New Delhi/Mumbai: On Friday, after the Supreme Court ruled in favour of Mukesh Ambani’s Reliance Industries Ltd (RIL) in its case with Reliance Natural Resources Ltd (RNRL), the latter’s chairman Anil Ambani smiled and shook hands warmly (it was almost a hug) with RIL’s lawyer Harish Salve.
Anil Ambani’s mood, and his statement later in the day claiming a legal victory for RNRL, can be attributed to that part of the court’s judgement which says that the two companies renegotiate their agreement over the supply of gas within the following 14 weeks, although it maintains the base price for this transaction at the government-mandated one.
Still, almost everyone else saw the judgement as a victory for RIL. “We believe this verdict implies a potential upside of Rs25 a share for RIL. Given that there is clarity on gas volume usage and allocation, we believe RIL is now in a better position to optimize gas output, manage its reservoir and reduce...costs,” wrote Nilesh Banerjee and Nishant Baranwal of Goldman Sachs in a note released after the judgement.
Graphic: Paras Jain / Mint
In a late evening release, Standard & Poor’s said its credit rating of RIL would remain unaffected, but added that it sees the ruling as “positive for RIL” because it “removes the uncertainty associated with the cash flows from RIL’s gas business”.
Also See Keeping Track (Graphic)
Harmony to Discord (Graphic)
“This is a total vindication of what RIL has been saying all along,” said P.M.S. Prasad, RIL’s executive director, referring to the judgement.
The loss significantly hurts Anil Ambani’s plans for his power generation business. “This is certainly a positive for RIL, negative for RNRL and for R-Power (Reliance Power Ltd) because it was depending on gas for its Dadri plant and it could have had the first right of refusal on 40% of all future discoveries by RIL,” said Deepak Pareek, sector analyst at Angel Broking Ltd.
The markets seemed to echo these sentiments. Shares of RIL rose Rs22.95, or 2.27%, to Rs1,033.85 each on the Bombay Stock Exchange at the close on Friday. Those of RNRL fell Rs15.60, or 22.82%, to Rs52.75 each. The Sensex fell 1.29% to 16,769.11 points.
And, looking at what RNRL wanted when it approached the Supreme Court, the judgement was indeed a loss for it.
RNRL, citing a private agreement between the brothers in 2005, claimed it had rights to gas from RIL’s block in the Krishna-Godavari basin for 17 years at $2.34 (Rs106.70) per mmBtu (million British thermal unit). RIL claimed that it could not supply gas at a price lower than that mandated by the government ($4.2 per mmBtu in this case), and to a buyer not mentioned by the government in its gas utilization policy.
What next? Anil Ambani comes out of the Supreme Court after the verdict was announced. RNRL says it has no plans to file a review petition. Raj K Raj / Hindustan Times
An earlier Bombay high court ruling had recognized the agreement between the two brothers and asked RIL to supply gas to RNRL. But that was before the government entered the fray.
In the apex court, the government argued that it owned all natural resources in the country, and that firms such as RIL, which operated blocks, were merely contractors who enjoyed certain rights under a production sharing contract. Pricing was not one of those rights and was a government prerogative.
The court, as evident from its ruling, seems to have agreed. The impact of this on other contracts for oil and gas exploration—RIL’s gas find was in a block auctioned under the first round of India’s New Exploration Licensing Policy in 1999; the country has just finished the eighth round of these auctions—wasn’t immediately clear. Nor was its impact on the production of other natural resources.
With regard to the agreement between the brothers on the division of assets, while the memorandum of understanding (MoU) “may be kept in mind during the process of renegotiation, it is clearly held that the MoU is not binding,” RIL said in a statement issued late on Friday.
RNRL currently has no plans to file a review petition in the Supreme Court, Anil Ambani said in a release. “RNRL looks forward to an expeditious and successful renegotiations with RIL.”
The judgement is also likely to have a significant impact on RNRL. “RNRL was existing (on the basis) of the agreement (between the Ambanis). Now, I don’t know what it will do unless R-Adag (Reliance-Anil Dhirubhai Ambani Group) finds another role for it. It was always a bit of a black box,” said an analyst at a Mumbai-based foreign brokerage, who did not want to be identified.
Even if RIL and RNRL manage to negotiate a deal at $4.2 per mmBtu of gas, the latter will only make a margin of $0.14 per mmBtu, said Angel’s Pareek. “This should mean a share price of around Rs32.”
The downstream impact on his power generation business (on Reliance Power, for instance) could explain the intensity with which Anil Ambani fought his battle with RIL—in court and outside it. Last year, he took on Murli Deora, the powerful minister for petroleum, effectively accusing him of bias through a series of front-page advertisements in mainstream newspapers, including Mint.
The government’s intervention would appear to have swung things RIL’s way, and Anil Ambani will have to look to negotiate a new gas supply deal with RIL, although it is clear that the base price for this will be $4.2 per mmBtu.
He will also have to raise money for power plants Reliance Power is building at Krishnapatnam in Andhra Pradesh and Tilaiya in Jharkhand, which were won by the company under the so-called ultra mega power plant programme. And if Reliance Power is still keen on building the Dadri plant in Uttar Pradesh, it will have to line up an alternative supply of gas (even if this is through a new deal with RIL).
In doing these, and in growing his other businesses in finance, entertainment, media and telecommunications, the big problem Ambani will face will be financing, say analysts.
In 2009-10, companies that are part of R-Adag generated Rs5,449.54 crore of cash. In the same year, RIL alone generated Rs18,245.86 of cash.
The men who made the difference
Chief Justice KG Balakrishnan
• Memorandum of understanding (MoU) between Ambani brothers is legally and technically not binding, and government gas utilization policy overrules family MoU
• Renegotiate gas supply master agreement (GSMA)
Justice P Sathasivam
• Though MoU is not binding, the parties should consider it while negotiating GSMA
• Production sharing contract is supreme
Justice B Sudershan Reddy
• Bring a comprehensive policy on energy security
• Stated that the Bombay high court judgement in favour of Anil Ambani was incorrect
The Road Ahead
Review: RNRL currently has no plans to file a review petition in the Supreme Court.
Anil Ambani’s future: The economics of the group’s 8,000MW gas-based power projects will become more challenging.
Government’s right to price scarce resources: The judgement is clear—the government has the authority to price scarce resources.
Validity of MoU: The court termed the secret 2005 memorandum of understanding between the Ambani brothers, when the two parted ways, not legally binding.
Graphics by Ahmed Raza Khan / Mint