Anil Ambani. Murli Deora. Mukesh Ambani. Three men, who have hogged the headlines over the past five years were on Friday respectively crestfallen, satisfied and invisible. As the three-judge bench of the Supreme Court headed by the Chief Justice of India K.G. Balakrishnan passed its judgement over the biggest corporate battle in India’s history, it could have been the end — The End — of a long-drawn and rather tiring family saga. It isn’t — the last chapter remains.
By passing a judgement over the three critical components of this fight — the price of gas, the ownership issue of that gas and the validity of a family MoU — the court has pretty much handed down a verdict that Mukesh should be celebrating. Mukesh is silent, Reliance Industries Limited (RIL) has merely welcomed the judgement and its share price has risen 2.3 per cent. Anil’s visible disappointment as he left the judgement behind him on Tilak Marg was amplified by Dalal Street that saw the share price of Reliance Natural Resources Ltd (RNRL), the company that was to buy the gas from RIL, after crashing almost 27 per cent, closing the day down 23 per cent.
Ruling that the government will decide the price at which Mukesh will sell gas from India’s largest basin, the KG-D6, to Anil, the apex court has effectively fixed it at $4.20 (Rs 190) per unit, about 80 per cent higher than what Anil wanted ($2.34). The 268-page judgement has also noted that the government is the owner of the gas and RIL only its contractor, ruling out any private agreement on the gas between Mukesh and Anil. Finally, by ruling that the family MoU had nothing to do with the contract, the court delivered a body blow to Anil — this has been the pivot of Anil’s argument that he won in the June 15, 2009 Bombay High Court judgement.
“RNRL looks forward to an expeditious and successful renegotiations with RIL within the stipulated period of six weeks to secure gas supply for the (ADAG) group’s power plants in line with the SC order,” Anil told reporters in a conference call. (The last time he did that, following the Bombay High Court order, Mukesh moved the cheese to the SC.) But what is to be negotiated and how? In a post-judgement press conference, even Mukesh’s lawyer Harish Salve couldn’t quite figure out. The MoU says that Mukesh will sell 28 mmscmd of gas to Anil for a period of 17 years at $2.34 per unit. But with the court handing the price and quantity fixation to the government and the MoU out of the picture, just what is to be discussed is hazy as of now.
Enough on the Ambanis.
What we need to be concerned about are three things. The first is how global investors will respond to Indian tenders and agreements when the government is seen to be changing the terms and conditions. The question is: how can the government change the terms of a contract after it has given it to a private party in an open auction? I spoke to two former petroleum secretaries and got two opposing perspectives. “It will have an impact on foreign investment in the sector,” the first one said. The other implied that there was no change: “Going back is illegal. The Production Sharing Contract (PSC) is sacrosanct.” We need greater clarity.
The other area of concern is how comfortable we are getting with enacting new legislation. “Before we part with the case, we consider it appropriate to observe and remind the GoI that it is high time it frames a comprehensive policy/suitable legislation with regard to energy security of India and supply of natural gas under production sharing contracts,” the judgement said. This suggests that the actions of the government as the competent authority on executing tenders is in doubt and that a new law is needed. Question: who will execute that policy or act? This observation is in tune with wanting to set up a regulatory agency at the drop of a hat, many of which end up becoming sinecures for senior bureaucrats and nothing else.
Finally, this case questions the way private investment is being invited to exploit India’s natural resources. The short history of gas production can be divided into pre- and post-1990s. In the former case, all investment and production was done by the government through state-owned companies. The mid-1990s saw the entry of private investment into the sector. Today, the need for private investment into this sector is critical to India’s energy security. With the government on a fiscal backfoot, the vacuum can only be filled by private investment. This money, apart from bringing in efficiencies as it invests in risk, needs a different approach. It needs security of capital — not through risk-reduction, but by contractual-enforcement mechanisms.
Surely there were weaknesses in the manner in which the KG-D6 fields were overseen that allowed two brothers to hijack the mindspace of the nation for five years as they fought their private battle. Following allegations by Anil that petroleum minister Deora was helping Mukesh, the government’s credibility took a knock. It took Prime Minister Manmohan Singh to come out and say that the government was one on this issue and Deora was not acting on his own before matters settled down. All of this could have been avoided had the rules and policies been clearer, more transparent and less flexible to opinions.
But then, we would have missed a great fight.