Court tells RIL to supply gas to RNRL at lower price

Ambani brothers given one month to come up with 'bankable' agreement or approach their mother.
A division bench of the Bombay High Court today asked Mukesh Ambani-promoted Reliance Industries (RIL) to sell natural gas to Reliance Natural Resources (RNRL), an Anil Ambani group company, at $2.34 per million British thermal units (mBtu), which is 44 per cent lower than the price fixed by the government.

Meanwhile, the court also ordered the two parties to explore a fresh agreement within a month for the sale of gas from RIL-controlled Krishna Godavari (KG) basin to RNRL, in accordance with the memorandum of understanding (MoU) signed between them in 2005.

It also said that the gas could be used only for power generation and not for trading.

The court directed both parties to either draw up a new supply contract or make the existing contract "bankable". Alternatively, the Ambani brothers have the option to go back to their mother, Kokilaben, who had reserved her right to intervene if her sons did not act according to the MoU.

In their order today, Justices J N Patel and K K Tated said RNRL had the option of approaching the courts again for a modification of the demerger scheme if negotiations failed to result in a satisfactory outcome in one month.

The court order vindicates our stand, an Anil Ambani group executive said.

The order was seen as a setback for RIL because the court dismissed the company's argument that its contract with the government prevented it from supplying gas at a price lower than $4.2 per mBtu to RNRL. The court also said RNRL had the option to claim damages in line with the MoU between the brothers.

"The full text of the judgment of the High Court has been received and is being reviewed by us. We will decide on the future course of action, based on legal advice," said a Reliance Industries spokesperson.

Press Trust of India cited RIL lawyer Milind Sathe as saying that filing an appeal in the Supreme Court was an option. But sources indicated that negotiations between the brothers could take place as early as Thursday (June 18) when the Ambani family meets at the Srinath Temple near Surat, which in an annual ritual.

The order will help the Anil Dhirubhai Ambani Group (ADAG) revive some of the gas-based power projects, such as 7,480 mega watt Dadri projects proposed near Delhi. But in the absence of any gas-based power plant, ADAG would be unable to access gas from the Krishna Godavari fields immediately,

Following the order, RIL share prices fell 7.48 per cent to close at Rs 2,180.45 on the Bombay Stock Exchange, but the RNRL scrip went up 24.11 per cent to close at Rs 108.35.

RNRL, which was demerged from RIL in 2006, had approached the court more than two years ago claiming that the latter was not signing the gas contract agreement as per the demerger scheme. The demerger scheme offered 28 million metric standard cubic metres per day (MMSCMD)gas to RNRL on the same terms and conditions as those offered to public sector electricity generator, NTPC.

RIL countered RNRL's contention, by saying $2.34 per unit offered to NTPC in 2004 was not tenable as the government later came out with new guidelines on pricing.

The court held that RIL's obligation to supply gas to its demerged entity was not a normal commercial transaction but belonged to a "class of its own" as it was part of a scheme of demerger.

Such a transaction was not restricted by government rules and RIL had to supply gas to RNRL according to the terms of the demerger, even if the price was lower than the price fixed by the government, the court said its 324-page order.

Since RNRL was demerged from RIL, the former had its claim for the gas from RIL's entitlement. Under the production sharing contract between RIL and the Centre, RIL was entitled to get more than 90 per cent of total gas production from KG basin in the first few years as a compensation for its investments and added incentive.

The court also quoted a letter from the Director General of Hydrocarbons (DGH) to the petroleum secretary in which the regulator had acknowledged that RIL could sell gas at a price distinct from the valuation fixed by the government.