Legal course was unnecessary: RIL to NTPC

Reliance Industries Ltd (RIL) has said NTPC Ltd's suit filed in the Mumbai High Court regarding latter's failure to supply gas as per the time schedule is motivated by other than purely commercial reasons.

RIL executives said NTPC could have encashed the bank guarantee of $4 million without going to court. "NTPC could have taken recourse to Clause 7.7 when RIL gave a conditional letter of intent (LOI) and subsequently when GSPA was not signed. It seems that it is for reasons other than economic that NTPC decided to go to the court," said an RIL executive.

NTPC can cancel the deal for purchase of gas from Reliance Industries Ltd (RIL) unilaterally without taking legal action. The provision for cancellation is available under Clause 7.7 of the request for proposal, which was laid down as part of the bidding conditions for the controversial gas deal.

Clause 7.7 of the contract states that the preferred bidder has to accept the offer within 30 days of issue of the letter of intent (LOI). The letter was issued on June 16, 2004, which RIL accepted on July 15, 2004.

The clause also grants NTPC the discretion of moving on to the second lowest bidder (L2 bidder) if the preferred bidder, in this case RIL, fails to sign the fuel supply agreement letter with it within 30 days of the acceptance of LOI. The gas sales purchase agreement (GSPA) has still not been signed.

In a letter to NTPC dated December 21, 2005, RIL vice-president, commercial, B Ganguly said the LOI was accepted on the condition that "the outstanding provisions of the GSPA will be agreed and incorporated". One of the conditions that RIL wanted was to cap the liability on it in case it failed to supply 12 million standard cubic metre a day (MMSCMD) of gas to NTPC over a period of 17 years.

NTPC chairman CP Jain was unavailable for comment though the company spokesperson maintained that RIL had accepted the conditions of GSPA before submitting their final price bid.

"RIL has been adopting dilatory tactics and seeking series of relaxation/dilutions of various contract stipulations from time to time resulting in inordinate delay of 16 months," an NTPC executive said. RIL executives said the fact that NTPC did not cancel the bid and went ahead with negotiations showed that its offer was "very good" even with the conditions.

RIL maintained that the possible liability under the draft GSPA would adversely impact not just its oil and gas business but all the other businesses.

NTPC, on the other hand, fears that if the liability in case of supply of alternative fuel is capped at $210 million, as demanded by RIL, then the private sector gas producer will be able to walk out of the contract for better price by paying only the capped amount.

RIL had offered to deliver natural gas to NTPC at $3.18 per million British thermal units exclusive of taxes, on net heat value basis. On gross heat value basis this would work out to $2.86 per MMBTU. The second lowest bidder, Petronas-Petronet, had quoted $4.23 per MMBTU.