The final verdict in the five-year-long corporate battle between the billionaire Ambani brothers that could impact the fortunes of India’s two largest business groups is expected to be pronounced sometime this week. Chief Justice of India, K.G. Balakrishnan, heading the three-member Supreme Court bench hearing the Ambani brothers’ case, retires on May 11 and in all likelihood will sign his judgement before that. Hindustan Times goes behind the case.
What the dispute is all about
The fight is between Mukesh Ambani’s Reliance Industries Ltd (RIL) and Anil’s Reliance Natural Resources Ltd (RNRL) over the sale of natural gas being produced by RIL from its prolific D6 gas block in the Krishna Godavari (KG) basin.
Under a family agreement in 2004, RIL had agreed to sell 28 million metric standard cubic metres per day of gas (mmscmd) to RNRL at a price of $2.34 per unit (Rs 104) for supplying gas to the latter’s power plants for 17 years. However, as the price impacts the government’s share of revenues, the Ministry of Petroleum and Natural Gas refused to give clearance to RIL to sell gas at this price.
The ministry also said that since the government is the owner of the gas and RIL just a contractor, it will not only decide the price of the gas that RIL will produce but also to whom it will sell. The government on October 10, 2007 subsequently fixed the price at $4.20 (Rs 187) per unit.
The final judgement by the Supreme Court may also cast its shadow on NTPC Ltd — India’s largest power company, generating close to 32,000 mega watts — currently locked in another similar legal battle against RIL in the Mumbai High Court. RIL had through a global tender agreed to sell gas to NTPC at $2.34 per unit but did not finally sign the deal with NTPC as the two refused to agree over the terms and conditions of the gas sales and purchase agreement.
How it will impact the companies
If the apex court upholds the June 15, 2009 judgement of Bombay High Court seeking RIL to sell the gas at $2.34 to RNRL, it would dent the profitability of RIL that posted a 30 per cent rise in its quarterly profits last week.
On the other hand, if the order goes in favour of RIL, RNRL will have to procure gas from other sources and reschedule and re-plan its gas-based power projects.
Anil’s Reliance Power Ltd has already announced setting up of three gas-based power projects including an 8,000 MW plant at Dadri in Uttar Pradesh, a 1,400 MW plant at Sambalpur in Andhra Pradesh and a 4,000 MW plant in Maharashtra.
On the stock exchanges, the share prices of RIL and RNRL moved in opposite directions in the previous week. While the RNRL share price rose by 11.3 per cent to close at Rs 70 in the week ended April 30, 2010, RIL saw its share price fall by 5 per cent in the same period to close at Rs 1033.
What the experts say
Former Petroleum Secretary Suresh Chand Tripathi said the main issue is whether the operator of an oil and gas block (RIL in this case for KG-D6 gas field) has the marketing and pricing freedom to sell its own share of gas.
“The government, at least during my time (as petroleum secretary), had been saying that the operator of the oil and gas block will have the freedom to market and price his share of gas. This is the understanding we used to give to investors while offering oil and gas blocks under the NELP rounds. However, the government is now saying that it has full marketing and pricing control even on the operator’s share.”
The price of $2.34 per unit was a good price in 2004, he said, while $4.2 per unit is a “very good price now”.
If RIL is forced to sell gas to NTPC and RNRL for $2.34 per unit, its operating profit could take a hit of Rs 4,500 crore annually, said Sandeep Randery, an analyst with Brics Securities, on Bloomberg UTV.