Reliance row resolved

The Supreme Court (SC) gave out an emphatic victory last Friday to Mukesh Ambani-led Reliance Industries (RIL) as well as union government in the dispute over gas from the Krishna Godavari basin (off the Andhra Pradesh coast), albeit, at the expense of Anil Ambani’s Reliance Natural Resources Limited (RNRL), whose gas business now lies shattered -almost. Two Ambani brothers are fighting court battles over the issue of supply of gas for over four years now.

With its ruling upholding the Production Sharing Contract (PSC), SC made it clear that government alone is the ultimate owner of all natural resources in the country and it will determine both the valuation and price of gas.  

Origin of dispute

It all started with the division of late Dhirubhai Ambani’s four-decade old business empire in 2005, when both his sons Mukesh and Anil were equals then. While Mukesh got energy and petrochemicals businesses as part of his share, Anil was given power, financial services and telecom. With that bifurcation, the fortunes of the Ambani brothers moved in different directions. While elder Mukesh kept growing in strength most businesses of younger sibling Anil are in trouble. Mukesh’s wealth was estimated at $29 billion but Anil’s at $13.7 billion in 2009, leaving a huge gap between them.

At the time of the division of assets in 2005 brothers agreed that RNRL will buy 28 million standard cubic meters a day (mscmd) of gas from RIL’s KG-D6 fields at $2.34 per mmBtu for 17 years but the union government set the price at $4.2 mmBtu after a surge in the crude oil and gas prices. After Mukesh expressed RIL’s inability to sell gas to RNRL at the agreed price, Anil filed a case in the Bombay High Court which ruled in favour of RNRL. But RIL appealed to Supreme Court against Bombay HC ruling. Finally, the apex court ruled in favour of RIL. It has also asked both RIL and RNRL to return to the negotiating table within the next 6-weeks.

Implication on companies

RIL: For Mukesh Ambani’s flagship company, the ruling may encourage it to explore more gas in the KG basin - which is currently at 12 mscmd - that may boost RIL’s profits as revenues from gas rise. RIL expects to produce 40 mscmd gas by the end of June and raise it to 80 mscmd by the end of the year. Over a 17 year period, for which RIL had agreed to sell gas to RBRL, the gain to RIL will be Rs 37,755 crore and the that for the government will be Rs 28,575 crore (by way of royalty and profit).

Some number crunching in rupee terms by market analysts suggest the net profit of RIL will improve as the selling price of the gas rises from $2.34 per mmBtu to at least $4.2 per mmbtu that will contribute Rs 1,688 crore in the net profit of RIL and increase its EPS by Rs 516. No wonder RIL shares jumped up after the SC verdict.

RNRL:  Notwithstanding the brave front put up by Anil Ambani consequent to the SC
verdict, the ramifications to ADAG firms was huge, to say the least. To begin with, scrips of RNRL, Reliance Infra and Reliance Power tumbled after the verdict.

The very image of RNRL, which was to become the gas marketing arm of the undivided Reliance group, took a beating as it had hoped to get 28 mscmd of gas from the D6 field.  The SC upholding the govt’s right to price and allocate gas has put a big question mark over RNRL’s plan of getting into the gas business. Its gas-based 8,000 MW power plant at Dadri in UP will also have to re-work its figures to arrive at a new feasibility structure. Above all, the ruling has virtually tripped Anil’s grandiose plans of becoming the biggest power producer in the country.  

In short, there are all the chances of RNRL becoming a shell company, if it does not get its entitlement of gas supply from RIL at commercial binding rates it signed, while its mega power plans of generating over 28,000 MW of power in the country would go awry or at best needs re-architecture.   

NTPC: Notwithstanding the claims of Union government that the SC ruling would not have any bearing on NTPC-RIL case in the Bombay High Court, any industry observer can vouch that the state-owned power utility enterprise is within the striking range of collateral damage in the Ambani brother’s fight. No wonder, NTPC scrip fell nearly a per cent on the BSE on Friday. Union Power Minister Sushilkumar Shinde says, “the Supreme Court’s decision is over the dispute between two brothers and it has nothing to do with RIL-NTPC case.”

It is easier said than done, say legal experts point out that Friday’s judgement has firmly established the concept of government setting the price, thereby it negates the very argument of NTPC that it has been exempted from the pricing decision of EGoM (empowered group of ministers) through a special “without prejudice” clause.

Future ahead

Industry observers maintain that there won’t be any problem in the immediate future as the new judgement clearly spells out that the price and buyer are to be decided by the government at the Centre — rather than RIL. It also spells out that that all the policies the government put in place after the two sides entered the original supply agreement in 2006 will be applicable to the two firms as well. Simply put, the government’s gas utilisation policy formulated in 2007-08, clearly spelt out that future gas plants come much lower down in the pecking order compared to existing plants.

Ideally, the entire gas supply should stay within the domain of government functions but for shortage of funds and technical know-how, the government has privatised those activities through PSC mechanism yet private parties are accountable to the constitutional set-up, said the Chief Justice Balakrishnan, who made up a majority on the bench.

Impact on stock markets

In the domestic bourses on Friday, where RIL stock has the highest weight in BSE Sensex closed 2.3 per cent higher, while RNRL went down by 22.8 per cent, while Reliance Power and Reliance Infra scrips were top nifty losers down by13.97 per cent and 13.91 per cent respectively. RIL’s market capital in one single day went up by Rs 7,500 crore, while that of ADAG companies combined lost by Rs 9,000 crore.

It is positive for RIL investors who can afford to ‘party hard’, while ADAG investors the news is certainly bad and that even smart people will have to work hard to sell their stock at every opportunity in the coming days, says KRIS Securities Director Arun Kejriwal.

What ever be the public-stance of Anil Ambani who welcomed the SC judgment and said will not appeal for a review. He also said that RNRL has upheld the MoU between RIL and RNRL signed on June 18, 2005 as the backdrop of the (demerger) scheme and the guiding force and the basis of “reorganisation” of RIL business, industry insider also point out that Anil is not so “helpless” now as is being perceived, for one crucial aspect in MoU, which is also expected to contain rollback clauses that allow him to reclaim in position in RIL in case of a failed division of assets.