That the Supreme Court verdict has been a huge blow for the Anil Dhirubhai Ambani Group (ADAG) is obvious. Of the 35,000 Mw of power plants it is working on, around 10,000 Mw were to be based on the 28 mmscmd that Mukesh Ambani’s Reliance Industries Limited (RIL) was supposed to supply it each year as per the MoU that Anil and Mukesh signed when the Dhirubhai empire was split. Given that the gas will no longer be available at $2.34 per mmBtu and will have to be bought at $4.2 per mmBtu, ADAG’s profitability will take a big hit. The court didn’t buy ADAG’s argument that when the MoU was signed, RIL had the complete freedom to sell gas; or that the gas it was to give ADAG was from its share of the gas, not from the government’s share.
It’s difficult, however, to say that ADAG has lost completely. When ADAG first went to the Bombay High Court, it argued that when RIL signed the gas contract with ADAG firm Reliance Natural Resources Limited (RNRL), it had signed an unbankable contract. At that time, RIL controlled RNRL as well, so, in a sense, it signed the contract on behalf of both itself as well as RNRL! Of the three RNRL directors, two went with RIL at the time of the split and one (J P Chalasani) went with ADAG — Chalasani protested the agreement but was overruled in a board meeting that lasted all of five minutes. The exact details are cumbersome but instead of signing an agreement that said RIL would supply RNRL 28 mmscmd of gas every year for 17 years (the MoU amount), the contract had a complex formula which, according to ADAG, would have resulted in it getting between 6 and 25 mmscmd of gas per year; another formula which determined the tenure restricted this to a maximum of 5 years — ironically, the greater RIL’s production, the horter the tenure.
So, now that the court has said RIL and RNRL have to renegotiate within 14 weeks, “an arrangement (that) must be suitable for the interests of the shareholders of RNRL as reflected by the MoU” (subject to it being in keeping with the government policy on gas utilisation), that’s a big step forward for ADAG. Whether mother Kokilaben will choose to intervene again, or whether Anil can invoke damages under the MoU since he has not got what was promised to him (getting gas at $4.2 instead of $2.34 means an additional cost of Rs 2,750 crore a year, for 17 years), remains an open question.
The other open question is the role of the government. For one, whatever agreement RIL and RNRL sign now, the gas can only flow if the government allows it to. The Empowered Group of Ministers (EGoM) which fixed the Gas Utilisation Policy was, for instance, clear that no gas could be given if firms didn’t have a gas linkage — well, RNRL’s Dadri plant, for which the gas was supposed to be used, still hasn’t been able to get its gas linkage cleared. Nor, the EGoM said, could gas be allotted to a plant that is not ready — but how do you even get financial closure if you don’t have a commitment of gas supply? Chicken and egg basically.
More important, from a public policy point of view, is the government’s stance on the issues that ADAG raised.
# Under the Production Sharing Contract under which RIL operates the KG Basin, the government’s share depends upon the investments RIL has incurred. If the capex rises, as it has, the government’s share remains low. While RIL claims the capex rose because of greater production and rigs getting more costly, ADAG argued the capex was padded. While the head of the Directorate General of Hydrocarbons, V K Sibal, dismissed this saying CAG had done an audit of all RIL’s costs, it turned out this was not true. While a CAG audit was then ordered, The Pioneer reported that RIL had purchased a flat in Mumbai for Sibal’s daughter — the matter is under investigation and the two-year extension recommended for Sibal wasn’t granted. Keeping an eye on capital costs is something the government needs to do, more so when the person in charge of approving these costs is under a cloud.
# When RIL called for bids from prospective buyers of its gas, ADAG alleged the bidding wasn’t fair since just a handful of firms had been asked to participate in the bid; these firms were so desperate for fuel, they’d naturally bid higher prices; and so on. The matter was finally looked into by the Prime Minister’s Economic Advisory Council headed by former RBI Governor C Rangarajan. It said, “Since there appear to be some doubt about the transparency of the bidding process adopted by M/s RIL, especially relating to placing restrictions on who was invited to bid, and the volume of total gas on offer, it may be appropriate to (i) Take immediate action to invite fresh bids in a transparent and well-publicised manner from all parties in a position to lift gas so as to discover the true arms length competitive price for the gas.” Though the EGoM didn’t pay too much attention to this, obviously the bidding process is something the government needs to look at closely in future.
# There is also the issue of marketing margins. Since the petroleum ministry is going to fix the price of the gas as per the Supreme Court order and, since gas is in short supply, it is also deciding who gets the gas, should RIL be allowed to charge a marketing margin, and how should this be calculated?
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# While transport costs at $1.25 work out to a whopping 30 per cent of the gas cost of $4.2 per mmBtu, this may not be as much of a concern since there is an appellate body that those think the costs are too high can go to.
Essentially, while Anil Ambani has lost the major battle and the government and RIL have won, the government needs to keep in mind its watchdog role — the questions raised by Anil Ambani have not been rendered invalid by the Supreme Court verdict.