End of Policy Flip Flops

Inspite of matriarchal intervention, even five years after splitting the Reliance empire, the Ambani brothers still seem to be washing dirty linen in public: the latest battle is over gas pricing. Hundreds of thousands of investors were hanging on to every word mouthed by the apex court that decide on the Gas War on which way fortunes will ride – with Anil or Mukesh. 

The raging dispute heard in the Supreme Court between the companies belonging to the two Ambani brothers, Mukesh and Anil, mainly concerned the supply, tenure and pricing of natural gas from the Krishna Godavari basin. At the core of the dispute was the question of how valid was the agreement reached between the two brothers, blessed by their mother Kokilabehn, when the Reliance empire was split in June 2005, in deciding the price of gas in which the government, too, has claimed a share.

As part of the family settlement, Reliance Industries (RIL) would supply Anil Ambani’s Reliance Natural Resources (RNRL) with 28 million standard cubic metres a day (mmscmd) of gas for 17 years at a rate below the government price. Reliance Industries argues the private deal cannot take precedence over government policy, which determines who can receive gas and at what price. Anil, who claims otherwise, rolled out a series of front-page adverts in major newspapers accusing the government of taking the side of Reliance Industries.

The Krishna Godavari basin off India’s east coast, which is operated by RIL, is India’s biggest gas find and should nearly double the nation’s gas output when production is at full throttle at 80 mmscmd. RNRL wanted a part of the gas from RIL for group firmRelaince Power’s proposed power plant in Dadri’s UP at a consessional price of $2.34 per million metric British thermal unit (mmBtu) as against the government-set rate of $4.2 per mmBtu, based on the 2005 family pact. Both the sanctity of the agreement between the two brothers and the contractual obligation of RIL arising out of it to supply gas were emphatically endorsed by the Bombay High Court in its judgment last June and in an interim order this January.

-The supply 28 million units of gas by RIL for 17 years at $2.34 per unit was agreed as per a legally-binding family pact between the two brothers.
-Under new policy, companies have full marketing freedom on their share of gas, and can fix at what price the resource should be sold. Government can only impose restrictions on its share of gas.
-Dispute does not involve the government. It is one between RNRL and RIL.
-The petroleum ministry said several times in parliament and outside that the contractor had marketing freedom. But it went on to change the stand during the hearing of the case.

-Reliance Industries cannot sell gas to RNRL unless the government that has fixed a price of $4.2 per unit approves it along with the quantity and tenure.
-The two brothers entered the gas pact in their personal capacities without any sanction by the board of RIL and hence not-binding.
-Price of $2.34 was arrived at based on a tender floated by NTPC, which itself failed to become a binding contract.

-Hydrocarbon finds in India are government’s sovereign property, hence the state has complete right to decide the supply, tenure and pricing of these assets.
-The pact between two Ambani brothers should be declared null and void as it is ultra vires Indian laws.

The verdict by the 3 judge bench of Supreme Court consisting of Chief Justice K G Balakrishnan, Justice P Sathasivam and B Sudershan Reddy has far more sub-texts woven into it. The primary issue, on which the three-judge bench pronounced its verdict, is asserting the supremacy of the government on the pricing and utilisation of a national asset.

While the verdict acknowledges that gas prices in India are now irrevocably going up, it is set to become the basic precedent for years to come, for subsequent court cases and government decisions on a large number of disputes involving the corporate sector. Of course, there is always the possibility of a review of this judgement by a larger bench. But it will not be unfair to compare Friday’s judgement with some of the legendary political cases that defined the course of Indian political history like the Kesavananda Bharati or S R Bommai case.

Already battle lines are being drawn in the telecom sector, with the mining sector not far behind. This is not surprising. The stakes have multiplied for the economic actors in the new India and so it is only fair that the Supreme Court has been asked to adjudicate on some of the first principles.

The sovereign obviously has the primacy of the right over national assets. It is for this very reason that modern laws of contract seek to establish the limits to which that right can be exercised by the sovereign. But in this case the Supreme Court has not decided on those limits.

It will, however, become necessary to define them soon. This will be necessary as India has a clearly defined rule of law that leaves no scope for expropriation of assets of a private enterprise, for instance. Yet as a large number of private enterprises do trade in national assets, the limits of government intervention, following the court order will have to be factored into new contracts. That can only happen either through fresh court judgements or government’s policy pronouncements. We never faced this dilemma before but it was bound to come up in an economy expanding as rapidly as India. The related issue that will also need to be defined, one suspects, is what constitutes as ‘national’.

So within two days, the Indian judiciary has given its verdict on perhaps the most high profile political and corporate cases of this decade. The death penalty for Ajmal Amir Kasab by a sessions court, am sure, was the easier of the two.

Picture Credit : Reuters India.

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