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RNRL will not become a shell company: Chalasani

RNRL will not become a shell company: Chalasani
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First Published: Mon, May 10 2010. 10 11 PM IST

Balancing interests: Reliance Power CEO J.P. Chalasani. Abhijit Bhatlekar / Mint
Balancing interests: Reliance Power CEO J.P. Chalasani. Abhijit Bhatlekar / Mint
Updated: Mon, May 10 2010. 10 11 PM IST
New Delhi: The Supreme Court on Friday ruled in favour of Mukesh Ambani’s Reliance Industries Ltd (RIL) in its dispute over gas supply with his estranged brother Anil Ambani’s Reliance Natural Resources Ltd (RNRL). The court ruled that RIL’s gas production-sharing agreement with the government supersedes all other documents, including an Ambani family memorandum of understanding (MoU). Anil Ambani has said his group has no plans to file a review petition, but would like to renegotiate with RIL to iron out loopholes in the agreement.
J.P. Chalasani, chief executive of Reliance Power, a Reliance-Anil Dhirubhai Ambani Group company, said in an interview that the interests of all stakeholders must be balanced. He also said that RNRL will not become a shell company and that the ruling will not affect its business. Edited excerpts:
Balancing interests: Reliance Power CEO J.P. Chalasani. Abhijit Bhatlekar / Mint
How do you view this judgement? What has been your group’s interpretation?
There are three aspects. First is that there was a scheme of demerger, which was made way back on this and was implemented. Our contention was scheme of demerger is not fully implemented because there was no suitable agreement, so we approached the court. So RIL’s contention to the court was that the courts do not have the power to discuss the scheme of demerger and to do anything with respect to that, whatever is done is final. (The) court has clearly upheld our view that the court has a power to modify the scheme.
Secondly, there is so much talk about the MoU. There again, let us look at what did the court say about the MoU, because the case is surrounding this. The MoU, they said, has a lot of relevance and that is the basis for all the discussion on this, though technically it is not legally binding.
The third main aspect of the petition in the Bombay high court as well as in the Supreme Court is that the agreement signed in January 2006 is not the suitable arrangement under the scheme. Therefore, that agreement needs to be modified. The contention of RIL was no, this is the right agreement, it need not be modified. The court by saying that this agreement needs to be renegotiated, that is a judgement on this, has clearly upheld our view that the agreement which is existing is not the suitable agreement. So these were three contentions that we had and all the three contentions were upheld by the court.
What are you going to renegotiate, because the judgement has also said that government policy cannot be overwritten by any private contract? So, therefore, you have to go by the government-approved price, which right now is $4.2 per mmBtu. The gas utilization policy has also been upheld. So what exactly has been left to renegotiate, is it the quantity, the tenure or what?
The court has clearly laid down both the time frame as well as the framework within which you have to negotiate. It first said that you initiate your negotiations in six weeks and thereafter complete it in eight weeks’ time. Unless the court thought that there is a lot to negotiate, it will not give eight weeks’ time.
What are you going to negotiate? The pricing you are not going to negotiate, you have to go to the government for approval as far as tenure and quantity is concerned. So what are RIL and RNRL going to negotiate?
I am not going to tell you what is going to be negotiated. Obviously, within the framework there will be a number of points which should be negotiated on this. Once you sit across the table, there will be plenty of issues to be negotiated and then settled.
One of the concerns is whether RNRL become a shell company. We saw on 7 May that its share price plunged by 20%. What is RNRL’s fate?
In my opinion, the RNRL business case got strengthened after the court’s judgement. What did the court say? It clearly said that the interest of RNRL shareholders has to be protected. Second, it also said that the test of a suitable agreement means that RNRL should not become a shell company. Third, it said that you go and negotiate an agreement. So that means there is going to be a gas-supply agreement with RNRL. So it had a gas supply agreement before and it will have one post-judgement as well.
Since now the pricing has been fixed—that it has to be at the government-approved price—and RNRL has been set up to trade the gas, buying the gas and selling to the company that will be setting up the power plant, will it not get more expensive because RNRL will also have to book profits?
We have on affidavit stated that we are not going to trade the gas. We have clearly said that if you get the gas at $2.34 (per mmBtu), the cost of power is going to be cheaper... Depending upon what’s the cost of gas that’s going to come, its going to be passed on. So as far as RNRL business model is concerned, I don’t think there is need for change, irrespective of what’s the price of gas. It gets gas and supplies it to others and that arrangement is still going to continue.
There is no possibility perhaps of the power tariffs going up because when RNRL will sell to Reliance Power, I am sure there will be a profit that’s going to be booked, right? So the tariffs for Reliance Power versus its competitors, could that be competitive?
I do not think the price would, in any manner, impact the business model of RNRL. I do not think there is any changes in the business model of RNRL because it is supposed to get the gas and supply the gas to the group companies. It will get the gas, it will supply to the group companies.
Let’s talk about pricing. Is there now consensus that the price, at least now till 2012, is $4.2 per mmBtu?
The Supreme Court said that the pricing will be decided by the government of India. The price is now common for everybody. Currently, the government has decided $4.2 per mmBtu, which is valid only for five years, and this price is currently for the existing assets who are taking the gas on this.
At the same time, you heard the petroleum secretary also saying that pricing of gas is a dynamic process. When the government has to decide on the pricing, on allocation and on everything on this basis, it means that how the gas is going to be used for which sectors, is what government has decided. It said that fertilizer and power are priority sectors. If you look at from the point of view of the power demand-wise in the country and you know, if you want to maintain the gross domestic product (GDP) growth of 9-10%, you have to create 40,000MW a year in power capacity. Therefore, gas to power (sector) is a must if you want to maintain growth rate in the country.
At the same time, government is going to look at what is the affordable power cost. So there is going to be a holistic view with respect to what is the prices are going to be. Today it’s $4.2 (per mmBtu) for five years for the existing assets, and we are not talking about the pricing is going to be dynamic and we are also talking about the pool price of the gas whereas concepts are coming on this.
So as you move forward what is going to be the pricing is what the government will decide in the overall interest of the gas production as well as power. Typically at Rs1,000 crore investment in the upstream industry like E&P (exploration and production) would need six times, about Rs6,000 crore investment, in the downstream.
Therefore, the government definitely would take an interest in both Rs1,000 crore as well as Rs6,000 crore. They can’t say they will take interest in Rs1,000 crore (upstream) and not the Rs6,000 crore (downstream). So what the Supreme Court has done now is (to ensure that) the government is going to do that. So therefore the government would take various aspects and decide whatever the pricing is.
cnbctv18@livemint.com
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First Published: Mon, May 10 2010. 10 11 PM IST