REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4273 OF 2010
(Arising out of S.L.P. (C) Nos. 14997 of 2009)
Reliance Natural Resources Ltd. .... Appellant (s)
Versus
Reliance Industries Ltd. .... Respondent(s)
WITH
CIVIL APPEAL NO. 4274 OF 2010
(Arising out of S.L.P. (C) No. 15033 of 2009)
CIVIL APPEAL NO. 4275-4276 OF 2010
(Arising out of S.L.P. (C) No. 15063-15064 of 2009)
CIVIL APPEAL NO. 4277 OF 2010
(Arising out of S.L.P. (C) No. 18929 of 2009)
I.A. NO. 1
IN
C.A.Nos.428-4281/2010 @ S. L. P. (C) .14414-
14415/2010
@ CC NO. 16126-16127 of 2009
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J U D G M E N T
P. Sathasivam, J.
1) I have had the benefit of reading the erudite judgment of
my learned Brother, Hon. B. Sudershan Reddy, J. I am
unable to share the view expressed by him on some points and
must respectfully dissent.
2) Though the facts and provisions of the relevant law have
been set out in the judgment prepared by B. Sudershan
Reddy, J., keeping in view of the importance in the matter, I
propose to refer all the details and deliver a separate judgment
in the following terms:-
3) Leave granted.
4) “The people of the entire country have a stake in
natural gas and its benefit has to be shared by
the whole country.”
- Association of Natural Gas & Ors. vs. Union of
India & Ors. – (2004) 4 SCC 489 (CB).
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5) Being aggrieved by the judgment and order of the
Division Bench of the High Court of Bombay dated 15.06.2009
in Appeal No. 1 of 2008 in Company Application No. 1122 of
2006 and in Company Petition No. 731 of 2005, Reliance
Natural Resources Ltd. (in short “RNRL”) has filed S.L.P.(C)
Nos. 14997 & 15033 of 2009. Questioning the same common
order of the Division Bench of the High Court, Reliance
Industries Limited (in short “RIL”) has filed S.L.P. (C) Nos.
15063-15064 of 2009. Since the Union of India intervened at
the stage when the Division Bench heard Appeal Nos. 844 of
2007 and 1 of 2008, it also filed S.L.P.(C) No. 18929 of 2009.
One Vishweshwar Madhavarao Raste also filed SLP(C)….CC
Nos.16126-16127 of 2009. Since all the appeals arising out of
the above special leave petitions emanated from the common
order dated 15.06.2009 passed by the Division Bench and the
issues raised in all these appeals are one and the same, all the
appeals were heard together and are being disposed of by this
common judgment.
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6) Brief facts:
The case of RNRL:
(a) In 1973, late Dhirubhai Ambani set up the RIL consisting
of Oil, gas, refining and exploration, textile, yarn, polyster,
petrochemicals and communication business with his two
sons Mukesh Ambani and Anil Ambani. In the year 1999, the
Government of India announced a New Exploration and
Licensing Policy, 1999 (in short “NELP”). This policy provided
that various petroleum blocks could be awarded for
exploration, development and production of petroleum and gas
to private entities.
(b) It is the policy of the Government that Petroleum
Resources which may exist in the territorial waters, the
continental shelf and the exclusive economic zone of India be
discovered and exploited with utmost expedition in the overall
interest of India and in accordance with good International
Petroleum Industry Practice.
(c) In the same year, i.e. 1999, RIL has formed a Consortium
with NIKO. Their consortium was the successful bidder for
Block KG-D6 and was called the Contractor.
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(d) On 24.03.2000, Reliance Platforms Communications.com
Private Limited was incorporated which was changed to Global
Fuel Management Services Limited and now called “Reliance
Natural Resources Limited (RNRL).
(e) A Production Sharing Contract (in short “PSC”) has been
entered into between the Government of India and the
Contractor on 12.04.2000. The PSC, as recorded, is within
the contract area identified as Block KG DWN-98-3. KG-D6 is
situated offshore coasts of Andhra Pradesh in the Indian
Ocean. Such blocks are called as “Deep Water Exploration
Blocks”. The exploration in such areas require employment of
highly skilled and experienced technical personnel and an
extremely expensive and time-consuming exercise. As
recorded, all exploration expenses required to locate petroleum
resources have to be borne by the Contractor. Therefore, the
Contractor is bound to incur huge cost and resources for
discovery of reserves in the area at their risk. The exploration
activities are still in progress, the first gas deal expected in
June, 2008. As per the PSC, all the expenses relating to the
exploration, development and production of cost incurred by
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the Contractor can only be recovered from the petroleum/gas
actually produced and sold by the Contractor. The Contractor
has freedom to sell the gas produced from the block subject to
the adjustment and the terms of profit sharing between the
Government and the RIL as set out in the PSC.
(f) On 06.07.2002, Mr. Dhirubhai Ambani passed away.
Sometime thereafter, differences started between Mukesh
Ambani and Anil Ambani over the management and control of
the group companies. Both the brothers, at the relevant time,
were looking after the affairs of RIL in all respects including
the group companies.
(g) The provisions of the PSC were known to the respective
Board of Directors as well as to both the brothers. Mukesh
Ambani was the Managing Director and Anil Ambani was the
Joint Managing Director of the RIL.
(h) In October, 2002, the Consortium (NIKO & RIL)
announced discovery of significant result of KG-D6 Block.
Sometime in the year 2003, the National Thermal Power
Corporation Limited (in short “NTPC”) floated a global tender
for supply of gas to its power projects. The Gas Sale and
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Purchase Agreement was annexed with the tender document.
NTPC invited international competitive bids for supply of
natural gas to its power plants located in the State of Gujarat
to meet its fuel requirements. RIL succeeded in its bid to sell,
transport and deliver 132 TBtu (means one trillion BTU
(British Thermal Unit) or 1000000 MMBTU). NTPC, by letter
dated 16.06.2004, confirmed RIL’s deal.
(i) In June, 2004, RIL entered into a State Support
Agreement with the Government of U.P. to make necessary
arrangements for land, water and other facilities for Dadri
Project.
(j) In a Board Meeting of Reliance Energy Limited (in short
“REL”) held on 20.10.2004, which was attended by Mukesh
Ambani and other Directors of RIL, after reviewing the Dadri
Project it was recorded that gas from KG Basin would be
supplied for the power projects of REL. The Board of REL was
assured about the availability of gas, its timing, adequate
quality and requested quantity at a competitive price for the
project.
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(k) On 18.06.2005, the media released a statement
informing the general public that an amicable settlement is
arrived at in respect of all disputes between the Ambani
Brothers. It was stated that Mukesh Ambani will take over the
responsibility for RIL and IPCL and Anil Ambani will take over
the responsibility for Reliance Infocomm Ltd., Reliance Energy
Ltd. and Reliance Capital Ltd. On the same day, Anil Ambani
resigned as Joint Managing Director of RIL.
(l) Both the brothers with the mediation of their mother
Mrs. Kokilaben Dhirubhai Ambani arrived at a Memorandum
of Understanding (MoU)/family arrangement dated 18.06.2005
and accordingly resolved their disputes amicably. Based
upon the said MoU, both the brothers and the officials of RIL
and other group companies, made various discussions,
exchanged correspondences, e-mails and held conferences and
meetings to implement the MoU and to resolve the disputes
and to divide the various companies by a Scheme of
Arrangement.
(m) On 11.08.2005, RNRL was acquired by RIL for the
purpose of de-merger. The name was changed to Global Fuel
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Management Services. RIL (de-merged company) moved a
petition in the Bombay High Court bearing No. 731/2005
dated 24.10.2005 to obtain a sanction of Scheme of
Arrangement (the Scheme) between RIL and four other
companies viz., (i) Reliance Energy Ventures Limited, (ii)
Global Fuel Management Services Limited, (iii) Reliance
Capital Ventures Limited and (iv) Reliance Communication
Ventures Limited. By order dated 09.12.2005, the Company
Judge, Bombay High Court has granted sanction to the
Scheme and inter alia directed that the shareholders of RIL
would hold shares in each of the resulting companies in the
ratio of 1:1 in addition to the shares held in the parent
company (RIL). The scheme provides that RIL successfully bid
for off-shore oil and gas fields; strategic investment in RIL
which has engaged in power projects, in order to use part of
gas discovered for the generation of power; appropriate gas
supply arrangement will be entered into between RIL and
Global Fuel Management Services pursuant to which gas will
be supplied to RIL; refined gas based energy undertaking; after
the record date the Board of the resulting companies shall be
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re-constituted and shall thereafter be controlled and managed
by Anil Ambani. A suitable arrangement would be entered
into in relation to supply of gas for power projects of Reliance
Patalganga Power Limited and REL with the gas based energy
resulting companies.
(n) The Scheme sanctioned by the Company Judge provided
for de-merger of four Undertakings of Reliance Industries
Limited (RIL) and transfer of these Undertakings on a “Going
concern” basis to four resulting Companies. They are:
(i) The Coal Based Energy Undertakings/Reliance Energy
Ventures Limited.
(ii) Gas Based Energy Undertaking/Global Fuel Management
Services Limited now known as “Reliance Natural Resources
Limited (RNRL).
(iii) Financial Services Undertaking/Reliance Capital
Ventures Limited.
(iv) Telecommunication Undertakings/Reliance
Communication Ventures Limited.
The De-merged company-Reliance Industries Limited (RIL) is
to retain all other businesses including Petrochemicals,
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refining, oil and gas exploration and production, textile and
other business. The Scheme became effective from
21.12.2005.
(o) A draft of GSMA (Gas Sale Master Agreement) and GSPA
(Gas Sale Purchase Agreement) were e-mailed by an official of
RIL to sole nominee of Anil Dhirubhai Ambani Group on the
Board of RIL on 11.01.2006, drafts of GSMA and GSPA were
approved by the Board of RIL at a time when the Board of
RNRL was under the control of Mukesh Ambani. The nominee
of Anil Dhirubhai Ambani Group had raised objections but the
same were overruled. There was no sufficient time given to
RNRL to read the draft. No independent or legal advise could
be taken on behalf of RNRL. Basic clauses to the agreements
are the bone of contention of the present litigation. Both the
agreements alleged to have also been settled and executed on
12.01.2006. On the same day, a letter addressed by Mr. J.P.
Chalasani, the nominee of ADAG on the Board of RNRL to
other Directors on the Board of RNRL namely, Mr. Sandip
Tandon and Mr. L.V. Merchant who were the nominees of
Mukesh Ambani/RIL, stating therein that the proceeding in
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the Board Meeting held on 11.01.2006 to consider the
agreement with RIL in terms of the Scheme were illegal and
void. By another letter dated 13.01.2006, a request was made
to take the contents of letter dated 12.01.2006 with regard to
the agenda-item No.8 (gas supply agreement) and be made
part of the minutes of the Board Meeting.
(p) On 13.01.2006 by a letter addressed to Shri Chalasani,
the minutes of the Board of Directors held on 11.01.2006 were
informed that it would be tabled at the meeting of 13.01.2006.
Some of the objections, as raised by Chalasani, were also
recorded. On 26.01.2006, the GSPA copy was made available
to ADAG for the first time. On 27.01.2006, the shares of the
RNRL to the shareholders of RIL were allotted.
(q) On 07.02.2006, the Board of the RNRL was reconstituted
in order to hand over the management and control
of the resulting companies to Mr. Anil Ambani. On
14.02.2006, a letter addressed by RIL to the RNRL stating that
a proforma gas sale and purchase agreement (GSPA) has been
annexed to the above GSMA. The proforma contains the terms
and conditions as mentioned in the GSPA signed by RIL on
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12.12.2005 and forwarded to the NTPC. It was further
informed that they agree to carry out the changes to the
proforma GSPA annexed to the GSMA so that it reflects the
same terms as contained in GSPA between NTPC and RIL as
and when any changes are carried out to NTPC GSPA.
(r) On 28.02.2006, RNRL, by its letter to RIL, informed and
elaborated various deviations in the GSMA from the agreed
terms which were necessary for de-merging the business. A
suitable draft agreement in compliance with the Scheme was
also sent with the letter. On 12.04.2006, RIL made an
application to the Ministry of Petroleum and Natural Gas
(MoPNG) for approval of the gas price at which the sale of 28
MMSCMD of gas was agreed with the RNRL under the GSMA.
(s) On 09.05.2006, RNRL, by a letter, requested the MoPNG
to accord approval to the application dated 12.04.2006 made
by the RIL. On 26.07.2006, the MoPNG communicated to the
RIL its refusal to approve the price of gas agreed between the
RNRL and the RIL under the GSMA. On 31.07.2006, RIL
forwarded a letter to the RNRL, a copy of letter dated
26.07.2006 received from the MoPNG rejecting the proposed
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formula for determining the gas price as the basis of valuation
of gas under the PSC.
(t) With these details, RNRL on 07.11.2006/08.11.2006,
filed a Company application No. 1122 of 2006 under Section
392 of the Companies Act, 1956 (hereinafter referred to as “the
Act”) before the High Court of Bombay in which the following
prayers were made:
“(a)Order and Direct RIL to take all necessary steps in order
to ensure actual supply of 28 MMSCMD or 40 MMSCMD of
gas to RNRL on the NTPC Contract Terms and as per the
commercial aspect set out in Para 8.3 hereinabove.
(b)Order and Direct RIL to execute an amendment to the
Gas Supply Master Agreement dated January 12, 2006 and
to the Form of Gas Sale and Purchase Agreement attached
in Schedule 3.2 thereto, to bring them in line with the Gas
Supply Master Agreement and Form of Gas Sale and
Purchase Agreement as set out in Ex. J to this Application.
(c) restrain RIL from creating any third party interests
or rights in respect of i) 28 MMSCMD of Gas to be supplied
to the Applicant; (ii) 12 MMSCMD to be supplied to the
Applicant on firm basis in case NTPC Contract does not
materialize; and/or entering into any contract(s) and/or
use or supply to any third party the said gas (28 MMSCMD
or 40 MMSCMD, as the case may be) which is required to
be supplied to the Applicant under the Scheme.
(d) pending the hearing and final disposal of the
application, direct RIL to supply the said 28 MMSCMD
or 40 MMSCMD gas, as the case may be, to the
applicant on the same terms as per NTPC Contract.
(e) ad-interim reliefs in terms of prayer (c) and (d) above.
(f) Such further orders be passed and/or directions be
given as this Hon’ble Court may deems fit and proper.”
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7) In the said application of RNRL, it was highlighted that to
make the Scheme as sanctioned by the High Court, effective
and workable, it is necessary to direct the amendments and
alterations to the GSMA dated 12.01.2006 and draft GSPA
annexed to the GSMA, as both do not result in effective
transfer of the business sought to be demerged and are not in
compliance with the terms of the Scheme of Arrangement in
its letter and spirit. The GSMA and GSPA are also not in
compliance with the MoU which was the very reason of the
Scheme of Arrangement as filed by RIL. Therefore, RNRL
prayed for Company Courts’ intervention to ensure that the
Scheme is implemented effectively.
8) In addition to the above particulars, RNRL placed the
following additional materials in support of their stand:
a) The Board of Directors of RIL were appreciative of the
resolution of the issues between Shri Mukesh Ambani and
Shri Anil Ambani and in their meeting held on June 18, 2005
noted the settlement and amicable resolution of the dispute
providing for reorganization of the Reliance Group including
the businesses and interests of RIL and adopted a resolution
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thanking the efforts made by Smt. Kokilaben Dhirubhai
Ambani in working towards the settlement.
b) The agreement arrived at between Shri Mukesh Ambani,
Chairman and Managing Director of RIL and Shri Anil Ambani
relating to the reorganization of the RIL Group envisaged the
supply of gas from RIL’s current and future gas fields for
various projects of Reliance-Anil Dhirubhai Group. The said
agreement contains the following clauses:-
(a) Quantum of Supply and Source of Supply
· Supply of 28 MMSCMD gas by RIL to Anil Dhirubhai
Ambani Group (ADAG). This supply is subject to supply of
12 MMSCMD to NTPC.
· In the event that NTPC contract does not materialize or
cancelled, the entitlement of NTPC to the said extent
should go to the ADA Group in addition to its entitlement
of 28 MMSCMD i.e. a total of 40 MMSCMD.
· ADA Group to have option to buy 40% of all balance and
future gas from the current or future gas fields of MDA
Group.
· Supply to be from the proven P1 Reserves of RIL whether
from the KGD-6 Basin or elsewhere.
(b) Supply period 17 (Seventeen) Years.
(c) ADA Group’s Purchase Obligation.
On take or pay basis.
(d) Price and Commercial Terms
· The firm quantity of 28 MMSCMD/ 40 MMSCMD at a price
no greater than NTPC prices.
· Option gas at the market rate
· Other commercial terms-same as those of NTPC contract.
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· Shall be in accordance with International Best Practices.
· Shall be bankable in International Financial Markets.
(e) Other terms governing the Arrangement.
· Reliance ADA Group shall have the option to take delivery
of gas at Kakinada on the East Coast and may construct
its own pipeline. However, REL would still have to pay
the transportation cost for supply to the West Coast even
if the facility is not used, but will have the right to deal
with the capacity as it deems fit and to sell or assign the
same to another party.
· The gas supply/option agreements would be between RIL
and a 100% subsidiary of RIL, which would be demerged
to the Reliance—ADA Group as part of the Scheme and
not with REL.
· In relation to applicable governmental and statutory
approvals, without in any manner mitigating RIL’s
responsibility, RIL and Reliance—ADA Group, give an
irrevocable Power of Attorney to the Reliance—ADA Group
to apply for and obtain all such governmental and
regulatory approvals as are necessary on its behalf.
c) The understanding and agreements relating to the supply
of gas as part of the reorganization of RIL are set out in the
Information Memorandum filed for the benefit of the
shareholders and investors by RNRL with the Bombay Stock
Exchange and of the RNRL. Consequently, as part of the
reorganization of the business and undertakings of RIL, the
power business of RIL including the Gas Based Power
Business, described in the Scheme as the Gas Based Energy
Undertaking, was also to be demerged. The Gas Based Energy
Undertaking of RIL to be demerged under the Scheme
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consisted of the business of supply of gas for power projects
REL and of Reliance Patalganga Power Ltd., through suitable
arrangements.
d) The Scheme also explains:
(i) Gas Based Energy Resulting Company
(ii) Gas Based Energy Undertaking
e) The Scheme provided for suitable arrangements whereby the
RNRL would receive gas from RIL and supply the same, as RIL
would otherwise have done, for the power projects of REL.
f) In the year 2003, NTPC had floated a global tender for
supply of gas to its power projects to be located at Kawas and
Gandhar in the State of Gujarat. RIL, who emerged as the
successful bidder, had at the time of submission of bids
unconditionally accepted all the terms and conditions
mentioned in the draft GSPA. In accordance with the agreed
position/settlement, the gas was to be supplied by RIL to the
RNRL at the price and terms no less favourable than those of
NTPC and the gas supply agreement between RIL and the
RNRL would be as per the said NTPC contract terms. RIL, by
letter dated 14.02.2006, signed by one K. Sethuraman,
Authorised Signatory of RIL, communicated that he was
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directed to confirm that RIL would agree to carry out
amending changes to the proforma of GSPA annexed to the
Gas Supply Master Agreement (GSMA) so that it reflects the
same terms as are contained in the GSPA for 12 MMSCMD
between NTPC and RIL as and when changes are carried out
to NTPC GSPA.
g) The Scheme also provided that post the demerger of the
Demerged Undertakings of RIL, Shri Anil Ambani would obtain
control and management of the businesses and undertakings
being demerged.
h) Further, the agreement had to reflect an interest in gas
produced by all the gas fields of RIL so as to ensure that gas
upto the agreed quantity i.e. 28 MMSCMD or 40 MMSCMD, as
the case may be, would be made available to RNRL in priority
to any other sale or use by RIL except for the gas to be used
for RIL itself for operation and transportation and for the gas
to be supplied to NTPC. The interest of RNRL was thus to
extend to gas fields other than the KG-D6.
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i) The GSMA and the form of GSPA significantly depart from
the Draft Agreement to the NTPC request for bids and
unconditionally accepted by RIL.
9) The case of RIL:-
a) A Scheme for the demerger of a large company with
majority of shares being held by the public and by institutions,
has to be in larger public interest as well as in the interest of
the company. It must necessarily safeguard the interest of
large body of shareholders of the Demerged Company as also
the shareholders of the Resulting Companies. Any settlement
of the disputes stated to have taken place between or amongst
the promoters has, as a necessity, to abide by the final
decision of the Board of the Demerged Company and such
adaptations as may be necessary to protect and further the
interests of the large body of shareholders or public interest.
(b) Once the Scheme as was placed before and duly approved
by; the shareholders (99% shareholders approved the Scheme)
which suggests that the Scheme had the support not merely of
the General Body of shareholders but also the members of the
promoters’ family-all anterior or underlying agreements
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become irrelevant. The senior-most member of the family who
resolved all the disputes has, at no point, contested the
Scheme as being inconsistent with any arrangement that may
have been arrived at. The present application is a thinly
disguised attempt to reopen the Scheme after it has been fully
implemented in a manner that is completely inconsistent not
only with the demerger of the businesses but the provisions of
Section 392 of the Companies Act, 1956.
c) That none of the heads of so-called Agreement are a part of
the Scheme as proposed by the Board of Directors of RIL and
approved by the creditors and general body of shareholders.
These allegations have no place in an application made for
implementation of the Scheme as sanctioned by the High
Court. The averments made therein are completely
extraneous and irrelevant. The issues, if at all, as between
Shri Mukesh Ambani and Shri Anil Ambani were personal to
the Ambani family and the Board of RIL was not aware of the
details of the settlement between Shri Mukesh Ambani and
Shri Anil Ambani.
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d) The Vice Chairman and Joint Managing Director of RIL, at
the relevant time, Shri Anil Ambani was or in any event,
should be deemed to be fully aware of the nature of the rights
of RIL in relation to exploration and production of gas from
various gas-fields as also the provisions of the Production
Sharing Contract (PSC). Significantly, the Production Sharing
Contract for Block KG-D6 was executed way back in the year
2000. Being Board managed company, the business and
affairs of RIL are under control and supervision of the Board of
Directors and in fact the Minutes of the Board meeting clearly
show that in all matters in which Shri Mukesh Ambani was or
could be said to be an interested director, he had refrained
from participating in the deliberations and voting on the
resolutions. The terms and conditions on which the gas was
to be supplied to the power plants of Reliance Patalganga
Power Limited and REL was to be at the discretion by the
Board of Directors of the Demerged Company who were not
bound by any “agreement” as between two groups of
promoters. The Board of Directors of Demerged Company was
obliged and in fact had at all times kept the interests of the
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general body of shareholders as being a paramount
importance and had taken such decisions as in the best
judgment of the Board, accorded to their duty as the Board
with the shareholders interests being of utmost importance.
10) After considering the claim of both the parties viz., RNRL
and RIL the “Company Judge has arrived at the following
conclusions”:
“184. The conclusions are:
(1) The present company application under Section 392 of
the Companies Act is maintainable.
(2) The Company Court, however, under Section 392 of the
Companies Act cannot direct or dictate to maintain or
amend or modify and/or insist for a particular clause or
clauses of such gas supply agreement or such other
commercial agreement/contract.
(3) The GSMA as formed and finalized in the Board of
Director’s Meeting of RIL on 11.01.2007 and modified on
12.01.2007 is in breach of the Scheme.
(4) The MoU (Memorandum of Understanding/Family
Arrangement) and its content are binding to both parties RIL
and RNRL and all the concerned, Mr. Mukesh Ambani and
his group of Companies and Mr. Anil Ambani and his group
of Companies have already acted upon at the pre and post
stages of the MoU and the pre and post stages of the Scheme
accordingly.
(5) The term “suitable arrangement” as referred in the
Scheme needs to read and interpret by taking into account
the terms of the MoU as well as the Scheme as referred
above. It is also necessary for the complete and full working
of the Scheme.
(6) The terms as mentioned in the MoU and GSMA need to
be suitable for both the parties subject to the Government’s
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policies and national, international practice in supply of gas
or such other products.
(7) The contract of such nature is subject to the
Government’s approval in view of NELP & PSC and such
related Government policies, but keeping in view the several
factors including the freedom and right of the contractor/RIL
and the limited and restricted scope of interference in such
permissible commercial aspects of the contractor, unless, it
is in breach of any public policy and public interest.
(8) The supply of gas contract/agreement needs to be clear
and bankable documents for all the concerned parties.”
Finally, the Company Judge directed the parties to renegotiate
for a “suitable arrangement”.
11) As discussed earlier, aggrieved by the said
order/directions of the Company Judge, RNRL has filed Appeal
No. 1 of 2008, RIL has also filed Appeal No. 844 of 2007 before
the Division Bench. During the course of hearing, considering
the public/national importance, the Division Bench permitted
the Union of India to intervene and put forth their stand.
12) The Division Bench framed the following “issues for
consideration”:
(1) Whether the Company Court has jurisdiction to entertain
the Application filed by RNRL under the Companies Act, 1956?
(2) What is a “suitable arrangement” between the two
Companies in the matter of supply of gas for the power
projects of the Resulting Companies and its affiliates?
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13) Answers by the Division Bench:
(a) The Division Bench has answered the first issue in the
affirmative. The reasoning of the Division Bench, however, is
different from that of the Single Judge. The Company Judge
had held that the Application was maintainable under Section
392 read with Section 394 of the Companies Act. The Division
Bench however found the Company Application to be
maintainable on the basis of Clauses 17, 18, 20 to 24 of the
Scheme of Demerger itself.
(b) On the second issue, the Division Bench held as follows:
(i) The suitable arrangement was required to be made by
engrafting the MoU on the GSMA,
(ii) As far as the fixation of price is concerned, the
Government has the power to fix the price, but only for its
“take” of the gas, and
(iii) Although the Government could lay down the Gas
Utilization Policy, such Utilization Policy would apply only to
the gas available for allocation after certain quantity of gas
which according to the Division Bench, “stood allocated” to
25
RNRL as per the MoU. The Gas Utilization Policy could apply
only to the balance quantities.
(iv) There was nothing in the PSC that prevented the
Contractor from selling gas at a price lower than the price
approved by the Government and RIL could fulfill its obligation
of supply of gas at a price of US $ 2.34 per mmbtu.
14) Aggrieved by the above directions/conclusions RNRL, RIL
as well as U.O.I. have filed these appeals by way of special
leave petition before this Court.
15) Heard M/s Ram Jethmalani and Mr. Mukul Rohatgi, Mr.
Ravi Shankar Prasad, learned senior counsel for RNRL, M/s
Harish N. Salve, and Mr. Rohington F. Nariman, learned
senior counsel for RIL and Mr. Gopal Subramanium, learned
Solicitor General, M/s Mohan Parasaran and Mr. Vivek
Tankha, Additional Solicitor General for the Union of India.
16) Historical background:
Up to the early 90’s, prior to the NELP and pre-NELP
years, natural gas was being produced only from the fields
operated by the Government companies, namely Oil & Natural
Gas Corporation (in short ‘ONGC’) and Oil India Limited (in
26
short ‘OIL), out of blocks which were given to these companies
by the Government on nomination basis. Since these fields
were given on nomination basis and only to Government
Companies, the Government’s power to regulate the Natural
Gas Sector was absolute.
Later, it was decided to open the sector to Private Sector
Investment during the mid 1990s when private investment
was sought on competition basis and certain blocks were
awarded to Private Sector companies under a Production
Sharing Contract (better known as the pre-NELP Production
Sharing Contracts). This was done to increase private
investment in this sector since the exploration and production
of oil and gas is associated with considerable risk and no
investment would have been attracted if the APM regime
continued. However, the Contractors who signed the PSC
were required to sell all the gas produced and saved to the Gas
Authority of India Limited, a PSU, and did not have marketing
freedom as regards natural gas.
The pre-NELP regime was replaced by the NELP regime
under which the PSC relevant to the present case was entered
27
into between a Joint Venture composed of RIL and NIKO
Resources Limited and the Government of India. In the NELP-
1 PSC, marketing freedom has been given to the contractor to
a limited extent subject to the overall regulation of the
Government.
17) Constitutional and other statutory Provisions:
“Article 297. Things of value within territorial waters or
continental shelf and resources of the exclusive
economic zone to vest in the Union - (1) All lands,
minerals and other things of value underlying the ocean
within the territorial waters, or the continental shelf, or the
exclusive economic zone, of India shall vest in the Union and
be held for the purposes of the Union.
(2) All other resources of the exclusive economic zone of
India shall also vest in the Union and be held for the
purposes of the Union.
(3) The limits of the territorial waters, the continental shelf,
the exclusive economic zone, and other maritime zones, of
India shall be such as may be specified, from time to time,
by or under any law made by Parliament.”
18) Article 39(b) of the Constitution envisages that the State
shall, in particular, direct its policy towards securing the
ownership and control of material resources of the community
as so distributed as best to sub-serve the common good.
19) This Court, in the case of State of Tamil Nadu vs. L.
Abu Kavur Bai, (1984) 1 SCC 515 at 549 held that the
28
expression ‘distribute’ under Article 39(b) cannot but be given
full play as it fulfills the basic purpose of re-structuring the
economic order. It embraces the entire material resources of
the community. Its goal is so to undertake distribution as
best to sub-serve the common good. It re-organizes by such
distribution the ownership and control. To distribute, would
mean, to allot, to divide into classes or into groups and
embraces arrangements, classification, placement, disposition,
apportionment, the system of disbursing goods throughout the
community.
20) In Salar Jung Sugar Mills Ltd. etc. vs. State of
Mysore & Ors., (1972) 1 SCC 23 at page 36 paragraph 38,
this Court held as under:
“38…………Delimiting areas for transactions or parties or
denoting price for transactions are all within the area of
individual freedom of contract with limited choice by reason
of ensuring the greatest good for the greatest number by
achieving proper supply at standard or fair price to eliminate
the evils of hoarding and scarcity on the one hand and
availability on the other.”
21) In Tinsukhia Electric Supply Company Ltd. vs. State
of Assam & Ors., (1989) 3 SCC 709, this Court affirmed the
views expressed in the above cases in the context of electricity
supply and also affirmed the Government’s role in the securing
29
and distributing of the resources of the community that best
sub-serves the common good.
22) This Court in numerous decisions has laid down that in
the award of tenders and the distribution of national property
and State largesse, the State is bound to follow the dictate of
Article 14.
23) In Ramana Dayaram Shetty vs. International Airport
Authority of India & Ors, (1979) 3 SCC 489, this Court has
pointed out that :
“……..The power or discretion of the Government in the
matter of grant of largess including award of jobs, contracts,
quotas, licences etc., must be confined and structured by
rational, relevant and non-discriminatory standard or norm
and if the Government departs from such standard or norm
in any particular case or cases, the action of the Government
would be liable to be struck down, unless it can be shown by
the Government that the departure was not arbitrary, but
was based on some valid principle which in itself was not
irrational, unreasonable or discriminatory ”
24) In Food Corporation of India vs. M/s Kamdhenu
Cattle Feed Industries, (1993) 1 SCC 71, this Court observed
as follows:
“In contractual sphere as in all other State actions, the State
and all its instrumentalities have to conform to Article 14 of
the Constitution of which non-arbitrariness is a significant
facet. There is no unfettered discretion in public law : A
public authority possesses powers only to use them for
30
public good. This imposes the duty to act fairly and to adopt
a procedure which is 'fairplay in action'. ………”
25) The Oil Fields (Regulation & Development) Act, 1948 and
the Petroleum and Natural Gas Rules, 1959, make provisions,
inter alia, for the regulation of petroleum operation and grant
of licence and leases for exploration, development and
production of petroleum in India. The Territorial Waters,
Continental Shelf, Exclusive Economic Zone and Maritime
Zones Act, 1976 provides for the grant or a licence of Letter of
Authority by the Government to explore and exploit the
resources of the Continental Shelf and Exclusive Economic
Zone and any Petroleum operation.
26) Under the Companies Act, there are no provisions except
Sections 391 to 394 which deal with the procedure and power
of the Company Court to sanction the Scheme which falls
within the ambit of requirements as contemplated under these
sections. Since the Company Judge as well as the Division
Bench of the High Court proceeded on the basis that it has
ample power and jurisdiction to supervise the Scheme as
sanctioned under Sections 391 to 394 of the Companies Act, it
is but proper to refer those sections which are as under:
31
“391. Power to compromise or make arrangements with
creditors and members
(1) Where a compromise or arrangement is proposed-
(a) between a company and its creditors or any class of them;
or
(b) between a company and its members or any class of
them,
the Tribunal may, on the application of the company or of
any creditor or member of the company or, in the case of a
company which is being wound up, of the liquidator, order a
meeting of the creditors or class of creditors, or of the
members or class of members, as the case may be to be
called, held and conducted in such manner as the Tribunal
directs.
(2) If a majority in number representing three-fourths in
value of the creditors, or class of creditors, or members, or
class of members as the case may be, present and voting
either in person or, where proxies are allowed under the
rules made under section 643, by proxy, at the meeting,
agree to any compromise or arrangement, the compromise or
arrangement shall, if sanctioned by the Tribunal be binding
on all the creditors, all the creditors of the class, all the
members, or all the members of the class, as the case may
be, and also on the company, or, in the case of a company
which is being wound up, on the liquidator and
contributories of the company:
Provided that no order sanctioning any compromise or
arrangement shall be made by the Tribunal unless the
Tribunal is satisfied that the company or any other person
by whom an application has been made under sub-section
(1) has disclosed to the Tribunal, by affidavit or otherwise, all
material facts relating to the company, such as the latest
financial position of the company, the latest auditor's report
on the accounts of the company, the pendency of any
investigation proceedings in relation to the company under
sections 235 to 351, and the like.
(3) An order made by the Tribunal under sub-section (2)
shall have no effect until a certified copy of the order has
been filed with the Registrar.
32
(4) A copy of every such order shall be annexed to every copy
of the memorandum of the company issued after the certified
copy of the order has been filed as aforesaid, or in the case of
a company not having a memorandum, to every copy so
issued of the instrument constituting or defining the
constitution of the company.
(5) If default is made in complying with sub-section (4), the
company, and every officer of the company who is in default,
shall be punishable with fine which may extend to one
hundred rupees for each copy in respect of which default is
made.
(6) The Tribunal may, at any time after an application has
been made to it under this section stay the commencement
or continuation of any suit or proceeding against the
company on such terms as the Tribunal thinks fit, until the
application is finally disposed of.
392. Power of Tribunal to enforce compromise and
arrangement : (1) Where the Tribunal makes an order
under section 391 sanctioning a compromise or an
arrangement in respect of a company, it-
(a) shall have power to supervise the carrying out of the
compromise or an arrangement; and
(b) may, at the time of making such order or at any time
thereafter, give such directions in regard to any matter or
make such modifications in the compromise or arrangement
as it may consider necessary for the proper working of the
compromise or arrangement.
(2) If the Tribunal aforesaid is satisfied that a compromise or
an arrangement sanctioned under section 391 cannot be
worked satisfactorily with or without modifications, it may,
either on its own motion or on the application of any person
interested in the affairs of the company, make an order
winding up the company, and such an order shall be deemed
to be an order made under section 433 of this Act.
(3) The provisions of this section shall, so far as may be, also
apply to a company in respect of which an order has been
made before the commencement of the Companies
33
(Amendment) Act, 2001 sanctioning a compromise or an
arrangement.
393. Information as to compromises or arrangements
with creditors and members - (1) Where a meeting of
creditors or any class of creditors, or of members or any
class of members, is called under section 391,-
(a) with every notice calling the meeting which is sent
to a creditor or member, there shall be sent also a
statement setting forth the terms of the compromise or
arrangement and explaining its effect; and in
particular, stating any material interests of the
directors, managing director or manager of the
company, whether in their capacity as such or as
members or creditors of the company or otherwise,
and the effect on those interests of the compromise or
arrangement if, and in so far as, it is different from the
effect on the like interests of other persons; and
(b) in every notice calling the meeting which is given by
advertisement, there shall be included either such a
statement as aforesaid or a notification of the place at
which and the manner in which creditors or members
entitled to attend the meeting may obtain copies of
such a statement as aforesaid.
(2) Where the compromise or arrangement affects the rights
of debenture-holders of the company, the said statement
shall give the like information and explanation as respects
the trustees of any deed for securing the issue of the
debentures as it is required to give as respects the
company's directors.
(3) Where a notice given by advertisement includes a
notification that copies of a statement setting forth the terms
of the compromise or arrangement proposed and explaining
its effect can be obtained by creditors or members entitled to
attend the meeting, every creditor or member so entitled
shall, on making an application in the manner indicated by
the notice, be furnished by the company, free of charge, with
a copy of the statement.
(4) Where default is made in complying with any of the
requirements of this section, the company, and every officer
34
of the company who is in default, shall be punishable with
fine which may extend to fifty thousand rupees; and for the
purpose of this sub-section any liquidator of the company
and any trustee of a deed for securing the issue of
debentures of the company shall be deemed to be an officer
of the company:
Provided that a person shall not be punishable under this
sub-section if he shows that the default was due to the
refusal of any other person, being a director, managing
director, manager or trustee for debenture holders, to supply
the necessary particulars as to his material interests.
(5) Every director, managing director, or manager of the
company, and every trustee for debenture holders of the
company, shall give notice to the company of such matters
relating to himself as may be necessary for the purposes of
this section; and if he fails to do so, he shall be punishable
with fine which may extend to five thousand rupees.
394. Provisions for facilitating reconstruction and
amalgamation of companies
(1) Where an application is made to the Tribunal under
section 391 for the sanctioning of a compromise or
arrangement proposed between a company and any such
persons as are mentioned in that section, and it is shown to
the Tribunal-
(a) that the compromise or arrangement has been proposed
for the purposes of, or in connection with, a scheme for the
reconstruction of any company or companies, or the
amalgamation of any two or more companies; and
(b) that under the scheme the whole or any part of the
undertaking, property or liabilities of any company
concerned in the scheme (in this section referred to as a
"transferor company") is to be transferred to another
company (in this section referred to as "the transferee
company");
the Tribunal may, either by the order sanctioning the
compromise or arrangement or by a subsequent order, make
provision for all or any of the following matters:-
(i) the transfer to the transferee company of the whole or
any part of the undertaking, property or liabilities of
any transferor company;
35
(ii) the allotment or appropriation by the transferee
company of any shares, debentures policies, or other
like interests in that company which, under the
compromise or arrangement, are to be allotted or
appropriated by that company to or for any person;
(iii) the continuation by or against the transferee company
of any legal proceedings pending by or against any
transferor company;
(iv) the dissolution, without winding up, of any transferor
company;
(v) the provision to be made for any persons who, within
such time and in such manner as the Court directs
dissent from the compromise or arrangement; and
(vi) such incidental, consequential and supplemental
matters as are necessary to secure that the
reconstruction or amalgamation shall be fully and
effectively carried out:
Provided that no compromise or arrangement proposed for
the purposes of, or in connection with, a scheme for the
amalgamation of a company, which is being wound up, with
any other company or companies; shall be sanctioned by the
Tribunal unless the Court has received a report from the
Registrar that the affairs of the company have not been
conducted in a manner prejudicial to the interests of its
members or to public interest:
Provided further that no order for the dissolution of any
transferor company under clause (iv) shall be made by the
Tribunal unless the Official Liquidator has, on scrutiny of
the books and papers of the company, made a report to the
Tribunal that the affairs of the company have not been
conducted in a manner prejudicial to the interests of its
members or to public interest.
(2) Where an order under this section provides for the
transfer of any property or liabilities, then, by virtue of the
order; that property shall be transferred to and vest in and
those liabilities shall be transferred to and become the
liabilities of the transferee company and in the case of any
property, if the order so directs, freed from any charge which
is, by virtue of the compromise or arrangement, to cease to
have effect.
36
(3) Within thirty days after the making of an order under this
section, every company in relation to which the order is
made shall cause a certified copy thereof to be filed with the
Registrar for registration.
If default is made in complying with this sub-section, the
company, and every officer of the company who is in default,
shall be punishable with fine which may extend to five
hundred rupees.
(4) In this section-
(a) "property" includes property rights and powers of every
description; and "liabilities" includes duties of every
description; and
(b) "Transferee company" does not include any company
other than a company within the meaning of this Act; but
"transferor company" includes any body corporate, whether
a company within the meaning of this Act or not.
394A. Notice to be given to Central Government for
applications under sections 391 and 394
The Tribunal shall give notice of every application made to it
under section 391 or 394 to the Central Government, and
shall take into consideration the representations, if any,
made to it by that Government before passing any order
under any of these sections.”
27) ISSUES ARISING IN THE PRESENT APPEALS:
a) Whether the Company Petition filed by RNRL under
Section 392 of the Companies Act, was maintainable?
b) Even if the Company Petition was maintainable, whether
the challenge raised by RNRL to the GSMA, that it is not
a “suitable arrangement” was maintainable particularly
37
in view of the fact that on merits, the Company Judge
had found, these objections to be unsustainable?
c) Whether the MoU entered into amongst the family
members of the Promoter was binding upon the corporate
entity – RIL?
d) Whether the terms of the MoU are required to be
incorporated in the GSMA as held by the Division Bench?
e) Whether the provisions in the GSMA requiring
Government approval for supply of gas to RNRL is
unreasonable and that its inclusion renders the GSMA as
not a “suitable arrangement” as contended by RNRL?
f) Having insisted upon a Gas Sale and Purchase
Agreement (GSPA) in conformity with the NTPC draft
GSPA dated 12th May, 2005 which contained an
unequivocal stipulation for Government approval for
quantity, tenure and price, whether it is open to RNRL to
now contend that the Government approval for supply of
gas is not required and further that the provision
requiring Government approvals should be deleted from
the GSMA/GSPA?
38
g) Whether it is necessary for this Court to go into the
interpretation of the provisions of the PSC?
h) i. Whether the approval of the Government is required
to the price at which gas is sold by the contractor
under the PSC?
ii. Whether the Government has the right to regulate
the distribution of gas produced which it has
exercised by putting in place the Gas Utilization
Policy under which sectoral and consumer-wise
priorities (to the quantities specified) have been
identified and notified to RIL?
iii. Whether the Contractor has a physical share in the
gas produced and saved which it can deal with at its
own volition?
i) In view of the Gas Utilization Policy and the Pricing Policy
of the Government, whether the “Suitable Arrangement”
for supply of gas to Dadri Power Plant of REL can only be
on the same terms as are applicable to other allottees of
gas and that too to the extent of the quantity of gas that
39
may be allocated by the Government as and when the
Dadri Power Plant is ready to receive gas?
28) All these issues can be answered in the following broad
headings:
(A) Maintainability of the company petition:
i) It has been argued before this Court that the original
company application was not maintainable as the Company
Judge (single Judge) did not have any jurisdiction. It has been
argued that the jurisdiction of the Court can only be found
under Section 394 of the Act and Section 392 is completely
inapplicable. RIL has argued this because the wording of both
the provisions suggests that Section 392 provides much wider
power to the Court with respect to making additions in the
Scheme. Section 392 (1)(b) states that the Court “may give
such directions in regard to any matter or making such
modifications in the compromise or arrangement as it may
consider necessary for the proper working of the compromise
or arrangement”. On the other hand, Section 394 restricts
this power essentially to “incidental, consequential and
supplemental matters only”. Mr. R.F. Nariman, learned senior
40
counsel appearing for RIL concentrated his argument with
reference to Sections 391 to 394 of the Companies Act.
According to him, Section 392 of the Act had no predecessors
either in English Law or in the Companies Act of 1913. The
reason why the Legislature appears to have felt the necessity
of enacting Section 392 is to bring Section 391 on par with
Section 394. Section 394 applies only to Companies which are
re-constructing and or amalgamating, involving the transfer of
assets and liabilities to another Company. It is thus,
applicable to a species of the genus of Company referred to
under Section 391. Section 394, sub-section 1 specifically
gives the Company Court the power not merely to sanction the
compromise or arrangement but also gives the Company Court
the power, by a subsequent order, to make provisions for
“such incidental, consequential and supplemental matters as
are necessary to secure that the re-construction or
amalgamation shall be fully and effectively carried out”
[Section 394(1)(vi)]. This power is absent in Section 391, so
that companies falling within Section 391, but not within
Section 394, would not be amenable to the Company Court’s
41
jurisdiction to enforce a compromise or arrangement made
under section 391 and to see that they are fully carried out.
Hence, the power under Section 392 has to be understood in
the above context, and is of the same quality as the power
expressly given to the Company Court post-sanction under
Section 394.
ii) It is pointed out by Mr. Nariman that on the facts of the
present case, Section 392 does not apply at all, for the reason,
that the sanctioned scheme on record is a scheme to which
both Sections 391 and 394 apply. That being the case, in
order to fully and effectively carry out an arrangement which
has been sanctioned under Sections 391 to 394, the Company
Court enjoys jurisdiction under Sections 394(1)(i) to (vi) itself.
He pointed out that this becomes clear beyond doubt from a
reading of sub section 3 of Section 392. He also pointed out
that Section 153-A of the 1913 Act is conspicuous by its
absence in sub-section(3) of Section 392. According to him,
this makes it clear that where a compromise or arrangement
has been sanctioned under Section 153 A of the previous Act,
the provisions of Section 392 of 1956 Act will not apply,
42
making it clear that where a scheme is governed by the
provisions of Section 394, Section 392 would have no
application.
iii) The learned Single Judge founded his power to give relief
in the Company Application filed by RNRL in Section 392 on
the ground that the applicants cannot be rendered remediless.
For this, Mr. Nariman pointed out that the Company Judge
was not correct for the simple reason that the remedy lies in
Section 394(1) sub-clause (vi) which gives ample power to the
Company Court to fully and effectively carry out the scheme
governed by the provisions of Section 394. He also pointed out
that the marginal note can be looked at to indicate the drift of
the Section.
iv) It is the claim of the RIL that the power to enforce the
compromise or arrangement includes the power to make such
modifications in the compromise or arrangement as the Court
may consider necessary for the proper working of the
compromise or arrangement. However, Mr. Nariman further
pointed out that the power to make modifications does not
extend obviously to make substantial or substantive
43
modifications to the scheme itself which has been passed by at
least 75% of the shareholders in exercise of their right of
Corporate Democracy. In the present case, the Scheme was
passed by an overwhelming majority of more than 99% of the
equity shareholders of RIL. He further pointed out that apart
from the language of Section 392 the power under Section 392
cannot possibly be a greater power than the power under
Section 391 to sanction the original scheme. In Miheer H.
Mafatlal vs. Mafatlal Industries Limited (1997) 1 SCC 579,
this Court delineated the extent of power of the Company
Court under section 391 in para 29 thus:
“29. However further question remains whether the Court
has jurisdiction like an appellate authority to minutely
scrutinise the scheme and to arrive at an independent
conclusion whether the scheme should be permitted to go
through or not when the majority of the creditors or
members or their respective classes have approved the
scheme as required by Section 391 sub-section (2). On this
aspect the nature of compromise or arrangement between
the company and the creditors and members has to be kept
in view. It is the commercial wisdom of the parties to the
scheme who have taken an informed decision about the
usefulness and propriety of the scheme by supporting it by
the requisite majority vote that has to be kept in view by the
Court. The Court certainly would not act as a court of appeal
and sit in judgment over the informed view of the parties
concerned to the compromise as the same would be in the
realm of corporate and commercial wisdom of the parties
concerned. The Court has neither the expertise nor the
jurisdiction to delve deep into the commercial wisdom
exercised by the creditors and members of the company who
have ratified the Scheme by the requisite majority.
Consequently the Company Court’s jurisdiction to that
44
extent is peripheral and supervisory and not appellate. The
Court acts like an umpire in a game of cricket who has to
see that both the teams play their game according to the
rules and do not overstep the limits. But subject to that how
best the game is to be played is left to the players and not to
the umpire. The supervisory jurisdiction of the Company
Court can also be culled out from the provisions of Section
392 of the Act which reads as under……..
…….Of course this section deals with post-sanction
supervision. But the said provision itself clearly earmarks
the field in which the sanction of the Court operates. It is
obvious that the supervisor cannot ever be treated as the
author or a policy-maker. Consequently the propriety and
the merits of the compromise or arrangement have to be
judged by the parties who as sui juris with their open eyes
and fully informed about the pros and cons of the scheme
arrive at their own reasoned judgment and agree to be
bound by such compromise or arrangement. The Court
cannot, therefore, undertake the exercise of scrutinising the
scheme placed for its sanction with a view to finding out
whether a better scheme could have been adopted by the
parties. This exercise remains only for the parties and is in
the realm of commercial democracy permeating the activities
of the concerned creditors and members of the company who
in their best commercial and economic interest by majority
agree to give green signal to such a compromise or
arrangement……. “
v) Again in S.K. Gupta & Anr. Vs. K.P. Jain & Anr. (1979)
3 SCC 54, this Court dealt with the creditors’ scheme
propounded under Section 391 to get a particular Company
out of winding up. Observations made in paragraphs 13 and
15 of this judgment, if read out of context, would make it clear
that this Court has extended the power under section 392 to
make modifications which would include additions and
omissions to the scheme at will. This is not the correct
45
purport of the observations in para 13 and 15. In fact, the
judgment very clearly states that the limit on the Court’s
power is always to see that the modifications are done for the
proper working of the scheme and not for any other purpose.
A very important paragraph of the judgment is para 27 where
this Court ultimately observed “strictly speaking, omission of
the original sponsor and substituting another one would not
change the ‘basic fabric’ of the scheme”. This judgment
therefore, must be understood as construing Section 392 in a
manner that would not permit the Company Court to so
modify a scheme as to change its basic fabric.
vi) Another judgment of this Court is in Meghal homes (P)
Ltd. vs. Shree Niwas Girni K.K. Samiti & Ors. (2007) 7 SCC
753 which squarely raises the issue as to whether in the guise
of modifying a scheme, the Company Court can substitute a
portion of the original scheme. This Court said an emphatic
no:-
“53. But before that, we think that another step has to be
taken in this case. What has now been accepted by the
Division Bench, is not the scheme as modified by the
General Meeting as contemplated by Section 391 of the Act.
At least two of the modifications having ramifications are
based on undertakings or statements made on behalf of
LBPL and there appears to be difference of opinion on that
modification even among the Somanis. There is also the
question whether the proposals of a person who is not one of
46
those recognised by Section 391 of the Act, could be
accepted by the Company Court while approving a scheme.
We are of the view that the scheme with the modifications as
now proposed or accepted, has to go back to the General
Meeting of the members of the Company, called in
accordance with Section 391 of the Act and the requisite
majority obtained.
54. It was argued on behalf of the respondents that under
Section 392 of the Act, the court has the power to make
modifications in the compromise or arrangement as it may
consider necessary and this power would include the power
to approve what has been put forward by LBPL who has
come forward to discharge the liabilities of the Company on
the rights in the properties of the Company other than in the
office building and in the godown, being given to it for
development and sale. As we read Section 392 of the Act, it
only gives power to the court to make such modifications in
the compromise or arrangement as it may consider
necessary for the proper working of the compromise or
arrangement. This is only a power that enables the court to
provide for proper working of compromise or arrangement, it
cannot be understood as a power to make substantial
modifications in the scheme approved by the members in a
meeting called in terms of Section 391 of the Act.
55. A modification in the arrangement that may be
considered necessary for the proper working of the
compromise or arrangement cannot be taken as the same as
a modification in the compromise or arrangement itself and
any such modification in the scheme or arrangement or an
essential term thereof must go back to the General Meeting
in terms of Section 391 of the Act and a fresh approval
obtained therefor. The fact that no member or creditor
opposed it in court cannot be considered as a substitute for
following the requirements of Section 391 of the Companies
Act for approval of the compromise or arrangement as now
modified or proposed to be modified.
56. In Miheer H. Mafatlal v. Mafatlal Industries Ltd.this Court
had insisted that the procedural requirements of Section 391
must be satisfied before the court can consider the
acceptability of a scheme even in respect of a company not in
liquidation. Therefore, we are not in a position to accept the
argument on behalf of the respondents that the scheme now
as modified by the decision of the Division Bench need not
go back to the General Meeting of the members in terms of
Section 391 of the Act. We must also remember that at least
before us there are serious objections to the modifications by
one of the Somanis who are the promoters of the Company
in liquidation and the sponsors of the arrangement and that
objection cannot be brushed aside.
57. We find that the modifications proposed alters the
position of the shareholders vis-Ã -vis the Company. Instead
of the Company reviving the spinning unit as recommended
47
by the State Bank of India Capital Markets Limited, as
adopted in the General Meeting, now the Company will have
nothing to do with the mill lands and the whole of the mill
lands will pass on to LBPL on LBPL paying a value of
Rs 97.50 crores to SCML and LBPL will start an industry of
its own in that property. This cannot be considered to be a
modification in the scheme necessary for the proper working
of the compromise or arrangement. This is a modification of
the scheme itself. Same is the position regarding the
provision of replacing the resolution passed that if any
surplus amounts are available, SCML would start a viable
industry in any part of the State of Maharashtra, by a
commitment that SCML would establish an industry in any
part of the State of Maharashtra on an investment of Rs 20
crores. This again is an obligation cast on the members of
SCML and we are of the view that this cannot also be taken
to be a modification which the court can bring about on its
own under Section 392 of the Act on the pretext that it is a
modification necessary for the proper working of the
compromise or arrangement. We have no hesitation in
holding that in any event, the Division Bench of the High
Court ought to have directed a reconvening of the meeting of
the members of the Company in terms of Section 391 of the
Act to consider the modifications and ensured that the
approval thereof by the requisite majority existed.”
vii) Mr. Nariman has submitted that the Company Judge in
the present case referred to S. K. Gupta’s (supra) case and
finally held that since Sections 391 to 394 are interconnected
it would be able to grant relief asked for in a Company
Application filed under Section 392. It is the claim of the Mr.
Nariman that it is not only incorrect but it would not be
possible in exercise of power under Sections 392 or 394 to
modify the terms of clause 19 of the Scheme. Insofar as the
Division Bench, according to him, goes into various clauses of
the Scheme to say that the subsequent power of modification
48
of the Scheme itself is contained in these Clauses, more
particularly, clause 22. He contended that even if it is to be
applied, no modification can be made under it without the
consent of the parties to the Scheme. According to him, if the
conclusion of the Division Bench is accepted, the resultant
order of the Division Bench is contrary to Clause 22 in that it
would not be possible to read the MoU dated 18.06.2005 into
Clause 19 of the Scheme without the consent of the
Shareholders and the Board of Directors of RIL. He insisted
that the Division Bench of the High Court was bound by the
judgment in Meghal Homes where the jurisdiction of the
Company Court under Section 392 was clearly spelt out.
viii) Learned senior counsel for RNRL submitted that RNRL
seeks to enforce the terms of the Scheme of Arrangement as
sanctioned by the Bombay High Court vide its order dated
09.12.2005. As per the said Scheme, RIL was required to
execute a suitable arrangement for supply of gas to RNRL.
However, RIL has wrongfully caused the execution of a
document the effect of which would be that the business of
supply of gas, as contemplated in the Scheme of Arrangement,
49
would not be transferred to RNRL. He further argued that the
timing and manner of the impugned agreement as well as
several clauses of the Scheme render the same virtually
unworkable. In these circumstances, it is pointed out that
RNRL has approached the Company Court seeking suitable
reliefs under Section 392 of the Companies Act.
ix) In the earlier part, the judgment of this Court in S.K.
Gupta (supra) has been discussed. It is the duty of the Court
to ensure that the Scheme is fully implemented. Learned
senior counsel for the RNRL pointed out that in this case it
would imply that this Court must ensure that the gas based
energy undertaking is, in fact, transferred to RNRL as
contemplated under the Scheme. For this purpose, the Court
has the jurisdiction and power to direct modification of the
GSMA which was required to be executed pursuant to clause
19 of the Scheme. Learned senior counsel further contented
that Section 392 shows the width of the power and the
ultimate consequence envisaged under the Companies Act for
non implementation of the Scheme. The only limitation on the
power of the Court is that it cannot change the basic structure
50
or character or purpose of the Scheme. It was further pointed
out that subject to this, the power is of widest amplitude and
unlimited. On behalf of the RNRL it was pointed out that the
decision of this Court in Meghal Homes (supra) is not
applicable to the present case, firstly, this judgment accepts
the principle that the Court has wide power under Section 392
though the same are circumscribed, secondly, the said
judgment does not refer to Gupta’s case which was a binding
decision of a three-Judge Bench. Further, in Meghal Homes
(supra) the challenge was the power of the Court to sanction
the Scheme and not power to direct modification to an already
sanctioned Scheme.
x) In the light of the stand taken by both parties, this Court
analyzed the relief sought for in the Company Application and
the relevant materials placed before the Company Judge.
Section 392 creates a duty to supervise the carrying out of the
compromise or arrangement. This power and duty was
created to enable the Court to take steps from time to time to
remove all obstacles in the way of enforcement of a sanctioned
scheme. While sanctioning, it shall anticipate some hitches
51
and difficulties which it can remove by the order of the
sanction itself but clause 1(b) makes it clear that this power
can also be exercised after the scheme has once been
sanctioned. So long as the basic nature of the arrangement
remains the same the power of modification is unlimited, the
only limit being that the modification should be necessary for
the working arrangement.
xi) In view of the above discussion, this Court holds that
Section 392 is applicable to the Company Application filed by
RNRL. This is more so because the Company Court has
originally sanctioned the scheme under both Sections 391 and
394. Further, the position derived from Gupta (supra) the
power of the Court under Section 392 is wide enough to make
any changes necessary for the working of the Scheme.
Therefore, Court does have jurisdiction over the present
matter. However, it is made clear that the power of the Court
does not extend to re-writing the Scheme in any manner.
xii) Furthermore, in the Companies Act, there is no provision
except Section 391 to Section 394 which deal with the
procedure and power of the Company Court to sanction the
52
Scheme which fall within the ambit of the requirements as
contemplated under these sections. In the absence of any
other provisions except Section 392, it is difficult to accept the
contention as raised that the present application under
Section 392 of the Companies Act is without jurisdiction. On
the other hand, Section 391 to Section 394 has ample power
and jurisdiction to supervise the scheme as sanctioned under
the Companies Act. As rightly observed by the Company
Judge, the exigencies, facts and circumstances, play dominant
role in passing appropriate order under Sections 391 to 394
after sanctioning of the Scheme. The Company Court is not
powerless and can never become functus officio. Sections 391
to 394 are interconnected and it can pass appropriate order
for sanctioning of any Scheme including of arrangement,
demerger, merger and amalgamation. Therefore, the
application filed by RNRL under Section 392 is maintainable.
Nevertheless, as observed earlier, the power of the Court does
not extend to re-writing the Scheme in any manner.
53
(B) Memorandum of Understanding (MoU)
i) In order to understand the position of RNRL and RIL as
well as “suitable arrangement” under the “Scheme”, it is but
proper to refer the contents of MoU (placed before the Division
Bench of the High Court) which are as under:
“STRICTLY CONFIDENTIAL
MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding (this “MoU”) is made at
Mumbai this___ day of June, 2005 amongst Kokilaben D.
Ambani (“Kokilaben”), Mukesh D. Ambani (“Mukesh”) and
Anil D. Ambani (“Anil”) (each of Kokilaben, Mukesh and Anil
hereinafter referred to individually as a “Party” and
collectively as the “Parties.”)
WHEREAS
A. After the demise of Shri Dhirubhai H Ambani (late
Dhirubhai) on July 6, 2002, Kokilaben is the head of
the Ambani family and has complete moral authority
over the family. Her four children, Mukesh, Anil, Dipti
and Nina have, by Deed of Release dated October 17,
2002, released their entire interest in the estate of late
Dhirubhai in her favour.
B. Mukesh and Anil have been managing the various
businesses of the family comprised in the Reliance
Group (the “Businesses”). Differences have arisen
between them in this behalf, and having regard to
recent events and with the intervention of Kokilaben,
the Parties have now agreed that the best way forward
would be to have a segregation of the ownership and
Businesses into two groups, with one group owned,
managed and controlled by Mukesh and the other
owned, managed and controlled by Anil. Most of the
key principles relating to the segregation of certain
family assets including controlling interest in the
Businesses and companies have been agreed to
between the Parties.
54
C. Mukesh and Anil have also expressed their
unconditional trust in Kokilaben and agreed that she
shall play a final and decisive role in resolving any
open issues in the process of settlement, and that they
shall abide by all decisions made by her to facilitate
early closure of the settlement.
D. The Parties are now desirous of formally recording
their agreement in this behalf.”
ii) It has been the consistent position of RNRL that the MoU
signed between Mukesh Ambani and Anil Ambani is binding,
and therefore, the “suitable arrangement” under the “scheme”
should be nothing but the MOU itself. On the other hand, RIL
has consistently argued that the MOU is not binding for them
since it is merely a non-legal instrument between certain
family members. Therefore, it was argued that it will not bind
the companies and the shareholders who have a completely
different personality.
iii) Mr. Ram Jethmalani, learned senior counsel appearing
for the RNRL strongly relied on the following decisions of this
Court with reference to the importance of family arrangement
(MoU) and its effect and value.
1. Kale & Ors. vs. Deputy Director of Consolidation &
Ors., (1976) 3 SCC 119 (Paragraphs 9, 17, 19, & 42) which
states as under:
55
“ 9…………A family arrangement by which the property is
equitably divided between the various contenders so as to
achieve an equal distribution of wealth instead of
concentrating the same in the hands of a few is undoubtedly
a milestone in the administration of social justice. That is
why the term “family” has to be understood in a wider sense
so as to include within its fold not only close relations or
legal heirs but even those persons who may have some sort
of antecedent title, a semblance of a claim or even if they
have a spes successionis so that future disputes are sealed
for ever and the family instead of fighting claims inter se and
wasting time, money and energy on such fruitless or futile
litigation is able to devote its attention to more constructive
work in the larger interest of the country. The courts have,
therefore, leaned in favour of upholding a family
arrangement instead of disturbing the same on technical or
trivial grounds. Where the courts find that the family
arrangement suffers from a legal lacuna or a formal defect
the rule of estoppel is pressed into service and is applied to
shut out plea of the person who being a party to family
arrangement seeks to unsettle a settled dispute and claims
to revoke the family arrangement under which he has
himself enjoyed some material benefits……..
17. In Krishna Biharilal v. Gulabchand,1971 1 SCC 837,
it was pointed out that the word “family” had a very wide
connotation and could not be confined only to a group of
persons who were recognised by law as having a right of
succession or claiming to have a share.
19. Thus it would appear from a review of the decisions
analysed above that the courts have taken a very liberal and
broad view of the validity of the family settlement and have
always tried to uphold it and maintain it. The central idea in
the approach made by the courts is that if by consent of
parties a matter has been settled, it should not be allowed to
be reopened by the parties to the agreement on frivolous or
untenable grounds.
42……….As observed by this Court in T.V.R. Subbu Chetty’s
Family Charities case, that if a person having full knowledge
of his right as a possible reversioner enters into a
transaction which settles his claim as well as the claim of
the opponents at the relevant time, he cannot be permitted
to go back on that agreement when reversion actually falls
open.”
56
2. K.K. Modi vs. K.N. Modi & Ors., (1998) 3 SCC 573
(Paragraphs 33 & 52) which states as under:
“33. In the present case, the Memorandum of Understanding
records the settlement of various disputes as between Group
A and Group B in terms of the Memorandum of
Understanding. It essentially records a settlement arrived at
regarding disputes and differences between the two groups
which belong to the same family. In terms of the settlement,
the shares and assets of various companies are required to
be valued in the manner specified in the agreement. ……
52. Group A contends that there is no merit in the challenge
to the decision of the Chairman of IFCI which has been made
binding under the Memorandum of Understanding. The
entire Memorandum of Understanding including clause 9
has to be looked upon as a family settlement between
various members of the Modi family. Under the
memorandum of Understanding, all pending disputes in
respect of the rights of various members of the Modi family
forming part of either Group A or Group B have been finally
settled and adjusted. Where it has become necessary to split
any of the existing companies, this has also been provided
for in the Memorandum of Understanding. It is a complete
settlement, providing how assets are to be valued, how they
are to be divided, how a scheme for dividing some of the
specified companies has to be prepared and who has to do
this work. In order to obviate any dispute, the parties have
agreed that the entire working out of this agreement will be
subject to such directions as the Chairman, IFCI may give
pertaining to the implementation of the Memorandum of
Understanding. He is also empowered to give clarifications
and decide any differences relating to the implementation of
the Memorandum of Understanding. Such a family
settlement which settles disputes within the family should
not be lightly interfered with especially when the settlement
has been already acted upon by some members of the family.
In the present case, from 1989 to 1995 the Memorandum of
Understanding has been substantially acted upon and hence
the parties must be held to the settlement which is in the
interest of the family and which avoids disputes between the
members of the family. Such settlements have to be viewed
a little differently from ordinary contracts and their internal
mechanism for working out the settlement should not be
lightly disturbed. The respondents may make appropriate
57
submissions in this connection before the High Court. We
are sure that they will be considered as and when the High
Court is required to do so whether in interlocutory
proceedings or at the final hearing.”
iv) However, Mr. Harish N. Salve, learned senior counsel for
the RIL while drawing our attention to Section 36 of the
Companies Act, 1956, submitted that the Memorandum and
Articles shall bind the company and its members. According
to him, the Articles of Association are the regulations of a
company which are binding on the company and its
shareholders. He, therefore, pointed out that nothing outside
the Articles can bind a shareholder vis-Ã -vis the company. In
support of the above stand, he heavily relied on paragraph 9 of
the judgment of this Court in V.B. Rangaraj vs. V.B.
Gopalkrishnan & Ors. , AIR 1992 SC 453 which reads as
under:
“9. …..the private agreement which is lied upon by the
plaitniffs whereunder there is a restriction on a living
member to transfer his shareholding only to the branch of
family to which he belongs in terms imposes two restrictions
which are not stipulated in the Article. Firstly, it imposes a
restriction on a living member to transfer the shares only to
the existing members and secondly the transfer has to be
only to a member belonging to the same branch of family.
The agreement obviously, therefore, imposes additional
restrictions on the member's right to transfer his shares
which are contrary to the provisions of the Art.13. They are,
therefore, not binding either on the shareholders or on the
company……”
58
29) It is seen from the above decision that the agreement
between the two groups of shareholders which impose certain
restrictions on the transferability of the shares held by them
was not binding either on the company or its shareholders
because the restrictions so imposed by the agreement were
contrary to the provisions of the Articles, sale of shares held
by one of the two groups in breach of the agreement could not,
therefore, be held to be valid. He also pointed out that the
agreement between the shareholders is not binding on the
company unless the company adopts it and it is incorporated
in the Articles of Association. Based on the above principles,
he pointed out that the de-merger Scheme was based on the
MoU and be treated as guidance to the term suitable
arrangement. He also pointed out that a family arrangement
or the MoU has not been referred to at any stage in the
Scheme or in any representation made to the Stock Exchange
and the same is contrary to the RNRL’s own pleading and their
case. Mr. Harish Salve also relied on various exerts from
some of the letters/e-mails from Exhibit “F” filed by RNRL.
Some of the letters/e-mail dated 30.07.2005 from Mr. Harish
59
Shah (RIL) to Mr. Venkat Rao (REL); e-mail dated 06.10.2005
from Mr. Cyril Shroff to Mr. Sandeep Tandon/RIL; e-mail
dated 29.11.2005 from Mr. Cyril Shroff to Mr. Anil Ambani; email
dated 14.12.2005 from RIL to Mr. J.P. Chalasani and email
dated 27.12.2005 from Mr. Sandeep Tandon (RIL) to Mr.
Venkat Ponanda etc. but not disputed the contents of the
letters or correspondences and e-mails referred therein. The
existence of letters/correspondence and e-mails remain
unchallenged.
30) In the light of the stand taken by both sides, this Court
analysed the contents of MoU and the subsequent
arrangement after exchange of various letters/e-mails as well
as deliberations among the officials of both the entities. It is
clear that both parties acted upon the said family
arrangement/MoU dated 18.06.2005. The above referred
letters and e-mails, further confirmed that there is an
arrangement made and agreed between the RIL and ADAG
(RNRL), it is also clear and show that the discussion between
the group of officials was intended to expedite the
implementation of the MoU by producing a “suitable
60
arrangement”. Though copy of the MoU was not part of the
record before the Company Judge, by consent, the above
extracted portion was placed before the Division Bench at the
time of hearing of the appeal. It cannot be accepted that
neither RIL nor its Board Members were aware of the contents
of the MOU. In fact, the Company Judge has pointed out that
a specific reference was made in the Company Application No.
1122 of 2006 and there is no specific denial by the RIL. The
Press Release at the instance of their mother Smt. Kokilaben
Ambani (Exh. “D”) about the family arrangement/MOU cannot
be over-looked. It is clear that because of the efforts of Smt.
Kokilaben Ambani, the mother of Mukesh Ambani & Anil
Ambani, the family settlement has been arrived at and
followed by the Scheme of De-merger. It is also clear from the
materials i.e. exchange of letters and e-mails and the
deliberations by the officials of both entities and their Board of
Directors as well as the shareholders have agreed for the
Scheme. Further it was demonstrated that after execution of
MOU, both the parties have been entering into contracts and
agreements as an independent entity. As pointed out that
61
except the gas supply agreement all other companies as found
are working and running their affairs smoothly.
31) Before the Division Bench, it was submitted by RIL that
the MoU amongst the promoters does not bind the corporate
entity RIL. It was not open to RNRL to produce the documents
at the stage of appeal which were not placed before the learned
Single Judge. The MoU was clearly in the private domain and
was never placed in the corporate domain even though such
course of action was suggested by Mr. Cyril Shroff, the
Solicitor appointed to draw the Scheme of Demerger. It was
also the stand of the RIL that MoU was never placed before its
Board of Directors and contents thereof were not known to the
Board. The correspondence contained in Exhibit F of the
Company Application, at best, goes to show that MoU was the
broad structure on which the demerger was to be worked out.
32) On the other hand, learned senior counsel appearing for
the RNRL demonstrated the existence, effect, sanctity and the
binding nature of MoU. It is their definite case that the
existence of MoU was specifically pleaded in para 6.6 of the
Company Petition. Learned Company Judge found that the
62
MoU existed and that the terms of MoU had to be
implemented. Inasmuch as the relevant part of MoU
concerning the gas business have already been placed before
the Division Bench in appeal with the consent of the parties
and the relevant terms relating to price, tenure, volume etc.
are admitted between the parties, it is only the interpretation
thereof which is to be considered. Further, the MoU itself
seeks to divide the business into two groups i.e. Anil Ambani
Group and Mukesh Ambani Group wherein both individuals
would control and supervise various businesses through
various corporate entities. The implementation of the MoU
resulted in the scheme under Section 391 of the Act before the
Company Court. Apart from this, it was pointed out that the
Board of RIL made a public announcement on 18.06.2005 i.e.
soon after the execution of MoU on the same day publicly
acknowledging, with gratitude to their mother, Smt. Kokilaben
that a settlement of disputes has been reached between the
members of the family. Further, Exhibit F reflects the
knowledge of the terms of MoU with the senior officials of both
sides wherein efforts were being made to work out mutually
63
negotiated GSMA/GSPA which would be in line with MoU.
33) Apart from the above factual details, Mr. Ram
Jethmalani, learned senior counsel appearing for RNRL
explained the Doctrine of Identification and submitted the
family arrangement was arrived at and signed by Smt.
Kokilaben Ambani, Shri Mukesh Ambani and Shri Anil
Ambani. Among the three, Shri Mukesh Ambani was and is
the Chairman and Managing Director of RIL. As per the
Doctrine of Identification, a company is identified with such of
its key personnel through whom it works. Mr. Jethmalani
further pointed out that his actions are deemed to be action of
the company itself, hence, RIL is deemed to be aware of and
bound by the actions of the Managing Director. In support of
the principle “Doctrine of Identification”, he relied on decisions
of this Court, namely, Union of India vs. United India
Insurance Co. Ltd., (1997) 8 SCC 683 at page 695, Assistant
Commissioner, Assessment-II, Bangalore & Ors. vs. M/s
Velliappa Textiles Ltd. & Ors, AIR 2004 SC 86 para 16, R.
vs. Mc Donnell, (1966) 1 All. E.R. 193 at page 196 & 202,
J.K. Industries Ltd. & Ors. vs. Chief Inspector of
64
Factories and Boilers & Ors. (1996) 6 SCC 665 paragraphs
44 & 45.
34) In the light of the stand taken by RIL and RNRL, the
contents of various clauses in MoU particularly with regard to
distribution of gas and also the conclusion arrived by the
Company Judge and the Division Bench of the High Court
have been carefully verified.
35) Firstly, the MoU is not technically binding between RIL
and RNRL. It is not in dispute that MoU is between three
persons and the personality of the company must be
construed separate from these persons. The principle
emphasized by Mr. Jethmalani i.e. Doctrine of Identification
may be applicable only in respect of small undertakings but in
the case of RIL and RNRL, the companies have more than
three million shareholders, in such a situation, one cannot
make the companies’ personality the same as that of persons
involved.
36) Secondly, in the light of the conduct of Mukesh Ambani,
Chairman of RIL, MoU was definitely the instrument which
was the basis of the scheme. Therefore, it can be used as an
65
external aid for the interpretation of “suitable agreement”
under the scheme. To put it clear, the MoU is one of the ways
in which the intention of the parties can be made clear with
regard to what was considered suitable. Nevertheless, there is
no specific requirement that the GSMA must confirm
completely with the MoU.
37) Thirdly, it must be pointed out that apart from the MoU,
“suitable arrangement” must be understood in the context of
government policies, production sharing contract (PSC)
between RIL and the Government, national interest and
interest of the shareholders. Therefore, in our view MoU is one
of the means of construing suitability of the arrangement and
not the sole means.
(C) GSMA and GSPA: whether they qualify as suitable
arrangement:
38) Subsequent to the formation of the Scheme, the Board
of Directors of RIL framed the GSMA and GSPA. As per the
Scheme clause VIII and sub-clause (xvii), the Board of
Directors of each of the resulting companies to be reconstituted
in such manner as is agreed between each
66
resulting companies and Anil Ambani and thereupon each of
the resulting companies shall be controlled and managed by
Anil Ambani. The demerged company constituting the
remaining Undertakings shall continue to be controlled and
managed by Mukesh D. Ambani. As per the preamble of the
Scheme and even otherwise the RIL being contractor in
pursuance to the PSC, remained under the control of Mukesh
D. Ambani having object to commence the production and sale
of gas and further as REL has announced setting up of Gas
Based Power Generation of India. RIL proposed to use part of
its gas discovered for the generation of power for which
purpose an appropriate gas supply arrangement agreed to be
entered into between RIL and Global Fuel Management
Services Limited (now RNRL) pursuant to which gas agreed to
be supplied to REL for their power projects including Reliance
Patalganga Power Limited, for the generation of power. This
business of supply of gas to REL for their power projects is an
integrated and/or constitute the Gas Based Energy
Undertaking of RIL. The intention, therefore, throughout was
even under the Scheme to reorganize and segregate the
67
business and undertakings to provide focused management
attention. In this background it was contended by learned
senior counsel appearing for RNRL that it was necessary that
RIL should have given full and proper opportunity to the RNRL
before passing such resolution hurriedly on 11.01.2006 and
before executing such GSMA and GSPA in question. As per
clause 19 as recorded the suitable arrangement should be
suitable to both the parties in all respects. In this aspect, the
decision as taken hurriedly on 11.01.2006, therefore, was one
sided, specifically taking into consideration the background
and/or events followed upto the sanctioning of the Scheme.
As noted, the control over the Board of the RNRL on
10.01.2006 was of RIL, as control over has not been handed
over to Anil Ambani. On 26.01.2006, final copy of GSPA was
made available by nominee of RIL to nominee of Ambani
Group. The drafts of GSMA and GSPA were only circulated on
10.01.2006 through mail. It is to be noted that shares of
RNRL were allotted/transferred to Anil Ambani only on
27.01.2006 i.e. after the Board meeting held on the same day.
The New Board was re-constituted in accordance with clause
68
17 of the Scheme on 07.02.2006. As per clause 6, RIL
continued to manage the resulting companies till the effective
date in the capacity of trustees. Therefore, it is the claim of
RNRL that the Board of the Meeting and the Resolution and/or
execution of the said GSMA on 11.01.2006/12.01.2006 before
the actual transfer of control of the resulting companies to Anil
Ambani and before re-constitution of the Board as per clause
17 of each resulting companies were against clauses 17 and
19 and the basic purpose of the Scheme in so far as the
supply of gas is concerned.
39) It was pointed out by the learned senior counsel for the
RNRL that pending the decisions and discussion on various
aspects of gas supply agreement hurriedly in spite of objection
by them, the Board on 12.01.2006 took a decision by majority
and approved the GSMA and GSPA. It was contended by
RNRL that such decision cannot be said to be bona fide. The
Resolution dated 12.01.2006 without new Board of Directors
of resulting companies is not as per the agreed terms of the
Scheme. It was also their claim that the decision as taken
hurriedly on 12.01.2006 raises various doubts and it is one
69
sided and it safeguards only the interest of RIL and not in the
interest of RNRL or resulting companies as it was by the Board
of Directors of the RIL, the trustee company after the Scheme,
but before the nomination or formation of Board of Directors of
RNRL. It was argued that the procedure as followed to adopt
or resolve or execute the GSMA was unfair and unjust. In
those circumstances, it was projected before the Company
Judge as well as the Division Bench that whether the parties
have committed any breach of clauses of the Scheme which is
creating hurdle.
40) The Division Bench has concluded that the allocation of
gas to RNRL for its resulting companies, i.e., supply of gas for
power project of Reliance Patalganga Power Limited and REL
with the Gas Based Energy Resulting Company, a suitable
arrangement which is required to be made by incorporating
the same in the GSMA and GSPA according to the MoU
reached between the parties on 18.06.2005. It is useful to
extract the relevant portion of the MoU relating to gas supply
which reads as under:
70
“II. GAS Supply
(i) An expert international firm will be appointed to
evaluate the nature and extent of gas reserves
particularly at KGD6 and all other gas fields
from which RIL produces gas from which gas
could be supplied to Reliance Energy Limited
(“REL”), for all its projects (including without
limitation its proposed Dadri Power Project).
The expert shall be appointed by ICICI Bank
Limited in consultation with both groups (who
must agree within 72 hours hereof) and if they
are unable to agree, an international energy
consultancy firm, as may be nominated by the
energy/E&P department of ICICI Bank Limited
will nominate an international expert who will
carry out this survey and provide an
independent report. Such international
consultancy firm shall not have any conflict of
interest. The report of such agency could
consider the DGH letter as one of the inputs and
its decision shall be final as to the quantity and
nature of reserve (including matters such as P,
P2, P3 reserves) and this would be the factual
basis for the rest of the decisions. The Mukesh
Ambani Group will now move expeditiously for
facilitating such verification and is to provide all
information for this purpose.
(ii) On the assumption that only 12 MMSCD is the
current P1 reserve and other reserves are in the
stages of discovery, arrangements as to quantity
of “net gas” (RIL’s entitlement of gas as reduced
by the quantity of the gas required for operation
and transportation ) are as follows:
(a) The first right would be to NTPC under its
existing draft supply agreement to the
extent of 12 MMSCD. This would be for
delivery on the west coast. In the event
that the NTPC contract does not
materialize or its cancelled, the
entitlement of NTPC to the said extent
shall go to the Anil Ambani Group in
addition to its entitlement of 28 MMSCD
in (b) below.
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(b) Thereafter, and subject to availability of
adequate P1 reserves the next 28 MMSCD
would go to REL. No sooner the P1
reserves (determined as per (i) above), are
identified (whether from KGD6 or
elsewhere), this would be included in a
binding gas supply agreement in favour of
REL. This would be at prices no greater
than NTPC prices.
(c) Thereafter and for the entire future of the
balance reserves (including new
discoveries of gas from new explorations
and/or bids as may be submitted from
time to time), the quantity of gas would, at
the option of the Anil Ambani Group
(exercised from time to time), be split in
the ratio of 60:40 with 60% to Mukesh
Ambani Group and 40% to Anil Ambani
Group. Subject to the above, after the 28
MMSCD to REL, the next order of priority
would be of RIL for its captive
consumption for Mukesh Ambani Group
Companies to the extent of a maximum of
25 MMSCD. Such 25 MMSCD will be set
off against 60% entitlement of the Mukesh
Ambani Group. An expert appointed by
ICICI Bank Limited will provide guidance,
within a period of 45 days from this MOU,
on the appropriateness of the amount of
25 MMSCD or captive consumption, and
in the event that the amount considered
necessary by such expert is materially less
than 25 MMSCD, Kokilaben will
reconsider the issue. Thereafter, the next
order of priority would be at Anil Ambani
Group’s option, go to Anil Ambani Group.
All such gas shall be supplied at market
rates.
By way of examples:
· If the P1 reserves are identified at 60
MMSCD, the sequence would be
NTPC-12, REL-28 and RIL (captive)-
20.
· In case the reserves are 100, the
sequence would be NTPC-12, REL-28,
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RIL(captive)-25, Anil Ambani Group
(second installment)-16.67 and in so
far as the balance 18.33 is concerned,
the same would be shared in the ratio
of 60:40. This shall be an option but
not an obligation.
(iii) For the first 28 MMSCD, the price and the
commercial terms shall be the same as those
applicable to NTPC.
(iv) REL shall have the option to set up its own
pipeline from the gas field to its plant at its own
cost. This shall not make a difference to the
price for the gas supplied by RIL to REL.
(v) REL shall have the option to take delivery of gas
at Kakinada on the East Coast and may
construct its own pipeline. However, REL would
still have to pay the transportation cost for
supply to the West Coast even if the facility is
not used, but will have the right to deal with the
capacity as it deems fit and to sell or assign the
same to another party, on the West Coast or
otherwise.
(vi) 50% of the commitment for supply of gas would
be supplied in the financial year 2008-09 and
the balance 50% in 2009-10.
(vii) As soon as the P1 reserves are identified, a
binding gas supply agreement, in accordance
with international best practices, bankable in
the international financial market would be
finalized and entered into, not later than 45 days
from the date of this MoU. As stated above, the
NTPC supply agreement would be a general
guidance for the same and shall as far as
possible be the basis for such contracts, and the
terms of such contracts shall be no less
favourable than those of the NTPC contract.
Mukesh will provide the Production Sharing
Contract and also correspondence with NTPC
and the latest version of the draft contract to the
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Anil Ambani Group. The gas supply working
group to discuss details.
(viii) Kokilaben recognizes that a long terms, stable
source of gas from RIL, which has the largest
find of gas, was absolutely essential for the
growth plans of the Anil Ambani Group and in
order to enable Anil to carry REL to even greater
heights. Kokilaben has, therefore, specially
stressed and impressed upon Mukesh and
Mukesh shall personally ensure that at the time
of finalization of the binding gas supply
agreement the terms provide the required
conform and stability in these agreements, even
if that means some departure from the NTPC
standard.
(ix) The gas supply/option agreements would be
between RIL and a 100% subsidiary of RIL,
which would be demerge to the Anil Ambani
Group as part of the Scheme of Arrangement.
Such agreements would not be with REL.
(x) The gas supplied to the Anil Ambani Group by
the Mukesh Ambani Group shall not be used for
trading, other than trading within the Anil
Ambani Group.
(xi) Swapping of gas is permitted.
(xii) (a) In relation to applicable governmental and
statutory approvals, without in any manner
mitigating RIL’s responsibility to jointly work
towards obtaining such approvals, RIL will, if so
required by the Anil Ambani Group, give an
irrevocable Power of Attorney to the Anil
Ambani Group/REL to apply for an obtain all
such governmental and regulatory approvals as
are necessary on its behalf.
(b) The definitive agreements will reflect that the
Mukesh Ambani Group will act in utmost good
faith and will make best endeavours to work for
and obtain such approvals. If there is any
action taken in bad faith for not
obtaining/scuttling the obtaining of such
approvals, Kokilaben reserves her ability to
74
intervene again and the Anil Ambani Group
would also have a claim for damages.”
A perusal of above-mentioned clauses show that there is a
fixed quantum of gas which stands allocated to RNRL, i.e.,
28MMSCD to REL and in the event NTPC contract does not
materialize or is cancelled, the entitlement of NTPC to the said
extent shall go to the RNRL in addition to its entitlement of 28
MMSCD in addition to this allocation from the cost and profit
gas which will be available for sharing with the Union of India
by RIL. It is further seen that for entire future of the balance
reserves the quantity of gas be shared in the ratio of 60:40,
i.e., 60 % to Mukesh Ambani Group and 40% to Anil Ambani
Group.
41) On going through the materials placed by RNRL, RIL, the
Company Judge and the Division Bench reached the following
conclusions:
(a) GSMA/GSPA was hurriedly framed which reflects
mala fides on the part of RIL.
(b) There is no fraud on the part of RIL in terms of Section
17 of the Contract Act as alleged by RNRL.
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(c) The dispute in the present case is about conditions of
supply (rate, quantity, tenure etc.) and the noncompliance
of the GSMA with MoU.
(d) GSMA/GSPA is not “suitable arrangement” as they are
not true to the MoU.
(e) The Court, under Section 392, does not have the
power to add clauses and/or amend clauses.
(f) The parties must negotiate the contents of “suitable
arrangement” in the Scheme, since the Court is not an
expert in such things.
42) On the very same issue, after analyzing all the materials,
the Division Bench agreed with the Company Judge that MoU
was binding on the parties by giving different reasons. On this
conclusion, the Division Bench ruled that all the aspects of
GSMA relating to supply of gas, tenure, pricing etc. must then
be the same as provided under the MOU. The Division Bench
also held that there is no absolute freedom to market the gas
as argued by RNRL. Under Articles 21.6.2(b) and (c) of the
PSC, the Government shall regulate the sale on the basis of a
formula. But at the same time, the Division Bench held that
76
there is nothing in the PSC to restrict the sale of gas by the
contractor at a price lesser than that approved by the
Government. In those circumstances, the Division Bench has
concluded that the Contractor has freedom to sell gas at arms
length price to the benefits of the parties to the PSC out of
their share of profit gas to which Article 21.6 of the PSC
applies. The Division Bench has finally held that “suitable
arrangement” should be entered into by the parties on the
basis of the MOU.
43) On consideration of the above analysis, it is quite
reasonable that the test must be formulated to determine what
“suitable arrangement” means. The determination of “suitable
arrangement” must not only include the MoU but other
considerations also. Among various considerations, the prime
aspect relates to the role of the Government, the proper
interpretation of PSC relating to pricing and valuation,
national interest relating to the interest of consumers and
protection of natural resources. At the same time, the other
consideration must relate to the interest of RNRL, i.e., whether
77
the GSMA results in RNRL becoming a shell company and
whether the GSMA is a bankable agreement.
44) Insofar as the workability of GSMA, RNRL has fourfold
objections. They are: 1) that the “suitable arrangement” under
the scheme is nothing but the MoU; 2) that the GSMA is not a
bankable agreement; 3) malafide on the part of RIL to bring in
an illegal gas agreement; 4) Pursuant to the stand of the RIL
and its response, RNRL has raised six points of protestation.
The GSMA was put into the place in pursuance of Clause 19 of
the scheme. Clause 19 of the scheme provides that in order to
effectuate the demerger or RIL, a suitable agreement has to be
formulated. In other words, the position of RNRL is that
“suitable arrangement” within the meaning of Clause 19 is
supposed to be the MoU. Such an arrangement must be
suitable for RNRL. According to RNRL, since GSMA is not a
replication of the conditions of the MoU and that it is not a
bankable agreement it will reduce RNRL into a shell company.
GSMA violates the scheme and must be replaced taking into
account the various points of protestation raised by them. On
the other hand, it is the claim of RIL that since the MoU is not
78
a binding document, there is no requirement that the GSMA
must replicate the MoU. Further, they questioned the stand of
RNRL that the GSMA is not suitable for RNRL. Further, they
put-forth their case that the GSMA is in consonance with the
obligations of RIL to the Government under the BSE and the
requirements flowing from the decisions of EGOM.
SUITABLE ARRANGEMENT:
45) Suitable Arrangement under Clause 19 of the scheme
must not be merely suitable for RIL alone. In other words, it
has a broader meaning. Such an arrangement must be
suitable for the interest of shareholders of RNRL as reflected
by MoU and RIL, the obligations of RIL under the PSC, the
National Policy of gas including the decisions of EGOM and
Gas Utilization Policy (GUP) and the broader national and
public interest.
46) There is a need to construct a suitable arrangement
under Clause 19. The broader construction of suitable
arrangement is that the arrangement must be suitable not
only for RIL and RNRL but also suitable with respect to the
government’s interest under PSC, in consonance with the
79
decisions of EGOM or any other gas utilization policy as well
as larger national interest. This is because gas is an essential
natural resource and is not owned by either RIL or RNRL. The
Government holds this natural resource as a trust for the
people of the country. Supply of gas is a matter of national
interest and in the present case, due to the very nature of the
companies involved, there are huge number of shareholders
and people who will be indirectly affected by the policies of the
companies. Therefore, the arrangement flowing from Clause
19 must be suitable for interest of all the above-mentioned
persons.
47) Keeping the said object in mind, Clause 19 must be
interpreted by taking into account 1) the interest of RNRL as
reflected by the MoU; 2) the interest of the shareholders of RIL
and RNRL; 3) the obligations of RIL under PSC; 4) the national
policy of gas including the decisions of EGOM and Gas
Utilization Policy; and 5) broader national and public interest.
80
(D) PRODUCTION SHARING CONTRACT (PSC):
48) Some of the salient features of the PSC are as follows:
i) Clause 6 of the Preamble makes it clear that discovery
and exploitation will be in the over all interest of India.
ii) Article 8.3(k) makes the contractor is to be mindful of the
rights and interest of the people of India in the conduct of
petroleum operations.
iii) Article 10.7(c) (iii) the contractor is duty bound to ensure
that the production area does not suffer any excessive rate of
decline of production or an excessive loss of reservoir
pressure.
iv) Article 32.2 makes it clear that the contractor is not
entitled to exercise the rights, privileges and duties within the
contract in a manner which contravenes the laws of India.
v) Article 21(1) mandates that the discovery and production
of natural gas shall be in the context of government’s policy for
the utilization of natural gas. The above clauses in the form of
articles make it clear that PSC is subject to the Constitution of
India, the Oil Fields Act, 1948, the Petroleum and Natural Gas
Rules, 1959, the Territorial Waters, the Continental Shelf and
81
Exclusive Economic Zone and other Maritime Zones Act, 1976
and also the gas utilization policy.
vi) Article 27(1) deals with title to petroleum under the
contract areas as well as natural gas produced and saved from
the contract area vests with the Government unless such title
has passed in terms of PSC. As per Clause (2), title remains
with the Government till the time the natural gas reaches the
delivery point as defined in the PSC.
49) Therefore, it is not permissible for RIL to enter into a
contract with RNRL to supply fixed quantity of gas as the gas
continues to be the property of the government till the time it
reaches the delivery point and thus, RIL has no right to
dispose of the same without the express approval of the Union
of India.
50) This Court in State of Tamil Nadu vs. L. Abu Kavur
Bai, (1984) 1 SCC 515 at 549 held “to distribute would mean
to allot, to divide into classes or into groups and embraces
arrangements, classification, placement, disposition,
apportionment and the system of disbursing goods through
out the community.
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51) In the light of the above, the Executive of the Union of
India enjoys its Constitutional powers under Article 73 and
Article 77 (3) in order to fulfill the objectives of the Directive
Principles of State Policy relating to distribution of Natural
Gas. This Natural Gas is a material resource under Article
39(b). in view of this, along with the contemplation of a
Government’s Policy for the utilization of Natural Gas under
Article 21.1 and the decision of this Court referred to above,
the Executive decided that distribution would include within
its ambit acquisition, including acquisition of private owned
material resources. The framing of the “Gas Utilization Policy”
in identifying the priority sectors, and allocating the requisite
quantities in accordance with the needs of the said sectors
and subjecting marketing freedom to the order of priority and
guidelines framed is very much in accordance with law.
Consequently, Article 21.1 and Article 21.3 should be read in
consonance with the Gas Utilization Policy and the latter is
neither inconsistent with the provisions of the Constitution,
nor the Oil Field Regulation Act, 1948, Petroleum and Natural
83
Gas Rules 1959 and the Articles of the Production Sharing
Contract referred to above.
52) To put it clear, both in terms of the Gas Utilization Policy
and the Production Sharing Contract, Government in the
capacity as an Executive of the Union can regulate and
distribute the manner of sale of Natural Gas through
allotments and allocation which would sub-serve the best
interest of the country.
53) At the outset, it is to be noted that the price determined
by the Government is not the subject matter of either the
Company Application nor is it an issue which arises out of the
impugned judgment. There is no duly constituted proceeding
where any challenge has been laid to Government Policy, price
fixation, grant or refusal of approval. Further, without such a
proceeding in existence and without NTPC being a party in the
present proceedings, any issue touching upon the validity of
price fixation or price formula does not arise.
54) The price of $ 4.20/mmbtu is based on the formula
approved by the Government under its powers pursuant to the
84
terms of the PSC. The policy of the Government is not under
challenge or adjudication before the Court.
55) Mr. Gopal Subramanium, learned Solicitor General
explained that up to early 1990s, prior to NELP and pre-NELP
years, gas was being produced only from the fields operated by
the Government companies, viz., ONGC and OIL, out of blocks
which were given to these companies by the Government on
nomination basis. Such gas was subjected to administered
price regime. This was because, firstly, the fields were given on
nomination basis and not on competition basis and secondly,
to the Government companies which are subject to directions
of the Government. Government, at that time, was guided
primarily by the needs of the consumers who naturally liked to
get the gas as cheap as possible. Therefore, the basis for
Administered Price Mechanism (APM) pricing was cost-plus.
Cost of production plus marginal profits as may be determined
by Government was the sale price. Fields were given to
Government-owned companies on nomination basis till early
1990s. There was, however, the problem of augmenting the
production. Exploration and Production was at the core of
85
energy security and hence it was decided to open the fields to
Private Sector investment. During mid-1990s, known as pre-
NELP years, private investment was sought on competition
basis and certain blocks were awarded to them under a
Production Sharing Contract. The pricing formula was
specifically mentioned in such contracts. This was a major
departure from a cost-plus or APM regime. It was thought
that without this, private investment will not take place. Pre-
NELP regime was further improved to NELP regime. Sourcing
of investment, technology and efficient operations from
companies within the country and from outside on a level
playing field with domestic public sector companies was the
main feature of the NELP regime and, therefore, the ‘arm’s
length’ price, which is another name for market price, was
introduced in the PSCs of NELP. Exploration and production
of oil and gas is associated with considerable risk and no
investment would have come if product prices were subjected
to cost-plus or administered price regime. So, the NELP
pricing regime provides for arm’s length price which is another
name for market price. But since the gas market is not fully
86
developed unlike markets for crude oil, it is stipulated in the
PSC that there will be a formula or basis for the determination
of the prices which shall be approved by the Government prior
to sale and for granting this approval, Government can not be
arbitrary but shall take into account the prevailing policy, if
any, on pricing of natural gas, including any linkages with
traded liquid fuels. The relevant PSC provisions in NELP-I
which guide the pricing of KG D-6 gas, are as follows:
“Article 21.6.1 – The Contractor shall endeavour to sell all
Natural Gas produced and saved from the Contract Area at
arms-length prices to the benefits of Parties to the Contract.
Article 21.6.2 – Notwithstanding the provision of Article
21.6.1, Natural Gas produced from the Contract Area shall
be valued for the purposes of this Contract as follows:
(a) Gas which is used as per Article 21.2 or flared with the
approval of the Government or re-injected or sold to
the Government pursuant to Article 21.4.5 shall be
ascribed a zero value;
(b) Gas which is sold to the Government or any other
Government nominee shall be valued at the prices
actually obtained; and
(c) Gas which is sold or disposed of otherwise than in
accordance with paragraph (a) or (b) shall be valued on
the basis of competitive arms length sales in the region
for similar sales under similar conditions.
Article 21.6.3 – The formula or basis on which the prices
shall be determined pursuant to Articles 21.6.2 (b) or (c)
shall be approved by the Government prior to the sale of
Natural Gas to the consumers/buyers. For granting this
approval Government shall take into account the prevailing
87
policy, if any, on pricing of Natural Gas including any
linkages with traded liquid fuels, and it may delegate or
assign this function to a regulatory authority as and when
such an authority is in existence.”
It is further pointed out that in accordance with this approach,
Government asked the Contractor to submit a formula on
arm’s length basis. EGOM was constituted by the
Government of India in August, 2007 which looked into the
pricing and utilization of gas in terms of the Government’s
rights and obligations under the PSC. RIL submitted a
formula based on Arm’s Length principle, having obtained
quotations from users of gas. The proposal of RIL was
examined by Committee of Secretaries (COS) and later by PM’s
Economic Advisory Council. EGOM, assisted by their views,
approved a newly suggested formula with certain
modifications, on 12/09/2007. The price formula approved by
the EGOM which is to be applicable uniformly to all sectors is
as follows:
Price (in US$ per mmbtu) = 2.5 + (Crude Price 0.15 – 25)
56) It is further pointed out that the said exercise was
undertaken by the government on an independent application
of mind and government differed from the Contractor and the
88
contractor relented leading to a lower price being fixed at $4.2
instead of $4.32 claimed by the contractor. This formula is
valid for 5 years as per the EGOM decision. According to the
formula, the price may vary between US $ 4.2 to US $
2.5/mmbtu during a period of 5 years. With crude prices of
US $ 60/barrel or more, the price will be US $ 4.2/mmbtu; for
US $ 25/barrel, it will be US $ 2.5/mmbtu. The formula,
thus, imposes a ceiling on gas price at US $ 4.2/mmbtu.
EGOM also decided on gas utilization policy in May 2008
whereby the priority sector and consumers were decided.
57) It is also brought to the notice of this Court that EGOM
consisted of the Chairman (External Affairs Minister), who was
a very senior Minister in the Council of Ministers, Ministers of
the consuming sectors (such as Fertilizer and Power), the
Minister from producing Sector (i.e., Petroleum & Natural
Gas), and the Ministers in charge of Ministry of Finance, Law
and Corporate Affairs, besides Planning Commission.
58) The pricing formula/basis as per the PSC has to be:
a) Firstly on arm’s length basis,
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b) Secondly, to the benefit of the contractor as well as the
Government;
c) Thirdly, having linkages with traded liquid fuels, and
d) Fourthly, Government will have to perform Regulator’s
function till one is appointed for the purpose.
59) The following table will indicate the pricing prevalent in
India in respect of gases from other fields (excluding, of
course, the gas from the Government companies’ fields, which
are at administered prices):
(in US$/mmbtu)
PMT (weighted) 5.51
Rawa 3.5
Rawa Satellite 4.3
Lakshmi 4.75
Weighted average 5.28
60) The fixation of price arose before the EGOM only in
August, 2007 when the price formula was considered. As
shown above, all prices prevailing in India and abroad
indicated a price which was in the region of $ 4.2. The
Contractor had asked the Government to approve it for RNRL
in 2006, but the Government rejected it as it was a related
90
party transaction. ‘Arms length sales’ has been defined in
Article 1.8 of the PSC as follows:
“Arms Length Sales” means sales made freely in the
open market, in freely convertible currencies,
between willing and unrelated sellers and buyers
and in which such buyers an sellers have no
contractual or other relationship directly or
indirectly, or any common or joint interest as is
reasonably likely to influence selling prices and
shall, inter alia, exclude sales (whether direct or
indirect, through brokers or otherwise) involving
Affiliates, sales between Companies which are
Parties to this Contract, sales between governments
and government-owned entities, counter trades,
restricted or distress sales, sales involving barter
arrangements and generally any transactions
motivated in whole or in part by considerations
other than normal commercial practices.”
61) Mr. Gopal Subramanium reiterated that the submissions
made pertaining to the PSC are without prejudice to the stand
of the Government vis-Ã -vis NTPC and also without prejudice
to the submission that this Court is not called upon in the
present proceedings to interpret the PSC.
62) In the case on hand, Price formula was approved by
Government in September, 2007 when it was expected that
gas would be produced from the basin in June, 2008. The
utilization of 40 mmscmd of gas was decided upon in the
months of May, 2008 in terms of sectors and units to which
91
gas would be supplied. As the production stabalized and
further volumes of gas were known to become available, the
government recently decided on the utilization of a further
volume of 19.826 (+0.875) mmscmd on firm basis + 30.00
mmscmd on fallback basis in October, 2009. As emphasized
earlier, it is up to the owner (the Government) to decide as to
how to utilize the gas and at what price it can be sold and this
has been done in accordance with Production Sharing
Contract (PSC) which has a statutory basis. The PSC under
Article 21.1 makes it clear that the Contractor is bound by the
Government’s policy for utilization of natural gas.
63) The position is that under Article 21.6.1 of the PSC, the
gas must be sold at an arm’s length price. Article 21.6.2
states that notwithstanding 21.6.1, if the gas is sold not to the
Government or its nominee, it must be sold on the basis of
“competitive arm’s length sales in the region for similar sales
under similar conditions”. Importantly, Article 21.6.3 states
that the basis on which such prices are to be determined shall
be approved by the Government prior to the sale. In the
present case, the formula submitted by RIL was looked into by
92
EGOM and examined by the Committee of Secretaries and
PM’s Economic Advisory Council. Due to this the price was
determined to be $ 4.20, on the basis of the formula, price
equivalent to 2.5 + (Crude Price-25)0.15.
64) Another important consideration to be kept in mind is
that the PSC overrides any other contract which may be
entered into for the supply for gas. This principle flows from
the following a) the natural resource, gas, is held by the
Government and trust on behalf the people. Therefore, for
legal purposes, the Government owns the gas till it reaches its
final consumer; b) the PSC is the basis on which the
contractor exercises his right over the supply of gas. Since it
is the very basis of such a right, the contractor does not have
the competent power to give any rights which do not accrue to
it under the PSC.
65) One of the main purposes of the PSC is pricing and
distribution of gas. Though there is “freedom of trade” within
the PSC, but this freedom is exercised by the contractor
through a transparent bidding process and non-interference of
the Government in the administration of gas supply. As a
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matter of policy also, the Government must be free to
determine the valuation formula as well as the price.
Therefore, keeping these considerations in mind, the
Government’s interpretation of the PSC as has been lucidly
demonstrated by the learned Solicitor General is valid. Thus
the Government has the power to determine valuation as well
as price for the purpose of the PSC.
66) It is also relevant to answer a fundamental question that
is whether the power of the Government under the PSC to
determine the valuation as well as pricing is the selling price
or is it the price only for the determination of the share of the
Government or is it the price at which RIL must sell the gas to
RNRL. The Division Bench of the High Court has held that
even if the price is to be determined by the Government, there
is no reason why RIL cannot sell the gas to RNRL at a lower
price than that. This position is unsustainable for two
reasons:
1) The power of the Government under the PSC is quite
broad and includes the power to regulate the price and
distribution of gas. Such a power requires
94
determination of price of supply and not only for the
determination of the share of the Contractor but also
for the Government. Thus keeping the objectives of
the PSC in mind, it would not be possible to restrict
the power of the Government.
2) The arrangement in pursuance of Clause 19 of the
Scheme must be suitable for the shareholders of RIL
as well. The position of RIL is that if gas is sold at
$2.34 that is at a price lower than the one decided by
the Government, there will be a disconnect between
the actual amount which the Contractor will earn from
the sale of gas and the amount which will be deemed
to have been earned by the Contractor under the PSC.
Due to this, the Contractor would be losing out on its
own profits which RIL claims would be halved. It is
also the grievance of RIL that the Court must take into
account the fact that the PSC provides for the
legitimate rights of the Contractor to earn certain
profits. If these profits are reduced to such a degree, it
would affect the interest of the shareholders of RIL.
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3) On the other hand, the position of RNRL as argued
before us is that the GSMA is not suitable for them
because it was not a bankable contract and that the
MoU is the suitable arrangement. The question
remains whether the GSMA is unsuitable due to it not
being a bankable contract or it reducing RNRL to a
shell company.
BANKABLE CONTRACT:
67) The question of bankability has been argued in detail by
RIL. Mr. Salve, learned senior counsel pointed out that GSMA
cannot be considered a non-bankable contract. On behalf of
RIL, it was pointed out that the question of bankability has to
be seen in the context of the Power Project that would be and
or should be promoted by the RNRL. There is no evidence
whatsoever to show that financing of any power project was
declined because gas supply arrangement was considered to
be non-bankable. It bears emphasis that under the GSMA in
respect of specific power projects, a GSPA qua that project
would be entered into.
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68) Normally, a banker financing a non-recourse project (i.e.
a situation where the finance for the project can only be
recovered from the project and not from the assets of the
owner of the project beyond those of the project itself) would
insist on full security not only from the physical assets but
also from revenue streams (normally the sale price of
electricity would be required to be put in escrow) as well as
firm supply contract of scarce resources like coal supply or gas
supply or other such valuable resources supply contract. The
banker could assign this resource to some other liquid buyer
and thereby recover its debt. Similarly, if the banker is unable
to recover its debt because of the default by raw-material
supplier (on which the project is based), the banker could
directly recover the liquidated damages, in repayment of its
debts from such raw material supplier. These are general
features of “banker contracts”.
69) RNRL’s case is that the project being promoted require
bankable contracts because they were “non recourse projects”
i.e. these projects would be self sustainable project which were
by themselves to be commercially and economically feasible
97
not requiring any support or guarantee from the parent i.e. no
recourse to parent company in case of default. There is no
such understanding either in the MoU or in the Scheme.
70) RIL facilitates for production of gas and REL’s Dadri
power plant was to be completed in the same time frame.
When RIL has put its equity and also borrowed money and
completed the project, RNRL is not even in initial stage of
construction of its power project. Obviously to secure finance
for a project RNRL would inter alia have to establish that gas
was available for that project on suitable terms. For that
purpose, RIL had proposed in the GSMA that it would enter
into a specific gas supply contract that would have a definite
tenure, definite price and definite quantity. The submission
that the GSMA is not a bankable agreement has to be seen in
this context.
71) It was pointed out by RIL that whether or not the
contract is bankable is not a question of law but a question of
fact. There are two ways to determine this, namely –
a) by way of fact evidence showing that
banks/financial institutions/Funding agencies had
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rejected the project on account of unsuitability of
certain clause of GSMA; or
b) expert evidence suggesting that on the basis of such
GSMA it could not be possible for RNRL to raise
funds for the gas based power project.
72) It was further pointed out that RNRL has acted in
furtherance of GSMA. It applied for grant of permission to lay
pipelines on an assertion that the GSMA is a suitable and
valid binding contract. In its letter dated 18th December, 2006
after filing of the petition RNRL sought Government’s approval
for laying pipeline. RNRL has acted under the price approval
clause of the GSMA by seeking approval of the price of US $
2.34. RNRL had also moved the Government for seeking
approval of the price of US $ 2.34 by their letter dated 17th
July, 2007.
73) While RNRL had all along been contending that for want
of bankable gas supply agreement it could not establish a
power plant including Dadri. In fact, money has already been
raised $ 510 m for Dadri Plant by way of External Commercial
Borrowings. This position was candidly accepted by RNRL.
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Reliance Power Ltd., the company that is now promoting Dadri
has raised Rs.11000 crores from the public. The shortage of
funds is an excuse – it is simply not true.
74) Furthermore, according to RIL, it is a fact that other gas
based power plants has been set up in the country without
having any long term supply of gas contrary to what is being
alleged by RNRL. It is, therefore, submitted that the
contention that GSMA is not a bankable document is without
any factual basis.
75) RNRL has enumerated the following main elements which
have, according to them, resulted in the agreement being not
bankable :-
1. P rice- price of US $ 2.34 wrongly subjected to
government approval
2. T erm- as per the formula (clause 3b) given in the GSMA,
the term of supply comes to be just 1 to 4 years instead
of 17 years. Whereas the NTPC contract contains a clear
period of 17 years.
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3. Quantity- as per the formula in clause 3.1 (c) of the
GSMA, RNRL would receive only 6 MMSCMD of gas
instead of 28 even if the total production is 38.
4. C apping of liability- clause 14.3 (i) of the GSMA limits the
liability of the seller i.e. RIL to maximum of 6 months
only.
5. By quoting clause 13.8 and 13.9 of the GSMA submitted
that as a result of these clauses if the government does
not accept the price which is the basis for determination
of the government’s share in Profit petroleum under the
PSC, the GSMA then will stand annulled.
76) In view of all these arguments and counter-arguments
regarding the unsustainability of the arrangement under the
GSMA, we hold that it is not proper for the court under
Sections 391-394 to make modifications of this nature in the
Scheme. These changes must be arrived at by the parties
themselves through negotiation. Furthermore, we hold that
such negotiations must be done within the ambit of the
Government policies, including the over-riding effect of the
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PSC (including the Development Plan under Article 10.7),
EGOM decisions and other related national policies.
(E) ROLE OF GOVERNMENT:
77) Though in the earlier part, we have adverted to certain
aspects about the government’s role since the above issue is
relevant for disposal of the dispute between the two entities, it
would be beneficial to once again narrate certain facts and
decide the issue.
78) In 1999, NELP announced to award petroleum blocks for
exploration, development, production of petroleum and
natural gas. RIL with NIKO were the successful bidders for
block KG-D6. Pursuant to the same, the government and the
contractor (RIL & NIKO) entered into a Production Sharing
Contract (PSC). In 2002, RIL & NIKO announced discovery of
significant result from KG-D6 block.
79) In 2003, NTPC floated a global tender for supply of gas to
their power projects. RIL succeeded in its bid to sell, transport
and deliver 132 Trillion British thermal unit (TBtu) or 1000000
MMBTU. NTPC confirmed the same on 16th June 2004. In a
board meeting of Reliance Energy Limited (REL) held in 2004
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which was attended by Mukesh Ambani and other members of
RIL recorded that gas from KG basin would be supplied for the
power projects of REL. In 2005, MoU was arrived at by both
the parties and Anil Ambani resigned as a Joint Managing
Director of RIL. Thereafter, a scheme of arrangement was
moved and the companies decided to move Bombay High
Court for sanction of the scheme of demerger. The High Court
approved the scheme. The scheme provided that an
appropriate gas supply arrangement will be entered into
between RIL and RNRL.
80) The learned Company Judge in his order has concluded
that the GSMA is not in terms of the scheme. MoU is binding
on both parties. The terms as mentioned in MoU and GSMA
need to be suitable for both the parties subject to government
policies and national and international practice in supply of
gas or such other products. The Company Judge further said
that such a contract is subject to government’s approval in
view of NELP & PSC, but keeping in view the several factors
including freedom and right to the contractor/RIL and the
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limited and restricted scope of interference in such commercial
aspects, unless, it is breach of any public policy or interest.
81) When the matter was taken up before the Division
Bench, the Division Bench had permitted the Union of India to
join as intervener in the appeals for the limited purpose of
assisting the court in the matter relating to Production
Sharing Contract between the union and the RIL with
particular emphasis to Article 21 of the contract as the
Division Bench was of the view that the pricing and
distribution of gas has far reaching consequences.
82) Before the Division Bench, on behalf of the Union of
India, it was submitted that India has been facing a chronic
shortage of natural gas due to demand and paucity of supply.
Under NELP, the government has given contractors the
freedom to market gas as well as oil in India in accordance
with the terms and conditions provided in the PSCs. This
freedom is not absolute and certain restrictions have been
imposed upon viz; the prices at which the sale takes place
have to be arms-length prices and are subject to approval by
the government. The gas can only be sold in accordance with
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the government approved price formula and the approved gas
utilization policy. The stand of the government was that the
Government of India continues to be the owner of the gas till
the delivery point. It was further pointed out that by private
negotiations no party can decide as to how natural resources
which are national assets vesting in the Government of India
are to be dealt with and that the price which has been arrived
at is binding on the contractor and no party can raise a
challenge regarding the same in a company petition.
83) The Division Bench, by the impugned order, has
concluded the terms as mentioned in the MoU and GSMA need
to be modified suitably for both the parties subject to the
government’s policies and national, international practice in
supply of gas and such other products. The contract of such
nature is subject to government’s approval in view of NELP
and PSC and such related government policies, but keeping in
view the several factors including the freedom and the right of
the contractor/RIL and the limited and restricted scope of
interference in such permissible commercial aspects of the
contractor, unless, it is in breach of any public policy and
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public interest. As regards the tenure of the gas supply, the
Division Bench observed that the MoU clearly carves out that
the NTPC supply agreement would be a general guidance for
the same and shall as far as possible be the basis for such
contracts and the terms of such contracts will be no less
favorable than those of NTPC contract. The NTPC contract
clearly provides 17 years as the period for which RIL will
supply gas. With regard to the price at which the gas has to
be supplied to REL for all its projects including its affiliates
would be subject to and under the terms of production
Sharing contract which REL has entered with the ministry of
petroleum and NIKO resources limited on 12th April, 2000. In
terms of article 21.6.3 the contractor shall be at the liberty to
market the gas but then the same will have to be regulated on
the basis of formula on which the price shall be determined
pursuant to articles 21.6.2 (b) and (c) to be approved by the
government prior to the sale of natural gas to the
consumer/buyer. The Division Bench has made it clear that
there is no specific provision under the production sharing
contract to prevent the contractor to sell the gas at lesser price
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than what is fixed by the government for valuation of gas to
the extent of its share and further observed that that the
contractor has freedom to sell gas at arm’s length prices to the
benefit of the parties to the production sharing contract out of
their share of Profit gas to which art. 21.6 Of the PSC applies.
84) It must be noted that the constitutional mandate is that
the natural resources belong to the people of this country.
The nature of the word “vest” must be seen in the context of
the Public Trust Doctrine (PTD). Even though this doctrine has
been applied in cases dealing with environmental
jurisprudence, it has its broader application.
85) Constitution Bench of this Court in Association of
Natural Gas v. Union of India (2004) 4 SCC 489, while
quoting Re: Cauvery Water Dispute Tribunal AIR 1992 SC
522 held that:
45. In Re: Cauvery Water Dispute Tribunal (Supra)
the right to flowing water of rivers was described as a
right 'publici juris', i.e. a right of public. So also the
people of the entire country has a stake in the natural
gas and its benefit has to be shared by the whole
country. There should be just and reasonable use of
natural gas for national development. If one State alone
is allowed to extract and use natural gas, then other
States will be deprived of its equitable share. This
position goes on to fortify the stand adopted by the
Union and will be a pointer to the conclusion that
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"natural gas' is included in Entry 53 of List I. Thus, the
legislative history and the definition of 'petroleum',
'petroleum products' and 'mineral oil resources'
contained in various legislations and books and the
national interest involved in the equitable distribution of
natural gas amongst the States - all these factors lead
to the inescapable conclusion that "natural gas" in raw
and liquefied form is petroleum product and part of
mineral oil resource, which needs to be regulated by the
Union.
With relation to the Public Trust Doctrine, this court in
M.C. Mehta v. Kamal Nath (1997) 1 SCC 388 held:
17. The Public Trust Doctrine primarily rests on the
principle that certain resources like air, sea, waters and
the forests have such a great importance to the people
as a whole that it would be wholly unjustified to make
them a subject of private ownership. The said resources
being a gift of nature. They should be made freely
available to everyone irrespective of the status in life.
The doctrine enjoins upon the Government to protect
the resources for the enjoyment of the general public
rather than to permit then- use for private ownership or
commercial purposes.
27. Our legal system-based on English Common Law -
includes the public trust doctrine as part of its
jurisprudence. The State is the trustee of all natural
resources which are by nature meant for public use and
enjoyment. Public at large is beneficiary of the seashore,
running waters, airs, forests and ecologically
fragile lands. The State as a trustee is under a legal
duty to protect the natural resources. These resources
meant for public use cannot be converted into private
ownership.
This doctrine is part of Indian law and finds application in the
present case as well. It is thus the duty of the Government to
108
provide complete protection to the natural resources as a
trustee of the people at large.
86) RIL’s right of distribution is based on the PSC, which
itself is derived from the power of the Government under the
constitutional provisions. Thus the very basis of RIL’s mandate
is the constitutional concepts that have been discussed by
now, including Article 297, Articles 14 and 39(b) and the
Public Trust Doctrine. Therefore, it would be beyond the power
of RIL to do something which even the Government is not
allowed to do. The transactions between RIL and RNRL are
subject to the over-riding role of the Government.
87) It is relevant to note that the Constitution envisages
exploration, extraction and supply of gas to be within the
domain of governmental functions. It is the duty of the Union
to make sure that these resources are used for the benefit of
the citizens of this country. Due to shortage of funds and
technical know-how, the Government has privatized such
activities through the mechanism provided under the PSC. It
would have been ideal for the PSUs to handle such projects
exclusively. It is commendable that private entrepreneurial
109
efforts are available, but the nature of the profits gained from
such activities can ideally belong to the State which is in a
better position to distribute them for the best interests of the
people. Nevertheless, even if private parties are employed for
such purposes, they must be accountable to the constitutional
set-up.
88) The statutory scheme of control of natural resources is
governed by a combined reading of the Oil Fields (Regulation
and Development) Act, 1948; the Petroleum and Natural Gas
Rules, 1959; and Maritime Zones Act.
89) As pointed out earlier, the proper interpretation of PSC
gives the power to the Government not only to determine the
basis of valuation of gas, but also its price. According to Article
21 of PSC, before the contractor sells the gas, the price of such
gas must be approved by the Government.
90) It has been argued by RNRL that the decision of the
EGOM (Empowered Group of Ministers) does not apply to the
rights of RNRL under the Scheme. This argument is based on
the text of the decision which states that the pricing decided
upon by EGOM is “without prejudice” to the rights of the
110
parties in the two cases pending before the Bombay High
Court, i.e. RIL v. NTPC and RIL v. RNRL. This is contested by
both the Government and RIL. This position of RNRL is
unsustainable. As pointed out by RIL the right interpretation
of “without prejudice” in the EGOM decision is that even
though EGOM intended it resolution on pricing to apply to
RNRL, it left the question of the rights of the parties accruing
from the MoU, the Scheme or the interpretation of PSC to the
court. In other words, the court is to determine whether the
Government has the power to determine the valuation and
pricing of the gas. This determination by the court is not
affected by the EGOM decision, as it would depend solely on
the interpretation of the provisions of the PSC itself. But once
it is determined that the Government does have the power to
determine the price of gas, EGOM’s decision regarding the
price would be applicable. The same goes for the general gas
utilization policy and the policy of the Government with regard
to pricing. Therefore, once the PSC is read to give power to the
Government to determine the price of gas, these policy
statements will be applicable.
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91) From the above analysis, the following are the broad
sustainable conclusions which can be derived from the
position of the Union:
1) The natural resources are vested with the Government
as a matter of trust in the name of the people of India.
Thus, it is the solemn duty of the State to protect the
national interest.
2) Even though exploration, extraction and exploitation of
natural resources are within the domain of
governmental function, the Government has decided to
privatize some of its functions. For this reason, the
constitutional restrictions on the government would
equally apply to the private players in this process.
Natural resources must always be used in the
interests of the country, and not private interests.
3) The broader constitutional principles, the statutory
scheme as well as the proper interpretation of the PSC
mandates the Government to determine the price of
the gas before it is supplied by the contractor.
112
4) The policy of the Government, including the Gas
Utilization Policy and the decision of EGOM would be
applicable to the pricing in the present case.
5) The Government cannot be divested of its supervisory
powers to regulate the supply and distribution of gas.
92) Summary of our conclusions:
A. Question of Maintainability of the Company Application
RNRL filed an application under the Companies Act arguing
that GSMA put in place by RIL does not satisfy the Scheme of
demerger. The Scheme under question was approved by the
Company Court on the previous occasion under Sections 392
and 394. Therefore, contrary to RIL’s argument, Sections 392
and 394 are applicable.
Further, the power of the court under Sections 391 to 394 of
the Companies Act is wide enough to make necessary changes
for working of the Scheme. This power is specific to the facts
and circumstances of the case at hand. Nevertheless, this
power does not extend to making any substantial or
substantive changes to the Scheme.
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Therefore, the Company Court enjoys jurisdiction to entertain
the application under Sections 392 and 394 of the Companies
Act.
B. Binding Nature of the Memorandum of Understanding
The MoU was signed as a private family arrangement or
understanding between the two brothers, Mukesh and Anil
Ambani, and their mother. Contents of the MoU were not
made public, and even in the present proceedings, they were
revealed in parts. Clearly, the MoU does not fall under the
corporate domain - it was neither approved by the
shareholders, nor was it attached to the scheme. Therefore,
technically, the MoU is not legally binding.
Nevertheless, cognizance can be taken of the fact that the
MoU formed the backdrop of the Scheme, and therefore,
contents of the Scheme have to be interpreted in the light of
the MoU.
C. Considerations to determine “suitable arrangement”
under Clause 19 of the Scheme.
“Suitable arrangement” under clause 19 of the Scheme must
not be merely suitable for RIL. It has a broader meaning. Such
114
an arrangement must be suitable for the interests of the
shareholders of RNRL as reflected by the MoU, and RIL; the
obligation of RIL under the PSC; the national policy on gas
including the decisions of EGOM and the Gas Utilization
Policy; and the broader national and public interest.
D. Proper Interpretation of the PSC
The objective of the PSC inter alia is to regulate the supply and
distribution of gas. Keeping this objective in mind, Article 21
of the PSC must be interpreted to give the power to the
Government to determine both the valuation and price of gas.
It is not feasible to restrict the power of the Government in
such matters of national importance, especially when the
governing contract, the PSC, also provides for it.
E. Role of the Government
In a constitutional democracy like ours, the national assets
belong to the people. The Government holds such natural
resources in trust. Legally, therefore, the Government owns
such assets for the purposes of developing them in the
interests of the people. In the present case, the Government
owns the gas till it reaches its ultimate consumer.
115
A mechanism is provided under the PSC between the
Government and the Contractor (RIL, in the present case). The
PSC shall over-ride any other contractual obligation between
the Contractor and any other party.
F. Relief
a) Though the Contractor (RIL) has the marketing freedom
to sell the product from the contract area to other consumers,
this freedom is not absolute. The price at which the produce
will be sold to the consumer would be subject to government’s
approval. The tenure of such contracts can’t be such that it
vitiates the development plan as approved by the government.
Therefore, the GSMA and the GSPA entered into with RNRL
should fix the price, quantity and tenure in accordance with
the PSC.
b) The EGOM has already set the price of gas for the
purpose of the PSC. The parties must abide by this, and other
conditions placed by the Government policy. The GSMA/GSPA
deeply affects the interests of the shareholders of both the
companies. These interests must be balanced. This balance
cannot be struck by the court as the court does not have the
116
power under Sections 391-394 to create new conditions under
the scheme. In view of the same, RIL is directed to initiate
renegotiation with RNRL within six weeks the terms of the
GSMA so that their interests are safeguarded and finalize the
same within eight weeks thereafter and the resultant decision
be placed before the Company Court for necessary orders.
c) While renegotiating the terms of GSMA, the following
must be kept in mind:
1) The terms of the PSC shall have an over-riding effect;
2) The parties cannot violate the policy of the Government
in the form of the Gas Utilization Policy and national
interests;
3) The parties should take into account the MoU, even
though it is not legally binding, it is a commitment which
reflects the good interests of both the parties;
d) The parties must restrict their negotiations within the
conditions of the Government policy, as reflected inter alia by
the Gas Utilization Policy and EGOM decisions.
117
93) With the above directions/observations, all the appeals
and I.A. No.1 are disposed of. No order as to costs.
.…….…….……………………CJI.
(K.G. BALAKRISHNAN)
....…………………………………J.
(P. SATHASIVAM)
NEW DELHI,
MAY 7, 2010.
118
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4273 OF 2010
ARISING OUT OF
SPECIAL LEAVE PETITION (CIVIL) NO. 14997 OF 2009
RELIANCE NATURAL RESOURCES LTD. ….APPELLANT
VERSUS
RELIANCE INDUSTRIES LTD. …..RESPONDENT
WITH
CIVIL APPEAL NO.4274 OF 2010
ARISING OUT OF
SPECIAL LEAVE PETITION (CIVIL) NO. 15033 OF 2009
RELIANCE NATURAL RESOURCES LTD. ….APPELLANT
VERSUS
RELIANCE INDUSTRIES LTD. ….RESPONDENT
WITH
CIVIL APPEAL NOs. 4275-4276 OF 2010
ARISING OUT OF
SPECIAL LEAVE PETITION (CIVIL) NOs. 15063-64 OF 2009
RELIANCE INDUSTRIES LTD. ….APPELLANT
VERSUS
RELIANCE NATURAL RESOURCES LTD. ….RESPONDENT
119
WITH
CIVIL APPEAL NO. 4277 OF 2010
ARISING OUT OF
SPECIAL LEAVE PETITION (CIVIL) NO. 18929 OF 2009
UNION OF INDIA ….APPELLANT
VERSUS
RELIANCE INDUSTRIES LTD. & ANR. ….RESPONDENTS
WITH
I.A. NO. 1
IN
CIVIL APPEAL NOs.4280-4281 OF 2010
ARISING OUT OF
SPECIAL LEAVE PETITION (CIVIL) Nos.14414-14415/2010
@ CC 16126-16127 OF 2009
VISHWESHWAR MADHAVRAO RASTE ….APPELLANT
VERSUS
RELIANCE INDUSTRIES LTD. & ORS. …..RESPONDENTS
JUDGMENT
B. SUDERSHAN REDDY, J.
I.A. No. 1 for permission to file Special Leave Petition
is allowed.
120
2. We grant special leave and proceed to dispose of all
the appeals.
PART I
PROLOGUE
“Jus publicum privatorum pactis mutari non potest.”
Public law cannot be changed by private pacts.
- Digest of Justinian
“Political democracy cannot last unless
there is at its base social democracy…. On
the social plane, we have in India a society
based on the principle of graded inequality,
which means elevation of some and
degradation of others. On the economic
plane, we have a society in which there are
some who have immense wealth as against
many who live in abject poverty…. How
long shall we continue to live this life of
contradictions? How long shall we continue
to deny equality in our social and economic
life? If we continue to deny it for long, we
will do so only by putting our political
democracy in peril. We must remove this
contradiction at the earliest possible
moment or else those who suffer from
inequality will blow up the structure of
political democracy which this Assembly
has so laboriously built up”.
3. Those who know the Constitutional history of India
recognize the above to be the wise words of Dr. Ambedkar, one
121
of our founding fathers. Those who are concerned about the
welfare of our people, and the future of our nation, his second
warning will always be a matter of intense intellectual disquiet:
“Indeed if I may say so, if things go wrong under the new
Constitution, the reason will not be that we had a bad
Constitution. What we will have to say is that Man was vile.” It is
never enough to have a written constitution. We need people
who, in the course of working the Constitution, to borrow a
memorable phrase from Granville Austin, will exhibit qualities of
great integrity and a deeply felt ethical urgency to ameliorate the
social and economic conditions in which our people live and
suffer. That obligation arises from the very politico-constitutional
ideals and structures upon which the State has been formed and
the future of the nation premised. In disputes such as the one
before this Court, the lens of the Constitution has to be used to
examine the implications with respect to achievements of such
ideals and the strength of our institutions. The power that is
vested in the State, and exercised by its agents, is the power of
all the people and not just of those with great wealth and status.
The vesting of such powers is an act of faith and of trust, two
qualities that are to be earned, sustained and nurtured.
122
Continuance of such faith and trust undoubtedly depends, in the
least, on the belief that people have that such powers are being
exercised to further the Constitutional goals. To the extent that
the people begin to believe that their faith and trust were
misplaced, and that their collective powers are being improperly
used for the benefit of the few, as opposed to being used for
public welfare and interests, one may reasonably conclude that
at least the effective functioning of the State would have been
compromised. Those with knowledge of history, and an
inclination to learn from, it would necessarily be concerned about
the situation today and potential consequences in the future. For
them the words of Dr. Ambedkar would appear to be prescient
and wise.
4. The wisdom of the ages, garnered through eons of
humanity’s collective struggles to find for all a life of dignity and
fraternity – a dignity that arises from and is informed by liberty,
equality, and justice in all walks of life and a fraternity that seeks
to promote such dignity for all is the fire in which the
Constitution of India has been forged. The very structure and
text of the Constitution, when viewed through the lens of history
123
and the working of the instrument itself, clearly demonstrates
that it crystallizes collective human wisdom in its triadic ethical
foundations. Those foundations are: (i) the Preamble that soars
in eloquence in its articulation of collective human aspirations as
national goals and sets out the raison d’etre for the nation itself;
(ii) the Fundamental Rights, that provide various necessary
freedoms for the individuals and social groups, and places upon
the State certain affirmative obligations to eliminate those
institutional and socio-economic conditions limiting such
freedoms, so that all can strive towards the achievement of the
goals set forth in the Preamble; and (3) the Directive Principles
of State Policy, fundamental to governance and necessary for the
achievement of all round socio-economic development so that
the goals of the Preamble can be secured, and the effective
exercise of the Fundamental Rights by all can be ensured.
5. It was recognized early in our struggle for freedom
that, as India awakens politically an explosive situation could
develop if the contradictions were not resolved soon. Thus, it was
felt that the State ought to play a key role in ensuring that all the
people are assured, a life informed by liberty, equality, justice
124
and fraternity, so that their dignity, as individuals and as social
beings, can be secured. To this effect, the State has been given
the powers to place reasonable restrictions even on the
Fundamental Rights of the individuals for the achievement of
broader good for all, the powers to enact socio-economic
legislation to effectuate re-distribution of wealth and ensure
equitable access to material resources and to frame policies that
ameliorate the harsh consequences of the civil and the market
spheres of social action that people participate in. Where such
power is vested in trust by the people, it implies, as a necessary
corollary, a trust that such powers will be fully used to further
the Constitutional goals within the four corners of Constitutional
permissibility. Availability of such powers to use, in a practical
sense, implies that those powers have not been abjured or
derogated from.
6. The dawn of independence evoked much hope; and
also much anxiety, especially amongst scholars and observers
from the West, about the feasibility of the experiment of India as
a Constitutional democracy. Yet, in our seventh decade of
freedom and the sixtieth year of constituting ourselves as a
125
Sovereign, Socialist, Secular, Democratic Republic, it is apparent
that we have survived, and indeed by and large flourished as a
political democracy. In part, this was surely on account of the
great moral integrity and wisdom that our founding fathers and
early political leadership brought to the table, and the efforts
they put in towards building the institutions of our democracy.
Additionally, credit must also go to the socio-political and
economic policies initiated and implemented, of course with
varying degree of success and failure, for sustaining the hope
that the promises enshrined in the Constitution are at least being
sought to be achieved. However, a much larger measure of credit
ought to go to the people: those people who turn up in ever
larger numbers to the voting booths and continue to retain trust
in the basic principles of democracy, notwithstanding their
abysmal lot in life. Yet, when the State attempts to alleviate just
a part of the burden of their continued dehumanized condition,
such attempts are decried as populist by the elite of this country.
7. So, willy-nilly, we come back to the question asked by
Dr. Ambedkar: how long will our people bear the contradictions
of endemic and gross inequalities? An aspiring and youthful
126
population can be a great boost to the economy and the society.
It would be tautological to state that the GDP would grow rapidly
with a larger proportion of the people in the productive phases of
their lives. But, the same youth unemployed or underemployed,
malnourished and without the capacity or hope to lead or achieve
a dignified life, can be the most dangerous of all forces.
8. A small portion of our population, over the past two
decades, has been chanting incessantly for increased
privatization of the material resources of the community, and
some of them even doubt whether the goals of equality and
social justice are capable of being addressed directly. They argue
that economic growth will eventually trickle down and lift
everyone up. For those at the bottom of the economic and social
pyramid, it appears that the Nation has forsaken those goals as
unattainable at best and unworthy at worst. The neo-liberal
agenda has increasingly eviscerated the State of stature and
power, bringing vast benefits to the few, modest benefits for
some, while leaving everybody else, the majority, behind.
127
“… these global imbalances are morally
unacceptable and politically unsustainable.”1
(emphasis added).
9. We have heard a lot about free markets and freedom
to market. We must confess that we were perplexed by the
extent to which it was pressed that contractual arrangements
between private parties with the State and amongst themselves
could displace the obligations of the State to the people
themselves. Judge Richard Posner, one of the doyens of the free
market ideology and responsible for building the intellectual
foundations of the neo-liberal segments of the law and economics
jurisprudence, had this to say about the recent global financial
crisis and it is worth quoting him in-extenso:
“Some conservatives believe that the
depression is the result of unwise
government policies. I believe it is a
market failure. The government’s myopia,
passivity, and blunders played a critical
role in allowing the recession to balloon
into a depression, and so have several
fortuitous factors. But without any
government regulation of the financial
industry, the economy would still, in all
likelihood, be in a depression. We are
learning from it that we need a more active
and intelligent government to keep our
model of capitalist economy from running
1 Quoted in Joseph Stiglitz, Making Globalization Work: The Next Steps to Global Justice, p. 8, Allen
Lane (2006).
128
off the rails. The movement to deregulate
the financial industry went too far by
exaggerating the resilience—the selfhealing
powers—of laissez-faire
capitalism”.2
10. History has repeatedly shown that a culture of
uncontained greed along with uncontrolled markets leads to
disasters. Human rationality, with respect to pursuit of lucre, is
essentially short run. So long as there appear to be possibilities
of making profits, especially windfall profits, the fears that the
competitors would reap them will drive businesses into taking
greater and greater risks; in fact, even by self-enforcement of
blindness to the potential for market collapse. To say that it was
a failure of regulation is trite. Markets failed because regulation
had practically ceased to exist. Finally veering around to the view
that regulation of markets is absolutely essential, after spending
a lifetime arguing for the opposite, and noting that the capacity
for self-regulation was highly over-rated, Judge Posner in his own
inimitable manner says:
“If you’re worried that lions are eating too
many zebras, you don’t say to the lions,
‘You’re eating too many zebras’. You have
2 Richard A. Posner: “A Failure of Capitalism: The Crisis of ’08 and the Descent Into Depression”, p. xi.
Harvard University Press (2009).
129
to build a fence around the lions. They’re
not going to build it.”3
11. Historically, and all across the globe, predatory forms
of capitalism seem to organize themselves, first and foremost,
around the extractive industries that seek to exploit the vast, but
exhaustible, natural resources. Water, forests, minerals and oil -
they are all being privatized; and not yet satisfied, the voices
that speak for predatory capitalism seek more, ignoring the
lessons from history and current experiences. One of the lessons
of history is that, barring a few, most of the countries endowed
with vast and easily exploitable natural resources have fared far
worse than those with smaller endowments, on almost every
social and economic indicia. As Joseph Stiglitz points out:
“[T]here is a curious phenomenon…..
‘resource curse.’ It appears, that on average,
resource rich countries have performed worse
than those with smaller endowments – quite
the opposite of what might have been
expected………..[B]ut even when countries as
a whole have done fairly well, resource rich
countries are often marked by large
inequality: rich countries with poor people…
….. [T]wo-thirds of the people” in an oil rich
country that is also a member of a global oil
producing countries group “live in poverty as
3 Richard A. Posner, ibid.
130
the fruits of the country’s oil bounty go to a
minority…… These puzzles cry out for an
explanation, one that will allow countries to
do something to undo the resource curse…..
We understand in particular that much of the
problem is political4 in nature……. [W]hen
compared to countries dependant on the
export of agricultural commodities, mineral
and oil exporting countries suffer from
unusually high poverty, poor health care,
widespread malnutrition, high rates of child
mortality, low life expectancy, and poor
educational performance – all of which are
surprising findings given the revenue streams
of resource-rich countries.” 5
12. We draw attention to this problem, because, even
though it is often associated with those countries that depend
mostly on earnings from export of natural resources, similar
effects can also arise from activities within the domestic
economy. Take the case of India itself. We cannot by any stretch
of imagination claim that we are a resource poor country. Yet, as
we cast a glance across the face of our land, the greater
incidence of social unrest, and movements for greater self
determination, seem to occur by and large in states and regions
that have plenty of natural wealth and paradoxically suffer from
low levels of human development. We hasten to add that we are
4 The word political is being used in a technical sense to denote the state and all of its institutions, rather
than merely political parties or to denounce the normative desirability of democratic political processes.
5 Joseph E. Stiglitz, Making Natural Resources into a Blessing rather than a Curse, in “Covering Oil” Ed.
Svetlana Tsalik and Anya Schiffrin, Open Society Institute (2005), p. 13-14.
131
not suggesting that absence of resources would lead to a better
situation. Rather, it is to point out that the problems arise
because exploitation of those resources occurs without
appropriate supervision by the State as to the rates of
exploitation, equitable distribution of the wealth it generates,
collusions between the extractive industry and some agents of
the State and the consequent evisceration of the moral authority
of the institutions of the State.
13. The crux of the problem is, as Prof. Terry Lynn Karl
says:
“….utilizing petroleum wealth effectively is not
easy…… Because the institutional setting is
generally incapable of dealing with economic
manifestations of resource curse, it ends up
transforming them in a vicious development
cycle or “staple trap.”6
14. One would have expected, that with the resources
being owned by the people as a nation, it would be the State
public institutions that would actually operate the extraction
industry. For a few decades that was the case, and it was beset
by problems of administrative apathy and even pilferage. Over
6 Terry Lynn Karl “Understanding the Resource Curse” in Covering Oil (Open Society Initiative, 2005).
132
the past two decades vast tracts of Nation’s resources have again
begun to be licensed for exploitation by private parties. Be that
as it may, it must be emphasized that the on going process
cannot dispense with the role to be played by the State. Strong
State institutions are even more necessary when we are dealing
with Nation’s resources and we allow contractors to exploit them.
15. The law is for the benefit of the people. Even where it
does not work in its full measure all the time, the public nature of
law is still capable of exerting moral authority and bringing
comfort to the people. But, when law is pushed into unseen
categories, effectively hidden from public gaze, it raises suspicion
- especially when it purports to deal with the collective resources
of the people. When the threshold of public scrutiny is crossed, it
raises vital issues regarding our continued fealty to democratic
values, constitutionalism, accountability, transparency and the
rule of law. Jody Freeman and Martha Minnow write:
“[T]he primary concern, voiced in recent
years by critics in public policy circles and in
academia, is that the ubiquity of governance
by private contractors strikingly outstrips our
legal and political capacities of oversight
meant to ensure that the contractors’
133
execution of those governmental functions
complies with democratic norms.”7
16. We are not saying that markets have no role to play in
a developing economy or that private initiative be suppressed
and that all markets are essentially and only tools for
expropriation and continuance of social injustices. We are stating
that our Constitution posits that markets can be inimical to social
justice, especially when left unregulated. Laissez faire market is a
myth and it is, as Prof. Cass Sunstein points out:
“….a grotesque misdescription of what free
markets actually require and entail. Free
markets depend for their existence on law……
moreover, the law that underlies free markets
is coercive in the sense that in addition to
facilitating individual transactions, it stops
people from doing many things they would
like to do. This point is not by any means a
critique of free markets. But it suggests that
markets should be understood as a legal
construct, to be evaluated on the basis of
whether they promote human interests,
rather than as a part of nature and the
natural order….. markets are a tool, to be
used when they promote human purposes,
and to be abandoned when they fail to do so…
Achievement of social justice is a higher value
than the protection of free markets; markets
7 Government by Contract: Outsourcing And American Democracy, Ed. Jody Freeman and American
Democracy.
134
are mere instruments to be evaluated by their
effects.”8
17. The Constitution of India postulates that monopolies,
created by an inequitable distribution of resources and their
concentration in the hands of the few, are inimical to democracy
and the values of equality and justice in all spheres of social
action. They were the lessons of history. While large economic
organizations might be necessary to accomplish certain kinds of
tasks, it is imperative that the State always be watchful that they
do not take over the essential functions of the State, especially of
policy formulation. In its dealings with such entities, the State
should always be mindful that it does not convey that its public
law duties could be bought or abrogated in any manner.
18. One may ask why in a Company Petition such a
discussion of constitutional values has had to come about. Such
is the nature of the dispute itself. The Company Petition, and the
Scheme of Arrangement that it arises from, ostensibly, are to be
dealt under Sections 391 through 394 of the Companies Act; but,
involve at their foundations, a claim by Reliance Natural
8 Cass Sunstein: Free Markets and Social Justice (Oxford University Press, 1997)
135
Resources Limited that it is entitled to receive, on account of a
private pact between members of the Ambani family, vast
quantities of natural gas, amounting to a significant portion of
what would be available for the entire country, at a low price and
for a long time, de-hors any policy made by the Government of
India. It claims that the GoI has a right to enter into and has
actually entered into a contract that allows, Reliance Industry
Limited to produce and decide how to use a precious and a
scarce natural resource belonging to the people of this nation
without any governmental supervision. Further, RNRL also
claims, that its vested interest in such vast quantities of natural
gas is such, that subsequently framed governmental policy
cannot have a bearing on such an entitlement irrespective of
public interest implications.
19. Apart from the above, this particular case also
implicates aspects of accountability of members of the
managements of corporations, who are also promoters and
powerful shareholders, to the Board of Directors and other
shareholders. One of the principal claims of RNRL in this case is
that a private pact between the family members of the Ambani
136
family can bind the Board and the Company, in the context of
reorganization of the company without the shareholders having
any knowledge of the extent of value that is actually likely to be
demerged, even if such likely value runs into many thousands of
crores of rupees and possibly hundred fold more than the assets
and liabilities that were actually shown as being demerged in the
Scheme document placed before the shareholders.
20. For a long time now, it has been well recognized that
the modern industrial and post-industrial corporations control
such a large extent of economic and social spheres that their
activities necessarily have a wide and pervasive impact on the
lives of most of the people of the country. We recognize that, in
many normal instances, when issues of public interest are not
apparent on the face of the record, then a Company Petition is
normally, and rightly, treated as a matter of corporate law.
However, when the conflict involves the right to use vast swaths
of a national natural resource that is owned by the people, public
law is necessarily implicated to a small or a large extent. Further,
when publicly listed companies, with many millions of
shareholders of ordinary people, do not reveal the full extent of
137
value that is to be transferred, it would obviously implicate the
broader principles of corporate law.
21. That is why we began this section with an epigraph, “Jus
publicum privatorum pactis mutari non potest” from the Digest of
Justinian. Natural Gas belongs to the people of India, and vests
in the Union of India, to be held for the purposes of the Union.
The Constitution of India commands the Government to frame
policy to prevent the distribution of such resources in a manner
that may be inimical to national development. Ultimately, the
residual owners of a company are its shareholders, and they
have a right to know what is happening to the company and its
assets, including assets by way of contractual rights, so that they
can take an informed decision about a proposal that is put up for
their consideration. For the past three hundred years of evolution
of corporate law, the principal theme has been the protection of
those who give their wealth and resources in trust to a company.
Managements and Board of Directors of companies have a
fiduciary responsibility to the shareholders, and neither the
processes nor the substantive objectives of protection of the
shareholders can be derogated from.
138
22. A number of acronyms have been used in this
judgment. A glossary is annexed herewith for referral.
23. It is with the above observations we shall now
proceed to consider the facts and the issues that arise for our
consideration.
PART II
THE FACTUAL MATRIX
24. In April 2000, a consortium of companies, Reliance
Industries Limited and NIKO, together forming the Contractor,
entered into a Production Sharing Contract with the Union of
India to explore for and produce Petroleum, which includes both
crude oil and natural gas as applicable, in a block KG-DWN-98/3,
located off the eastern sea shore of Andhra Pradesh. This block
has been referred to as KG-D6 by the parties and we shall adopt
that nomenclature; however, the judgment and decision shall be
understood as being applicable to the entire KG-DWN-98/3 block.
25. In 2002, RIL announced the discovery of a very large
reservoir of natural gas in KG-D6. In the same year Shri.
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Dhirubhai Ambani, the founder of RIL, passed away and
subsequently the management of RIL was led by Mukesh D.
Ambani, the elder son, as the Chairman and Managing Director
and Anil D. Ambani, the younger son, as the Vice-Chairman and
Joint Managing Director. On May 21, 2003, RIL submitted its
conclusions to GoI that the reservoir discovered was a
commercial discovery, which was subsequently certified to be so
by GoI on 10.01.2004.
26. In May 2004, RIL submitted to the Management
Committee of the PSC an Initial Development Plan, inter-alia,
describing the nature of the discovery, the potential extent of
natural gas that could be extracted, the kind of infrastructure and
expenditure necessary for the same, and the potential market for
natural gas in India. It was stated that natural gas produced from
KG-D6 could be used by entities operating in the power and
fertilizer sectors located in Andhra Pradesh, Maharashtra,
Karnataka, Gujarat and Uttar Pradesh. It was stated that such
users could use up to 82 MMSCMD of natural gas. It was also
stated that NTPC’s demand could be as much as 17 MMSCMD.
The production of natural gas was projected to be possibly 40
140
MMSCMD and that it could go up to 80 MMSCMD a few years
later. It was also stated that natural gas supply in India was
highly constrained and the short fall had led to many units that
use natural gas as a fuel or feedstock being stranded. RIL also
stated that it expected to be the exclusive agent for selling
natural gas produced from KG-D6. This Initial Development Plan
was approved by the Management Committee of the PSC in
November 2004. The GoI issued a Petroleum Mining Lease with
respect to KG-D6 on 02.03.2005.
27. In the meantime, in mid 2003 RIL bid in response to
an international tender floated by the National Thermal Power
Corporation and won the bid on the substantial terms that it
would supply 12 MMSCMD, for seventeen years, at a well head
price of USD 2.34/mmBtu, plus transportation and marketing
charges for a total of USD 3.18/mmBtu at the Delivery Point at
Kakinada. Negotiations began to execute a full fledged gas
supply and purchase agreement and various drafts were
produced, including the drafts of May, 2005 in which
governmental approvals were stated to be required for RIL to
supply natural gas to NTPC.
141
28. From the record it is also clear that between 2002 and
2005 various discussions were conducted in RIL and the Reliance
Group about using the natural gas that was likely to be produced
from KG-D6, to support various internal business divisions and
undertakings, such as petro-chemicals, captive power plants, the
power plant of Reliance Patalganga Power Limited and power
plants to be set up by Reliance Energy Limited. An
announcement was made that a 3500 MW power generating
plant was to be set up in Dadri, Uttar Pradesh using natural gas.
29. On July 27, 2004, in a Board Meeting of RIL it was
decided that, in light of the fast emerging opportunities and
exigencies and to facilitate quick response, all the powers of the
Board be vested in MDA except those powers that the Board was
required, by the Companies Act, 1956 and the Articles of
Association, to retain. This exacerbated an already festering
dispute between the two brothers, necessitating the intervention
of their mother, Smt. Kokilaben D. Ambani leading to a
Memorandum of Understanding, dated June 18, 2005, that was
drafted with the help of lawyers and marked strictly confidential.
Only a portion of the MoU was placed on record in the later
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stages of proceedings before the Division Bench. It is an
admitted fact that it has been executed by and between the
mother and her two sons only.
30. The MoU provided that - with disputes between the
brothers, the other matters of family assets, and interests in
various businesses being settled - the best way forward would be
by way of a scheme of reorganization in which the energy
producing, financial services and the telecommunications
divisions were to be demerged to the ADA Group for ownership
and control. The remaining divisions were to be with the MDA
Group, including petroleum exploration and production division.
The MoU specifically provided that the approvals of statutory and
regulatory bodies, the shareholders and the boards of Directors
of various companies would be conditions precedent for
operationalising the reorganization. It was also specifically stated
that personnel of both MDA Group and ADA Group would
participate in the process of preparation of the Scheme so that
their mutual interests could be protected. It was also agreed that
the same lawyer who drafted the MoU would also draft the
Scheme.
143
31. In addition, the MoU also had a section titled “Gas
Supply” in which it was provided that, from all P1 reserves of
existing and any future gas fields from which RIL may produce
natural gas: (i) 12 MMSCMD would be supplied to NTPC;
however, if the contract did not go through, then that would be
supplied to the ADA Group; (ii) in addition, another 28 MMSCMD
would be supplied to REL. The quantity of gas referred to in (ii)
was to be at a price no greater than the price for supply of gas to
NTPC and the terms of such supply were to be the same as to
NTPC and even surpass them to provide ADA Group an added
level of comfort. Further, with respect to all other future
production of natural gas by RIL, under any contract and in any
gas field, it was to be split in a 60:40 ratio between the MDA
Group and the ADA Group. This right was an option right
exercisable by the ADA Group and to be supplied to it at the then
prevailing market prices and has been referred to as the Option
Volumes by the parties. The gas supplied to ADA Group was only
meant for trading within the group.
32. In addition to the above, and in the same section “Gas
Supply”, it was also stated, after KDA exhorted her elder son to
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ensure that stability was given to the ADA Group with respect to
gas supply, that the MDA Group would act in “utmost good faith”
and exert their “best endeavours” to work for and obtain all the
necessary governmental and regulatory approvals. It was also
provided that the ADA Group would be given an irrevocable
power of attorney to be able to independently pursue the same,
though that was not to mitigate the burden to be borne by the
MDA Group. KDA reserved the right to intervene and it was
stated that ADA Group would have a right to damages in the
event that MDA Group did not act in good faith. The binding gas
supply agreements were to be executed within 45 days.
33. KDA issued a press statement, the day that the MoU
was executed, stating that the differences between her sons were
settled and that ADA will be responsible for Reliance Infocom,
Reliance Energy and Reliance Capital. On the same day the Board
of Directors of RIL also met. The minutes reveal that MDA stated
in broad terms the terms of the settlement – that the energy,
telecom and financial businesses were to be demerged to ADA,
with himself remaining in charge of the other businesses.
Thereupon he placed a copy of the press statement of KDA and
145
left the meeting stating potential conflict of interest issues. Other
Directors continued and after expressing their thanks to KDA, it
was recorded that some Directors felt that any reorganization be
undertaken only if it is in the best interests of all the
shareholders. To this effect it was resolved that a Corporate
Governance and Stakeholders Interface Committee comprising
independent Directors examine in depth all the issues relevant
for reorganization and suggest a proposal to the Board, including
any scheme. It was also resolved that the said committee of
independent Directors also be assisted by professionals, such as
chartered accountants, solicitors, merchant bankers etc.,
including the lawyer who had drafted the MoU.
34. Based upon such authorization the CG Group
proceeded to perform its assigned duties, assisted by various
professionals, and with the active participation of personnel of
both ADA and MDA groups. On August 3, 2005 Term Sheets were
prepared and executed by representatives of the two groups and
it was provided therein that the Scheme would be based on the
terms agreed. With regard to the principal disclosures to be
made in the scheme, it was decided that one of them would be
146
about the fuel agreement for supply of gas that was to be
executed. It was also provided that the Scheme would be framed
in such a manner that the Resulting Companies, which were all to
be 100% subsidiaries of RIL, would be listed on the same stock
exchanges as RIL, and that after issuance of shares by the
Resulting Companies to RIL’s shareholders they would then cease
to be subsidiaries of RIL. The CG Committee formulated the
Scheme’s rationale of the demerger as one of substantial benefits
that would accrue to the Resulting Companies on account of
focused attention.
35. On August 5, 2005 the Board of Directors of RIL met
and the CG Committee presented its recommendations. Some
outside professionals from the fields of law, accounting and
finance also rendered their opinions and provided inputs. The
minutes of the meeting show that one of the Directors of RIL
particularly stated and emphasised that the gas supply
agreement should specifically state that price and terms and
conditions shall be subject to Central Government’s approval. It
is also recorded that all those present, including Cyril Shroff, who
had prepared the MoU, was in charge of preparing the Scheme
147
and was advising ADA with respect to gas based energy
business, agreed with that view. The Board then resolved, interalia,
that pursuant to proposals of certain professional
organizations and the solicitor firm M/s Amarchand Mangaldas
and Suresh A. Shroff and Co., and recommendations of the CG
Committee, to segregate by a process of demerger the
undertakings relating to Coal based Energy, Gas based Energy,
Financial Services and Telecommunications. They also further
resolved that, pursuant to provisions of Section 391-394 of the
Companies Act, 1956, a Scheme of Arrangement be filed by
which each of the undertakings would be transferred to four
different Resulting Companies, including the transfer of the Gas
based Energy Undertaking to Global Fuel Management Services
Limited, which through various transmutations of its name
became Reliance Natural Resources Limited, the main protagonist
in these proceedings.
36. A Company Application for reorganisation of RIL was
filed in September 2005 in the High Court and based on its
directions, meetings of the shareholders and the stakeholders
under the aegis of a retired High Court Judge were conducted on
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October 21, 2005. The Scheme as presented was approved near
unanimously by the shareholders and the stakeholders.
Subsequently, the High Court sanctioned the Scheme on
December 09, 2005. The MoU and the terms in it relating to gas
supply do not find any mention in any of the petitions as well as
the sanctioned Scheme.
37. Beginning on June 30, 2005 representatives of both
the groups started negotiating the terms of gas supply
agreements. Voluminous correspondence (Exh. F) ensued,
mostly in the form of emails. Neither prior to the filing of the
Scheme nor thereafter could the two groups arrive at any
agreement. It is clear from the correspondence, that even until
end of February, 2006 there was no controversy that was raised
regarding the requirement of governmental approvals. The draft
NTPC-GSPAs of May, 2005 containing the requirement of
governmental approvals had been handed over to the ADA Group
and it was agreed by an ADA Representative that it would form
the basis for negotiation of gas supply agreements.
38. On January 12, 2006 a meeting of the Board of
Directors of RNRL was called for, in which, a Gas Supply Master
149
Agreement and a model Gas Sale and Purchase Agreement,
approved by the Board of RIL, were placed for consideration of
the Board of RNRL. Two Directors, both nominees of the MDA
Group, voted to accept the said gas supply agreements, and one
Director, the sole nominee of the ADA Group, strongly protested.
The said nominee of ADA Group also wrote a letter protesting the
same, and, inter-alia, alleged that he had been given the gas
supply agreements the previous night, had no time to properly
read through them, no one in the ADA Group got a chance to vet
them and further that the gas supply agreements were illegal
because they should have been executed by RNRL only after ADA
Group was fully in charge of RNRL.
39. On January 27, 2006, RNRL was listed on the stock
exchanges that RIL was listed on and the shares of RNRL were
given to the shareholders of RIL as provided for in the Scheme.
In particular, each shareholder of RIL was given one share of
RNRL for each of the shares he/she/it held with RIL, except
certain specified shareholders of RIL as provided for in the
Scheme. On February 7, 2006 RNRL was handed over to the ADA
Group for focused leadership of ADA after reconstitution of the
150
Board of RNRL as per the wishes of ADA and ADA Group.
Thereafter on February 28, 2006 a letter was written by RNRL to
RIL alleging various malafide actions by RIL with respect to gas
supply agreements, amongst other things.
40. In April, 2006, RIL applied to MoPNG for approval of
the the well-head price of USD 2.34/mmBtu for the natural gas
to be supplied to RNRL on the grounds that it was the same as
the agreed price for supply of gas to NTPC. The MoPNG rejected
it on July 27, 2006 and the same was communicated by RIL to
RNRL. In the meanwhile, RNRL had also written to MoPNG asking
for the approval of the same, though in the letter RNRL stated
that the GoI’s rights with respect to price formula/basis are only
with respect to the valuation that GoI might wish to place on
natural gas to determine its share of profit petroleum.
41. In the meanwhile RNRL was also writing to a number
of governmental, statutory and regulatory bodies regarding the
status of its gas supply agreements with RIL. In its statements
made with respect to issuance of Global Depository Receipts, in
Luxembourg, RNRL specifically stated that gas supply
agreements including price formula/basis would be subject to
151
governmental approvals and if approved it would then be able to
sell it to end customers at market prices.
42. On August 1, 2006 the MoPNG constituted a
Committee to “Formulate Transparent Guidelines for Approving
Gas Price Formula/Basis” for giving Government Approval under
the PSC for the same. On August 17, 2006, the said Pricing
Committee issued letters to various stakeholders, seeking their
comments and thereupon submitted its report in November
2006.
43. On November 8, 2006, RNRL filed Company
Application under Section 392 of the Companies Act, 1956
seeking directions from the High Court to order RIL to change the
gas supply agreements in a certain specific manner. According to
RNRL, the gas supply agreements were not bankable in
international financial markets, did not demerge the business of
supply of gas to gas based energy producing companies within
the ADA Group and thereby the very purpose for which RNRL had
been set up was negated. Further, RNRL also claimed that unless
the said changes were made, the Scheme would be unworkable
and hence the reliefs as prayed for. RIL countered that the
152
Company Application of 2006 was not maintainable, as the
clauses that were being sought to be changed were not
unconscionable, and the jurisdiction under Section 392 was only
to ensure that the Scheme as presented to the shareholders and
stakeholders was implemented and not to substitute better terms
or to frame a better Scheme. According to RIL, Clause 19 of the
Scheme provided that suitable arrangements with respect to gas
supply were to be made and the gas supply agreements put in
place by it were suitable because they protected the interests of
both RIL and RNRL. Further, RIL also took the affirmative
defense that under the PSC it was obligated to obtain approvals
of the government. The MoU was not pleaded specifically by
RNRL, though in the pleadings it raised issues about what had
been promised to it which could be linked to the MoU. The
correspondence between the two groups after the MoU,
regarding the gas supply agreements were placed on record and
analysed.
44. In May 2007, RIL submitted a price formula/basis to
the MoPNG for its approval so that all gas from KG-D6 could be
sold at a price derived from that formula. Around the same time,
153
RNRL also made a representation to the Ministry of Chemicals
and Fertilizers that the Government should put in place a
Utilisation Policy which RNRL stated was a right of the GoI under
the PSC and also take its share of profit petroleum in kind and
distribute the same to power and fertilizer sectors at a
reasonable price.
45. Be that as it may, in August 2007 an Empowered
Group of Ministers, consisting of Senior Cabinet Ministers, was
constituted by the GoI, which met in a series of meetings
(numbering six in all) between August 27, 2007 and January 8,
2009. The substantive decisions taken were: (i) acceptance of
the price formula/basis submitted by RIL, based on, inter-alia, an
evaluation by the Prime Ministers Economic Advisory Council that
the price band that would be derived pursuant to the price
formula/basis was comparable to prices at which non-APM
regime natural gas prices were prevailing. The formula was
modified to set an upper limit to the crude oil at USD 60 and set
the biddable factor to zero so that the alleged non-transparency
aspect could be mitigated; (ii) set in place an Utilisation Policy
that specified the sectoral allocations and priority list of the
154
sectors; (iii) that all users should be in a position to consume gas
right away or within a short period of time and that there was to
be no reservation of gas; and (iv) the policy was to be effective
for five years.
46. While the EGOM meetings were being held the
litigation between RIL and NTPC, and RIL and RNRL were in
various stages before the High Court. It appears that while
exercising its sovereign right to frame policy of national
importance, EGOM was also sensitive to the issue of decisions to
be made by the concerned courts, and hence noted that the
decisions of EGOM would be without prejudice to the rights of the
litigants as decided by the Courts.
47. A final order and judgment was passed, on
15.10.2007, by the Learned Company Judge. The judgment held:
the Application under Section 392 to be maintainable, that the
Company Court was not competent to dictate the specific
changes sought, that the GSMA was in breach of the Scheme,
that the MoU was binding on both parties, and that “suitable
arrangements” in Clause 19 of the Scheme had to be read in light
of the MoU and that it was necessary for the Scheme. The
155
Learned Company Judge also held that such gas supply contracts
would be subject to Government’s approval, pursuant to NELP
and PSC and it was further held that Government should
normally approve such contracts unless clearly in breach of public
policy and public interest. The Learned Company Judge then
ordered the parties to renegotiate.
48. Both sides filed appeals before the Division Bench
against the said judgment. As a number of interim orders were
passed at the stage of the proceedings before the Learned Single
Judge and then later on before the Division Bench, the GoI
intervened in the proceedings as it had been realized that it had
a vital stake because the dispute involved issues that could affect
national development, national interest and also GoI’s revenues.
49. The Division Bench disposed off the appeals of RIL and
RNRL by its order and judgment dated 15.06.2009. The decision
at the level of the Division Bench turned, it seems, on the fact
that a portion of the MoU was jointly tendered by RIL and RNRL
and apperception of the Division Bench that under the PSC, RIL is
entitled to a physical share of natural gas, as a part of cost gas
and profit gas. Further, the Division Bench seemingly agreed with
156
the conclusions of the Learned Company Judge and then
departed from it. Substantively it was held that a fixed quantum
of 28 MMSCMD plus 12 MMSCMD in the event that NTPC contract
did not fructify stood allocated and to be supplied for use in any
of REL’s power projects, and that the allocations made were a
class apart in themselves. The price of supply was to be in
accordance with the PSC – but as there was no clause in the PSC
prohibiting RIL from selling it at a price lower than that arising
from the price formula/approved by the Government, natural
gas up to the first 40 MMSCMD at a well head price of USD
2.34/mmBtu of natural gas stands allocated to RNRL, as RIL
would still make profits at that price point. Further, the Division
Bench also ordered the parties to renegotiate with respect to
issues regarding identity, definition of affiliate and limitation of
liability to make the gas supply agreements bankable.
50. There is considerable confusion as to what the Division
Bench ordered with respect to Utilisation Policy and its
applicability with respect to the Option Volumes of natural gas
provided for in the MoU. The three parties to this case have
urged three different interpretations regarding the same.
157
51. Aggrieved by the said Judgment and Order of the
Division Bench all the parties have approached this Court in
appeal by way of special leave. The Union of India which was
allowed to intervene before the Division Bench, being aggrieved
by certain findings, has also preferred an appeal against the
Judgment and Order of the Division Bench. After initially raising
objections, the Learned Senior Counsel appearing for RNRL, Shri.
Ram Jethmalani withdrew his objections to leave being granted.
Further, in as much as on the face of the record it would appear
that the PSC, to which the UoI is a party, has been interpreted
without the GoI having had an opportunity to be properly
impleaded and present its case and the potentially serious public
interest implications that arise therefrom, leave has been granted
to the UoI.
52. Now we shall proceed to summarise the contentions of
the parties made during the oral hearings spanning 27 days and
in the many thousands of pages of written documents. A number
of authorities were also cited by each of the counsel in support of
their arguments. We make it clear that we shall advert only to
158
those submissions and citations which are necessary for disposal
of these appeals.
PART III
SUMMARY OF THE SUBMISSIONS OF THE PARTIES:
53. Though the first party to file a special leave petition
in these proceedings was RIL, and it is Shri Harish Salve, the
learned senior counsel for RIL who led the arguments, because of
the fact that it was RNRL’s petition and the main attack was
initiated by RNRL in the courts below, we consider it appropriate
and convenient to note their submissions first. While there is a
welter of facts and arguments it would also be quite clear that
there has been a set of consistent themes flowing right through
this case. In addition, at the earlier stages of proceedings the
public interest and public law elements were not properly before
the courts. Though late, with the entry of Union of India as a
full fledged party to the case, the issue of public interest and
welfare has also come to be crystallized.
159
CONTENTIONS OF RNRL:
54. The line of argument that RNRL has taken in the
course of these proceedings can be gleaned from the Six
Protested Points they have raised about the underlying gas
supply agreements. They are about Price, Quantity, Tenure,
Identity of Buyer, Definition of Affiliate and Limitation of Liability.
We note each one of them below as substantively argued by Shri.
Mukul Rohtagi, learned senior counsel appearing on behalf of
RNRL.
1. Price: The natural gas that is to be supplied to it, not
including the Option Volumes, should be at a fixed price of
USD 2.34/mmBtu well head cost plus marketing margins
and transportation charges at the delivery point for a total
of USD 3.18/mmBtu. Contemporaneously, while various
commitments were being made by RIL between 2002 to
2005 to the gas based energy producing division while it
was a part of RIL, a bid was offered on the international
tender floated by NTPC at the said price. In as much as that
was the only contemporaneous arms length and a market
160
determined price, it is contended that the same price should
apply to RNRL as it is the derivative of and the successor in
interest to that gas based energy producing division.
2. Quantity: The quantum that RNRL should receive 28
MMSCMD plus, in the event that NTPC’s contract does not
go through, an additional 12 MMSCMD. It is argued that the
size of the gas based energy producing plant, at Dadri, of
7500 MW of generating capacity is the first determinant of
the requirement of 28 MMSCMD. The other 12 MMSCMD is
based on the required supplies for RPPL and other gas
based energy producing plants it had proposed to set up.
According to RNRL these were commitments that RIL had
made prior to the demerger and even prior to the MoU and
hence ought to honour them.
3. Tenure: The tenure should be a firm 17 years, as that was
the term that had been promised to NTPC and that the
provision regarding the same should be as stated in the
draft agreements with NTPC.
161
4. Identity of Buyer: In as much as the gas supply agreements
mandate that it nominate an affiliate from within the ADA
Group that is engaged in gas based energy production as a
buyer, and the gas is directly supplied to it and payments
made to RIL are also from that quarter, the very purpose
for which RNRL has been set up, to supply gas to gas based
energy producing companies and thus promoting the
setting up of such companies, would be negated. It is
contended by RNRL that a fair reading of the Scheme would
reveal the same.
5. Definition of an Affiliate: According to RNRL the definition of
an affiliate should not require 51% ownership, but rather
the definition as contained in either the PSC or the NTPC
draft agreements. It is argued that by restricting its
nominees to only those companies in which RNRL owns at
least 51%, the freedom of RNRL to set up gas based energy
producing companies is automatically restricted and in as
much such a restriction was not placed on NTPC it should
be accordingly changed. Further, RNRL also contends that
162
the definition of affiliate as provided for in the PSC could
also be appropriate.
6. Limitation of Liability: The promise made to RNRL was that
gas would be supplied to it from any of the gas fields given
to RIL by GoI, and consequently it should be possible to
draft a liability clause that becomes operative in the event
that there is no gas available at any of the gas fields or for
reasons beyond the control of RIL.
55. The three themes that RNRL presses are and they
relate to Government Approvals, binding nature of the MoU and
maintainability in seeking the reliefs claimed as above.
1. Government Approvals: In its claimed reliefs, RNRL seeks
the deletion of Section 13.9 of the GSMA and Clauses (d) and (e)
of Schedule 3.2 of the GSPA, which substantively deal with the
issue of approval of the price formula/basis and also of
applicability of governmental utilization policy or any other
powers of the GoI to curtail production or otherwise prevent RIL
from supplying natural gas. The first contention of RNRL, as
163
pressed by both Shri. Jethmalani and Shri. Rohtagi, is that under
the PSC what is shared between RIL and UoI are physical
quantities of natural gas, and that is what a PSC means – sharing
of production. For this proposition reliance is placed on CIT v
Enron Oil and Gas India Ltd.9 Further, it is also argued that
because the Contractor expends monies on exploration,
development and production and is allowed to recover its costs
first, it should be deemed that the title to natural gas to the
extent of cost and profit petroleum pass to the Contractor at the
Delivery Point when natural gas is first brought on-shore. To this
effect they rely upon the provisions of Article 27.2 of the PSC.
Consequently, they also argue that the approval of price
formula/basis in Article 21.6.3 of the PSC is only to facilitate GoI
in placing a value on natural gas so that its share to physical
quantity of natural gas under the Profit Petroleum component can
be calculated. They also argue that if GoI is allowed to determine
price and also frame a utilization policy, then the absolute
freedom to market, as promised in NELP and in Article 21.3 of
the PSC would become otiose.
9 (2008) 305 ITR 75
164
Alternately, it is also argued by Shri. Jethmalani and Shri.
Mukul Rohtagi that, even if one were to assume that the title
does not pass through to the Contractor and that the GoI did
have such rights, when the binding commitments were made by
RIL to RNRL, there was no utilization policy in place,
consequently RIL was free to find its own buyers under the
marketing freedom promised by NELP, the only policy in place.
Moreover, it is argued, the GoI knew about supply of natural gas
to RNRL in as much as it was specifically mentioned in the IDP
approved by the MC of the PSC. Arguing that the State has to act
justly, fairly and reasonably even in contractual field, they have
relied upon Kumari Shrilekha Vidyarthi v State of U.P.,10 Mahabir
Auto Stores v Indian Oil Corpn.,11 LIC of India v Consumer
Education & Research Center.12 Further, they also argue that
EGOM decisions cannot be held to be applicable in a manner that
would affect its pre-existing contractual rights with RIL as
executive action cannot interfere with contractual rights. To this
effect they rely upon Rai Sahab Ram Jawaya Kapur & Ors. v
State of Punjab,13 State of Madhya Pradesh v Thakur Bharat
10 (1991) 1 SCC 212
11 (1990) 3 SCC 752
12 (1995) 5 SCC 482
13 1995(2) SCR 2.
165
Singh,14 and Poonam Verma v DDA.15 Even if one were to
consider EGOM decisions as policy, it cannot have retrospective
effect and to this effect they placed reliance on Union of India &
Ors. v Asian Food Industries,16 and Kusumam Hotels (P) Ltd. v
Kerala SEB.17 Moreover, in as much as in the EGOM minutes it is
clearly recorded that their decisions are without prejudice to the
rights of RNRL in the court cases, RNRL’s rights were beyond the
pale of EGOM’s decision. For interpretation of the expression
“without prejudice” they relied upon NTPC Ltd. v Reshmi
Constructions, Builders & Contractors.18 Finally, arguing that
Article 297 of the Constitution does not give sovereign rights to
GoI with respect to dealings with its own citizens to change
contractual rights and that sovereignty is restricted to the sphere
within the international context, Shri. Jethmalani relied upon
Madhav Rao Jivaji Rao Scindia v Union of India.19
2. Binding Nature of MoU: It is the contention of RNRL that the
MoU is binding upon all and hence, the main commercial terms
14 1967 (2) SCR 454
15 (2007) 13 SCC 154
16 (2006) 13 SCC 542
17 (2008) 13 SCC 213
18 (2004) 2 SCC 663
19 (1971) 1 SCC 85
166
provided in its gas supply section should be faithfully followed, as
they relate to the Six Protested Points. Shri. Jethmalani argues
that at the time of the execution of the MoU, MDA was not just
the Chairman and M.D., but also armed with all the powers of the
Board. Consequently, he was the controlling mind of the
Company. To this effect he pressed the Doctrine of Identification
to state that MDA’s actions should be deemed to be the actions
of the Company, and the Board. He relied upon Lennards
Carrying Co. v Asiatic Petroleum Co. Ltd.20, Boulting and Anr. v
Association of Cinematography, Television and Allied
Technicians21, R. Vs. McDonnell 22, Tesco Super Markets v
Nattrass23, Meridian Global v Securities Commission24, J.K.
Industries Ltd. v Chief Inspector of Factories & Boilers25, Indian
Bank v Godhara Nagrik Coop. Credit Society Ltd.26, H.L. Bolton
(Engineering) Co. Ltd. v T.J. Graham & Sons27, Union of India v
United India Insurance Co. Ltd.28, Assistant Commissioner,
Assessment-II, Bangalore & Ors. v M/s. Velliappa Textiles Ltd. &
20 2924-25 AllER 280
21 (1963) 2 QB 606
22 (1966) 1 ALLER 193
23 (1971) UKHL 1; (1972) AC 153
24 (1995) 3 ALL ER 918
25 (1966) 6 SCC 665
26 (2008) 12 SCC 541
27 (1956) 3 ALL ER 624
28 (1997) 8 SCC 683
167
Ors.29 It was argued that the terms of gas supply, which are in
the nature of day to day agreements entered into by the
Management and hence need not have been placed before the
shareholders for approval and that the powers of a Director to
enter into contracts are very wide and reliance is placed on LIC
v. Escorts Ltd30 and Mohta Alloy & Steel Works v Mohta Finance
& Leasing Co. Ltd.31
3. Maintainability: It was also argued by the Learned Senior
Counsel for RNRL that the power of the Company Court is of the
widest amplitude and that in fact it is the duty of the court to
ensure that the Scheme is fully implemented and the only
limitation on the powers of the court is that it cannot change the
character, purpose or basic structure of the Scheme. He relied
on S.K. Gupta v K.P. Jain32
CONTENTIONS OF RIL:
29 AIR 2004 SC 86
30 (1989) 1 SCC 264
31 (1997) 89 Comp. Cases 227
32 (1979) 3 SCC 54
168
56. RIL’s position with regard to the Six Protested Points
was argued by Shri. Harish Salve as follows:
The basic contention of RIL is that under the PSC the GoI
has the right to approve the price formula/basis on which sales
can be effectuated, pursuant to Art. 21.6 et. seq. Additionally, it
says that ordering it to supply at USD 2.34 mmBtu well head
price even if the valuation placed by GoI is much higher is
misconceived, because it cannot recover its interest costs and its
investments are recouped over a long time frame, its rate of
return which is very, very modest will be threatened and that it
would amount to RIL subsidizing RNRL, which was never
contemplated in the Scheme. The Scheme cannot be changed to
the detriment of shareholders of RIL.
It was submitted that RIL can commit to supply only that
amount of gas as have been certified to be proven reserves. In
early 2006, the total amount of natural gas in gas field that
would be required to commit 28 MMSCMD and the Option
Volumes had not yet been certified; and it was not known
169
whether P1 reserves were available beyond the 12 MMSCMD
needed for NTPC.
RIL contends that the kind of certitude that is being
demanded by RNRL could have been given by it only if certified
and proven reserves were known. Further Shri Salve submitted
that as and when new reserves became known, new GSPA’s
would then be executed with a nominee of RNRL. In fact it is
RIL’s contention that if certified reserves were known and firm
commitments had been made, given that the project in Dadri, in
2006, was nowhere near completion, RNRL would have had to
suffer the very onerous “take or pay” clauses in the Industry.
Shri Salve also argued that in any event it cannot commit
supplies beyond the validity of the Mining Lease which expires in
2025.
It was argued by Shri. Salve that the protest of RNRL about
limitation of liability was in fact frivolous and that the clause is
being protested by only selectively reading it. The phrase “short
fall” in the clause in the GSMA, RIL says, refers to non-
170
availability of natural gas and not a voluntary shutting of gas
supply by RIL.
RIL contents that the Scheme itself postulates supply of gas
only to power plants of REL and RPPL. However, the fact that
GSMA has included a definition of affiliate so that it can take on
the higher responsibility of supplying gas even to power
generating units started by entities other than REL and RPPL
provided RNRL owned at least 51% of that company
demonstrates the good intentions of RIL. It further contends
that in fact the GSMA is more flexible than the Scheme or for
that matter the MoU and hence, on that count RNRL has no right
to contend that the definition of affiliate should be wider than
what was provided in the GSMA.
It was submitted that the GSMA and GSPA fully comply with
the requirements of Clause 19 of the Scheme, which requires
that arrangements be entered into with RNRL for supply of gas to
the power plants of REL and RPPL. Under the GSMA, RNRL would
have the right to nominate affiliates to whom gas is required to
be supplied under different GSPAs. The GSPA’s are to be entered
171
into with companies who are engaged in generation of electricity
like the REL. RIL also further contends that the Scheme does not
contemplate RNRL purchasing the gas and selling the same to its
affiliates at a profit. RIL says that the buyers under the Scheme
were to be companies which actually own and operate power
plants and moreover under the PSC the title can only pass to the
end consumer at the delivery point. It was stated that the
scheme envisaged that RNRL take delivery of gas at the delivery
point on behalf of the buyers and arrange for its transportation to
the ultimate consumption point and for this purpose charge a
marketing margin which must be nominal and the transportation
charges incurred. The submission was that the very names Gas
based Energy Undertaking suggests that the value arises, not
from trading of gas, but from generating energy from gas. Shri
Salve explained that the procedure that RIL put in place,
whereby the GSMA is with RNRL and the GSPA with its nominee
company that is actually starting a gas based electricity
generating plant, would make it bankable for both the power
generating company as well as RIL. It was his contention that in
the event that RIL did not get paid and with “take or pay”
penalty not being there, then it would at least have a company
172
with some actual assets against which it can proceed to collect.
57. With regard to the issue of bankability of the GSMA
and GSPA, it was submitted that RNRL has not shown one
single document or produced any evidence suggesting that they
are not bankable in the international financial spheres. It was
submitted that contrary to RNRL’s assertions that they are not
bankable, RNRL has in fact raised substantial funds, both
domestically and abroad. RIL also contends that even though
such huge sums of money have been raised, not a brick has been
laid so far to begin the construction of the Dadri power plant in
Uttar Pradesh. It was also stated that by entering into GSPA’s
with the nominee companies that would be setting up gas based
power plants, it would actually make the agreements bankable
because it is the nominee companies which need to raise monies
to establish the power plants.
58. Shri Salve argued that as a matter of both law and
logic, within the context of the scope of this litigation, the rights
of RNRL vis-a-vis RIL cannot transcend the rights possessed by
RIL and actually demerged by RIL. The rights of the UoI with
respect to approval of the price formula – and thereby affecting
173
the price - and to frame a government utilization policy
effectively delimits RIL’s own rights as to what it can do with the
natural gas. It is mandatory that RIL strictly remain within those
boundaries. The width and nature of GoI’s control can be
discerned from its continuing and constant role in overseeing
activities in all aspects and phases of the Petroleum Operations.
Further, Shri. Salve says that what RIL gets is not a physical
share but only a share of the value, that the title only passes to
the end user and purchaser at the Delivery Point and not to RIL
when natural gas is extracted and that RIL can really only act as
an agent of UoI.
59. According to Shri. Salve, what was approved by the
shareholders and formed the basis for sanction of the Scheme,
has in fact been propounded by the Board. The minutes of the
Board meetings and the discussions recorded clearly show that
the Board sought the opinion of the CG Committee and outside
professionals in deciding whether to go with the reorganization or
not, and also the nature of the Scheme that was to be put
together. It is clear from the record that the Board acted
independently and collectively. What it did not include in the
174
Scheme therefore cannot now be said to be a part of the Scheme
itself. With respect to gas supply agreements, the Board had
clearly recognized that they were not permissible without
governmental approvals, and in fact the personnel of ADA Group
knew this and so did the lawyer who put the scheme together,
drafted the MoU and was advising ADA.
60. Shri. Salve argued that the MoU was a confidential
document from the private domain of the promoters and was
executed in the context of settlement of family disputes. In as
much as the MoU was never placed before the Board or the
shareholders, it cannot be deemed to have been approved by
them. According to Shri. Salve, Sections 193, 194 and 195 of the
Companies Act, 1956 raise the presumption that the record of
the proceedings of the meetings of the Board are accurate The
minutes of the Board were never challenged and were never put
in issue in any proceeding.
61. With respect to the Doctrine of Identification, Shri
Salve argues that it has no relevance in the context of the facts
of these cases. The resolutions of the Board vesting vast powers
upon MDA themselves speak of the fact that the powers which
175
the Board was required to retain, by the Companies Act, 1956
and the Articles of Association, it did so. Under Section 293 of
the Companies Act, the Board cannot sell off or otherwise dispose
off an undertaking without the consent of the shareholders.
Consequently, the Board cannot relieve itself of the powers with
respect to matters that only it can take a decision on. The record
clearly indicates that Directors acted independently and that the
Board applied its collective mind after obtaining the necessary
inputs and recommendations of the CG Committee and other
professionals and accordingly had the Scheme prepared and
recommended to the shareholders. Consequently it is not MDA
who acted but the Board itself. Hence, the Doctrine of
Identification which arises in cases involving torts and criminal
liability has no application here.
62. MoU is an antecedent document that should not have been
considered by the Courts below. Even if considered, the MoU
itself contemplated that the actions necessary to start the
process of reorganization had conditions precedent which
included approvals by the Board and the shareholders. Further,
176
the MoU itself also shows that governmental approvals were
always known to be necessary.
63. RNRL’s Application Not-Maintainable: According to
Shri. Salve and Learned Senior Counsel Shri. R. F. Nariman, the
powers of the Company Court under Section 392 cannot be
greater than the powers under Section 391 of the Companies
Act, 1956. The width of the powers of the Company Court are
that of an umpire, ensuring that the rules of the game are fair,
and then allowing the parties to inter-se decide the appropriate
terms of commercial exchange. The Court pursuant to Section
391, for instance, cannot compel the parties to substitute a
Scheme approved by the members of the classes required to
approve the Scheme with what the Court feels is a better one.
Shri. Nariman relied upon Miheer H. Mafatlal v Mafatlal
Industries.33 Consequently, under Section 392 the Court cannot
impose its own wisdom, and change the basic fabric of the
Scheme itself. Reliance was placed on S.K. Gupta (supra).
Further, Shri Nariman also argued that in search of modification,
it is impermissible to substitute a portion of the Scheme with a
33 (1997) 1 SCC 579.
177
new Scheme. Reliance was placed on Meghal Homes (P) Ltd. V
Shree Niwas Girni K.K. Samiti & Ors.34 According to RIL there is
nothing unconscionable in the six clauses that have been
protested and hence also the application by RNRL was not
maintainable.
64. Scope of Clause 19 of the Scheme: Shri. Rohinton
Nariman argues that what was provided for in Clause 19 with
respect to the gas supply was a “suitable arrangement,” which
means an uncrystallized arrangement to be negotiated. This,
according to Shri Nariman is to be contrasted with the
crystallized agreements and rights to use Reliance brand logo
etc. which are also found in Clause 19 and this difference must
be interpreted to be intentional. Further, according to Shri.
Nariman the “suitable arrangements” with respect to gas supply
were to be between the Demerged Company owned by two
million shareholders and the Gas Based Resulting Company,
whereas the MoU on the other hand is between three
shareholders out of two million shareholders and consequently it
cannot now be said that the gas supply provisions of MoU
34 (2007) 7 SCC 753
178
constitutes the phrase ‘suitable arrangement’. Shri Nariman also
argued that what is contemplated in Sections 391-394 of the
Companies Act, 1956 is an arrangement between the company
and a class of shareholders. The present Scheme treats all equity
shareholders as a class. The MoU was between three
shareholders and has nothing to do with the entire class of
shareholders who approved this Scheme. Further, Shri Nariman
also argued that if the MoU were known to the Board, then the
fact that the terms and conditions of the gas supply contained
therein were kept out, indicates that the act of omission was
deliberate and hence foreign to the Scheme.
CONTENTIONS OF THE UNION OF INDIA:
65. According to Learned Solicitor General, Shri. Gopal
Subramaniam, there are two kinds of Production Sharing
Contracts, one in which physical produce is shared and the other
in which revenue is shared. He relied on a book “International
Petroleum Fiscal Systems and Production Sharing Contracts” by
Daniel Johnston.
179
66. The Learned Solicitor General, presenting a synoptic
view of the history of oil production contracts, from early
concessions to modern day arrangements, says that the PSC’s
evolved to give the State greater control over all aspects of
petroleum operations. This includes the right to determine the
expenses to be incurred, the rates of production, the equipment
to be used and also which markets to sell to or not to sell to.
Further, the Learned Solicitor General submits that PSC’s have
many aspects which are negotiated and the specific set of rights
given, in terms of recoupment of costs, the extent and
delineation of such costs determines the particular bargain
struck. Hence, an assumption or conclusion that because a
contract is titled “Production Sharing Contract”, physical
quantities of the produce are to be shared would be erroneous.
The specific terms of the contract ought to be determinative,
rather than a general assumption.
67. According to the Learned Solicitor General the concept
of Permanent Sovereignty over natural resources is a widely
accepted one in international law and UN General Assembly
Resolution 1803 of 1962 specifically recognizes the same.
180
Further, it was also argued that, in fact, forms of PSC developed
as a result of such a resolution. Under the new contractual
systems in the petroleum industry, as opposed to the historical
concessions given by Persia for instance, the ownership of the
resource vests and continues to vest with the sovereign until it is
disposed off. It was pointed that Article 297 of the Constitution
declares that minerals and other resources underlying the ocean
vest in the Union of India. Learned Solicitor General specifically
stated in his oral arguments that the PSC was placed on the floor
of the Parliament.
68. It was argued that the EGOM decisions, regarding the
utilization of natural gas and the price formula/basis, have never
been challenged independently and that the present litigation is
an attempt, in a seeming internecine war, to waylay GoI policies
in a Company Petition. Learned Additional Solicitor General Shri.
Mohan Parasaran points to Articles 77(3) and 73 of the
Constitution and argues that the powers of EGOM are not merely
traceable to the PSC but also to the powers flowing from such
Constitutional provisions and its policy decisions have the force of
law.
181
69. Arguing that distribution of national property and
state largesse has to adhere to the dictates of Article 14 of the
Constitution, Shri. Mohan Parasaran says that if the GoI had
effectuated the distribution of natural gas in the manner in
which it is being claimed to have been allocated by the MoU, in
secret and without it being offered to others, it would be liable to
be struck down by the courts. To this effect he relies on R.D.
Shetty v. International Airports Authority of India35 and F.C.I. v
Kamdhenu Cattle Feed Industries.36 Further, Shri. Parasaran also
argued that the State is enjoined to distribute the material
resources in a manner that promotes common good. In this
regard he assails the demands of RNRL for a reservation of gas
that places vast amounts of it in the hands of one entity as being
detrimental to common good. He relied on State of Tamil Nadu v.
L. Abu Kavur Bai 37 and Salar Jung Sugar Mills Ltd. v State of
Mysore.38 Shri. Mohan Parasaran also stated that natural gas is to
be used for national development and placed reliance on
Association of Natural Gas & Ors. v. Union of India & Ors. 39
35 (1979) 3 SCC 489
36 AIR 1993 SC 1601.
37 1984 (1) SCC 515
38 1972 (1) SCC 23.
39 2004 (4) SCC 489
182
70. Learned Additional Solicitor General Shri. Vivek
Tankha explained that natural gas is a very scarce resource in
India and that many units which could use it have been stranded
on account of its non-availability. In fact, he pointed out that, a
Chief Minister and others have also written to GoI with regard to
non-availability of natural gas from KG-D6 on account of the
claimed reservation of natural gas by RNRL. Additionally, he
submitted that the market for natural gas in India is
undeveloped. Shri. Tankha pointed out that the network of
pipelines that can transport natural gas in India is very small in
comparison to developed Nations. This, he pointed out, means
that many regions of the country cannot get access, and
reservation of such huge amounts of gas by one entity would
mean that other regions would not be able to access such gas
after pipeline is developed there. He also stated that while some
new discoveries have been made, some of the older fields are
likely to run out of natural gas. In light of such factors, Shri
Tankha argued that, it is very important for GoI to be able to
monitor and frame policy for utilization of natural gas. It was
emphatically stated by him, and also by Shri. Mohan Parasaran,
183
that any marketing freedom under the PSC can be only pursuant
to a gas utilization policy put in place by the GoI.
71. Shri Mohan Parasaran analysed Articles 27.1, 27.2, in
conjunction with Article 21.1 and posited that title to PSC can
pass to an end user only upon sale, and such sales have to be in
accordance with a utilization policy. With respect to what is
shared between the contractor and the GoI, he argues that it is
revenue. To this effect he also drew our attention to the fact that
the PSC considered by this Court in CIT v Enron Oil & Gas India
Ltd. (supra) – is different from the PSC in hand, and hence that
case is not applicable.
72. Shri. Mohan Parasaran interpreted Article 21.6 to
mean that arms length prices and the price formula therein as
being applicable with respect to all gas produced and sold from
KG-D6.
PART IV
WHOSE GAS IS IT ANYWAY? WHETHER A CONTRACTOR
BECOMES THE OWNER OF THE GAS?
73. Shorn of all the details and lengthy submissions and
contentions we shall now proceed to consider the relevant and
184
substantive issues that are required to be dealt with. It may be
necessary to have a bird’s eye-view about the importance of the
natural gas and the evolution of the PSCs. We also set forth a
broad and a brief overview of the political economy of natural gas
industry and the evolution of the various arrangements between
sovereign nations and oil companies.
74. Natural Gas is a mixture of hydrocarbons, but mostly
methane and is a primary source of energy. It is formed by the
conjuncture of a random set of factors – biological, physical,
chemical & geological – intersecting precisely to trap the formed
gas in underground cisterns (See: Association of Natural Gas).
The known reservoirs across the globe are randomly distributed.
Those regions that have many large reservoirs are considered to
have been favored by the cosmic dice. The difficulties of
exploration and mining, and the location specificity of reservoirs
have a direct bearing on identification of those reservoirs,
extraction from them and subsequently distribution of natural
gas. Its gaseous nature makes it expensive and difficult to store
and transport. Between continents it is shipped in the form of
LNG; and overland it is transported by pressurized pipelines. It
185
is used as a fuel and a feed stock in: (i) production of fertilisers,
(ii) generation of power, (iii) transportation, (iv) households,
and (v) production of various products such as petro-chemicals,
textiles, sponge iron etc. Its low carbon content, relative to other
fossil fuels, implies that its use may help in combating global
warming problems. Availability at an attractive price point could
potentially induce entities in those sectors to switch to using
natural gas. However, because it is also an exhaustible and nonrenewable
resource, there is an imperative need to conserve it.
Such conservation can be achieved by restricting the amount
available and also by modulating the price. Because the
differences in relative abilities to pay varies between different
sectors, in conditions of extreme scarcity, it is likely that certain
sectors could out-bid others and corner the entire available
quantities in unregulated markets; and that could lead to a
shortage of supply to vulnerable sectors like fertilisers, power,
transportation and households. Availability of natural gas to each
of those sectors raises thorny questions of equality and quality of
life issues40.
40 Handbook of Natural Gas Technology and Business, ed. Parag Diwan and Ashutosh Karnatak,
Pentagon Energy Press (2009).
186
75. The size, scale, scope and nature of a market for
natural gas is a function of the total supplies, the level of demand
and relative abilities to pay by different user segments, the
length and density of network of pipelines, the number of
producers, distributors and retailers etc. One of the critical
features of a properly developed market for natural gas would be
the network of large capacity pipelines that can carry it to
different regions, and then a further local network to distribute it
to end users41. Further, where that large capacity pipeline goes
to, determines which regions get natural gas. In a large country,
if many regions are left without access, then inter-regional
conflicts could develop, especially if competition for primary
energy sources intensifies.
76. All of these factors play a role in classifying a market
as developed or undeveloped. The market for natural gas in
United States is considered to be the most developed, with
historically large supplies being available, hundreds of producers,
many lakhs of miles of pipeline and dense local networks.
Consequently spot markets have developed, in which prices are
41 Ibid.
187
determined and are sensitive to various factors, including factors
such as prices of alternative fuels and peak demand. In other
jurisdictions with such features being less developed, prices have
been set through formulae linked to prices of alternate fuels,
including crude. Historically natural gas industry has been highly
regulated and it is only over past three decades that there has
been a greater dependence on market forces to effectuate
market coordination. Different jurisdictions have chosen different
paths, with variations regarding which of the various stages of
the value chain from production to end user access are
regulated. The mechanisms for such regulation also vary from
direct state commands to setting of rules and allowing private
players to operate with relative freedom within those set of rules.
The choices made seem to depend on various historical events,
and factors and already established institutions and rules. 42, 43
77. We have referred to a number of journals, articles and
books in this regard, too numerous to all be cited44, and one
42 Ibid.
43 Robert J. Michaels, “Natural Gas Markets and Regulation”, in the Concise Encylcopedia of Economics,
2nd Ed.
44 A small sample: Stephen Breyer: Regulation and its Reform, Harvard University Press (1982); Paul
Stephen Dempsey: Deregulation and Reregulation – Policy, Politics and Economics in Handbook of
Regulation and Administrative Law ed. David H. Rosenbloom & Richard D. Schwartz, New York
(1994); Colin Scott: The Juridification of Relations in the UK Utility Sector in Commercial Regulation
& Judicial Review ed. Julia Black, Peter Muchlinski & Paul Walker, Hart (1998); Cosmo Graham:
Regulating Public Utilities – A Constitutional Approach; UNCTAD: Competition in Energy Markets
188
thing stands out: there are no completely unregulated free
markets for natural gas anywhere in the world. By framing an
overarching analytical framework, it can be observed that every
jurisdiction grapples with three sets of issues relating to
ensuring: (1) adequate supplies to meet overall energy and
industrial needs; (2) equitable access across all sectors,
especially those which have implications for quality of life; and
(3) equitable pricing, even if market forces are allowed to play a
much larger role. Three more issues are emerging with respect to
ensuring: (4) energy security of the nation; (5) energy defense
links; and (6) inter-generational equities. Under conditions of
scarcity, these latter factors may indicate a greater need for
emphasis on conservation as opposed to current consumption. It
would appear that markets, with their emphasis on current
consumption and short run profits may lead to faster depletion,
and consequently necessitate far greater and indeed a primary
role for the State in coordination and making choices between
different objectives and value premises. While markets and
private initiatives have an important role in garnering financial
TD/B/COM.2/CLP/60 GE. 07-50741 (2007); Gas Regulation: in 35 jurisdictions, Global Competition
Review (2006); and Handbook of Natural Gas Technology & Business, supra note 40. Also see
Integrated Energy Policy – Report of the Expert Committee, Planning Commission of India, GoI
(2006).
189
resources, developing and bringing new technologies to practical
use, expanding the infrastructure, and increasing supplies by
identification of and extraction from new sources, if unmonitored
and completely unregulated markets are also capable of causing
great inequities, in access, overpricing and sometimes even
under pricing (if externalities, such as environmental costs, are
not taken into account) the resources.
78. It would be a gross understatement to say that India’s
identified reserves and availability of natural gas for domestic
consumption are very small. The total proven and identified
reserves of natural gas in India are said to be about 1074 BCM45.
That may appear to be very large. It is not. United States
consumes around 22-23 Trillion Cubic Feet46 of natural gas every
year – yes every year. According to MoPNG documents the total
global reserves are around 6534 TCF47, and our access to those
global reserves are very limited, because of relatively
underdeveloped shipping infrastructure for transport of LNG and
the difficulties in laying international and undersea pipelines for
45 MoPNG Basic Statistics (2008-2009).
46 Energy Information Administration, Dept. of Energy, U.S. Government.
47 MoPNG Basic Statistics (2008-2009) citing BP Statistical Review of World Energy, June 2008 &
OPEC Annual Statistical Bulletin.
190
its transport from better endowed regions such as the Middle
East. While some new discoveries, such as the one in KG Basin,
have raised hopes of the supply constraints easing somewhat, we
should always remember given India’s extremely low – in fact
de-humanized – per-capita consumption levels of energy, such
easing of constraints only implies an easing with respect to the
pressure of immediate and effective demand, and not with
respect to potential demand that could arise with economic
growth and certainly not in relation to the kind of levels of
consumption that would enable our people to live with a
modicum of dignity. As the Planning Commission has stated,
India’s energy challenge is of a fundamental order with
immediate resonance in respects of our constitutional goals,
internal and external security. India’s energy security cannot be
taken for granted – that would be disastrous, ethically
impermissible and a fraud on the Constitution. Planning
Commission also warns that the hubris of having large coal
reserves is unwarranted; according to it, much of that coal is unextractable
and clean coal technologies are only possibilities and
not certainties. 48
48 Integrated Energy Policy: Report of the Expert Committee, supra note 44
191
79. If, as many scholars state, oil production has peaked
or will peak in the future49, India will increasingly have to
compete for primary sources of energy and this may lead to geopolitical
instability on a global scale and even within national
boundaries. Identification of our own domestic sources,
determination of whether they can be extracted from and
augmentation of such sources with new forms of energy
production, and balancing of needs between current consumption
and future consumption, reserves for defense purposes etc., are
all absolutely essential tasks which have to be performed by the
GoI50.
80. The network of pipelines for transport of natural gas
is very small in length in India, of a few thousand kilometers
only, and the density is also very low51. Except for a few states,
and that too a few small regions in those states, access to
natural gas in the rest of the country is non-existent. It is not a
wonder that at least one Chief Minister wrote to the GoI in the
49 Adam R. Brandt: Testing Hubbert (2006); Aleklett, Hook, Jakobsson, Lardelli, Snowden &
Soderberger: The Peak of the Oil Age, Energy Policy Vol. 38 (2010). There are of course many more
articles in the public domain regarding this. There are of course industry experts who do not agree.
50 Integrated Energy Report, supra note 44.
51 See Basic Statistics on Indian Petroleum & Natural Gas, 2008-2009, MoPNG GoI.
192
middle of the last decade protesting about non-availability of new
natural gas discovered off the sea shore of that state’s coast for
various units located in that state which had already been started
and lying stranded on account of lack of domestic supplies of
natural gas.
81. Historically, oil production had been undertaken by
major oil producing companies in the private sector52. Their
relationship with sovereign owners of such petroleum resources
has changed over one hundred years of struggle of the
sovereigns. These struggles reveal nine zones of problems or
great mischiefs that can occur: (1) of oil companies not
producing even after discovery and not relinquishing the area of
exploration; (2) of oil companies forming into pools and trusts to
reduce production levels and keep the market prices at a high
level;53 (3) of oil companies financing armed revolutions and
interfering in political aspects; (4)of oil companies claiming
ownership rights over the areas in which oil could be produced
from; (5) of oil companies claiming permanent rights to extract
52 Ernest E. Smith & John Dzienkowski, “A Fifty Year Perspective on World Petroleum Arrangements”
24 TEX. INT'L L. J. 13 (1989). This is a broad survey of the history of this industry post nationalization of
Mexican Oil Industry and the citations therein are very valuable resources.
53 In United States legislature and courts combated with development of anti-trust jurisprudence. See
Ernest E. Smith & John Dzienkowski, ibid. Also see Oswald Whitman Knauth: The Policy of United
States Towards Industrial Monopoly, Bibliolife (2010).
193
petroleum resources in-situ and taking the physical quantities
away for marketing elsewhere; (6) of under development of
facilities for refining the petroleum and the Nation not having
access to channels to market and distribute the resources;54 (7)
of deception by oil companies via low posted prices, and thereby
reducing the royalty payments to the sovereign owners and
reaping higher rewards in downstream activities that were also
controlled by the oil companies; (8) sovereign owners not having
any rights to determine what levels of production can take place
and without rights in management of petroleum operations; and
(9) joint off take agreements between oil companies and
downstream divisions amongst them that controlled production,
at an international level, keeping posted prices low so that even
if sovereigns tried to take over the industry, they could be beaten
down with production from elsewhere.55
82. In response to such great mischiefs, different types of
arrangements have emerged between sovereign nations and oil
producing companies. The philosophical and operational
54 The great mischiefs 3 to 6 led to nationalization of the oil industry in Mexico, in 1938. They also led to
the first modern declaration that all natural resources belong to the people as a nation and to be used for
national development and substantively informed the progress in international law , led by former
colonies, that the people in those lands are the rightful owners and should benefits from the use of such
resources.
55 Ernest E. Smith & John Dzienkowski, supra note 52.
194
differences are with respect to: (1) the lengths of time over
which exploration could take place and the requirement that after
the initial period, if requisite exploration is not undertaken or
does not result in a commercially exploitable discovery, the
return of the contract area; (2) nature, extent and mode of
participation in management of the petroleum operations; (3)
participation in price setting and price modulation functions,
through both administered price mechanisms and also through
varying the quantity available in the market; (4) setting up of a
financial system between the oil produces and the sovereign
involving various parameters such as the tax regime, royalty
structures, and sharing of production – the last one being in
terms of physical quantities or in terms of realized value after
sales; and (5) assertion of sovereign ownership rights of both insitu
and also of extracted resources. These parameters obviously
vary across various regimes and jurisdictions. These aspects
enter into the complex conspectus of factors with respect to
negotiations of particular arrangements. Factors such as levels of
competition for exploration activities on a global scale at the time
of such negotiations, the certitudes of fiscal systems proposed,
assessments of the hydro-carbon potential (which in turn
195
depends upon historical discoveries already made and extracted
from) etc., would play a role in the particular bargain as Learned
Solicitor General Shri. Gopal Subramaniam stressed.
83. Scholars and experts divide the modern agreements
between sovereign nations and oil companies into specific types
of agreements. However, as experts point out, there is often a
considerable overlap. As Prof. Ernest E. Smith and John S.
Dzienkowski point out:
“....there are four basic arrangements
between host countries and multinational oil
companies…. (1) the concession; (2)the
production sharing agreement; (3) the
participation agreement, and (4) the service
contract. Although each of these four
arrangements can be used to accomplish the
same purpose, they are conceptually different
from each other. They provide for different
levels of control by the company, different
compensation arrangements, and different
levels of state oil company involvement. It is
important to note, however, that some
existing agreements have borrowed clauses
and concepts from two or more of the types
of arrangements. Thus precise categorization
of a particular country’s arrangements is not
always possible.”56
56 Ernest E. Smith & John Dzienkowski, supra note 52
196
84. The principal themes in production sharing contracts
would appear to be that the sovereignty over the petroleum
produced continues to be with the nation, and the contractor
bears varying levels of and forms of risk with respect to
exploration activities and what is allowed to be recovered as
costs (called Contract Costs) and to what extent in each year
(called Cost Petroleum). According to Daniel Johnston, who was
cited by Learned Solicitor General, Gopal Subramaniam:
“contractual arrangements are divided into
service contracts and production contracts.
The difference between them depends on
whether or not the contractor receives
compensation in cash or in kind (crude). This
is a rather modest distinction and, as a result,
systems on both branches are commonly
referred to as PSC’s or sometimes production
sharing agreements (PSA’s)”
85. One authentic source has been the United Nations. In
a document titled “Alternative Arrangements for Petroleum
Development: A Guide for Government Policy-makers and
Negotiators”57 published by the United Nations Centre on
Transnational Corporations it has been stated:
57 UN Document No. ST/CTC/43, Sales No. E.82.II.A.22
197
“almost all forms of agreements between
Governments of host countries and foreign oil
companies increasingly reflect the
Government’s objectives of greater
participation, greater control over operations
and a greater share.”58
“Sharing of net revenue generated by
petroleum exploitation has been a constant
source of conflict between Governments and
oil companies….. A certain proportion of the
gross revenue must be set aside to repay
capital costs of exploitation and field
development to meet current operating
costs…. The remainder of sales revenue is
then available to provide a return to the oil
company and to provide income to the State.
The Government, in its role as sovereign and,
in most cases, as owner of the petroleum
resource, expects to retain the bulk of such
rent and to restrict profits of oil companies to
that which is required to attract the
companies investment”59
“Even more variety appears in the provisions
that determine how net revenue is shared if
production is undertaken. Inspite of the
variety, most payments can be classified in
one of two types: payments based on
profitability and payments based on
production.”60
The present PSC is required to be interpreted and understood
with this background in mind.
58 Ibid page 5, para 15.
59 Ibid page 14, para 48
60 Ibid page 16 para 57
198
86. We now turn to an analysis of the constitutional and
statutory matrix in which the question “whose gas is it anyway?”
needs to be addressed.
87. The natural gas, under dispute in these proceedings, is
being mined from deep beneath the sea bed, off the eastern
shore of India. Thus, it is a resource that falls squarely within the
purview of Article 297 of the Constitution of India and is explicitly
noted so in the PSC. Article 297 of the Constitution declares that
“All lands, minerals and other things of value underlying the
ocean within the territorial waters or the continental shelf or the
exclusive economic zone shall vest in the Union, to be held for
the purposes of the Union”. This Article of the Constitution is
unique as it is the only such provision in the Constitution that
addresses a particular inclusive set of potential resources in a
particular class of geographic zones. It goes on to say that the
limits of those geographic zones “shall be such as may be
specified, from time to time, by or under any law made by
Parliament.” We need to appreciate the purport and meaning of
Article 297 of our Constitution as increasingly these resources in
the geographic zones specified by it are going to be tapped,
199
because of technological developments enhancing the capacities
of the nation.
88. While the word “vest” could normally partake of at least a
portion of the full bundle of rights associated with ownership, the
phrase “shall vest” as used in Article 297 of the Constitution
implies a deliberate, and not an incidental, act by a body at the
various constitutional moments that have informed our
Constitution. That body is the people as a nation. It is now a well
established principle of jurisprudence that the true owners of
“natural wealth and resources” are the people as a nation. U.N.
General Assembly Resolution 1803 (XVII) of December 1962
states that the “right of the people and nations to permanent
s overeignty over t heir natural wealth and resources m ust be
e xercised in the interest of t heir national development and the
w ell-being of the people of the S tate concerned.” (emphasis
supplied) Consequently, we have to hold that it is the people of
India, the true owners, who have vested, the inclusive set of
potential resources in a particular class of geographic zones, in
the Union, and that it is an act of trust and of faith, with a
specific set of instructions.
200
89. Those instructions are inscribed, nay genetically encoded
and hardwired, in the commands “to be held” “for the purposes
of the Union.” The core and pure purport of the word “hold” is to
conserve, to preserve and to keep in place and it only secondarily
means ‘use’ or ‘disposal’. The fact that the phrase “be held” is
used in Article 297 of the Constitution, whereas in Article 298 of
the Constitution, in its immediate neighborhood, the word “hold”
is used in conjunction with abilities to “acquire” and “dispose” is
significant and a clear indication of the intent of the supreme
drafter of the Constitution – the people. The use of a series of
words in a Constitutional setting clearly implies that they are
being used precisely, so that overlapping meanings are to be set
aside and the purer and the core meanings be delineated. The
phrase “be held” when viewed along with the phrase “shall vest”,
which vesting was done by the people as a nation, can only mean
that it was used as a lock to conserve, to preserve and to keep in
place. And the key to that lock is also there in the same Article of
the Constitution: “purposes of the Union” which can only mean
the integrity, unity and development of the nation.
201
90. Within the context of international law, there has emerged
a body of thought under the broad rubric of Human Rights, that
the people as the true owners of natural wealth and resources,
ought to exercise a “permanent sovereignty” i.e., the power to
make laws, over such resources to ensure national development
and well being of the people. The responsible use of such natural
resources for the well-being of the people of a nation has been
seen as an important aspect of maintenance of international
peace and a part of their right to “self determination”61. Further,
these rights of the people as Nations have been secured by
many struggles for self-determination over millennia. Those
rights encompass the freedom of self-determination through a
democratic order within the boundaries of the nation-state and
the imperative of such self-determination in inter-se and yet
interdependent zones of co-existence between nation-states.
91. In Association of Natural Gas (supra), a Constitution Bench
speaking through Balakrishnan, J.( as he then was) said:
“…. The people of the entire country has a
stake in the natural gas and its benefit has to
61 . See UN General Assembly Resolution 523 (vi) of January, 1952, 626 (vii) of December, 1952, 1314
(xiii) of December, 1958, 1515 (xv) of December, 1960 – all specifically referred in Resolution 1803 on
Permanent Sovereignty
202
be shared by the whole country. There should
be just and reasonable use of natural gas for
national development.”
92. Article 38 of the Constitution, a Directive Principle of
State Policy, states that: “(1) State shall strive to promote the
welfare of the people by securing and promoting as effectively as
it may a social order in which justice, social, economic and
political, shall inform all the institutions of the national life.” And
further it is stated that the “State shall, in particular, strive to
minimize the inequalities in income and endeavour to eliminate
inequalities in status, facilities and opportunities, not only
amongst individuals but also amongst groups of people residing
in different areas or engaged in different vocations.” Thus, we
can see that Article 38, though not enforceable in any court, but
nevertheless fundamental in governance, codifies a part what the
Preamble sets forth as the goal of the nation i.e. national
development as both a process and a situation in which
conditions of complete justice prevail. These conditions are
essential for maintenance of social order in which our people can
live with dignity and fraternity. National Development has been
203
conceived as welfare of the people; a concept of welfare that
subsumes within itself the benefits of the conditions of justice.
93. The structure of our Constitution is not such that it
permits the reading of each of the Directive Principles of State
Policy, that have been framed for the achievement of conditions
of social, economic and political justice in isolation. The structural
lines of logic, of ethical imperatives of the State and the lessons
of history flow from one to the other. In the quest for national
development and unity of the nation, it was felt that the
“ownership and control of the material resources of the
community” if distributed in a manner that does not result in
common good, it would lead to derogation from the quest for
national development and the unity of the nation. Consequently,
Article 39(b) of the Constitution should be construed in light of
Article 38 of the Constitution and be understood as placing an
affirmative obligation upon the State to ensure that distribution
of material resources of the community does not result in
heightening of inequalities amongst people and amongst
regions. In line with the logic of the Constitutional matrix just
enunciated, and in the sweep of the quest for national
204
development and unity, is another provision. In as much as
inequalities between people and regions of the nation are inimical
to those goals, Article 39(c) posits that the “operation of the
economic system” when left unattended and unregulated, leads
to “concentration of wealth and means of production to the
common detriment” and commands the State to ensure that the
same does not occur.
94. The concept of equality, a necessary condition for
achievement of justice, is inherent in the concept of national
development that we have adopted as a nation. India was never
meant to be a mere land in which the desires and the actions of
the rich and the mighty take precedence over the needs of the
people. The ambit and sweep of our egalitarian ideal inheres
within itself the necessity of inter-generational equity. Our
Constitutional jurisprudence recognizes this and makes
sustainable development and protection of the environment a
pre-condition for the use of nature. The concept of people as a
nation does not include just the living; it includes those who are
unborn and waiting to be instantiated. Conservation of resources,
especially scarce ones, is both a matter of efficient use to
205
alleviate the suffering of the living and also of ensuring that such
use does not lead to diminishment of the prospects of their use
by future generations.
95. The statutory matrix dealing with natural gas and
other petroleum resources also clearly indicates the importance
of such permanence of sovereignty. The Territorial Waters
Continental Shelf, Exclusive Economic Zone and Other Maritime
Zones Act, 1976, the Oilfields (Regulation & Development) Act,
1948 and the Petroleum and Natural Gas Rules, 1959, all
emphasise the importance and duty of the GoI to conserve and
develop mineral oils, including natural gas.
96. As we have noted above, Article 297 of the
Constitution is a special provision which leads us to conclude that
the powers granted to the Union to hold the resources for
purposes of the Union casts special obligations over and above
what are normally affixed with respect of all other resources that
the Union may be permitted to act upon pursuant to Article 298.
We hold that under Article 297 of the Constitution, the Union of
India can indeed enter into contracts for the identification,
development and extraction of resources in the geographic zones
206
specified therein. However, such activities can only be premised
on the key therein to unlock those resources: for the purposes of
the Union.
97. Much of the jurisprudence regarding restrictions of
powers of the State in using natural resources has arisen from
the concept of “public trust.” Prof. Joseph Sax has said:
“[t]he idea of a public trusteeship rests upon
three related principles. First that certain
interests….. have such importance to the
citizenry as a whole that it would be unwise to
make them the subject of private ownership.
Second that they partake so much of the
bounty of nature, rather than of individual
enterprise, that they should be made freely
available to the entire citizenry, without
regard to economic status. And finally, that it
is a principal purpose of government to
promote the interests of the general public
rather than to redistribute public goods from
public uses to restricted private benefits….”62
98. The concept of public trust actually finds its genesis
with respect to the ocean and waters, and some have even
traced this concept to the Ch’in Dynasty in China (249-207 BC)
and the Roman Justinian Institutes. This has been extended
substantially, and the broader notion now is that the State really
62 Joseph L. Sax, Defending the Environment: A Strategy for Citizen Action (1971).
207
is acting only in a fiduciary capacity. “The message is simple: the
sovereign rights of the nation-states over certain environmental
resources are not proprietary, but fiduciary.”63
99. In light of the public trust elements so intrinsic to resources
under the sea-bed, and the special nature of Article 297, the
implications of natural gas for India’s energy security, and the
imperatives of national development – including the concepts of
egalitarianism and promotion of inter-regional parity, we hold
that the Union of India cannot enter into a contract that permits
extraction of resources in a manner that would abrogate its
permanent sovereignty over such resources. It is not just a
matter of mere textual provisions in a contract or a statute. It is
a matter of Constitutional necessity. We hold that with respect to
the natural resources extracted and exploited from the
geographic zones specified in Article 297 the Union may not: (1)
transfer title of those resources after their extraction unless the
Union receives just and proper compensation for the same; (2)
allow a situation to develop wherein the various users in different
63 Peter H. Sand Sovereignty Bounded: Public Trusteeship for Common Pool Resources. Also
seeTurnipseed, Roady, Sagarin & Crowder: The Silver Anniversary of the United States Exclusive
Economic Zone – Twenty Five Years of Ocean Use and Abuse, and the Possibility of a Blue Wtare
Public Trust Doctrine., Energy Law Quarterly Vol. 36:1 (2009).
208
sectors could potentially be deprived of access to such resources;
(3) allow the extraction of such resources without a clear policy
statement of conservation, which takes into account total
domestic availability, the requisite balancing of current needs
with those of future generations, and also India’s security
requirements; (4) allow the extraction and distribution without
periodic evaluation of the current distribution and making an
assessment of how greater equity can be achieved, as between
sectors and also between regions; (5) allow a contractor or any
other agency to extract and distribute the resources without the
explicit permission of the Union of India, which permission can be
granted only pursuant to a rationally framed utilization policy;
and (6) no end user may be given any guarantee for continued
access and of use beyond a period to be specified by the
Government.
100. Any contract including a PSC which does not take into
its ambit stated principles may itself become vulnerable and fall
foul of Article 14 of the Constitution.
101. Based on the above discussion, we now turn our
attention to the specific PSC under consideration in this case.
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From a broad consideration of the provisions therein, as
discussed below, we cannot on the face of it deem that the PSC
is in contravention of the Constitutional values enunciated above.
The subsequent policy decisions of GoI in no manner derogate
from covenants of the PSC.
102. The PSC itself specifically recognizes that the interests
of India are of paramount importance. Recital 6 of the PSC states
that the “Government desires that the petroleum resources…… be
discovered and exploited with utmost expedition in the overall
interests of India and in accordance with Good International
Petroleum Industry Practices”. Further, the PSC also places an
affirmative obligation on the Contractor, in Article 8.3(k) to “be
always mindful of the rights and interests of India in the conduct
of Petroleum Operations”. Article 32.2 specifically states that
nothing in the PSC shall “entitle the Contractor to exercise the
rights, privileges and powers conferred upon it in a manner which
will contravene the laws of India.” We fail to appreciate, given
such a clear linkage between the PSC and the constitutional
imperatives, Shri Jethmalani’s argument that GoI’s policy
initiatives violate the terms of the PSC and sanctity of contracts.
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103. Does a Production Sharing Contract only mean a
sharing of physical quantity of natural gas as contended by
RNRL? What does this PSC provide?
As discussed earlier, it is clear that a wide variety of
instruments have come to be called Production Sharing Contracts
and there is no specific concordance between that title and what
is actually shared pursuant to a PSC. In light of that discussion
and the general acceptance that revenues are also shared in the
context of Production Sharing Contracts, the insistence of RNRL
that only production i.e., physical volume of gas can be shared
under any production sharing contract may have to be held to be
unsustainable.
104. One of the bigger sources of confusion has been the
manner in which the word Petroleum has been used in the
specific PSC under consideration. The word Petroleum, referring
to crude oil or natural gas as the case may be, is used in two
senses in different parts of the PSC: as a physical product and
also in terms of the monetized value. However, when the word
Petroleum has been used in conjunction with the words Cost and
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Profit, the definitions in this PSC clearly indicate that reference is
to the monetized value of the physical product i.e., the units of
the physical quantity multiplied by the sale price at which the
physical quantity is sold at. Article 1.28 of the PSC defines “Cost
Petroleum” to mean “the portion of total value of the Crude Oil,
Condensate and Natural Gas produced and saved from the
Contract Area which the Contractor is entitled to take in a
particular period, for the recovery of Contract Costs as provided
in Article 15”. Article 1.77 of the PSC defines “Profit Petroleum”
to mean “the total value of Crude Oil, Condensate and Natural
Gas produced and saved from the Contract Area in a particular
period, as reduced by Cost Petroleum and calculated as provided
in Article 16.” Reading Articles 2.2, 8, 15 and 16 of the PSC
together, it would have to be concluded that under this PSC the
contractor is only entitled to cost petroleum and share of Profit
Petroleum in terms of realized value from sale of Petroleum i.e.
natural gas in this case, and not to a share in physical quantities
of Petroleum.
105. As pointed out by the Learned Additional Solicitor
General, Shri. Mohan Parasaran, in some previous PSC’s the
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word volume had been used instead of value, but that has been
specifically changed. The change in the wording is of great
significance. PSC’s and such instruments are model contracts
that are developed and written to reflect particular policy
decisions and we have been informed by the counsel of UoI that
it was laid on the floor of the Parliament. This implies that the
Government is of the view, that the entire range of activities
being contemplated by the Policy and the PSC itself to be of such
importance that they also be noticed and commented upon, and
if necessary acted upon, by the Parliament as a whole.
Consequently, we are of the opinion and hold that such Contracts
be very carefully examined and interpreted so as to not disturb
the most obvious meanings ascribable. The two words in
question here are “volume” and “value,” which need to be
appreciated.
106. The word “volume” when used in scientific contexts
would normally mean physical dimensions on three coordinate
axes; in business and industrial parlance it is also used to reflect
the total quantity of some physical produce. The word “value”, on
the other hand, implicates the meaning of both intrinsic capacity
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to provide some utility, and also the value derived in the context
of exchange in the market place. The word “value” and the
phrase “total value” when used in the context of commerce
would normally only reflect the monetized sum that is derived by
multiplying the number of units of a physical product with the
sale price. This distinction is clearly stated in P. Ramanatha
Aiyar’s “Advanced Law Lexicon” (3rd Ed. 2005) as follows:
“Volume: “…Term often confused with turnover,
although in some instances they may be used to
mean the same thing. Strictly, volume is the
number of units traded, whereas turnover refers
to the value of the units traded. On the
commodities market, however, volume refers to
the quantity of soft commodities traded, and
turnover refers to the tonnage of metals traded
over a particular period of time.”…. Number of
units traded (as opposed to turnover, which is the
value of the units traded, although the terms are
sometimes interchanged). (International
Accounting)
Whereas, Value is said to be : “The expression
“VALUE” in relation to any goods shall be deemed
to be the wholesale cash price for which such
goods of the like kind and quality are sold or are
capable of being sold for delivery at the place of
manufacture and at the time of their removal
therefrom……”
Also, according to Black’s Law Dictionary, Value is said to be:
“1. The significance, desirability or utility of
something. (as a noun).
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2. The monetary worth or price of something; the
amount of goods, services or money that
something will command in an exchange. 2. The
significance, desirability, or utility of something.
3. Sufficient contractual consideration. (Black, 7th
Edn. 1999)”
107. In as much as the words “volume” and “value” have
different connotations and meanings, though occasionally they
may have some overlap, the fact that one was replaced by the
other implies that the meaning ascribable in the context of this
PSC should eliminate the overlap. Consequently it can only be
understood that the word “value” is being used, in the PSC, to
mean the monetized value of the physical quantity that is a
resultant of multiplying the quantity of Petroleum (crude oil or
natural gas) produced, saved and sold in the market (as
discussed below) at a “price.” The words produced and saved
are first used in the phrase “Petroleum Operations” defined in
Art. 1.74 of the PSC, wherein it is stated that Petroleum
Operations mean, as “the context may require, Exploration
Operations, Development Operations or Production Operations or
any combination of two or more of such operations, including
construction, operation and maintenance of all necessary
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facilities….. environmental protection, transportation, storage,
sale or disposition of Petroleum to the Delivery Point…. And all
other incidental operations or activities as may be necessary.”
Further Article 21.6.1 specifically states that the Contractor “….
shall endeavour to sell all Natural Gas produced and saved…”
This indicates that the entire set of all Petroleum Operations are
to end in a sale at the Delivery Point; so it has to be concluded
that the phrase “produced and saved” in the PSC encompasses
the activity of sale of natural gas. Consequently, the phrases
“Total Value”, “Cost Petroleum” and “Profit Petroleum” can only
be interpreted as having been used to denote the monetary value
realized after the sale of natural gas at the delivery point.
108. The change in the wording clearly implies that under
the PSC by making the “value” of the natural gas produced,
saved and sold as what is to be shared, the intention of the
Government was to ensure that the “volume” i.e., the physical
quantities remain outside the purview of what is to be shared
between the Contractor and the Government. Consequently,
under this PSC, RIL has no rights whatsoever to take physical
quantities/volume of natural gas as a part of Profit Petroleum or
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Cost Petroleum, in as much as the contractor’s right to take
anything under the PSC can only be from the total value i.e.,
total revenue received from sale of natural gas.
109. The decision in Commissioner of Income Tax,
Dehradun (supra), relied upon by the Learned Senior Counsels
for RNRL is inapposite in the instant matter, for the reason that
the PSC that was under consideration in that particular case,
Cost Petroleum (Article 1.24 therein) and Profit Petroleum (Art.
1.69 therein) were defined in terms of volume and not value. The
observation of this Court in that decision that in Production
Sharing Contracts what is shared is physical oil was based on
that specific PSC. We have verified that contract also which was
placed before us and we do find the difference as submitted by
Shri Mohan Parasaran.
110. Under the PSC does the title get transferred to
Contractor on account of it expending monies on exploration,
development and production?
According to the Learned Senior Counsel for RNRL, in as
much as Article 27.2 of the PSC specifies that title “to Petroleum
to which the Contractor is entitled under this Contract and title to
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Petroleum sold by the Companies shall pass to the relevant buyer
party at the Delivery Point…..” it indicates that the title
automatically passes to the Contractor on account of the
Contractor having expended monies for exploration, development
and production activities. This is only a partial reading of the
PSC. Article 27.1 states that the “Government is the sole owner
of Petroleum underlying the Contract Area and shall remain the
sole owner of Petroleum produced pursuant to the provisions of
this Contract except as regards that part of Crude Oil,
Condensate, or Gas the title whereof has passed to the
Contractor or any other person in accordance with the provisions
of this Contract.” These clauses do not state that the title passes
through the contractor as an offset. Offset cannot be read into
these clauses by implications. All Petroleum Operations are
directed towards selling of Petroleum i.e. natural gas in this case
at the Delivery Point as discussed earlier.
111. The title pursuant to Article 27.1 of the PSC can pass
from the sovereign owner, the people of India, at the Delivery
Point upon a sale, and not as a matter of offset against any
incurred expenditure by RIL. The rights of RIL under the PSC are
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to recover its costs first, from sale of Petroleum, and that too
only up to a maximum of 90% of each year’s total value realised
from sale. In as much as the contractor under such a PSC takes
the risk that exploration costs cannot be recovered unless
petroleum is discovered in commercially exploitable form, this is
a continuation of the risk. For instance, the reservoir could stop
producing or its production could start to decline precipitously. If
the total volume of natural gas that is produced over the life of
the reservoir is very little or not sufficient and the market prices
are low, the Contractor would risk not recovering its investments.
Sale of Petroleum, is an integral part of Petroleum Operations
and hence selling of Petroleum is an obligation of the Contractor.
The question of an automatic offset of incurred expenditures to
effectuate an automatic transfer of title is not contemplated in
this PSC at all. The transfer of title can be only to entities within
a class of buyers specified by a utilization policy as discussed
below.
112. It should be noted, that in as much as title passes
only upon sale at the Delivery Point, the true owner, the people
of India acting through the Union of India have a sovereign right,
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that is tempered by public law, in determining the manner in
which that sale is effectuated. Public resources cannot be
distributed or disposed off in an arbitrary manner.
113. Does the GoI have the right to frame a Utilisation
Policy under this PSC?
RNRL has repeatedly argued that in as much as NELP
promised the freedom to market to the contractors and that is
what is provided in Article 21.3 of the PSC, and no other
utilization policy was put in place, RIL had the right to commit to
sell natural gas at its sole discretion. They argue that in this case
RIL chose to commit to RNRL, via the MoU and the Scheme.
Therefore, according to RNRL’s counsel, the GoI should not have
any right to interfere in this contractual commitment.
114. We disagree. The sale at the Delivery Point takes
place when the people of India are still the owners of the natural
gas and consequently they have the responsibility of ensuring
that they exercise their permanent sovereignty, through their
elected government, in order to achieve a broad set of goals that
constitute national development. While revenue generation is one
part of those objectives, that cannot be the only objective of
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India. Timely utilization, by users spread across many sectors
and across regions as the network of pipelines spreads and
conservation are all necessary objectives to be kept in mind. The
fundamental rationale of the PSC is “the overall interests of
India” and the obligation of the Contractor is to always be
mindful of the rights and interests of India.
115. Article 21.1 of the PSC makes it very clear that the
sales of Natural Gas have to be in accordance with a Government
Utilisation Policy and to the Indian Domestic Market.
“Subject to Article 21.264, the Indian domestic
market shall have the first call on the
utilization of Natural Gas discovered and
produced from the Contract Area. Accordingly
any proposal by the Contractor relating to
Discovery and production of Natural Gas from
the Contract Area shall be made in the
context of the Government’s policy for the
utilization of Natural Gas and shall take into
account the objectives of the Government to
develop its resources in the most efficient
manner and to promote conservation
measures.”
116. Article 21.1 clearly contemplates that the pool of
eligible buyers of natural gas extends to the whole of Indian
64 Article 21.2 gives the right to the Contractor to use a small part of the Natural Gas produced from the
Contract Area for purposes of Petroleum Operations such as reinjection for pressure maintenance in Oil
Fields, gas lifting and captive power generation required for Petroleum Operations i.e. for technical
purposes of extraction and saving of natural gas.
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domestic market. It does not speak of RIL having a right to
unilaterally decide who to sell to. Clearly, under the provisions
of Article 21.1 in the PSC, the Board Room of RIL or its internal
divisions do not constitute the Indian domestic market. That
phrase contemplates the entire class of eligible buyers in India.
117. Further, the said Article 21.1 proceeds to state that all
proposals of the Contractor for production, which includes the
activity of selling, shall take into account Government’s utilization
policy. We note that it does not say that the Contractor take into
account a government utilization policy only if there is one. It
mandates that the extraction and sale can only be in the context
of a utilization policy. Without a utilization policy that satisfies
the conditions of Article 297 of our Constitution, not even a cubic
centimeter of that natural gas can be sold, let alone the many
millions of cubic metres of natural gas that RNRL claims vested in
it as a matter of contractual right.
118. Consequently, we hold that under the PSC, unless the
Government actually sets out a policy regarding utilization of the
natural gas produced, it cannot be committed or sold to anyone.
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The freedom to market can only be exercised subject to the
utilization policy of the GoI.
119. Of what purport the approval by the MC of the PSC of
the Initial Development Plan?
RNRL also contends that because the Initial
Development Plan was approved by the MC of the PSC, and that
plan had specifically stated that natural gas produced from KGD6
would be used in their prospective power plant at Dadri, that
the GoI knew about the allocation for Dadri and therefore should
be presumed to have agreed to the same. That argument is
attractive but does not bear the scrutiny. First and foremost, the
IDP was only a proposal as to who could be the potential users.
Secondly, the proposal also specified that there could be other
users, especially those who have already started units that
needed natural gas and were stranded. The MoU and the extent
of natural gas that RNRL is demanding, completely denies the
rights of those users to a fair access.
120. Over and above that, under the PSC the right to
effectuate a utilization policy only vests with the GoI. Indeed, it
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cannot be any other way. The MC of the PSC is not the GoI to be
able to effectuate decisions which would have the ramifications of
policy, especially over a scarce resource with the kind of
implications across the constitutional spectrum that we have
delineated in this decision so far. In the instant case, what RNRL
had demanded, as of the first time that it filed the Company
Application was for 28 MMSCMD (and in the event that NTPC
contract did not go through then 40 MMSCMD) and the Option
Volumes of 40% of all the gas to be ever produced by RIL under
any contract with the GoI. The notion that two nominees of the
GoI can effectuate policy decisions of such a nature, in the
context of their role as members of the Management Committee
to effectuate the working of a PSC, is simply untenable and
impermissible.
121. The IDP itself was proposed way back in the year
2004 and the production started only in 2009. The fact that there
was no Government Utilisation Policy in place has a direct
connection to that lengthy gap. Over such a time frame, many
new developments, including the increase of supply of gas,
newer sources, depletion of older sources, availability of gas from
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other sources etc., could have as well taken place. There would
have been no way for the GoI to know who would be the
potential users, what are the needs of the nation, inequities
between regions, how the network of pipeline would develop –
those and many other such factors play a role in determining the
policy. In such circumstances, one cannot imagine how the GoI
could have framed a Utilisation Policy with respect to intersectoral
needs, the requirements arising from strategic
considerations or some other necessary factor that would be
needed to be taken into consideration so many years ahead of
actual production.
122. The Silence and the Noise of Various Government
Officials:
The Learned Senior Counsel for RNRL also argued, very
vehemently, that the GoI had remained silent for a very long
time, and even though it knew that RIL was making
commitments to its internal divisions, said and did nothing. From
this, they attempted to draw the implication that the GoI had
agreed to RIL making such commitments to its own internal
divisions. They went even further. They claimed that in the
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atmosphere of such a silence, RIL and the gas based energy
producing division within RIL could make and indeed have made
such allocations and that such a silence implies that rights have
vested in them. That is an unsustainable argument. It is not
uncommon for government agents to remain silent, even though
the instruments under which private parties get rights to exploit
natural resources provide otherwise and impose restrictions that
are being flouted. This happens many a times, and for obvious
reasons. That cannot become the basis for evisceration of policy
making rights of the GoI. And in this case, it involves a scarce
resource in such massive quantity, that is almost 50% of what
had been available throughout the country for use by all the
other users in the previous decade, that silence by officials of GoI
cannot and ought not to be given any weight at all.
123. It was also argued by the learned senior counsel for
RNRL that various utterances by senior officials and replies by
some Ministers in the Parliament indicate that the Government
knew that the PSC provided the kinds of rights to RIL that RNRL
claims in order to sustain its demands. The short answer to that,
in the context of this case is: it does not matter. At best, they
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may suggest that the Ministers concerned may need better
advisors from the permanent machinery.
124. The courts cannot be solely guided by the replies
given by Ministers in the Parliament, in response to queries by
Members, to appreciate and interpret the covenants in the PSC.
When the covenants evidently carry a plain meaning which could
be gathered from what the instrument itself has said, such
responses cannot be used to interpret the terms of a contract.
The answers, at the most, may reflect the opinion of an
individual minister and they would have no bearing on the
interpretations to be placed by the courts. At any rate, the courts
are not bound by the answers so given to interpret the
instruments. The decision in Emperor v Sibnath Banerjee &
Ors.65, relied upon by Shri Jethmalani is not an authority for the
proposition that the courts are bound by such statements made
in the House in response to queries by members. The decision
merely holds that such answers were “admissible under Sections
17, 18 and 20 of the Indian Evidence Act.”
65 .AIR 1943 FC 75
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125. Is the Price Formula/Basis For Valuation to determine
government Share or For Sale of All Natural Gas?
It was argued on behalf of RNRL that the provisions of
Article 21.6 titled “Valuation” can be read to mean that the right
of the GoI to approve a “price formula/basis” is only to enable it
to place a value on natural gas to be able to determine its own
physical share of the natural gas, and that consequently, RIL was
free to sell it at whatever price it may to sell it at, so long as the
price is an “arms length price.” RNRL also claims that the price
fixed with respect to commitments to supply natural gas at USD
2.34/mmBtu well head price should apply, because that was the
only contemporaneous arms length price that was available for a
determination of what price RNRL should be paying.
126. This is yet another strained interpretation that defies
credulity. In a lengthy letter to Minister of Fertilisers and
Chemicals written by a Senior executive of RNRL in June 2007, it
was stated that a number of factors enter into price
determination, including spot, length of supply, quantity, delivery
point, price floor, and that even end use must be taken into
account. Obviously this set of factors is not all inclusive. In a
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seller’s market i.e., where natural gas is in acute shortage, the
options given to a buyer can have a huge bearing on the price.
The parameters between NTPC terms and RNRL are of a
significantly different order. First, the onerous “take or pay”
clause is a part of the NTPC contract but not the gas supply
agreements with RNRL, as repeatedly pointed out by Shri Salve.
Secondly, NTPC did not get the option to get quantities of natural
gas that were promised to some one else, in the event that
contract failed. Nor did NTPC get the right to receive 40% of all
future gas supplies that were likely to be produced from any gas
fields of RIL. Nor was the price for NTPC fixed in the confines of
a Board room. Moreover, when the MoU was executed, a few
years later the prices of natural gas all over the world had risen
considerably. If an international tender were floated at that point
of time, it would defy logic for RIL to bid at such a low price
level.
127. The terms of Article 21.6 et. seq. are clear. The first
one is a command that all the natural gas produced from KG-D6
is to be sold at “arms length sales price”, per Article 21.6.1.
There is a reason for such a requirement. Historically, oil
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companies and sovereigns have bickered over the posted prices
and joint off take agreements through which the real value
realized is hidden from the sovereign. The requirements of arms
length prices and arms length sales are to ensure that the
sovereign receives a fair share of the revenues. However, it may
not be possible to determine true arms length prices in all
situations, because a market may not have developed properly.
128. A spot market for natural gas for instance, which is
possible when a large quantity of natural gas is available in a
region, and distributed through a dense network of pipelines,
would be the best source for determination of arms length sales
prices because numerous transactions take place and records are
kept of the prices. Where such arms length prices are not
available or a sizable class of comparable transactions in the
recent past is also not available such as the one provided in
Article 21.6.2 (c), other methods have been chosen, including
formulas that link prices to basket of fuel oils or even to crude oil
as provided for in Article 21.6.3. All three Articles i.e., 21.6.1,
21.6.3 and 21.6.2(c) have to be read together. Article 21.6.2 (b)
provides for a situation in which natural gas is sold to nominees
230
of GoI, in which case the GoI would know the actual price. RNRL
is taking a clause that is provided to protect the GoI, in the event
that GoI is unable to determine whether it can assure to itself
that the Contractor has sold or is selling at the stated price and
conflating it to a right of RIL.
129. With regard to refusal of GoI to approve the proposed
sale price on parity with the NTPC bids, it is noted that RNRL has
not separately challenged it. The rejection was precisely on the
ground that it is not a competitive arms length price between two
unrelated parties, and was justified. At any rate as there is no
provision for sharing physical quantities, the question of
Government fixing the price for its share of gas does not arise.
EGOM Decisions:
130. The Empowered Group of Ministers framed a
utilization policy and also approved the price formula/basis
submitted by RIL. It was constituted pursuant to Business Rules
framed under Article 77(3) and its decisions are treated as the
decisions of the Cabinet itself. It is a policy decision of the
Government and has force of law since the field is not occupied
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by any legislation made by the Parliament. It is needless to state
that under Article 73 of the Constitution the powers of the Union
executive do extend to matters upon which the Parliament is
competent to legislate and are not confined to matters over
which the legislation has been passed already. There is no need
to dilate further on this issue since there is no independent
challenge questioning the validity of EGOM decisions. The
collateral attack leveled against EGOM decision cannot be
entertained notwithstanding the serious allegations of mala fides
made against some Ministries during the course of hearing of this
matter. The Government did not surrender its rights under PSC
to fix the price by way of approval. Nor do the decisions of EGOM
run counter to any of the covenants of PSC. The contention that
no policy decision could have been taken by the Government
retrospectively effecting the contractual rights needs no further
consideration for the simple reason that the decision of EGOM
does not run counter to the contract. The decisions cited in this
regard are not required to be gone into.
PART V
WHOSE COMPANY IS IT ANYWAY?
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131. We would have thought that the answer to this
question was settled in the early stages of evolution of corporate
form of organization. However, where an atmosphere of privilege
and of secrecy is allowed to be all pervasive, trust and capacity
for fiduciary action would consequently decline and this question
would have to be asked again. Whether it be social life or the
hurly burly of action in economic sphere, neither law nor force
can sustain a path of growth and development, if the capacity to
trust is consistently undercut by surreptitious activities.
132. Be that as it may, we now turn to some of the issues
that come up for our consideration with respect to matters
internal to RIL. They are not dispositive as to the main elements
of these proceedings, in as much as both Shri. Harish Salve and
Shri. Mukul Rohtagi had submitted that the issue of
governmental approvals was the key to the entire dispute. We
have already expressed our view about that set of questions.
Nevertheless, certain aspects of law and questions remain, on
account of the decisions of the courts below. We turn to those
issues.
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133. Of What Purport the “Gas Supply Arrangements” in
Clause 19 of the Scheme From the Perspective of Section 391?:
It has been a widely accepted principle that companies can
only transfer such rights, powers, duties and property as are
capable of being lawfully transferred by a party to a scheme; and
this determination has to be made as if the Companies Act, 1956
itself did not exist. Way back in 1958, Sachs J., had enunciated
that principle. Specifically he held, and it is worth quoting him inextenso:
“… It is not necessary in a scheme to exclude
specifically from its operation things incapable
of such transfer, as general words in the
scheme and any order in furtherance thereof
must be taken to operate in a manner not
repugnant to the general law…… If, however,
on a proper construction of the terms of a
scheme, some part of it happens, by
inadvertence, expressly to order an act which,
had there been no scheme, the parties could
not, either in relation to the interests of third
parties or otherwise, bind themselves to do,
then that part of the scheme would, in my
view, have to be treated as a nullity in so far
as it purports so to order. To my mind, this
latter principle equally applies where a
scheme expressly prohibits an act which the
parties could not, under general law…. bind
themselves to refrain from doing.”66
66 In the Estate of Skinner, (1958) 1 W.L.R. 1043.
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134. In this case, no definitive agreement for gas supply
was placed before the shareholders and indeed such an
agreement was not even promised or stated to be possible. No
sensible person, exercising judgment from within the sphere of
“commercial wisdom”, could have arrived at the conclusion that
the State in India could abrogate its responsibilities to frame
policies for utilization and pricing in the context of production and
distribution of an extremely scarce and a vital natural resource
and that in the context of such policies supply of gas between RIL
and RNRL could not have been interrupted or abrogated.
Consequently, if Clause 19 of the Scheme were to be read as the
imposition of the burden upon RIL to supply natural gas,
irrespective of governmental policies with respect to utilization
and pricing of natural gas, then it would have to be struck down
as a nullity.
135. Clause 19 of the Scheme makes a very important
distinction between agreements - which are more concrete - and
arrangements - which are amorphous and not certain. The
Scheme implicitly contemplated a situation in which the
arrangements for supply of gas may not occur or function to the
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full extent as desired. Governmental approvals and governmental
policies are set in the context of national welfare and
constitutional imperatives, and they cannot be said to be within
the control of any particular person or company. Does that mean
then that the Scheme with respect to the Gas Based Energy
Business, which is now RNRL, has become unworkable? We hold
that it has not become unworkable, but only that one part of the
Scheme, which was in any case in the nature of a contingent and
a highly uncertain event, has not come to pass for now on
account of events and powers beyond the capacity of those who
proposed the Scheme. Given the acute scarcity of natural gas in
India, and given the constitutional imperatives on the GoI, no
shareholder who was not naïve would, could or should have
relied on the certitude of natural gas supply from RIL to RNRL.
Clause 19 of the Scheme provides that “suitable arrangements”
would have to be made with respect to gas supply as opposed to
the more definitive “suitable agreements” with regard to “right to
use the Reliance logo” in the same clause. The word arrangement
as used in this context clearly only indicates a potential that may
or may not be realized and that is the only way it could have
been interpreted. The word ‘arrangements’ as used in Clause 19
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contemplates a complex set of mechanisms and would involve
many broad aspects, with a multitude of smaller parts, that may
or may not work, especially because of changed circumstances.
Hence, the phrase “suitable arrangements” has to be treated as
being amorphous, requiring flexibility, involving uncertainty and
even the potential that the results sought may not be achieved
or realized.
136. RNRL has argued vehemently that it will become a
shell company if it does not get natural gas from RIL and trade
with it, as it claims that was its main purpose and also claims
that would be a fair construction of the purport of the Scheme. A
Scheme must be understood and interpreted exactly in terms of
how a shareholder and a stakeholder who voted for it and
received shares after the demerger would have understood it.
137. In the Explanatory Statement to the Scheme, while
one of the purposes of RNRL as stated in its Memorandum of
Association is said to be dealing in the business of supply of gas,
it is only a part of the total business of buying, selling and
distributing a wide spectrum of fuels, with Natural Gas being just
one of them; moreover, when we turn to the second objective of
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the Memorandum of Association, it is clear that an equally
important purpose of RNRL is to “carry on, manage, supervise
and control the business of transmitting, manufacturing,
supplying, generating, distributing and dealing in electricity and
all forms of energy and power generated by any source, whether
nuclear, steam, hydro, or tidal, water, wind, solar, hydrocarbon
fuel, natural gas or any other form kind or description.”
Consequently we fail to see how RNRL can claim that it was set
up only to obtain natural gas from RIL and then to trade with it
within the ADA Group, or that any one who reads the Scheme
can understand it in that manner.
138. The arguments made by RNRL that it has not been
able to set up the mega gas based power plant at Dadri because
it did not get bankable agreements from RIL are unpersuasive.
First and foremost, it would seem extremely unlikely that
bankers do not understand that there are always supply risks
associated with natural gas in a country like India, whether that
be on account of GoI’s policies or otherwise. It is also observed
that others have started gas based energy generation plants and
they have faced equally serious uncertainties, if not more.
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Furthermore, we have not been given one single document that
shows denial of financing on account of lack of definitive natural
gas supplies. Additionally, we were also informed that significant
amounts of monies have been raised, and accepted as a fact by
RNRL’s counsel, both here in India and abroad and yet
admittedly not even a brick has been laid at Dadri for the power
project for which natural gas was first sought and RNRL claims its
rights begin from.
139. RNRL also filed an information document for the
issuance of its GDR’s at Luxembourg in which it specifically
claimed that the risks that it would face include the fact that
Governmental Approvals for gas supply arrangements with RIL
may not come through. These are business risks associated with
scarcity of natural gas and the necessity of national policy. These
risks are attendant upon every entity that wants to rapidly
expand. We see no reason to conflate that general condition
which affects everyone in the Indian economy, to an issue of
workability of the Scheme itself.
140. Can the MoU be binding on the company?:
239
It is absolutely clear that the MoU was executed in the
private domain, with the help and aid of a lawyer and then
marked confidential. Further, the individuals, from all indications
have only executed it in their individual capacity and it was not
purported to be in exercise of their positions in RIL or any other
company of the Reliance Group. It is also very clear that the MoU
itself recognizes that the reorganization that the promoters
sought would have to be routed through the Board. The
promoters also had the right to apply for a Scheme of
Rearrangement under Section 391 of the Companies Act, 1956,
in which case the mode of shareholder approvals and the classes
formed would have been entirely different. As Shri. Rohinton
Nariman points out, the MoU is an agreement between three
promoters, and the Scheme is between two million shareholders,
all of the same equity class and hence the MoU cannot now be
imported into the Scheme. Otherwise the promoters who under
the Scheme were the same as any one else would now become
special, thereby negating the very concept of class of members
with similar interests voting on a proposal for reorganization.
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141. The minutes of the meetings of the Board of RIL
dealing with various issues concerning the reorganization do not
reveal anywhere whether the Board as a collective body ever
took note of and approved the MoU. This is not a mere
technicality. There is a certain legal sanctity associated with it, in
the first place, in the form of presumptions that flow from
Sections 193, 194 and 195 of the Companies Act, 1956 that they
are an accurate record of the proceedings. The collective decision
making, at a conjoint sitting allows for exchange of ideas. The
idea of the Board working as a collective is also about the
process of sharing of views and arriving at collective decisions to
protect and enhance the interests of all the shareholders. And in
the very first meeting, albeit on the same day that the MoU was
announced, the various Directors of RIL after thanking KDA, quite
effectively severed any umbilical cord that the eventual Scheme
might have had with the MoU, when they asserted that any
reorganization can only be premised on protection of the value of
all the shareholders. There is not even a whisper of protection of
a broader class of shareholders in the MoU. This is not some
mere technicality; but a fundamental philosophical and attitudinal
approach with regard to arrival at the decision to reorganize the
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businesses. The duty to protect the interests of the shareholders
is cast upon the Board, and the Board has to act in a fiduciary
capacity vis-Ã -vis the shareholders. This duty has been a part of
broader understanding of company law from the days of
Settlement Companies67 that were the precursors of joint stock
companies. What RNRL is demanding, by implications that follow
the insertion of the gas supply section of the MoU in Clause 19 of
the Scheme, is that the Board of RIL only acted at the behest of
the promoters and were mere rubber stamps of the decisions of
the promoters. Acceptance of such demands would destroy the
fabric of company law itself and the foundations of trust, faith
and honest dealing with the shareholders. The actions of the
Board of RIL clearly indicate that it did not conceive its role in
that manner.
142. It is quite obvious, from the MoU itself, that the
promoters family had a number of personal issues to settle,
amongst which the issue relating to businesses and ownership
over them was but one. It is also equally obvious that what has
been revealed is but a portion of the total document. If such a
67 See part 1.103 – 1.104 of Palmer’s Company Law, page 1011, 25th Edn. Vol.1.
242
document were to be filed as a proposal for arrangement, it
would have to be thrown out at the very inception. The
differences in details of the proposals for demerger as contained
in the MoU, when contrasted with that of the Scheme, are
staggering. Where no reasons for reorganization are adduced in
the MoU, apart from a statement that having settled all the other
family and other business related issues the best way forward
would be a reorganization, it is the Scheme as framed and
approved by the Board which provides the justifications. The
Scheme specifies that each of the businesses carry different sets
of risks and prospects, and that they could attract different sets
of investors, that a focused management is needed to enhance
the prospects of each business, etc. Finally, it is the Board which
recommended the Scheme to the shareholders saying that it
would benefit them.
143. The fact that the Board asked that an analysis of the
pros and cons of such a reorganization be undertaken by the CG
Committee of Independent Directors, along with the command
that they propose a scheme of reorganization if any, with the
help of professionals to study the various businesses and the
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implications with respect to statutory and legal issues, is prima
facie evidence of independence and application of the mind.
Further, from the record it can be gleaned that the CG
Committee with the help of professionals framed an outline of a
Scheme, executed by representatives of both the MDA and the
ADA Group and on that count too, it would have to be held that
the Scheme was something more and fundamentally different
from the MoU.
144. Clinchingly, with respect to the most contentious
aspect - governmental approvals - which RNRL claims were not
necessary, the minutes reveal that the Board actually
commanded that it be made sure that any gas supply
agreements, including terms of price, tenure etc., be subject to
such approvals. Moreover, if MoU is considered, it actually runs
counter to the entire claim of RNRL that it formed the basis of the
Scheme regarding gas supply also in as much as the Board
approved a Scheme in which the only provision with respect to
gas supply was for a plan to set some uncrystallised “suitable
arrangements” in place. If the Board had agreed to the
commercial terms of agreement, as contained in the gas supply
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section of the MoU, then it would have been mandatory upon
them to reveal the same to the shareholders of RIL, because of
the sheer scale of monetary value of the gas supply contracts.
RNRL itself claims that the potential monetary value of such gas
supply arrangements could run into many thousands of crores of
rupees, and we fail to see how prospective agreements involving
such huge value, in which commercial terms are claimed to have
been settled, cannot be revealed to the shareholders in the
context of a scheme of arrangement. No rationale or justification
can support such a proposition.
145. The Companies (Amendment) Act, 1965, based on the
recommendations of Daphtary-Sastri Committee specifically
provided that the applicants for a scheme shall “disclose by
affidavit all material facts”. (See: Section 391(2) of the
Companies Act, 1956). In as much as the terms and conditions of
gas supply, as specified in the MoU, were not specifically
informed to all the shareholders and stakeholders, including in
this case the GoI (as a party to the PSC), we simply fail to see
how the MoU can be read into the Scheme itself. It doesn’t
matter whether one calls MoU the guiding light or a tool for
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interpretation or a foundation – the sheer fact that the terms of
gas supply contained in the MoU were withheld from the
shareholders implies that it cannot now be imported into the
Scheme. The argument that contracts are entered into all the
time, and are treated as day to day affairs for the management
and the Board, fails at the point of division of a company. Where,
in regular times a shareholder or a stakeholder can demand and
obtain information and have time to try and monitor such
contracts and the actions of the management, the act of hiving
off an undertaking is a much more crucial point, when the
shareholders have to be even more careful about the transfer of
value. The whole purpose of Section 293 which prohibits the
Board from hiving off an undertaking without shareholders
approvals, is to prevent such transfers being effectuated on a
permanent basis without the knowledge of the shareholders. The
very essence of the requirement that all material facts be
disclosed would have been decimated. Consequently, we hold
that the Scheme as propounded by the Board, placed before and
approved by shareholders and stakeholders and sanctioned by
the court is completely different from the MoU. The MoU may
have been the starting point. The end point is significantly,
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substantially and materially different from it and it cannot now be
brought back in the guise of interpretation.
146. Does the MoU support the contentions of RNRL with
respect to governmental approvals?
The provisions of Paragraph xii (a) and (b) of the Gas
Supply section of the MoU, makes it abundantly clear that the
two brothers who executed the MoU understood that the gas
allocation set forth in it would require governmental approvals.
The said paragraphs state as follows:
“Xii(a): In relation to applicable
governmental and statutory approvals,
without in any manner mitigating RIL’s
responsibility to jointly work towards
obtaining such approvals, RIL will, if so
required by the Anil Ambani Group, give an
irrevocable Power of Attorney to the Anil
Ambani Group/REL to apply for and obtain
such governmental and regulatory approvals
as are necessary on its behalf.
(b) The definitive agreements will reflect
that the Mukesh Ambani Group will act
in utmost good faith and will make best
endeavours to work for and obtain such
approvals. If there is any action taken in
bad faith for not obtaining/scuttling the
obtaining of such approvals, Kokilaben
reserves her ability to intervene again
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and the Anil Ambani Group would also
have a claim for damages.” (emphasis
supplied)
147. In the course of the proceedings before us, Shri.
Harish Salve repeatedly challenged that RNRL had singularly
failed to explain this provision which so clearly demonstrates that
ADA was aware that governmental approvals would be necessary
for the kind of gas supply agreements that had been
contemplated in the MoU. At first, we heard an argument by
RNRL that the said paragraphs do not relate to gas supply as
such, but general governmental and statutory approvals with
respect to reorganization. When pointed out that general
approvals were provided for separately in the section of the MoU
dealing with “Manner of Business Segregation”, we next heard
the arguments from RNRL’s counsel that these relate to laying of
pipes and make other arrangements for transport of natural gas
from Kakinada. Finally, in the written submissions given to us
after the hearings ended, this is what the counsel for RNRL
submitted on page 43 of their written submissions:
“8.GOVERNMENT/STATUTORY APPROVAL
CLAUSES IN THE MOU:
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i) Contrary to what is falsely contended by
RIL, MOU did not provide that the commercial
terms of supply of gas would require
Government/statutory approval.
ii) MOU merely referred to applicable
regulatory and other approvals as RIL would
require to engage in and carry on the gas
exploration and production business.”
These defenses of RNRL absolutely hold no water. The
entire gas supply section of the MoU deals primarily with the
issue of quantum and by reference to NTPC terms, price and
tenure, as has been repeatedly contended by RNRL itself. To
now turn around and claim that the governmental approvals
mentioned in that section refer to RIL’s business of oil production
and exploration is untenable. This is further evidenced by at
least two other factors. The first one relates to RNRL’s total
failure to rebut the inferences drawn by Shri Harish Salve from
the fact that ADA Group and RNRL’s executives had accepted
that NTPC draft agreements from May, 2005 were to be the basis
for gas supply agreements and those draft NTPC agreements
specifically provided for governmental approvals. The second
factor, equally striking, is that in the letter dated February 28,
2006 in which RNRL strongly protested the GSMA & GSPA,
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RNRL did not protest the terms that governmental approvals
were required. In the annexure to the said letter, in which
differences between the MoU and the gas supply agreements
were listed in a tabular form, in item 16 the protest was that
with respect to governmental agreements it was not provided
that the MDA Group would act in “utmost good faith” and “make
best endeavours”. Many more of such acts of omission and
commission which would demonstrate unequivocally that RNRL
and ADA Group always knew that governmental approvals were
necessary could be adduced. We do not consider it to be
necessary to go into all those details. We conclude that ADA
Group and subsequently RNRL was always aware that under the
PSC the GoI had a right to frame policy and approve price
formula/basis applicable to the sale of all gas produced from KGD6.
DOCTRINE OF IDENTIFICATION:
148. Shri. Jethmalani went to some lengths in arguing that
the Doctrine of Identification has immediate and crucial relevance
in this case. As explained by him, there are certain individuals,
who are the controlling mind of the Company and that once they
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have agreed to something, it should be deemed that the
Company also agreed to the same, including the Board. Reliance
was placed upon the decisions referred to in the summary of
submissions. In the instant matter his argument was that, in as
much as MDA had agreed to the gas supply agreements as
provided for in the MoU, it should be deemed that the Board and
the Company also agreed to the same. Consequently his
argument is that the MoU is binding on RIL.
149. We disagree. Doctrine of Identification as developed
by the courts is typically applicable in criminal and tortious
liability cases. Even assuming that it is applicable in matters such
as this case, nothing really turns upon it in the factual matrix of
this case. It is a fact that the Board in mid 2004 had vested a
substantial portions of its powers on MDA but retained the
powers that only it could exercise. The crucial fact is that ADA
had agreed that the agreements entered into with MDA as a part
of the MoU be mediated through the Board in the form of a
reorganization, and the Board thereafter acted independently.
This is amply evidenced by the Board insisting that governmental
approvals were necessary for gas supply agreements, which
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RNRL claims were not a part of the MoU. If that be the case, for
the sake of argument, then it only strengthens the finding that
the Board acted independently and provided that “suitable
arrangements” needed to be put in place with respect to gas
supply. Moreover, it is absolutely clear that the personnel from
both ADA and MDA Group participated in the discussions leading
up to the Board resolution approving the Scheme as presented to
the shareholders and the stakeholders. The same Scheme was
also approved by over 99% of the shareholders, which would
mean that ADA himself also approved the Scheme as presented.
Further, given the finding above by us that ADA and ADA Group
members knew that government approvals were necessary and
these are a part of general business risks that the ADA Group
undertook, we fail to see what is left to impute to any one.
Further, ADA was a member of the Ambani family and a powerful
shareholder who would have obviously had deep connections in
the Company’s management. To claim that he did not know what
was going on with respect to how the Scheme was going to be
framed and have the changes made in accordance to what he
wanted, if acceptable to others, is simply unacceptable. Further,
the active participation of the lawyer - who had framed the MoU
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and was advising ADA on gas based energy production business
-in the relevant Board meetings in which gas supply agreements
were discussed and it was recorded that he concurs with the view
of Board members that the same are necessary, implies that
ADA was aware of the same.
150. Over and above all of that, the matter turns upon
Governmental approvals. How can anyone be held liable and then
that liability be extended to the company, on a matter such as
securing governmental approvals and that too with matters that
involve major policy decisions? What exactly are RNRL, its board,
ADA Group and ADA asking that MDA and RIL should have done?
For the view we have taken in the matter it may not be
necessary to refer any of the decisions upon which both the
parties relied upon in support of their submissions.
MAINTAINABILITY:
151. The learned Senior Counsel for RNRL have contended
that the powers of the Court, under Section 392 of the
Companies Act, are of the of the widest amplitude, much wider
than the powers under Section 391, because they can extend
even to suo moto ordering the winding up of the Company.
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Consequently, they argue that the courts must exercise such
powers to fully implement the Scheme to effectuate the scheme
one way or the other. They relied upon S.K. Gupta (supra).
152. Shri. Nariman argued that Section 392 of the
Companies Act, 1956 appears to have been enacted to bring the
provisions of Section 391 on par with the provisions of Section
394. To this effect he pointed out to the differences between
Section 394, which he stated was a complete code because it
included powers of supervision in the post-sanction scenario, and
Section 391 which does not have similar provisions. Mr. Nariman,
relying on the decision of this court in Miheer H. Mafatlal (supra)
submitted that the company court’s jurisdiction is peripheral and
supervisory and not appellate, and further that the power to
enforce a compromise or an arrangement by way of modification
does not extend to substantive modifications to the scheme itself
as approved by the shareholders. The power of modification,
pursuant to Section 392, cannot be greater than the power to
sanction the scheme. In this regard he also argued that the ratio
of S.K. Gupta (supra) should be construed to be that courts
have the power to modify terms of the scheme to remove
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impediments and the like to make the scheme function properly
so long as the basic fabric of the scheme is not affected.
According to Shri Nariman, the judgment of this Court in Meghal
Homes (P) Ltd. (supra) sets out the correct position in which it
was stated in para 54 that:
“… Section 392 of the Act… only gives power
to the Court to make such modifications in the
compromise or arrangement as it may
consider necessary for the proper working of
the compromise or arrangement… it cannot be
understood as a power to make substantial
modifications in the scheme approved by the
members in a meeting called in terms of
Section 391 of the Act.”
153. However wide the powers of the courts may be, they
cannot be so wide as to order supply of gas in contravention of
government policies, the constitutional obligations that the GoI
must bear in mind when formulating such policies and in
contravention of broader public interest. The Division Bench
erred by holding that certain quantum of natural gas stood
allocated to RNRL. The error is on account of both a
misinterpretation of the PSC and also public law. Apart from that,
both the Learned Single Judge and the Division Bench below
have erroneously held that the MoU’s gas supply section be read
255
into the Scheme thereby effectively substituting the phrase
“suitable arrangements” in Clause 19 to mean the gas supply
provisions of the MoU. We hold that those conclusions were
erroneous. We disagree with the propositions of Learned Counsel
for RNRL that the ratio in S.K. Gupta (supra) would support such
a result.
154. The ratio of S.K. Gupta (supra) is that under Section
392 the Courts have the duty of continuous supervision to make
the Scheme workable by removing the hitches, obstacles or
impediments as necessary to ensure the proper functioning of
the Scheme. Further, while the Court does state that the powers
of the court are of the widest amplitude, including the power to
modify a provision of the scheme, it also does hold that the same
can only be exercised so as to ensue the proper working of the
Scheme and further, that such powers may not be exercised in a
manner that would alter the “basic fabric” of the scheme. The
removal of obstacles, impediments or hitches cannot be held to
mean wholesale changes in the scheme itself and go beyond the
confines of what the shareholders, the stakeholders and the
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courts that sanctioned the scheme would have understood the
provisions of the scheme to mean.
155. It is true that in paragraph 26 of the said decision it
was stated that if “something can be omitted or something can
be added to a scheme of compromise by the Court, on its own
motion or on the application of a person interested in the affairs
of the company” then there ought not to be any justification for
restricting the meaning of the word of modification and whittle
down the powers of the court. However, the next paragraph
holds the key to the judgment that the “basic fabric” of the
scheme ought not to be changed. The limit on the powers of the
Court to modify by way of even additions or omissions as
contemplated is that the “basic fabric” of the Scheme cannot be
changed; and according to the said decision, even before a court
could embark upon a mission of suggesting modifications it has
to first determine what “modifications are necessary to make the
compromise or arrangement workable.” Any such determination
first has to arrive at a conclusion that the Scheme has become
unworkable in its entirety or in a portion thereof. Arrangements,
by their very nature are complex processes involving many
elements that may or may not work. In fact in S.K. Gupta
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(supra) this court recognized that to be the very reason why the
legislature in India has given such a power to the courts; and
such power can be exercised only to order those minimal
modifications that would bring the aspect that is not working into
a functional zone, with the proviso that at any rate such a
modification cannot lead to a change of the “basic fabric” of the
Scheme.
156. What does the expression “basic fabric” mean?
“Fabric” can imply both the end result, and also equally
importantly, the processes, procedures and steps that were
taken to weave the “fabric” of the Scheme. During the course of
weaving of the “fabric”, decisions could be taken to leave out
certain aspects as unacceptable to the Board or the shareholders
and stakeholders or the Court. Further, those processes
necessarily involve certain steps in obtaining shareholders
permissions. Such processes are the very essence of the fabric
and not just some technicalities that are to be consigned to
history and ignored in making modifications. Whatever changes
are made can only be minor ones which would not tamper with
the essence of the scheme.
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157. In this Scheme, the shareholders & stakeholders of
RIL would have broadly understood from the Scheme two things:
(1) that the Gas based Energy Resulting Company was to engage
in the business of supply of many different kinds of fuels, in
which supply of natural gas to its affiliate companies is one; and
(2) that the Gas based Energy Resulting Company will engage in
the business of promoting energy generation business, from
using any and all fuels, including natural gas, both from RIL and
also from other sources. Nowhere did the Scheme state that the
only fuel that the Gas based Energy Resulting Company would
deal with would be natural gas from RIL. To change that meaning
would be to begin the process of tearing apart the “basic fabric”
of the Scheme.
158. “Basic fabric” of a scheme also implicates the
essentiality of common interests between the class of members
who have voted together, thinking that they all have the same
level of information and the same understanding of the entire
class of members as to what the Scheme entails. That
understanding would certainly not have comprehended the claims
that RNRL is putting forward in these proceedings: (i) that the
intent was to actually share the benefits of the production and
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exploration activities, including the benefit of internal use of
natural gas; (ii) that because the same was not possible on
account of statutory and contractual problems, the gas supply
agreement was a way out; (iii) that the gas be supplied in
accordance with the commercial terms regarding quantity, price
and tenure in the MoU which were never revealed to them; (iv)
that the burden of gas supply would involve the transgression of
the boundaries of the PSC from which the value flows to RIL; and
(v) that the burden would extend to RIL subsidizing RNRL if it
were required to pay a much higher value to GoI than what it
receives from RNRL. In contrast to the foregoing, all that the
class of members who approved the scheme and the court which
sanctioned it would have understood was that normal commercial
agreements of supply, that would protect the interests of both
parties and also including the clauses of governmental
agreements, would be put in place. Such a conclusion would also
follow from the main tenet of the Scheme that the two groups
were to function independently of each other.
159. If the question regarding what would make the
Scheme work had been framed properly by the courts below and
they had appreciated the role of the courts better then this case
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would not have taken the twists and turns that it has. The first
question would have been whether the Scheme itself has become
unworkable? RNRL’s arguments that the gas supply is integral to
the whole Scheme are simply an unsustainable proposition. Gas
supply is but a part of the Scheme as a whole. The fact remains
that RIL can supply gas to RNRL provided appropriate
governmental approvals, pursuant to constitutionally permissible
utilization policies, are in place; and moreover, the commitment
to supply gas in the Scheme was to established gas based energy
generating power plants. That possibility still remains. We fail to
see where even that aspect of the Scheme has failed to work. We
were given to understand that in fact one of the gas based power
generating power plants associated with RNRL and ADA Group is
in fact being supplied natural gas, all in accordance with the
utilization policies set in place by the GoI. If that be the case,
then the conclusion that even this small part of the Scheme is
not working is completely unwarranted and would not even merit
a second look at.
160. The Learned Counsel for RNRL objected to reliance of
RIL on the ratio of Miheer H. Mafatlal (supra), on the ground that
it only pertains to the situation at the time of sanction of the
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scheme and that the ratio of Megal Homes (supra) cannot be
relied upon as S.K. Gupta (supra) a three judge decision,
suggests otherwise. In light of the discussion above we do not
see how, in the context of this case, the ratio of S.K. Gupta
(supra) is different from that of Meghal Homes (supra): they
both speak of the same thing, that the basic fabric of the scheme
cannot be changed. Which aspect of that basic fabric the courts
may deal with could vary, but certainly the processes that protect
the shareholders, their rights to know what is being transferred
and the sanctity of the class of members who have voted
together cannot be derogated from.
161. In the instant case by importing the gas supply
section into the Scheme, in the guise of interpreting it, the
phrase “suitable arrangements” was transformed into “suitable
arrangements as agreed upon by the promoters in the gas supply
section of the MoU”. Such a modification necessarily tears apart
the basic fabric and cannot be permitted.
162. For the view that we have taken it is not necessary to
go into the protested points regarding the Identity of the Buyer,
Definition of Affiliate and Limitation of Liability.
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CONCLUSIONS:
163. In the result, we hold that:
(i) both the learned Single Judge and the Division Bench
committed a serious error in exercising jurisdiction in
the manner they did under Section 392 of the
Companies Act, 1956, for such interference has
resulted in the provisions of a document (MoU) which
was not before the shareholders supersede the
Scheme of Arrangement. Such a document could not
have been read into and incorporated in the Scheme
propounded by the Board, approved by the
shareholders and sanctioned by the Company Court;
(ii) the courts below having rightly directed the parties to
negotiate, and further having rightly refused to grant
the prayers in the Company Application, however, fell
into error directing the MoU to be binding and the
basis for further negotiations between the parties.
MoU is a private pact between the members of
Ambani family which is not binding on RIL;
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(iii) the EGOM decisions, regarding the utilization of the
natural gas and the price formula/basis etc. do not
suffer from any legal or constitutional infirmities.
They shall apply to all supplies of natural gas under
the PSC. The parties are bound by the governmental
policy and approvals regarding price, quantity and
tenure for supply of gas;
(iv) under the PSC in issue the Contractor (RIL) does not
become the owner of natural gas, and there is nothing
like specified physical quantities of natural gas to be
shared by the GoI and the Contractor;
(v) we, accordingly, direct the parties to renegotiate as
to the suitable arrangements for supply of gas de-hors
the MoU. Such renegotiations shall be within the
framework of governmental policy and approvals
regarding price, quantity and tenure for supply of gas.
The renegotiations shall commence within eight weeks
from today at the initiative of RIL and shall be
completed within a period of six weeks from the day
of commencement of negotiations.
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Accordingly, the judgments of the learned Single
Judge and the Division Bench of the Bombay High Court are set
aside and we dispose of all the appeals without any order as to
costs. Intervention Applications do not require any adjudication.
They are also accordingly disposed of.
164. 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.
165. What remains for us is to place our appreciation on
record of the invaluable assistance rendered by Sarvashri Ram
Jethmalani, Harish N. Salve, Mukul Rohatgi, R.F. Nariman and
Ravi Shankar Prasad, all learned senior counsel appearing on
behalf of the parties. We also acknowledge a very dispassionate
assistance rendered by learned Solicitor General and his team of
Additional Solicitors General.
………………………………..J.
(B. SUDERSHAN REDDY)
NEW DELHI,
265
MAY 07, 2010.
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ANNEXURE
GLOSSARY OF TERMS
ADA : Anil D. Ambani
APM : Administered Price Mechanism
BCF : Billion Cubic Feet
BCM : Billion Cubic Meters
CG : Corporate Governance
CNG : Compressed Natural Gas
DGH : Directorate General of Hydrocarbons
EGOM : Empowered Group of Ministers
GoI : Government of India
GSMA : Gas Sales & Master Agreement
GSPA : Gas Sale & Purchase Agreement
GUP : Gas Utilization Policy
IDP : Initial Development Plan
KDA : Smt. Kokilaben Dhirubhai Ambani
KG-DWN-98/3 : KG-D6
LNG : Liquefied Natural Gas
MC : Management Committee
MDA : Mukesh D. Ambani
mmBtu : Million British Thermal Units
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MMSCMD : Million Standard Cubic Meters Per Day
MoPNG : Ministry of Petroleum and Natural Gas
MoU : Memorandum of Understanding
NELP : New Exploration Licensing Policy
NTPC : National Thermal Power Corporation
P1 Reserves : Proven Reserves
P2 Reserves : Probable Reserves
P3 Reserves : Possible Reserves
PNG : Petroleum and Natural Gas
PSC : Production Sharing Contract
PSU : Public Sector Undertaking
REL : Reliance Energy Limited
RIL : Reliance Industries Limited
RNRL : Reliance Natural Resources Limited
RPPL : Reliance Patalganga Power Limited
Scheme : Scheme of Arrangement
SCF : Standard Cubic Feet
TCF : Trillion Cubic Feet
TBtu : Trillion British Thermal Units
UoI : Union of India
USD : United State Dollar
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