Far-going judgment

There are many dimensions to the Supreme Court judgment in the case involving Anil Ambani's Reliance Natural Resources Ltd (RNRL) and Mukesh Ambani's Reliance Industries Ltd (RIL), besides the obvious. The crux of the case relates to the price and distribution of gas the latter company produces in the Krishna-Godavari basin. A 2005 memorandum of understanding between the two Ambani brothers bound RIL to supply gas to RNRL at $2.34 an mmbtu (million metric British thermal unit), the price at which RIL had agreed to supply NTPC in a 2004 international tender. Yet in 2006 the government rejected RIL's request to supply RNRL at that price, and instead determined in 2007 a formula that linked the gas price to that of crude oil. With crude oil prices well above $60 a barrel, the price of natural gas was set at $4.20. RNRL insisted on RIL fulfilling its obligation anyway. The majority judgment of the Supreme Court effectively overturns the Bombay High Court verdict of last June which substantially favoured RNRL. Holding that the private agreement between the two brothers is not legally binding on the two companies, the Supreme Court has asked the two parties to renegotiate the contract. The decision has wide-ranging ramifications for the investors of the two companies. On Friday, the stock markets reacted almost instantaneously marking up the price of RIL's shares while lowering that of RNRL. The judgment will set precedents in diverse areas including contracts and company law.

The most significant message from the judgment is the emphasis on the public ownership of all natural assets including hydrocarbon resources. Private parties, such as RIL in this case, are appointed to exploit the natural resources for the common good. From this assertion, it follows that the production-sharing contracts, entered into by the government with the contractor overrides everything else. Under the contract, the government alone can decide who the contractor should sell the gas to and at what price. In no other comparable sector has the government appropriated, let alone exercised, so much power. Thus far the public policy on pricing and utilisation of natural gas has been ad hoc, opaque, and at times whimsical. Uncertainty over the government policies has dampened investor interest in the last couple of bidding rounds under the New Exploration and Licensing Policy. The user-industries, such as power and fertilizer, have suffered because of the ad hocism in the gas policy. The last couple of rounds under NELP attracted very few big oil companies. It is hoped that, with this welcome nudge from the Supreme Court, the government will act quickly to remove the shortcomings in its policy.