SC verdict on Ambani feud: Can Reddys now be reined in?

 The far-reaching judgement may well have an impact on the sanctity of private contracts in the field of natural resources since the court rejected the memorandum of understanding signed between Ambani brothers.

Some people have even expressed apprehension that the verdict may hamper future investment in oil exploration by foreign oil companies.
But there’s no denying that the supreme court has not only upheld the terms of the production sharing contract (PSC), but has gone beyond and upheld the public trust doctrine to rule in favour of the government. Surprisingly, only a minority have commented on such path-breaking observations by the judges and what potential impact it can have on the future exploration of India’s natural resources like petroleum, water, forest and minerals.

It may be useful to have a brief look at Ambani brothers’ dispute. Under an MoU signed by them, while Reliance Industries Limited (RIL) managed by the elder brother Mukesh Ambani had the assets of prolific KG basin gas reserves, the younger brother Anil Ambani’s Reliance Natural Resources Ltd  (RNRL) had the right to secure gas supplies.
The gas sales contract consisted of selling 28 million standard cubic meters per day gas at a fixed price of $2.34 per Million British Thermal Units (mmbtu) for 17 years by RIL to RNRL. The most important clause mentioned in the MoU was that the terms offered like price, tenure, and quantity were subject to the government approval as per the production sharing contract (PSC).

It was this ‘innocent’ looking clause that became a stumbling block for Anil Ambani in making crores of rupees from the deal at the expense of the people of India. The amount of money involved was at least Rs 55,000 crore! If oil prices were to be higher than $60 per barrel, it could have been even higher. RNRL lawyers claimed that under the MoU signed by the brothers, it had the right to buy gas at $2.34/mmbtu for 17 years whereas RIL was arguing that it could sell gas only at $4.20/mmbtu as per the formula approved by the empowered group of ministers. The SC ruled that Ambani brothers should negotiate the contract only within the framework of government policy and approvals regarding price, quantity and tenure of supply gas.

Winners and losers
Without a doubt, the losers are shareholders of Anil Ambani-led RNRL who bought the shares by paying a higher price after the de-merger. They might have speculated that their company has access to ‘cheap’ gas. The SC judgment has put to rest such dreams.
If the original intent of the board of RIL was to cleverly transfer the rights in KG basin gas reserves at attractive price using the camouflage of signing a contract with the government company NTPC, and later monetise those gas reserves at higher price then the original shareholders of RIL are also the losers.
If there was no fight between the brothers, one wonders if the public would have ever learnt about this ‘game’ which is often played by companies who are masters at manipulating the political and bureaucratic system. This is an important lesson that the public and the government should learn.

People of India are undoubtedly the winners because of the verdict. Their winnings can be even more significant if some of the observations made by the court are implemented. All three judges quoting Article 297 of the Constitution observed that the Constitution mandates that the natural resources belong to the people of India and discussed the concept of Public Trust Doctrine and how it applies in this case. This is an observation of enormous importance.

The supreme court verdict urges the government to frame a comprehensive policy or suitable legislation with regard to energy security of India and supply of natural gas under the production sharing contracts. Will GoI pay attention to it at least now?
Now that the SC has ruled that natural resources belong to the nation and they should be used to the maximum benefit of all as per the constitutional mandate, will there be a series of PILs against the plundering of iron ore mines in Karnataka and Andhra Pradesh by the politically-connected? Will there be a PIL against the government to prevent it from selling gas owned by ONGC and OIL below the market price? It can be argued that when the government sells a precious commodity like gas below the market price, it benefits only one section of consumers.

We can also argue that when the government forces ONGC and OIL to sell crude oil to PSUs below the market price so that they in turn can sell products like petrol and diesel below the international prices, it is benefiting mostly the rich and middle class. This was argued by three high level committees headed by Dr Rangarajan, Dr Chutervedi and Dr Parikh. They have all recommended that petroleum product prices should be liberalised. If the government is forced to implement the recommendations of these committees, it would indeed usher a new era in the oil sector of India. There would be many such benefits to be derived in the future from this potentially path-breaking SC judgement.