Mumbai: The Bombay high court on Monday directed Mukesh Ambani-managed Reliance Industries Ltd, or RIL, to forge a “suitable arrangement” within a month to sell natural gas at a price 44% lower than the government-stipulated price to Reliance Natural Resources Ltd (RNRL), headed by estranged younger brother Anil Ambani.
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The verdict has come as a huge boost for RNRL, according to sector analysts, emphasizing its claim over substantial portions of natural gas being pumped out of the Krishna-Godavari river basin off the eastern coast of India.
RIL’s shares fell 7.48% to close at Rs2,180.45, pulling down the bellwether equity index Sensex by 2.38% to 14,875.52.
RNRL gained 24.11% to close at Rs108.35 a share and those of Reliance Power Ltd, a power generation company that will benefit from obtaining cheaper gas as feedstock, rose by 4.32% to Rs200.5 a piece.
RNRL has been fighting a three-year court battle to obtain 28 million standard cubic metres of gas (mscmd) a day for 17 years at $2.34 per million British thermal unit (mBtu), citing an undisclosed family agreement or memorandum of understanding (MoU) that set the rules for the demerger of the Reliance businesses between the two brothers.
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RIL lawyers disputed this claim in the court, calling it a “ghost MoU” and pleaded their inability to sell the gas at a price lower than the government-mandated price of $4.2 per mBtu.
“The full text of the judgment of the honourable high court has been received by us and is being reviewed by us. We will decide on the future course of action, based on legal advice.” said an RIL spokesperson.
News agency PTI reported RIL’s lawyer Milind Sathe as saying that though the new agreement will have to be as per the MoU, he would be able to comment on the verdict after seeing the full order. Filing an appeal in the Supreme Court is one option, Sathe said.
Analysts expect RIL’s annual gas revenues to touch Rs10,000 crore when production peaks at 80mscmd in 2010-11.
Power struggle: Anil Ambani (left) and Mukesh Ambani.
Monday’s court ruling, given by a two-member bench of justice J.N. Patel and K.K. Tated, sided with RNRL’s arguments that its claim was rooted in the MoU and was “binding on the parties”.
Noting that the development was a negative sentiment for RIL, Mumbai-based brokerage KR Choksey Shares and Securities Pvt. Ltd’s analyst Maulik Patel said the “near-term impact won’t be much” as the litigation was likely to drag on.
Patel and many other analysts felt that after the court passed an interim order on 30 January, allowing gas to be sold to government-nominated buyers at $4.2 per mBtu, it could have led to market expectations that the final order could go in RIL’s favour.
The court had then said the gas sale agreements should be entered into with the provision that it was subject to the final ruling.
“The case has just got more confusing. The shred of clarity (on RIL’s future revenue stream) that had come in after the interim court judgement is gone. The uncertainty is back,” said a Mumbai-based analyst with a foreign brokerage tracking RIL, who didn’t want to be named.
Yet another research report, by Morgan Stanley’s Vinay Jaising and three other analysts, released on Monday, said: “RNRL or its affiliate companies will take close to two years to build a gas-based power plant... So the current judgement makes no impact to our (RIL) earnings even if this does go to the Supreme Court and it gives the same judgement.”
“We believe these agreements (with fertilizer and power companies) will not be hampered,” it said.
Lawyers representing RNRL were ecstatic. “The verdict has established Adag’s (Anil Dhirubhai Ambani Group’s) legal right to the gas. It has put us on a firm footing,” said Mahesh Jethmalani, one of the lawyers representing RNRL.
The court ruling gave “a direction to the parties that within a month from the date of pronouncement of the judgement and order, the parties should enter into a “suitable arrangement” on the basis of quantity, tenure and price as specified and agreed between the parties under the MoU.
This can be done either by renegotiating the terms of the contract so as to make it bankable for RNRL to raise money for its Dadri power plant in Uttar Pradesh or revert to their mother Kokilaben Ambani to intervene.
The court also pointed out that the scheme of arrangement that led to the demerger also provided for an indemnity clause that could be invoked.
If all these options fail, “it will be open for the aggrieved party to approach the company court for modification of the scheme.”
It also said that there was no specific provision under the production sharing contract, a document signed between the government and the contractor RIL for KG Basin, to prevent RIL from selling the gas at a price lower than the price fixed by the government for valuation of its share in gas.
Government counsel Mohan Parasaran, who had made submissions in the case as well, said: “We are going to examine the order and discuss it with the petroleum ministry. It is premature to comment. The court has seen it as a mere contractual dispute and has enforced it in RNRL’s favour.”
According to him, the government needed to take a call on whether the contractor could sell it at a price lower than $4.2 per mBtu and if indeed it could, will the government reduce its royalty charge. The government is the principle owner of all natural resources of the country and it leases them out to contractors such as RIL for development at a royalty.
NTPC Ltd is also fighting a lawsuit with RIL over for 12mscmd of gas for 17 years at $2.34 per mBtu.
“This court judgement is in our favour as $2.34 per mBtu is mentioned. There can’t be two different standards for similar cases in the same court,” said a senior NTPC executive who did not want to be named.
Utpal Bhasker in New Delhi contributed to this story.