Natural Resources Ltd. Vs. Reliance Industries Ltd.  INSC 374 (7 May
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 1
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.
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.
"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).
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.
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.
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.
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
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
4 (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).
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 5 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
06.07.2002, Mr. Dhirubhai Ambani passed away.
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
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.
October, 2002, the Consortium (NIKO & RIL) announced discovery of
significant result of KG-D6 Block.
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 6 Purchase Agreement was annexed with the tender
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.
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
(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.
7 (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.
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.
11.08.2005, RNRL was acquired by RIL for the purpose of de-merger. The name was
changed to Global Fuel 8 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 9 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.
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.
Coal Based Energy Undertakings/Reliance Energy Ventures Limited.
Based Energy Undertaking/Global Fuel Management Services Limited now known as
"Reliance Natural Resources Limited (RNRL).
Financial Services Undertaking/Reliance Capital Ventures Limited.
Telecommunication Undertakings/Reliance Communication Ventures Limited.
De-merged company-Reliance Industries Limited (RIL) is to retain all other
businesses including Petrochemicals, 10 refining, oil and gas exploration and
production, textile and other business. The Scheme became effective from
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 11 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
(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
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.
07.02.2006, the Board of the RNRL was re- constituted 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 12 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.
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.
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 13 formula for determining the gas price as the basis of valuation
of gas under the PSC.
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:
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.
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
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.
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.
ad-interim reliefs in terms of prayer (c) and (d) above.
further orders be passed and/or directions be given as this Hon'ble Court may
deems fit and proper."
14 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.
addition to the above particulars, RNRL placed the following additional
materials in support of their stand:
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 15 thanking the efforts made by Smt.
Kokilaben Dhirubhai Ambani in working towards the settlement.
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 7 Supply of
28 MMSCMD gas by RIL to Anil Dhirubhai Ambani Group (ADAG). This supply is
subject to supply of 12 MMSCMD to NTPC.
7 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.
Group to have option to buy 40% of all balance and future gas from the current
or future gas fields of MDA Group.
to be from the proven P1 Reserves of RIL whether from the KGD-6 Basin or
Supply period 17 (Seventeen) Years.
Group's Purchase Obligation.
or pay basis.
and Commercial Terms 7 The firm quantity of 28 MMSCMD/ 40 MMSCMD at a price no
greater than NTPC prices.
gas at the market rate 7 Other commercial terms-same as those of NTPC contract.
Shall be in accordance with International Best Practices.
be bankable in International Financial Markets.
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.
7 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.
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
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 17 consisted of the business of supply of gas for
power projects REL and of Reliance Patalganga Power Ltd., through suitable
Scheme also explains:
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
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 18 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.
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.
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.
19 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.
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.
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 20 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.
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
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.
21 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 22 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.
considering the claim of both the parties viz., RNRL and RIL the "Company
Judge has arrived at the following conclusions":
The conclusions are:
present company application under Section 392 of the Companies Act is
(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
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.
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.
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
terms as mentioned in the MoU and GSMA need to be suitable for both the parties
subject to the Government's 23 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
supply of gas contract/agreement needs to be clear and bankable documents for
all the concerned parties."
the Company Judge directed the parties to re- negotiate for a "suitable
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.
Division Bench framed the following "issues for consideration":
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? 24 13)
Answers by the Division Bench:
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.
the second issue, the Division Bench held as follows:
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.
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.
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.
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.
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.
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.
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.
Constitutional and other statutory Provisions:
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.
other resources of the exclusive economic zone of India shall also vest in the
Union and be held for the purposes of the Union.
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."
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
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.
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:
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."
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.
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.
Ramana Dayaram Shetty vs. International Airport Authority of India & Ors,
(1979) 3 SCC 489, this Court has pointed out that :
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 "
Food Corporation of India vs. M/s Kamdhenu Cattle Feed Industries, (1993) 1 SCC
71, this Court observed as follows:
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'. ........."
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.
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:
"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;
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:
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.
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
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
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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");
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;
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;
continuation by or against the transferee company of any legal proceedings
pending by or against any transferor company;
dissolution, without winding up, of any transferor company;
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
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:
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.
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.
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.
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.
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 anybody corporate, whether a company
within the meaning of this Act or not.
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."
ISSUES ARISING IN THE PRESENT APPEALS:
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
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:
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
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
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.
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.
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.
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.
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.
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:
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.
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........
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....... "
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
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.
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.
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.
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.
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.
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.
find that the modifications proposed alters the position of the shareholders
vis-`-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."
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.
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.
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
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
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.
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
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
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.
as observed earlier, the power of the Court does not extend to re-writing the
Scheme in any manner.
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:
CONFIDENTIAL MEMORANDUM OF UNDERSTANDING This Memorandum of Understanding (this
"MoU") is made at Mumbai this___ day of June, 2005 amongst Kokilaben
("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.
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.
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.
Parties are now desirous of formally recording their agreement in this
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"
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.
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.
& Ors. vs. Deputy Director of Consolidation & Ors., (1976) 3 SCC 119
(Paragraphs 9, 17, 19, & 42) which states as under:
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 forever 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........
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.
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.
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."
Modi vs. K.N. Modi & Ors., (1998) 3 SCC 573 (Paragraphs 33 & 52) which
states as under:
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. ......
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.
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."
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-`-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:
.....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.
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
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.
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;
e- mail dated 14.12.2005 from RIL to Mr. J.P. Chalasani and e- mail 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
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.
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.
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.
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
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.
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
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.
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
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.
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.
and GSPA: whether they qualify as suitable arrangement:
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 re- constituted 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.
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.
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.
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.
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:
"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).
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
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:
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.
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.
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.
gas shall be supplied at market rates.
By way of
7 If the
P1 reserves are identified at 60 MMSCD, the sequence would be NTPC-12, REL-28
and RIL (captive)- 20.
7 In case
the reserves are 100, the sequence would be NTPC-12, REL-28, 72
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.
the first 28 MMSCD, the price and the commercial terms shall be the same as
those applicable to NTPC.
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.
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.
of the commitment for supply of gas would be supplied in the financial year
2008-09 and the balance 50% in 2009-10.
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.
will provide the Production Sharing Contract and also correspondence with NTPC
and the latest version of the draft contract to the 73 Anil Ambani Group. The
gas supply working group to discuss details.
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
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
agreements would not be with REL.
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.
Swapping of gas is permitted.
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
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."
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.
going through the materials placed by RNRL, RIL, the Company Judge and the
Division Bench reached the following conclusions:
GSMA/GSPA was hurriedly framed which reflects mala fides on the part of RIL.
is no fraud on the part of RIL in terms of Section 17 of the Contract Act as
alleged by RNRL.
The dispute in the present case is about conditions of supply (rate, quantity,
tenure etc.) and the non- compliance of the GSMA with MoU.
GSMA/GSPA is not "suitable arrangement" as they are not true to the
Court, under Section 392, does not have the power to add clauses and/or amend
parties must negotiate the contents of "suitable arrangement" in the
Scheme, since the Court is not an expert in such things.
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.
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
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.
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.
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 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.
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.
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.
PRODUCTION SHARING CONTRACT (PSC):
of the salient features of the PSC are as follows:
6 of the Preamble makes it clear that discovery and exploitation will be in the
over all interest of India.
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.
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.
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.
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
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.
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
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.
82 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"
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
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.
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.
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.
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.
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.
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
cannot 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
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.
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
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;
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
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."
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:
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.
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
pricing formula/basis as per the PSC has to be:
Firstly on arm's length basis, 89 b) Secondly, to the benefit of the contractor
as well as the Government;
Thirdly, having linkages with traded liquid fuels, and d) Fourthly, Government
will have to perform Regulator's function till one is appointed for 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):
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:
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."
Gopal Subramanium reiterated that the submissions made pertaining to the PSC
are without prejudice to the stand of the Government vis-`-vis NTPC and also
without prejudice to the submission that this Court is not called upon in the
present proceedings to interpret the PSC.
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.
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.
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.
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 93
matter of policy also, the Government must be free to determine the valuation
formula as well as the price.
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
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.
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.
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.
95 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
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.
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
RNRL's case is that the project being promoted require bankable contracts
because they were "non recourse projects"
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.
facilitates for production of gas and REL's Dadri power plant was to be
completed in the same time frame.
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
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 98 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.
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,
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.
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.
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.
has enumerated the following main elements which have, according to them,
resulted in the agreement being not bankable :-
price of US $ 2.34 wrongly subjected to government approval
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.
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.
Capping of liability- clause 14.3 (i) of the GSMA limits the liability of the
seller i.e. RIL to maximum of 6 months only.
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.
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 101 PSC (including the Development Plan under Article
10.7), EGOM decisions and other related national policies.
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.
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
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 102
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.
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 103
limited and restricted scope of interference in such commercial aspects,
unless, it is breach of any public policy or interest.
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.
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.
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 104 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
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 105 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 106 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.
must be noted that the constitutional mandate is that the natural resources
belong to the people of this country.
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.
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:
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 107 "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.
relation to the Public Trust Doctrine, this court in M.C. Mehta v. Kamal Nath
(1997) 1 SCC 388 held:
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.
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
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 sea- shore, 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.
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.
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
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.
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.
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
From the above analysis, the following are the broad sustainable conclusions
which can be derived from the position of the Union:
natural resources are vested with the Government as a matter of trust in the
name of the people of India.
is the solemn duty of the State to protect the national interest.
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.
resources must always be used in the interests of the country, and not private
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.
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.
Government cannot be divested of its supervisory powers to regulate the supply
and distribution of gas.
Summary of our conclusions:
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.
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.
Therefore, the Company Court enjoys jurisdiction to entertain the application
under Sections 392 and 394 of the Companies Act.
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.
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.
Considerations to determine "suitable arrangement"
Clause 19 of the Scheme.
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
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
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.
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.
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.
the GSMA and the GSPA entered into with RNRL should fix the price, quantity and
tenure in accordance with the PSC.
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
renegotiating the terms of GSMA, the following must be kept in mind:
terms of the PSC shall have an over-riding effect;
parties cannot violate the policy of the Government in the form of the Gas
Utilization Policy and national interests;
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 must restrict their negotiations within the conditions of the
Government policy, as reflected inter alia by the Gas Utilization Policy and
With the above directions/observations, all the appeals and I.A. No.1 are
disposed of. No order as to costs.
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 WITH CIVIL APPEAL
NO.4274 OF 2010 ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO. 15033 OF 2009
RELIANCE NATURAL RESOURCES LTD. ....APPELLANT VERSUS 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 119 WITH CIVIL APPEAL NO.
4277 OF 2010 ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO. 18929 OF 2009
UNION OF INDIA ....APPELLANT VERSUS 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
SUDERSHAN REDDY, J.
1 for permission to file Special Leave Petition is allowed.
2. We grant
special leave and proceed to dispose of all the appeals.
PROLOGUE "Jus publicum privatorum pactis mutari non potest."
law cannot be changed by private pacts.
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".
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:
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
vesting of such powers is an act of faith and of trust, two qualities that are
to be earned, sustained and nurtured.
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.
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
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.
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.
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.
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
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
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.
"... these global imbalances are morally unacceptable and politically
unsustainable."1 (emphasis added).
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:
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).
the rails. The movement to deregulate the financial industry went too far by
exaggerating the resilience--the self- healing powers--of laissez-faire
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:
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",
University Press (2009).
build a fence around the lions. They're not going to build it."3
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:
is a curious phenomenon.....
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.
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
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
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.
E. Stiglitz, Making Natural Resources into a Blessing rather than a Curse, in
"Covering Oil" Ed.
Tsalik and Anya Schiffrin, Open Society Institute (2005), p. 13-14.
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.
crux of the problem is, as Prof. Terry Lynn Karl says:
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
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
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.
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:
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
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:
grotesque misdescription of what free markets actually require and entail. Free
markets depend for their existence on law......
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...
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.
mere instruments to be evaluated by their effects."8
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
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.
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.
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.
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.
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.
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.
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.
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
2002, RIL announced the discovery of a very large reservoir of natural gas in
KG-D6. In the same year Shri.
Dhirubhai Ambani, the founder of RIL, passed away and subsequently the
management of RIL was led by Mukesh D.
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
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.
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.
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.
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.
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.
portion of the MoU was placed on record in the later 142 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.
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
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.
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
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.
addition to the above, and in the same section "Gas Supply", it was
also stated, after KDA exhorted her elder son to 144 ensure that stability was
given to the ADA Group with respect to gas supply, that the MDA Group would act
in "utmost good faith"
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.
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
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.
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.
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, inter- alia, 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.
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 148 October 21, 2005. The Scheme as presented was approved near unanimously
by the shareholders and the stakeholders.
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.
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
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.
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
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
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.
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
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.
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.
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.
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.
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.
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.
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.
final order and judgment was passed, on 15.10.2007, by the Learned Company
Judge. The judgment held:
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.
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.
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.
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.
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.
Jethmalani withdrew his objections to leave being granted.
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.
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
SUMMARY OF THE SUBMISSIONS OF THE PARTIES:
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.
CONTENTIONS OF RNRL:
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.
each one of them below as substantively argued by Shri.
Rohtagi, learned senior counsel appearing on behalf of RNRL.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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
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 , 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
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:
2004 SC 86 30 (1989) 1 SCC 264 31 (1997) 89 Comp. Cases 227 32 (1979) 3 SCC 54
position with regard to the Six Protested Points was argued by Shri. Harish
Salve as follows:
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.
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.
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.
Salve also argued that in any event it cannot commit supplies beyond the
validity of the Mining Lease which expires in 2025.
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.
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.
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
not being there, then it would at least have a company 172 with some actual
assets against which it can proceed to collect.
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.
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.
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.
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.
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.
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.
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.
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
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.
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).
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.
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
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.
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.
OF THE UNION OF INDIA:
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.
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.
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.
specific terms of the contract ought to be determinative, rather than a general
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.
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.
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.
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.
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
(1) SCC 515 38 1972 (1) SCC 23.
(4) SCC 489 182
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.
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.
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.
IS IT ANYWAY? WHETHER A CONTRACTOR
THE OWNER OF THE GAS?
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
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).
reservoirs across the globe are randomly distributed.
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 non- renewable resource, there is an imperative need
to conserve it.
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.
Handbook of Natural Gas Technology and Business, ed. Parag Diwan and Ashutosh
Karnatak, Pentagon Energy Press (2009).
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
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.
spot markets have developed, in which prices are 41 Ibid.
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.
choices made seem to depend on various historical events, and factors and
already established institutions and rules. 42 , 43
have referred to a number of journals, articles and books in this regard, too
numerous to all be cited44, and one 42 Ibid.
J. Michaels, "Natural Gas Markets and Regulation", in the Concise
Encylcopedia of Economics, 2nd Ed.
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:
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,
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.
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
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).
Information Administration, Dept. of Energy, U.S. Government.
Basic Statistics (2008-2009) citing BP Statistical Review of World Energy, June
2008 & OPEC Annual Statistical Bulletin.
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 un-
extractable and clean coal technologies are only possibilities and not
certainties. 48 Integrated Energy Policy: Report of the Expert Committee, supra
note 44 191
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 geo- political 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.
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.
Integrated Energy Report, supra note 44.
Basic Statistics on Indian Petroleum & Natural Gas, 2008-2009, MoPNG GoI.
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.
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"
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
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,
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
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.
E. Smith & John Dzienkowski, supra note 52.
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 in- situ 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.
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
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
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
arrangements are divided into service contracts and production contracts.
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)"
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:
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.
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.
page 5, para 15.
page 14, para 48 60 Ibid page 16 para 57 198
now turn to an analysis of the constitutional and statutory matrix in which the
question "whose gas is it anyway?"
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.
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.
Assembly Resolution 1803 (XVII) of December 1962 states that the "right of
the people and nations to permanent sovereignty over their natural wealth and
resources must be exercised in the interest of their national development and
the well-being of the people of the State 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.
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"
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.
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.
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."
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.
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
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.
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
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.
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.
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:
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.
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
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).
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
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).
sectors could potentially be deprived of access to such resources;
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
no end user may be given any guarantee for continued access and of use beyond a
period to be specified by the Government.
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.
Based on the above discussion, we now turn our attention to the specific PSC
under consideration in this case.
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.
subsequent policy decisions of GoI in no manner derogate from covenants of 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.
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.
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 211 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"
"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.
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 212 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.
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.
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 213 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:
"...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......"
according to Black's Law Dictionary, Value is said to be:
The significance, desirability or utility of something. (as a noun).
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.
Sufficient contractual consideration. (Black, 7th Edn. 1999)"
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 215 facilities..... environmental protection,
transportation, storage, sale or disposition of Petroleum to the Delivery
Point.... And all other incidental operations or activities as may be
Article 21.6.1 specifically states that the Contractor "....
endeavour to sell all Natural Gas produced and saved..."
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
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 216 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.
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.
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.
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 217 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.
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 218 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.
Petroleum, is an integral part of Petroleum Operations and hence selling of Petroleum
is an obligation of the Contractor.
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.
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, 219 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.
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.
according to RNRL's counsel, the GoI should not have any right to interfere in
this contractual commitment.
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 220 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.
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
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."
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.
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
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.
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.
freedom to market can only be exercised subject to the utilization policy 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 KG- D6 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.
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.
and above that, under the PSC the right to effectuate a utilization policy only
vests with the GoI. Indeed, it 223 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.
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 224 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 inter- sectoral 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.
Silence and the Noise of Various Government Officials:
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 225 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.
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 226 may suggest that
the Ministers concerned may need better advisors from the permanent machinery.
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.
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.
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."
1943 FC 75 227 125. 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.
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 228 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.
parameters between NTPC terms and RNRL are of a significantly different order.
First, the onerous "take or pay"
a part of the NTPC contract but not the gas supply agreements with RNRL, as
repeatedly pointed out by Shri Salve.
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.
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.
a reason for such a requirement. Historically, oil 229 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.
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.
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.
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 231 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.
WHOSE COMPANY IS IT ANYWAY? 232 131. 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.
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.
certain aspects of law and questions remain, on account of the decisions of the
courts below. We turn to those issues.
Of What Purport the "Gas Supply Arrangements" in Clause 19 of the
Scheme From the Perspective of Section 391?:
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
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.
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
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.
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 235 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 naove would,
could or should have relied on the certitude of natural gas supply from RIL to
of the Scheme provides that "suitable arrangements"
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 19 236 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.
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.
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.
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 237 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."
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 anyone who
reads the Scheme can understand it in that manner.
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
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.
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.
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.
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 anyone else would now become special, thereby
negating the very concept of class of members with similar interests voting on
a proposal for reorganization.
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 241 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-`-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.
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.
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.
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 243
implications with respect to statutory and legal issues, is prima facie evidence
of independence and application of the mind.
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.
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 244 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.
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
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 245
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, 246 substantially and materially different from
it and it cannot now be brought back in the guise of interpretation.
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
paragraphs state as follows:
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
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 247 and the Anil Ambani Group would also have a
claim for damages." (emphasis supplied) 147. In the course of the
proceedings before us, Shri.
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:
APPROVAL CLAUSES IN THE MOU:
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.
merely referred to applicable regulatory and other approvals as RIL would
require to engage in and carry on the gas exploration and production
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, 249 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 KG- D6.
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 250 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.
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.
amply evidenced by the Board insisting that governmental approvals were
necessary for gas supply agreements, which 251 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.
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
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 252 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.
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.
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.
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).
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 254 impediments and the like to make the scheme function
properly so long as the basic fabric of the scheme is not affected.
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."
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
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 256 courts that sanctioned the scheme would have
understood the provisions of the scheme to mean.
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 257
(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
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.
In this Scheme, the shareholders & stakeholders of RIL would have broadly
understood from the Scheme two things:
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
"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 259 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.
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 260 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.
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 261 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.
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.
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
the result, we hold that:
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;
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;
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.
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;
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;
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.
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.
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
also accordingly disposed of.
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.
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
......................................J. (B. SUDERSHAN REDDY)
MAY 07, 2010.