it had tried to become a party to the case before Bombay High Court as well. At one stage, both the Ambani camps had opposed the government’s locus standi in the case.

The high court only agreed to take the government on board as an “intervener” to clarify issues relating to the production sharing contract between the government and RIL with respect to the KG-D6 gas field.

By seeking to broaden its role as a respondent in the case before the Supreme Court, the government is asserting its right to play a more dominant role in this case than the courts have allowed it so far. The Supreme Court will have to deal with extremely tortuous arguments when it starts hearing the case on Monday.