Reliance Natural Resources Ltd. Vs Reliance Industries Ltd.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4273 OF 2010 (Arising out of S.L.P. (C) Nos. 14997 of 2009)

Reliance Natural Resources Ltd. .... Appellant (s)

Versus

Reliance Industries Ltd. .... Respondent(s)

WITH

CIVIL APPEAL NO. 4274 OF 2010 (Arising out of S.L.P. (C) No. 15033 of 2009)

CIVIL APPEAL NO. 4275-4276 OF 2010 (Arising out of S.L.P. (C) No. 15063-15064 of 2009)

CIVIL APPEAL NO. 4277 OF 2010 (Arising out of S.L.P. (C) No. 18929 of 2009)

I.A. NO. 1 IN

C.A.Nos.428-4281/2010 @ S. L. P. (C) .14414- 14415/2010

@ CC NO. 16126-16127 of 2009

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J U D G M E N T

P. Sathasivam, J.

1) I have had the benefit of reading the erudite judgment of

my learned Brother, Hon. B. Sudershan Reddy, J. I am

unable to share the view expressed by him on some points and

must respectfully dissent.

2) Though the facts and provisions of the relevant law have

been set out in the judgment prepared by B. Sudershan

Reddy, J., keeping in view of the importance in the matter, I

propose to refer all the details and deliver a separate judgment

in the following terms:-

3) Leave granted.

4) “The people of the entire country have a stake in

natural gas and its benefit has to be shared by

the whole country.”

- Association of Natural Gas & Ors. vs. Union of India & Ors. – (2004) 4 SCC 489 (CB).

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5) Being aggrieved by the judgment and order of the

Division Bench of the High Court of Bombay dated 15.06.2009

in Appeal No. 1 of 2008 in Company Application No. 1122 of

2006 and in Company Petition No. 731 of 2005, Reliance

Natural Resources Ltd. (in short “RNRL”) has filed S.L.P.(C)

Nos. 14997 & 15033 of 2009. Questioning the same common

order of the Division Bench of the High Court, Reliance

Industries Limited (in short “RIL”) has filed S.L.P. (C) Nos.

15063-15064 of 2009. Since the Union of India intervened at

the stage when the Division Bench heard Appeal Nos. 844 of

2007 and 1 of 2008, it also filed S.L.P.(C) No. 18929 of 2009.

One Vishweshwar Madhavarao Raste also filed SLP(C)….CC

Nos.16126-16127 of 2009. Since all the appeals arising out of

the above special leave petitions emanated from the common

order dated 15.06.2009 passed by the Division Bench and the

issues raised in all these appeals are one and the same, all the

appeals were heard together and are being disposed of by this

common judgment.

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6) Brief facts:

The case of RNRL:

(a) In 1973, late Dhirubhai Ambani set up the RIL consisting

of Oil, gas, refining and exploration, textile, yarn, polyster,

petrochemicals and communication business with his two

sons Mukesh Ambani and Anil Ambani. In the year 1999, the

Government of India announced a New Exploration and

Licensing Policy, 1999 (in short “NELP”). This policy provided

that various petroleum blocks could be awarded for

exploration, development and production of petroleum and gas

to private entities.

(b) It is the policy of the Government that Petroleum

Resources which may exist in the territorial waters, the

continental shelf and the exclusive economic zone of India be

discovered and exploited with utmost expedition in the overall

interest of India and in accordance with good International

Petroleum Industry Practice.

(c) In the same year, i.e. 1999, RIL has formed a Consortium

with NIKO. Their consortium was the successful bidder for

Block KG-D6 and was called the Contractor.

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(d) On 24.03.2000, Reliance Platforms Communications.com

Private Limited was incorporated which was changed to Global

Fuel Management Services Limited and now called “Reliance

Natural Resources Limited (RNRL).

(e) A Production Sharing Contract (in short “PSC”) has been

entered into between the Government of India and the

Contractor on 12.04.2000. The PSC, as recorded, is within

the contract area identified as Block KG DWN-98-3. KG-D6 is

situated offshore coasts of Andhra Pradesh in the Indian

Ocean. Such blocks are called as “Deep Water Exploration

Blocks”. The exploration in such areas require employment of

highly skilled and experienced technical personnel and an

extremely expensive and time-consuming exercise. As

recorded, all exploration expenses required to locate petroleum

resources have to be borne by the Contractor. Therefore, the

Contractor is bound to incur huge cost and resources for

discovery of reserves in the area at their risk. The exploration

activities are still in progress, the first gas deal expected in

June, 2008. As per the PSC, all the expenses relating to the

exploration, development and production of cost incurred by

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the Contractor can only be recovered from the petroleum/gas

actually produced and sold by the Contractor. The Contractor

has freedom to sell the gas produced from the block subject to

the adjustment and the terms of profit sharing between the

Government and the RIL as set out in the PSC.

(f) On 06.07.2002, Mr. Dhirubhai Ambani passed away.

Sometime thereafter, differences started between Mukesh

Ambani and Anil Ambani over the management and control of

the group companies. Both the brothers, at the relevant time,

were looking after the affairs of RIL in all respects including

the group companies.

(g) The provisions of the PSC were known to the respective

Board of Directors as well as to both the brothers. Mukesh

Ambani was the Managing Director and Anil Ambani was the

Joint Managing Director of the RIL.

(h) In October, 2002, the Consortium (NIKO & RIL)

announced discovery of significant result of KG-D6 Block.

Sometime in the year 2003, the National Thermal Power

Corporation Limited (in short “NTPC”) floated a global tender

for supply of gas to its power projects. The Gas Sale and

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Purchase Agreement was annexed with the tender document.

NTPC invited international competitive bids for supply of

natural gas to its power plants located in the State of Gujarat

to meet its fuel requirements. RIL succeeded in its bid to sell,

transport and deliver 132 TBtu (means one trillion BTU

(British Thermal Unit) or 1000000 MMBTU). NTPC, by letter

dated 16.06.2004, confirmed RIL’s deal.

(i) In June, 2004, RIL entered into a State Support

Agreement with the Government of U.P. to make necessary

arrangements for land, water and other facilities for Dadri

Project.

(j) In a Board Meeting of Reliance Energy Limited (in short

“REL”) held on 20.10.2004, which was attended by Mukesh

Ambani and other Directors of RIL, after reviewing the Dadri

Project it was recorded that gas from KG Basin would be

supplied for the power projects of REL. The Board of REL was

assured about the availability of gas, its timing, adequate

quality and requested quantity at a competitive price for the

project.

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(k) On 18.06.2005, the media released a statement

informing the general public that an amicable settlement is

arrived at in respect of all disputes between the Ambani

Brothers. It was stated that Mukesh Ambani will take over the

responsibility for RIL and IPCL and Anil Ambani will take over

the responsibility for Reliance Infocomm Ltd., Reliance Energy

Ltd. and Reliance Capital Ltd. On the same day, Anil Ambani

resigned as Joint Managing Director of RIL.

(l) Both the brothers with the mediation of their mother

Mrs. Kokilaben Dhirubhai Ambani arrived at a Memorandum

of Understanding (MoU)/family arrangement dated 18.06.2005

and accordingly resolved their disputes amicably. Based

upon the said MoU, both the brothers and the officials of RIL

and other group companies, made various discussions,

exchanged correspondences, e-mails and held conferences and

meetings to implement the MoU and to resolve the disputes

and to divide the various companies by a Scheme of

Arrangement.

(m) On 11.08.2005, RNRL was acquired by RIL for the

purpose of de-merger. The name was changed to Global Fuel

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Management Services. RIL (de-merged company) moved a

petition in the Bombay High Court bearing No. 731/2005

dated 24.10.2005 to obtain a sanction of Scheme of

Arrangement (the Scheme) between RIL and four other

companies viz., (i) Reliance Energy Ventures Limited, (ii)

Global Fuel Management Services Limited, (iii) Reliance

Capital Ventures Limited and (iv) Reliance Communication

Ventures Limited. By order dated 09.12.2005, the Company

Judge, Bombay High Court has granted sanction to the

Scheme and inter alia directed that the shareholders of RIL

would hold shares in each of the resulting companies in the

ratio of 1:1 in addition to the shares held in the parent

company (RIL). The scheme provides that RIL successfully bid

for off-shore oil and gas fields; strategic investment in RIL

which has engaged in power projects, in order to use part of

gas discovered for the generation of power; appropriate gas

supply arrangement will be entered into between RIL and

Global Fuel Management Services pursuant to which gas will

be supplied to RIL; refined gas based energy undertaking; after

the record date the Board of the resulting companies shall be

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re-constituted and shall thereafter be controlled and managed

by Anil Ambani. A suitable arrangement would be entered

into in relation to supply of gas for power projects of Reliance

Patalganga Power Limited and REL with the gas based energy

resulting companies.

(n) The Scheme sanctioned by the Company Judge provided

for de-merger of four Undertakings of Reliance Industries

Limited (RIL) and transfer of these Undertakings on a “Going

concern” basis to four resulting Companies. They are:

(i) The Coal Based Energy Undertakings/Reliance Energy

Ventures Limited.

(ii) Gas Based Energy Undertaking/Global Fuel Management

Services Limited now known as “Reliance Natural Resources

Limited (RNRL).

(iii) Financial Services Undertaking/Reliance Capital

Ventures Limited.

(iv) Telecommunication Undertakings/Reliance

Communication Ventures Limited.

The De-merged company-Reliance Industries Limited (RIL) is

to retain all other businesses including Petrochemicals,

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refining, oil and gas exploration and production, textile and

other business. The Scheme became effective from

21.12.2005.

(o) A draft of GSMA (Gas Sale Master Agreement) and GSPA

(Gas Sale Purchase Agreement) were e-mailed by an official of

RIL to sole nominee of Anil Dhirubhai Ambani Group on the

Board of RIL on 11.01.2006, drafts of GSMA and GSPA were

approved by the Board of RIL at a time when the Board of

RNRL was under the control of Mukesh Ambani. The nominee

of Anil Dhirubhai Ambani Group had raised objections but the

same were overruled. There was no sufficient time given to

RNRL to read the draft. No independent or legal advise could

be taken on behalf of RNRL. Basic clauses to the agreements

are the bone of contention of the present litigation. Both the

agreements alleged to have also been settled and executed on

12.01.2006. On the same day, a letter addressed by Mr. J.P.

Chalasani, the nominee of ADAG on the Board of RNRL to

other Directors on the Board of RNRL namely, Mr. Sandip

Tandon and Mr. L.V. Merchant who were the nominees of

Mukesh Ambani/RIL, stating therein that the proceeding in

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the Board Meeting held on 11.01.2006 to consider the

agreement with RIL in terms of the Scheme were illegal and

void. By another letter dated 13.01.2006, a request was made

to take the contents of letter dated 12.01.2006 with regard to

the agenda-item No.8 (gas supply agreement) and be made

part of the minutes of the Board Meeting.

(p) On 13.01.2006 by a letter addressed to Shri Chalasani,

the minutes of the Board of Directors held on 11.01.2006 were

informed that it would be tabled at the meeting of 13.01.2006.

Some of the objections, as raised by Chalasani, were also

recorded. On 26.01.2006, the GSPA copy was made available

to ADAG for the first time. On 27.01.2006, the shares of the

RNRL to the shareholders of RIL were allotted.

(q) On 07.02.2006, the Board of the RNRL was 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

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12.12.2005 and forwarded to the NTPC. It was further

informed that they agree to carry out the changes to the

proforma GSPA annexed to the GSMA so that it reflects the

same terms as contained in GSPA between NTPC and RIL as

and when any changes are carried out to NTPC GSPA.

(r) On 28.02.2006, RNRL, by its letter to RIL, informed and

elaborated various deviations in the GSMA from the agreed

terms which were necessary for de-merging the business. A

suitable draft agreement in compliance with the Scheme was

also sent with the letter. On 12.04.2006, RIL made an

application to the Ministry of Petroleum and Natural Gas

(MoPNG) for approval of the gas price at which the sale of 28

MMSCMD of gas was agreed with the RNRL under the GSMA.

(s) On 09.05.2006, RNRL, by a letter, requested the MoPNG

to accord approval to the application dated 12.04.2006 made

by the RIL. On 26.07.2006, the MoPNG communicated to the

RIL its refusal to approve the price of gas agreed between the

RNRL and the RIL under the GSMA. On 31.07.2006, RIL

forwarded a letter to the RNRL, a copy of letter dated

26.07.2006 received from the MoPNG rejecting the proposed

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formula for determining the gas price as the basis of valuation

of gas under the PSC.

(t) With these details, RNRL on 07.11.2006/08.11.2006,

filed a Company application No. 1122 of 2006 under Section

392 of the Companies Act, 1956 (hereinafter referred to as “the

Act”) before the High Court of Bombay in which the following

prayers were made:

“(a)Order and Direct RIL to take all necessary steps in order to ensure actual supply of 28 MMSCMD or 40 MMSCMD of gas to RNRL on the NTPC Contract Terms and as per the commercial aspect set out in Para 8.3 hereinabove.

(b)Order and Direct RIL to execute an amendment to the Gas Supply Master Agreement dated January 12, 2006 and to the Form of Gas Sale and Purchase Agreement attached in Schedule 3.2 thereto, to bring them in line with the Gas Supply Master Agreement and Form of Gas Sale and Purchase Agreement as set out in Ex. J to this Application.

(c) restrain RIL from creating any third party interests or rights in respect of i) 28 MMSCMD of Gas to be supplied to the Applicant; (ii) 12 MMSCMD to be supplied to the Applicant on firm basis in case NTPC Contract does not materialize; and/or entering into any contract(s) and/or use or supply to any third party the said gas (28 MMSCMD or 40 MMSCMD, as the case may be) which is required to be supplied to the Applicant under the Scheme.

(d) pending the hearing and final disposal of the application, direct RIL to supply the said 28 MMSCMD or 40 MMSCMD gas, as the case may be, to the applicant on the same terms as per NTPC Contract.

(e) ad-interim reliefs in terms of prayer (c) and (d) above. (f) Such further orders be passed and/or directions be

given as this Hon’ble Court may deems fit and proper.”

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7) In the said application of RNRL, it was highlighted that to

make the Scheme as sanctioned by the High Court, effective

and workable, it is necessary to direct the amendments and

alterations to the GSMA dated 12.01.2006 and draft GSPA

annexed to the GSMA, as both do not result in effective

transfer of the business sought to be demerged and are not in

compliance with the terms of the Scheme of Arrangement in

its letter and spirit. The GSMA and GSPA are also not in

compliance with the MoU which was the very reason of the

Scheme of Arrangement as filed by RIL. Therefore, RNRL

prayed for Company Courts’ intervention to ensure that the

Scheme is implemented effectively.

8) In addition to the above particulars, RNRL placed the

following additional materials in support of their stand:

a) The Board of Directors of RIL were appreciative of the

resolution of the issues between Shri Mukesh Ambani and

Shri Anil Ambani and in their meeting held on June 18, 2005

noted the settlement and amicable resolution of the dispute

providing for reorganization of the Reliance Group including

the businesses and interests of RIL and adopted a resolution

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thanking the efforts made by Smt. Kokilaben Dhirubhai

Ambani in working towards the settlement.

b) The agreement arrived at between Shri Mukesh Ambani,

Chairman and Managing Director of RIL and Shri Anil Ambani

relating to the reorganization of the RIL Group envisaged the

supply of gas from RIL’s current and future gas fields for

various projects of Reliance-Anil Dhirubhai Group. The said

agreement contains the following clauses:-

(a) Quantum of Supply and Source of Supply

• Supply of 28 MMSCMD gas by RIL to Anil Dhirubhai Ambani Group (ADAG). This supply is subject to supply of 12 MMSCMD to NTPC.

• In the event that NTPC contract does not materialize or cancelled, the entitlement of NTPC to the said extent should go to the ADA Group in addition to its entitlement of 28 MMSCMD i.e. a total of 40 MMSCMD.

• ADA Group to have option to buy 40% of all balance and future gas from the current or future gas fields of MDA Group.

• Supply to be from the proven P1 Reserves of RIL whether from the KGD-6 Basin or elsewhere.

(b) Supply period 17 (Seventeen) Years.

(c) ADA Group’s Purchase Obligation.

On take or pay basis.

(d) Price and Commercial Terms

• The firm quantity of 28 MMSCMD/ 40 MMSCMD at a price no greater than NTPC prices.

• Option gas at the market rate • Other commercial terms-same as those of NTPC contract.

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• Shall be in accordance with International Best Practices. • Shall be bankable in International Financial Markets.

(e) Other terms governing the Arrangement.

• Reliance ADA Group shall have the option to take delivery of gas at Kakinada on the East Coast and may construct its own pipeline. However, REL would still have to pay the transportation cost for supply to the West Coast even if the facility is not used, but will have the right to deal with the capacity as it deems fit and to sell or assign the same to another party.

• The gas supply/option agreements would be between RIL and a 100% subsidiary of RIL, which would be demerged to the Reliance—ADA Group as part of the Scheme and not with REL.

• In relation to applicable governmental and statutory approvals, without in any manner mitigating RIL’s responsibility, RIL and Reliance—ADA Group, give an irrevocable Power of Attorney to the Reliance—ADA Group to apply for and obtain all such governmental and regulatory approvals as are necessary on its behalf.

c) The understanding and agreements relating to the supply

of gas as part of the reorganization of RIL are set out in the

Information Memorandum filed for the benefit of the

shareholders and investors by RNRL with the Bombay Stock

Exchange and of the RNRL. Consequently, as part of the

reorganization of the business and undertakings of RIL, the

power business of RIL including the Gas Based Power

Business, described in the Scheme as the Gas Based Energy

Undertaking, was also to be demerged. The Gas Based Energy

Undertaking of RIL to be demerged under the Scheme

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consisted of the business of supply of gas for power projects

REL and of Reliance Patalganga Power Ltd., through suitable

arrangements.

d) The Scheme also explains:

(i) Gas Based Energy Resulting Company (ii) Gas Based Energy Undertaking

e) The Scheme provided for suitable arrangements whereby the

RNRL would receive gas from RIL and supply the same, as RIL

would otherwise have done, for the power projects of REL.

f) In the year 2003, NTPC had floated a global tender for

supply of gas to its power projects to be located at Kawas and

Gandhar in the State of Gujarat. RIL, who emerged as the

successful bidder, had at the time of submission of bids

unconditionally accepted all the terms and conditions

mentioned in the draft GSPA. In accordance with the agreed

position/settlement, the gas was to be supplied by RIL to the

RNRL at the price and terms no less favourable than those of

NTPC and the gas supply agreement between RIL and the

RNRL would be as per the said NTPC contract terms. RIL, by

letter dated 14.02.2006, signed by one K. Sethuraman,

Authorised Signatory of RIL, communicated that he was

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directed to confirm that RIL would agree to carry out

amending changes to the proforma of GSPA annexed to the

Gas Supply Master Agreement (GSMA) so that it reflects the

same terms as are contained in the GSPA for 12 MMSCMD

between NTPC and RIL as and when changes are carried out

to NTPC GSPA.

g) The Scheme also provided that post the demerger of the

Demerged Undertakings of RIL, Shri Anil Ambani would obtain

control and management of the businesses and undertakings

being demerged.

h) Further, the agreement had to reflect an interest in gas

produced by all the gas fields of RIL so as to ensure that gas

upto the agreed quantity i.e. 28 MMSCMD or 40 MMSCMD, as

the case may be, would be made available to RNRL in priority

to any other sale or use by RIL except for the gas to be used

for RIL itself for operation and transportation and for the gas

to be supplied to NTPC. The interest of RNRL was thus to

extend to gas fields other than the KG-D6.

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i) The GSMA and the form of GSPA significantly depart from

the Draft Agreement to the NTPC request for bids and

unconditionally accepted by RIL.

9) The case of RIL:-

a) A Scheme for the demerger of a large company with

majority of shares being held by the public and by institutions,

has to be in larger public interest as well as in the interest of

the company. It must necessarily safeguard the interest of

large body of shareholders of the Demerged Company as also

the shareholders of the Resulting Companies. Any settlement

of the disputes stated to have taken place between or amongst

the promoters has, as a necessity, to abide by the final

decision of the Board of the Demerged Company and such

adaptations as may be necessary to protect and further the

interests of the large body of shareholders or public interest.

(b) Once the Scheme as was placed before and duly approved

by; the shareholders (99% shareholders approved the Scheme)

which suggests that the Scheme had the support not merely of

the General Body of shareholders but also the members of the

promoters’ family-all anterior or underlying agreements

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become irrelevant. The senior-most member of the family who

resolved all the disputes has, at no point, contested the

Scheme as being inconsistent with any arrangement that may

have been arrived at. The present application is a thinly

disguised attempt to reopen the Scheme after it has been fully

implemented in a manner that is completely inconsistent not

only with the demerger of the businesses but the provisions of

Section 392 of the Companies Act, 1956.

c) That none of the heads of so-called Agreement are a part of

the Scheme as proposed by the Board of Directors of RIL and

approved by the creditors and general body of shareholders.

These allegations have no place in an application made for

implementation of the Scheme as sanctioned by the High

Court. The averments made therein are completely

extraneous and irrelevant. The issues, if at all, as between

Shri Mukesh Ambani and Shri Anil Ambani were personal to

the Ambani family and the Board of RIL was not aware of the

details of the settlement between Shri Mukesh Ambani and

Shri Anil Ambani.

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d) The Vice Chairman and Joint Managing Director of RIL, at

the relevant time, Shri Anil Ambani was or in any event,

should be deemed to be fully aware of the nature of the rights

of RIL in relation to exploration and production of gas from

various gas-fields as also the provisions of the Production

Sharing Contract (PSC). Significantly, the Production Sharing

Contract for Block KG-D6 was executed way back in the year

2000. Being Board managed company, the business and

affairs of RIL are under control and supervision of the Board of

Directors and in fact the Minutes of the Board meeting clearly

show that in all matters in which Shri Mukesh Ambani was or

could be said to be an interested director, he had refrained

from participating in the deliberations and voting on the

resolutions. The terms and conditions on which the gas was

to be supplied to the power plants of Reliance Patalganga

Power Limited and REL was to be at the discretion by the

Board of Directors of the Demerged Company who were not

bound by any “agreement” as between two groups of

promoters. The Board of Directors of Demerged Company was

obliged and in fact had at all times kept the interests of the

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general body of shareholders as being a paramount

importance and had taken such decisions as in the best

judgment of the Board, accorded to their duty as the Board

with the shareholders interests being of utmost importance.

10) After considering the claim of both the parties viz., RNRL

and RIL the “Company Judge has arrived at the following

conclusions”:

“184. The conclusions are:

(1) The present company application under Section 392 of the Companies Act is maintainable.

(2) The Company Court, however, under Section 392 of the Companies Act cannot direct or dictate to maintain or amend or modify and/or insist for a particular clause or clauses of such gas supply agreement or such other commercial agreement/contract.

(3) The GSMA as formed and finalized in the Board of Director’s Meeting of RIL on 11.01.2007 and modified on 12.01.2007 is in breach of the Scheme.

(4) The MoU (Memorandum of Understanding/Family Arrangement) and its content are binding to both parties RIL and RNRL and all the concerned, Mr. Mukesh Ambani and his group of Companies and Mr. Anil Ambani and his group of Companies have already acted upon at the pre and post stages of the MoU and the pre and post stages of the Scheme accordingly.

(5) The term “suitable arrangement” as referred in the Scheme needs to read and interpret by taking into account the terms of the MoU as well as the Scheme as referred above. It is also necessary for the complete and full working of the Scheme.

(6) The terms as mentioned in the MoU and GSMA need to be suitable for both the parties subject to the Government’s

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policies and national, international practice in supply of gas or such other products.

(7) The contract of such nature is subject to the Government’s approval in view of NELP & PSC and such related Government policies, but keeping in view the several factors including the freedom and right of the contractor/RIL and the limited and restricted scope of interference in such permissible commercial aspects of the contractor, unless, it is in breach of any public policy and public interest. (8) The supply of gas contract/agreement needs to be clear and bankable documents for all the concerned parties.”

Finally, the Company Judge directed the parties to re-

negotiate for a “suitable arrangement”.

11) As discussed earlier, aggrieved by the said

order/directions of the Company Judge, RNRL has filed Appeal

No. 1 of 2008, RIL has also filed Appeal No. 844 of 2007 before

the Division Bench. During the course of hearing, considering

the public/national importance, the Division Bench permitted

the Union of India to intervene and put forth their stand.

12) The Division Bench framed the following “issues for

consideration”:

(1) Whether the Company Court has jurisdiction to entertain

the Application filed by RNRL under the Companies Act, 1956?

(2) What is a “suitable arrangement” between the two

Companies in the matter of supply of gas for the power

projects of the Resulting Companies and its affiliates? 24

13) Answers by the Division Bench:

(a) The Division Bench has answered the first issue in the

affirmative. The reasoning of the Division Bench, however, is

different from that of the Single Judge. The Company Judge

had held that the Application was maintainable under Section

392 read with Section 394 of the Companies Act. The Division

Bench however found the Company Application to be

maintainable on the basis of Clauses 17, 18, 20 to 24 of the

Scheme of Demerger itself.

(b) On the second issue, the Division Bench held as follows:

(i) The suitable arrangement was required to be made by

engrafting the MoU on the GSMA,

(ii) As far as the fixation of price is concerned, the

Government has the power to fix the price, but only for its

“take” of the gas, and

(iii) Although the Government could lay down the Gas

Utilization Policy, such Utilization Policy would apply only to

the gas available for allocation after certain quantity of gas

which according to the Division Bench, “stood allocated” to

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RNRL as per the MoU. The Gas Utilization Policy could apply

only to the balance quantities.

(iv) There was nothing in the PSC that prevented the

Contractor from selling gas at a price lower than the price

approved by the Government and RIL could fulfill its obligation

of supply of gas at a price of US $ 2.34 per mmbtu.

14) Aggrieved by the above directions/conclusions RNRL, RIL

as well as U.O.I. have filed these appeals by way of special

leave petition before this Court.

15) Heard M/s Ram Jethmalani and Mr. Mukul Rohatgi, Mr.

Ravi Shankar Prasad, learned senior counsel for RNRL, M/s

Harish N. Salve, and Mr. Rohington F. Nariman, learned

senior counsel for RIL and Mr. Gopal Subramanium, learned

Solicitor General, M/s Mohan Parasaran and Mr. Vivek

Tankha, Additional Solicitor General for the Union of India.

16) Historical background:

Up to the early 90’s, prior to the NELP and pre-NELP

years, natural gas was being produced only from the fields

operated by the Government companies, namely Oil & Natural

Gas Corporation (in short ‘ONGC’) and Oil India Limited (in

26

short ‘OIL), out of blocks which were given to these companies

by the Government on nomination basis. Since these fields

were given on nomination basis and only to Government

Companies, the Government’s power to regulate the Natural

Gas Sector was absolute.

Later, it was decided to open the sector to Private Sector

Investment during the mid 1990s when private investment

was sought on competition basis and certain blocks were

awarded to Private Sector companies under a Production

Sharing Contract (better known as the pre-NELP Production

Sharing Contracts). This was done to increase private

investment in this sector since the exploration and production

of oil and gas is associated with considerable risk and no

investment would have been attracted if the APM regime

continued. However, the Contractors who signed the PSC

were required to sell all the gas produced and saved to the Gas

Authority of India Limited, a PSU, and did not have marketing

freedom as regards natural gas.

The pre-NELP regime was replaced by the NELP regime

under which the PSC relevant to the present case was entered

27

into between a Joint Venture composed of RIL and NIKO

Resources Limited and the Government of India. In the NELP-

1 PSC, marketing freedom has been given to the contractor to

a limited extent subject to the overall regulation of the

Government.

17) Constitutional and other statutory Provisions:

“Article 297. Things of value within territorial waters or continental shelf and resources of the exclusive economic zone to vest in the Union - (1) All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the Union and be held for the purposes of the Union.

(2) All other resources of the exclusive economic zone of India shall also vest in the Union and be held for the purposes of the Union.

(3) The limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by Parliament.”

18) Article 39(b) of the Constitution envisages that the State

shall, in particular, direct its policy towards securing the

ownership and control of material resources of the community

as so distributed as best to sub-serve the common good.

19) This Court, in the case of State of Tamil Nadu vs. L.

Abu Kavur Bai, (1984) 1 SCC 515 at 549 held that the

28

expression ‘distribute’ under Article 39(b) cannot but be given

full play as it fulfills the basic purpose of re-structuring the

economic order. It embraces the entire material resources of

the community. Its goal is so to undertake distribution as

best to sub-serve the common good. It re-organizes by such

distribution the ownership and control. To distribute, would

mean, to allot, to divide into classes or into groups and

embraces arrangements, classification, placement, disposition,

apportionment, the system of disbursing goods throughout the

community.

20) In Salar Jung Sugar Mills Ltd. etc. vs. State of

Mysore & Ors., (1972) 1 SCC 23 at page 36 paragraph 38,

this Court held as under:

“38…………Delimiting areas for transactions or parties or denoting price for transactions are all within the area of individual freedom of contract with limited choice by reason of ensuring the greatest good for the greatest number by achieving proper supply at standard or fair price to eliminate the evils of hoarding and scarcity on the one hand and availability on the other.”

21) In Tinsukhia Electric Supply Company Ltd. vs. State

of Assam & Ors., (1989) 3 SCC 709, this Court affirmed the

views expressed in the above cases in the context of electricity

supply and also affirmed the Government’s role in the securing 29

and distributing of the resources of the community that best

sub-serves the common good.

22) This Court in numerous decisions has laid down that in

the award of tenders and the distribution of national property

and State largesse, the State is bound to follow the dictate of

Article 14.

23) In Ramana Dayaram Shetty vs. International Airport

Authority of India & Ors, (1979) 3 SCC 489, this Court has

pointed out that :

“……..The power or discretion of the Government in the matter of grant of largess including award of jobs, contracts, quotas, licences etc., must be confined and structured by rational, relevant and non-discriminatory standard or norm and if the Government departs from such standard or norm in any particular case or cases, the action of the Government would be liable to be struck down, unless it can be shown by the Government that the departure was not arbitrary, but was based on some valid principle which in itself was not irrational, unreasonable or discriminatory ”

24) In Food Corporation of India vs. M/s Kamdhenu

Cattle Feed Industries, (1993) 1 SCC 71, this Court observed

as follows:

“In contractual sphere as in all other State actions, the State and all its instrumentalities have to conform to Article 14 of the Constitution of which non-arbitrariness is a significant facet. There is no unfettered discretion in public law : A public authority possesses powers only to use them for

30

public good. This imposes the duty to act fairly and to adopt a procedure which is 'fairplay in action'. ………”

25) The Oil Fields (Regulation & Development) Act, 1948 and

the Petroleum and Natural Gas Rules, 1959, make provisions,

inter alia, for the regulation of petroleum operation and grant

of licence and leases for exploration, development and

production of petroleum in India. The Territorial Waters,

Continental Shelf, Exclusive Economic Zone and Maritime

Zones Act, 1976 provides for the grant or a licence of Letter of

Authority by the Government to explore and exploit the

resources of the Continental Shelf and Exclusive Economic

Zone and any Petroleum operation.

26) Under the Companies Act, there are no provisions except

Sections 391 to 394 which deal with the procedure and power

of the Company Court to sanction the Scheme which falls

within the ambit of requirements as contemplated under these

sections. Since the Company Judge as well as the Division

Bench of the High Court proceeded on the basis that it has

ample power and jurisdiction to supervise the Scheme as

sanctioned under Sections 391 to 394 of the Companies Act, it

is but proper to refer those sections which are as under: 31

“391. Power to compromise or make arrangements with creditors and members

(1) Where a compromise or arrangement is proposed-

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them,

the Tribunal may, on the application of the company or of any creditor or member of the company or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be to be called, held and conducted in such manner as the Tribunal directs.

(2) If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members as the case may be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Tribunal be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company:

Provided that no order sanctioning any compromise or arrangement shall be made by the Tribunal unless the Tribunal is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Tribunal, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 351, and the like.

(3) An order made by the Tribunal under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar.

32

(4) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a company not having a memorandum, to every copy so issued of the instrument constituting or defining the constitution of the company.

(5) If default is made in complying with sub-section (4), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one hundred rupees for each copy in respect of which default is made.

(6) The Tribunal may, at any time after an application has been made to it under this section stay the commencement or continuation of any suit or proceeding against the company on such terms as the Tribunal thinks fit, until the application is finally disposed of.

392. Power of Tribunal to enforce compromise and arrangement : (1) Where the Tribunal makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it-

(a) shall have power to supervise the carrying out of the compromise or an arrangement; and

(b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement.

(2) If the Tribunal aforesaid is satisfied that a compromise or an arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order made under section 433 of this Act.

(3) The provisions of this section shall, so far as may be, also apply to a company in respect of which an order has been made before the commencement of the Companies

33

(Amendment) Act, 2001 sanctioning a compromise or an arrangement.

393. Information as to compromises or arrangements with creditors and members - (1) Where a meeting of creditors or any class of creditors, or of members or any class of members, is called under section 391,-

(a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any material interests of the directors, managing director or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests of the compromise or arrangement if, and in so far as, it is different from the effect on the like interests of other persons; and

(b) in every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.

(2) Where the compromise or arrangement affects the rights of debenture-holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company's directors.

(3) Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall, on making an application in the manner indicated by the notice, be furnished by the company, free of charge, with a copy of the statement.

(4) Where default is made in complying with any of the requirements of this section, the company, and every officer

34

of the company who is in default, shall be punishable with fine which may extend to fifty thousand rupees; and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company:

Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the refusal of any other person, being a director, managing director, manager or trustee for debenture holders, to supply the necessary particulars as to his material interests.

(5) Every director, managing director, or manager of the company, and every trustee for debenture holders of the company, shall give notice to the company of such matters relating to himself as may be necessary for the purposes of this section; and if he fails to do so, he shall be punishable with fine which may extend to five thousand rupees.

394. Provisions for facilitating reconstruction and amalgamation of companies (1) Where an application is made to the Tribunal under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal-

(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and

(b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this section referred to as a "transferor company") is to be transferred to another company (in this section referred to as "the transferee company");

the Tribunal may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters:-

(i) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company;

35

(ii) the allotment or appropriation by the transferee company of any shares, debentures policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;

(iii) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;

(iv) the dissolution, without winding up, of any transferor company;

(v) the provision to be made for any persons who, within such time and in such manner as the Court directs dissent from the compromise or arrangement; and

(vi) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out:

Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies; shall be sanctioned by the Tribunal unless the Court has received a report from the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest:

Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by the Tribunal unless the Official Liquidator has, on scrutiny of the books and papers of the company, made a report to the Tribunal that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.

(2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order; that property shall be transferred to and vest in and those liabilities shall be transferred to and become the liabilities of the transferee company and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.

36

(3) Within thirty days after the making of an order under this section, every company in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration.

If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees.

(4) In this section-

(a) "property" includes property rights and powers of every description; and "liabilities" includes duties of every description; and

(b) "Transferee company" does not include any company other than a company within the meaning of this Act; but "transferor company" includes any body corporate, whether a company within the meaning of this Act or not.

394A. Notice to be given to Central Government for applications under sections 391 and 394 The Tribunal shall give notice of every application made to it under section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections.”

27) ISSUES ARISING IN THE PRESENT APPEALS:

a) Whether the Company Petition filed by RNRL under

Section 392 of the Companies Act, was maintainable?

b) Even if the Company Petition was maintainable, whether

the challenge raised by RNRL to the GSMA, that it is not

a “suitable arrangement” was maintainable particularly

37

in view of the fact that on merits, the Company Judge

had found, these objections to be unsustainable?

c) Whether the MoU entered into amongst the family

members of the Promoter was binding upon the corporate

entity – RIL?

d) Whether the terms of the MoU are required to be

incorporated in the GSMA as held by the Division Bench?

e) Whether the provisions in the GSMA requiring

Government approval for supply of gas to RNRL is

unreasonable and that its inclusion renders the GSMA as

not a “suitable arrangement” as contended by RNRL?

f) Having insisted upon a Gas Sale and Purchase

Agreement (GSPA) in conformity with the NTPC draft

GSPA dated 12th May, 2005 which contained an

unequivocal stipulation for Government approval for

quantity, tenure and price, whether it is open to RNRL to

now contend that the Government approval for supply of

gas is not required and further that the provision

requiring Government approvals should be deleted from

the GSMA/GSPA?

38

g) Whether it is necessary for this Court to go into the

interpretation of the provisions of the PSC?

h) i. Whether the approval of the Government is required

to the price at which gas is sold by the contractor

under the PSC?

ii. Whether the Government has the right to regulate

the distribution of gas produced which it has

exercised by putting in place the Gas Utilization

Policy under which sectoral and consumer-wise

priorities (to the quantities specified) have been

identified and notified to RIL?

iii. Whether the Contractor has a physical share in the

gas produced and saved which it can deal with at its

own volition?

i) In view of the Gas Utilization Policy and the Pricing Policy

of the Government, whether the “Suitable Arrangement”

for supply of gas to Dadri Power Plant of REL can only be

on the same terms as are applicable to other allottees of

gas and that too to the extent of the quantity of gas that

39

may be allocated by the Government as and when the

Dadri Power Plant is ready to receive gas?

28) All these issues can be answered in the following broad

headings:

(A) Maintainability of the company petition:

i) It has been argued before this Court that the original

company application was not maintainable as the Company

Judge (single Judge) did not have any jurisdiction. It has been

argued that the jurisdiction of the Court can only be found

under Section 394 of the Act and Section 392 is completely

inapplicable. RIL has argued this because the wording of both

the provisions suggests that Section 392 provides much wider

power to the Court with respect to making additions in the

Scheme. Section 392 (1)(b) states that the Court “may give

such directions in regard to any matter or making such

modifications in the compromise or arrangement as it may

consider necessary for the proper working of the compromise

or arrangement”. On the other hand, Section 394 restricts

this power essentially to “incidental, consequential and

supplemental matters only”. Mr. R.F. Nariman, learned senior

40

counsel appearing for RIL concentrated his argument with

reference to Sections 391 to 394 of the Companies Act.

According to him, Section 392 of the Act had no predecessors

either in English Law or in the Companies Act of 1913. The

reason why the Legislature appears to have felt the necessity

of enacting Section 392 is to bring Section 391 on par with

Section 394. Section 394 applies only to Companies which are

re-constructing and or amalgamating, involving the transfer of

assets and liabilities to another Company. It is thus,

applicable to a species of the genus of Company referred to

under Section 391. Section 394, sub-section 1 specifically

gives the Company Court the power not merely to sanction the

compromise or arrangement but also gives the Company Court

the power, by a subsequent order, to make provisions for

“such incidental, consequential and supplemental matters as

are necessary to secure that the re-construction or

amalgamation shall be fully and effectively carried out”

[Section 394(1)(vi)]. This power is absent in Section 391, so

that companies falling within Section 391, but not within

Section 394, would not be amenable to the Company Court’s

41

jurisdiction to enforce a compromise or arrangement made

under section 391 and to see that they are fully carried out.

Hence, the power under Section 392 has to be understood in

the above context, and is of the same quality as the power

expressly given to the Company Court post-sanction under

Section 394.

ii) It is pointed out by Mr. Nariman that on the facts of the

present case, Section 392 does not apply at all, for the reason,

that the sanctioned scheme on record is a scheme to which

both Sections 391 and 394 apply. That being the case, in

order to fully and effectively carry out an arrangement which

has been sanctioned under Sections 391 to 394, the Company

Court enjoys jurisdiction under Sections 394(1)(i) to (vi) itself.

He pointed out that this becomes clear beyond doubt from a

reading of sub section 3 of Section 392. He also pointed out

that Section 153-A of the 1913 Act is conspicuous by its

absence in sub-section(3) of Section 392. According to him,

this makes it clear that where a compromise or arrangement

has been sanctioned under Section 153 A of the previous Act,

the provisions of Section 392 of 1956 Act will not apply,

42

making it clear that where a scheme is governed by the

provisions of Section 394, Section 392 would have no

application.

iii) The learned Single Judge founded his power to give relief

in the Company Application filed by RNRL in Section 392 on

the ground that the applicants cannot be rendered remediless.

For this, Mr. Nariman pointed out that the Company Judge

was not correct for the simple reason that the remedy lies in

Section 394(1) sub-clause (vi) which gives ample power to the

Company Court to fully and effectively carry out the scheme

governed by the provisions of Section 394. He also pointed out

that the marginal note can be looked at to indicate the drift of

the Section.

iv) It is the claim of the RIL that the power to enforce the

compromise or arrangement includes the power to make such

modifications in the compromise or arrangement as the Court

may consider necessary for the proper working of the

compromise or arrangement. However, Mr. Nariman further

pointed out that the power to make modifications does not

extend obviously to make substantial or substantive

43

modifications to the scheme itself which has been passed by at

least 75% of the shareholders in exercise of their right of

Corporate Democracy. In the present case, the Scheme was

passed by an overwhelming majority of more than 99% of the

equity shareholders of RIL. He further pointed out that apart

from the language of Section 392 the power under Section 392

cannot possibly be a greater power than the power under

Section 391 to sanction the original scheme. In Miheer H.

Mafatlal vs. Mafatlal Industries Limited (1997) 1 SCC 579,

this Court delineated the extent of power of the Company

Court under section 391 in para 29 thus:

“29. However further question remains whether the Court has jurisdiction like an appellate authority to minutely scrutinise the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective classes have approved the scheme as required by Section 391 sub-section (2). On this aspect the nature of compromise or arrangement between the company and the creditors and members has to be kept in view. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the parties concerned to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties concerned. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court’s jurisdiction to that

44

extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of Section 392 of the Act which reads as under……..

…….Of course this section deals with post-sanction supervision. But the said provision itself clearly earmarks the field in which the sanction of the Court operates. It is obvious that the supervisor cannot ever be treated as the author or a policy-maker. Consequently the propriety and the merits of the compromise or arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court cannot, therefore, undertake the exercise of scrutinising the scheme placed for its sanction with a view to finding out whether a better scheme could have been adopted by the parties. This exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the company who in their best commercial and economic interest by majority agree to give green signal to such a compromise or arrangement……. “

v) Again in S.K. Gupta & Anr. Vs. K.P. Jain & Anr. (1979)

3 SCC 54, this Court dealt with the creditors’ scheme

propounded under Section 391 to get a particular Company

out of winding up. Observations made in paragraphs 13 and

15 of this judgment, if read out of context, would make it clear

that this Court has extended the power under section 392 to

make modifications which would include additions and

omissions to the scheme at will. This is not the correct 45

purport of the observations in para 13 and 15. In fact, the

judgment very clearly states that the limit on the Court’s

power is always to see that the modifications are done for the

proper working of the scheme and not for any other purpose.

A very important paragraph of the judgment is para 27 where

this Court ultimately observed “strictly speaking, omission of

the original sponsor and substituting another one would not

change the ‘basic fabric’ of the scheme”. This judgment

therefore, must be understood as construing Section 392 in a

manner that would not permit the Company Court to so

modify a scheme as to change its basic fabric.

vi) Another judgment of this Court is in Meghal homes (P)

Ltd. vs. Shree Niwas Girni K.K. Samiti & Ors. (2007) 7 SCC

753 which squarely raises the issue as to whether in the guise

of modifying a scheme, the Company Court can substitute a

portion of the original scheme. This Court said an emphatic

no:-

“53. But before that, we think that another step has to be taken in this case. What has now been accepted by the Division Bench, is not the scheme as modified by the General Meeting as contemplated by Section 391 of the Act. At least two of the modifications having ramifications are based on undertakings or statements made on behalf of LBPL and there appears to be difference of opinion on that modification even among the Somanis. There is also the question whether the proposals of a person who is not one of

46

those recognised by Section 391 of the Act, could be accepted by the Company Court while approving a scheme. We are of the view that the scheme with the modifications as now proposed or accepted, has to go back to the General Meeting of the members of the Company, called in accordance with Section 391 of the Act and the requisite majority obtained.

54. It was argued on behalf of the respondents that under Section 392 of the Act, the court has the power to make modifications in the compromise or arrangement as it may consider necessary and this power would include the power to approve what has been put forward by LBPL who has come forward to discharge the liabilities of the Company on the rights in the properties of the Company other than in the office building and in the godown, being given to it for development and sale. As we read Section 392 of the Act, it only gives power to the court to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. This is only a power that enables the court to provide for proper working of compromise or arrangement, it cannot be understood as a power to make substantial modifications in the scheme approved by the members in a meeting called in terms of Section 391 of the Act.

55. A modification in the arrangement that may be considered necessary for the proper working of the compromise or arrangement cannot be taken as the same as a modification in the compromise or arrangement itself and any such modification in the scheme or arrangement or an essential term thereof must go back to the General Meeting in terms of Section 391 of the Act and a fresh approval obtained therefor. The fact that no member or creditor opposed it in court cannot be considered as a substitute for following the requirements of Section 391 of the Companies Act for approval of the compromise or arrangement as now modified or proposed to be modified.

56. In Miheer H. Mafatlal v. Mafatlal Industries Ltd.this Court had insisted that the procedural requirements of Section 391 must be satisfied before the court can consider the acceptability of a scheme even in respect of a company not in liquidation. Therefore, we are not in a position to accept the argument on behalf of the respondents that the scheme now as modified by the decision of the Division Bench need not go back to the General Meeting of the members in terms of Section 391 of the Act. We must also remember that at least before us there are serious objections to the modifications by one of the Somanis who are the promoters of the Company in liquidation and the sponsors of the arrangement and that objection cannot be brushed aside.

57. We find that the modifications proposed alters the position of the shareholders vis-à-vis the Company. Instead of the Company reviving the spinning unit as recommended

47

by the State Bank of India Capital Markets Limited, as adopted in the General Meeting, now the Company will have nothing to do with the mill lands and the whole of the mill lands will pass on to LBPL on LBPL paying a value of Rs 97.50 crores to SCML and LBPL will start an industry of its own in that property. This cannot be considered to be a modification in the scheme necessary for the proper working of the compromise or arrangement. This is a modification of the scheme itself. Same is the position regarding the provision of replacing the resolution passed that if any surplus amounts are available, SCML would start a viable industry in any part of the State of Maharashtra, by a commitment that SCML would establish an industry in any part of the State of Maharashtra on an investment of Rs 20 crores. This again is an obligation cast on the members of SCML and we are of the view that this cannot also be taken to be a modification which the court can bring about on its own under Section 392 of the Act on the pretext that it is a modification necessary for the proper working of the compromise or arrangement. We have no hesitation in holding that in any event, the Division Bench of the High Court ought to have directed a reconvening of the meeting of the members of the Company in terms of Section 391 of the Act to consider the modifications and ensured that the approval thereof by the requisite majority existed.”

vii) Mr. Nariman has submitted that the Company Judge in

the present case referred to S. K. Gupta’s (supra) case and

finally held that since Sections 391 to 394 are interconnected

it would be able to grant relief asked for in a Company

Application filed under Section 392. It is the claim of the Mr.

Nariman that it is not only incorrect but it would not be

possible in exercise of power under Sections 392 or 394 to

modify the terms of clause 19 of the Scheme. Insofar as the

Division Bench, according to him, goes into various clauses of

the Scheme to say that the subsequent power of modification

48

of the Scheme itself is contained in these Clauses, more

particularly, clause 22. He contended that even if it is to be

applied, no modification can be made under it without the

consent of the parties to the Scheme. According to him, if the

conclusion of the Division Bench is accepted, the resultant

order of the Division Bench is contrary to Clause 22 in that it

would not be possible to read the MoU dated 18.06.2005 into

Clause 19 of the Scheme without the consent of the

Shareholders and the Board of Directors of RIL. He insisted

that the Division Bench of the High Court was bound by the

judgment in Meghal Homes where the jurisdiction of the

Company Court under Section 392 was clearly spelt out.

viii) Learned senior counsel for RNRL submitted that RNRL

seeks to enforce the terms of the Scheme of Arrangement as

sanctioned by the Bombay High Court vide its order dated

09.12.2005. As per the said Scheme, RIL was required to

execute a suitable arrangement for supply of gas to RNRL.

However, RIL has wrongfully caused the execution of a

document the effect of which would be that the business of

supply of gas, as contemplated in the Scheme of Arrangement,

49

would not be transferred to RNRL. He further argued that the

timing and manner of the impugned agreement as well as

several clauses of the Scheme render the same virtually

unworkable. In these circumstances, it is pointed out that

RNRL has approached the Company Court seeking suitable

reliefs under Section 392 of the Companies Act.

ix) In the earlier part, the judgment of this Court in S.K.

Gupta (supra) has been discussed. It is the duty of the Court

to ensure that the Scheme is fully implemented. Learned

senior counsel for the RNRL pointed out that in this case it

would imply that this Court must ensure that the gas based

energy undertaking is, in fact, transferred to RNRL as

contemplated under the Scheme. For this purpose, the Court

has the jurisdiction and power to direct modification of the

GSMA which was required to be executed pursuant to clause

19 of the Scheme. Learned senior counsel further contented

that Section 392 shows the width of the power and the

ultimate consequence envisaged under the Companies Act for

non implementation of the Scheme. The only limitation on the

power of the Court is that it cannot change the basic structure

50

or character or purpose of the Scheme. It was further pointed

out that subject to this, the power is of widest amplitude and

unlimited. On behalf of the RNRL it was pointed out that the

decision of this Court in Meghal Homes (supra) is not

applicable to the present case, firstly, this judgment accepts

the principle that the Court has wide power under Section 392

though the same are circumscribed, secondly, the said

judgment does not refer to Gupta’s case which was a binding

decision of a three-Judge Bench. Further, in Meghal Homes

(supra) the challenge was the power of the Court to sanction

the Scheme and not power to direct modification to an already

sanctioned Scheme.

x) In the light of the stand taken by both parties, this Court

analyzed the relief sought for in the Company Application and

the relevant materials placed before the Company Judge.

Section 392 creates a duty to supervise the carrying out of the

compromise or arrangement. This power and duty was

created to enable the Court to take steps from time to time to

remove all obstacles in the way of enforcement of a sanctioned

scheme. While sanctioning, it shall anticipate some hitches

51

and difficulties which it can remove by the order of the

sanction itself but clause 1(b) makes it clear that this power

can also be exercised after the scheme has once been

sanctioned. So long as the basic nature of the arrangement

remains the same the power of modification is unlimited, the

only limit being that the modification should be necessary for

the working arrangement.

xi) In view of the above discussion, this Court holds that

Section 392 is applicable to the Company Application filed by

RNRL. This is more so because the Company Court has

originally sanctioned the scheme under both Sections 391 and

394. Further, the position derived from Gupta (supra) the

power of the Court under Section 392 is wide enough to make

any changes necessary for the working of the Scheme.

Therefore, Court does have jurisdiction over the present

matter. However, it is made clear that the power of the Court

does not extend to re-writing the Scheme in any manner.

xii) Furthermore, in the Companies Act, there is no provision

except Section 391 to Section 394 which deal with the

procedure and power of the Company Court to sanction the 52

Scheme which fall within the ambit of the requirements as

contemplated under these sections. In the absence of any

other provisions except Section 392, it is difficult to accept the

contention as raised that the present application under

Section 392 of the Companies Act is without jurisdiction. On

the other hand, Section 391 to Section 394 has ample power

and jurisdiction to supervise the scheme as sanctioned under

the Companies Act. As rightly observed by the Company

Judge, the exigencies, facts and circumstances, play dominant

role in passing appropriate order under Sections 391 to 394

after sanctioning of the Scheme. The Company Court is not

powerless and can never become functus officio. Sections 391

to 394 are interconnected and it can pass appropriate order

for sanctioning of any Scheme including of arrangement,

demerger, merger and amalgamation. Therefore, the

application filed by RNRL under Section 392 is maintainable.

Nevertheless, as observed earlier, the power of the Court does

not extend to re-writing the Scheme in any manner.

53

(B) Memorandum of Understanding (MoU)

i) In order to understand the position of RNRL and RIL as

well as “suitable arrangement” under the “Scheme”, it is but

proper to refer the contents of MoU (placed before the Division

Bench of the High Court) which are as under:

“STRICTLY CONFIDENTIAL

MEMORANDUM OF UNDERSTANDING

This Memorandum of Understanding (this “MoU”) is made at Mumbai this___ day of June, 2005 amongst Kokilaben D. Ambani (“Kokilaben”), Mukesh D. Ambani (“Mukesh”) and Anil D. Ambani (“Anil”) (each of Kokilaben, Mukesh and Anil hereinafter referred to individually as a “Party” and collectively as the “Parties.”) WHEREAS

A. After the demise of Shri Dhirubhai H Ambani (late Dhirubhai) on July 6, 2002, Kokilaben is the head of the Ambani family and has complete moral authority over the family. Her four children, Mukesh, Anil, Dipti and Nina have, by Deed of Release dated October 17, 2002, released their entire interest in the estate of late Dhirubhai in her favour.

B. Mukesh and Anil have been managing the various businesses of the family comprised in the Reliance Group (the “Businesses”). Differences have arisen between them in this behalf, and having regard to recent events and with the intervention of Kokilaben, the Parties have now agreed that the best way forward would be to have a segregation of the ownership and Businesses into two groups, with one group owned, managed and controlled by Mukesh and the other owned, managed and controlled by Anil. Most of the key principles relating to the segregation of certain family assets including controlling interest in the Businesses and companies have been agreed to between the Parties.

54

C. Mukesh and Anil have also expressed their unconditional trust in Kokilaben and agreed that she shall play a final and decisive role in resolving any open issues in the process of settlement, and that they shall abide by all decisions made by her to facilitate early closure of the settlement.

D. The Parties are now desirous of formally recording their agreement in this behalf.”

ii) It has been the consistent position of RNRL that the MoU

signed between Mukesh Ambani and Anil Ambani is binding,

and therefore, the “suitable arrangement” under the “scheme”

should be nothing but the MOU itself. On the other hand, RIL

has consistently argued that the MOU is not binding for them

since it is merely a non-legal instrument between certain

family members. Therefore, it was argued that it will not bind

the companies and the shareholders who have a completely

different personality.

iii) Mr. Ram Jethmalani, learned senior counsel appearing

for the RNRL strongly relied on the following decisions of this

Court with reference to the importance of family arrangement

(MoU) and its effect and value.

1. Kale & Ors. vs. Deputy Director of Consolidation &

Ors., (1976) 3 SCC 119 (Paragraphs 9, 17, 19, & 42) which

states as under: 55

“ 9…………A family arrangement by which the property is equitably divided between the various contenders so as to achieve an equal distribution of wealth instead of concentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term “family” has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spes successionis so that future disputes are sealed for ever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest of the country. The courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement under which he has himself enjoyed some material benefits……..

17. In Krishna Biharilal v. Gulabchand,1971 1 SCC 837, it was pointed out that the word “family” had a very wide connotation and could not be confined only to a group of persons who were recognised by law as having a right of succession or claiming to have a share.

19. Thus it would appear from a review of the decisions analysed above that the courts have taken a very liberal and broad view of the validity of the family settlement and have always tried to uphold it and maintain it. The central idea in the approach made by the courts is that if by consent of parties a matter has been settled, it should not be allowed to be reopened by the parties to the agreement on frivolous or untenable grounds.

42……….As observed by this Court in T.V.R. Subbu Chetty’s Family Charities case, that if a person having full knowledge of his right as a possible reversioner enters into a transaction which settles his claim as well as the claim of the opponents at the relevant time, he cannot be permitted to go back on that agreement when reversion actually falls open.”

56

2. K.K. Modi vs. K.N. Modi & Ors., (1998) 3 SCC 573

(Paragraphs 33 & 52) which states as under:

“33. In the present case, the Memorandum of Understanding records the settlement of various disputes as between Group A and Group B in terms of the Memorandum of Understanding. It essentially records a settlement arrived at regarding disputes and differences between the two groups which belong to the same family. In terms of the settlement, the shares and assets of various companies are required to be valued in the manner specified in the agreement. ……

52. Group A contends that there is no merit in the challenge to the decision of the Chairman of IFCI which has been made binding under the Memorandum of Understanding. The entire Memorandum of Understanding including clause 9 has to be looked upon as a family settlement between various members of the Modi family. Under the memorandum of Understanding, all pending disputes in respect of the rights of various members of the Modi family forming part of either Group A or Group B have been finally settled and adjusted. Where it has become necessary to split any of the existing companies, this has also been provided for in the Memorandum of Understanding. It is a complete settlement, providing how assets are to be valued, how they are to be divided, how a scheme for dividing some of the specified companies has to be prepared and who has to do this work. In order to obviate any dispute, the parties have agreed that the entire working out of this agreement will be subject to such directions as the Chairman, IFCI may give pertaining to the implementation of the Memorandum of Understanding. He is also empowered to give clarifications and decide any differences relating to the implementation of the Memorandum of Understanding. Such a family settlement which settles disputes within the family should not be lightly interfered with especially when the settlement has been already acted upon by some members of the family. In the present case, from 1989 to 1995 the Memorandum of Understanding has been substantially acted upon and hence the parties must be held to the settlement which is in the interest of the family and which avoids disputes between the members of the family. Such settlements have to be viewed a little differently from ordinary contracts and their internal mechanism for working out the settlement should not be lightly disturbed. The respondents may make appropriate

57

submissions in this connection before the High Court. We are sure that they will be considered as and when the High Court is required to do so whether in interlocutory proceedings or at the final hearing.”

iv) However, Mr. Harish N. Salve, learned senior counsel for

the RIL while drawing our attention to Section 36 of the

Companies Act, 1956, submitted that the Memorandum and

Articles shall bind the company and its members. According

to him, the Articles of Association are the regulations of a

company which are binding on the company and its

shareholders. He, therefore, pointed out that nothing outside

the Articles can bind a shareholder vis-à-vis the company. In

support of the above stand, he heavily relied on paragraph 9 of

the judgment of this Court in V.B. Rangaraj vs. V.B.

Gopalkrishnan & Ors. , AIR 1992 SC 453 which reads as

under:

“9. …..the private agreement which is lied upon by the plaitniffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the Article. Firstly, it imposes a restriction on a living member to transfer the shares only to the existing members and secondly the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the member's right to transfer his shares which are contrary to the provisions of the Art.13. They are, therefore, not binding either on the shareholders or on the company……”

58

29) It is seen from the above decision that the agreement

between the two groups of shareholders which impose certain

restrictions on the transferability of the shares held by them

was not binding either on the company or its shareholders

because the restrictions so imposed by the agreement were

contrary to the provisions of the Articles, sale of shares held

by one of the two groups in breach of the agreement could not,

therefore, be held to be valid. He also pointed out that the

agreement between the shareholders is not binding on the

company unless the company adopts it and it is incorporated

in the Articles of Association. Based on the above principles,

he pointed out that the de-merger Scheme was based on the

MoU and be treated as guidance to the term suitable

arrangement. He also pointed out that a family arrangement

or the MoU has not been referred to at any stage in the

Scheme or in any representation made to the Stock Exchange

and the same is contrary to the RNRL’s own pleading and their

case. Mr. Harish Salve also relied on various exerts from

some of the letters/e-mails from Exhibit “F” filed by RNRL.

Some of the letters/e-mail dated 30.07.2005 from Mr. Harish

59

Shah (RIL) to Mr. Venkat Rao (REL); e-mail dated 06.10.2005

from Mr. Cyril Shroff to Mr. Sandeep Tandon/RIL; e-mail

dated 29.11.2005 from Mr. Cyril Shroff to Mr. Anil Ambani; 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

unchallenged.

30) In the light of the stand taken by both sides, this Court

analysed the contents of MoU and the subsequent

arrangement after exchange of various letters/e-mails as well

as deliberations among the officials of both the entities. It is

clear that both parties acted upon the said family

arrangement/MoU dated 18.06.2005. The above referred

letters and e-mails, further confirmed that there is an

arrangement made and agreed between the RIL and ADAG

(RNRL), it is also clear and show that the discussion between

the group of officials was intended to expedite the

implementation of the MoU by producing a “suitable

60

arrangement”. Though copy of the MoU was not part of the

record before the Company Judge, by consent, the above

extracted portion was placed before the Division Bench at the

time of hearing of the appeal. It cannot be accepted that

neither RIL nor its Board Members were aware of the contents

of the MOU. In fact, the Company Judge has pointed out that

a specific reference was made in the Company Application No.

1122 of 2006 and there is no specific denial by the RIL. The

Press Release at the instance of their mother Smt. Kokilaben

Ambani (Exh. “D”) about the family arrangement/MOU cannot

be over-looked. It is clear that because of the efforts of Smt.

Kokilaben Ambani, the mother of Mukesh Ambani & Anil

Ambani, the family settlement has been arrived at and

followed by the Scheme of De-merger. It is also clear from the

materials i.e. exchange of letters and e-mails and the

deliberations by the officials of both entities and their Board of

Directors as well as the shareholders have agreed for the

Scheme. Further it was demonstrated that after execution of

MOU, both the parties have been entering into contracts and

agreements as an independent entity. As pointed out that

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except the gas supply agreement all other companies as found

are working and running their affairs smoothly.

31) Before the Division Bench, it was submitted by RIL that

the MoU amongst the promoters does not bind the corporate

entity RIL. It was not open to RNRL to produce the documents

at the stage of appeal which were not placed before the learned

Single Judge. The MoU was clearly in the private domain and

was never placed in the corporate domain even though such

course of action was suggested by Mr. Cyril Shroff, the

Solicitor appointed to draw the Scheme of Demerger. It was

also the stand of the RIL that MoU was never placed before its

Board of Directors and contents thereof were not known to the

Board. The correspondence contained in Exhibit F of the

Company Application, at best, goes to show that MoU was the

broad structure on which the demerger was to be worked out.

32) On the other hand, learned senior counsel appearing for

the RNRL demonstrated the existence, effect, sanctity and the

binding nature of MoU. It is their definite case that the

existence of MoU was specifically pleaded in para 6.6 of the

Company Petition. Learned Company Judge found that the

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MoU existed and that the terms of MoU had to be

implemented. Inasmuch as the relevant part of MoU

concerning the gas business have already been placed before

the Division Bench in appeal with the consent of the parties

and the relevant terms relating to price, tenure, volume etc.

are admitted between the parties, it is only the interpretation

thereof which is to be considered. Further, the MoU itself

seeks to divide the business into two groups i.e. Anil Ambani

Group and Mukesh Ambani Group wherein both individuals

would control and supervise various businesses through

various corporate entities. The implementation of the MoU

resulted in the scheme under Section 391 of the Act before the

Company Court. Apart from this, it was pointed out that the

Board of RIL made a public announcement on 18.06.2005 i.e.

soon after the execution of MoU on the same day publicly

acknowledging, with gratitude to their mother, Smt. Kokilaben

that a settlement of disputes has been reached between the

members of the family. Further, Exhibit F reflects the

knowledge of the terms of MoU with the senior officials of both

sides wherein efforts were being made to work out mutually

63

negotiated GSMA/GSPA which would be in line with MoU.

33) Apart from the above factual details, Mr. Ram

Jethmalani, learned senior counsel appearing for RNRL

explained the Doctrine of Identification and submitted the

family arrangement was arrived at and signed by Smt.

Kokilaben Ambani, Shri Mukesh Ambani and Shri Anil

Ambani. Among the three, Shri Mukesh Ambani was and is

the Chairman and Managing Director of RIL. As per the

Doctrine of Identification, a company is identified with such of

its key personnel through whom it works. Mr. Jethmalani

further pointed out that his actions are deemed to be action of

the company itself, hence, RIL is deemed to be aware of and

bound by the actions of the Managing Director. In support of

the principle “Doctrine of Identification”, he relied on decisions

of this Court, namely, Union of India vs. United India

Insurance Co. Ltd., (1997) 8 SCC 683 at page 695, Assistant

Commissioner, Assessment-II, Bangalore & Ors. vs. M/s

Velliappa Textiles Ltd. & Ors, AIR 2004 SC 86 para 16, R.

vs. Mc Donnell, (1966) 1 All. E.R. 193 at page 196 & 202,

J.K. Industries Ltd. & Ors. vs. Chief Inspector of

64

Factories and Boilers & Ors. (1996) 6 SCC 665 paragraphs

44 & 45.

34) In the light of the stand taken by RIL and RNRL, the

contents of various clauses in MoU particularly with regard to

distribution of gas and also the conclusion arrived by the

Company Judge and the Division Bench of the High Court

have been carefully verified.

35) Firstly, the MoU is not technically binding between RIL

and RNRL. It is not in dispute that MoU is between three

persons and the personality of the company must be

construed separate from these persons. The principle

emphasized by Mr. Jethmalani i.e. Doctrine of Identification

may be applicable only in respect of small undertakings but in

the case of RIL and RNRL, the companies have more than

three million shareholders, in such a situation, one cannot

make the companies’ personality the same as that of persons

involved.

36) Secondly, in the light of the conduct of Mukesh Ambani,

Chairman of RIL, MoU was definitely the instrument which

was the basis of the scheme. Therefore, it can be used as an

65

external aid for the interpretation of “suitable agreement”

under the scheme. To put it clear, the MoU is one of the ways

in which the intention of the parties can be made clear with

regard to what was considered suitable. Nevertheless, there is

no specific requirement that the GSMA must confirm

completely with the MoU.

37) Thirdly, it must be pointed out that apart from the MoU,

“suitable arrangement” must be understood in the context of

government policies, production sharing contract (PSC)

between RIL and the Government, national interest and

interest of the shareholders. Therefore, in our view MoU is one

of the means of construing suitability of the arrangement and

not the sole means.

(C) GSMA and GSPA: whether they qualify as suitable

arrangement:

38) Subsequent to the formation of the Scheme, the Board

of Directors of RIL framed the GSMA and GSPA. As per the

Scheme clause VIII and sub-clause (xvii), the Board of

Directors of each of the resulting companies to be re-

constituted in such manner as is agreed between each

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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

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business and undertakings to provide focused management

attention. In this background it was contended by learned

senior counsel appearing for RNRL that it was necessary that

RIL should have given full and proper opportunity to the RNRL

before passing such resolution hurriedly on 11.01.2006 and

before executing such GSMA and GSPA in question. As per

clause 19 as recorded the suitable arrangement should be

suitable to both the parties in all respects. In this aspect, the

decision as taken hurriedly on 11.01.2006, therefore, was one

sided, specifically taking into consideration the background

and/or events followed upto the sanctioning of the Scheme.

As noted, the control over the Board of the RNRL on

10.01.2006 was of RIL, as control over has not been handed

over to Anil Ambani. On 26.01.2006, final copy of GSPA was

made available by nominee of RIL to nominee of Ambani

Group. The drafts of GSMA and GSPA were only circulated on

10.01.2006 through mail. It is to be noted that shares of

RNRL were allotted/transferred to Anil Ambani only on

27.01.2006 i.e. after the Board meeting held on the same day.

The New Board was re-constituted in accordance with clause

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17 of the Scheme on 07.02.2006. As per clause 6, RIL

continued to manage the resulting companies till the effective

date in the capacity of trustees. Therefore, it is the claim of

RNRL that the Board of the Meeting and the Resolution and/or

execution of the said GSMA on 11.01.2006/12.01.2006 before

the actual transfer of control of the resulting companies to Anil

Ambani and before re-constitution of the Board as per clause

17 of each resulting companies were against clauses 17 and

19 and the basic purpose of the Scheme in so far as the

supply of gas is concerned.

39) It was pointed out by the learned senior counsel for the

RNRL that pending the decisions and discussion on various

aspects of gas supply agreement hurriedly in spite of objection

by them, the Board on 12.01.2006 took a decision by majority

and approved the GSMA and GSPA. It was contended by

RNRL that such decision cannot be said to be bona fide. The

Resolution dated 12.01.2006 without new Board of Directors

of resulting companies is not as per the agreed terms of the

Scheme. It was also their claim that the decision as taken

hurriedly on 12.01.2006 raises various doubts and it is one

69

sided and it safeguards only the interest of RIL and not in the

interest of RNRL or resulting companies as it was by the Board

of Directors of the RIL, the trustee company after the Scheme,

but before the nomination or formation of Board of Directors of

RNRL. It was argued that the procedure as followed to adopt

or resolve or execute the GSMA was unfair and unjust. In

those circumstances, it was projected before the Company

Judge as well as the Division Bench that whether the parties

have committed any breach of clauses of the Scheme which is

creating hurdle.

40) The Division Bench has concluded that the allocation of

gas to RNRL for its resulting companies, i.e., supply of gas for

power project of Reliance Patalganga Power Limited and REL

with the Gas Based Energy Resulting Company, a suitable

arrangement which is required to be made by incorporating

the same in the GSMA and GSPA according to the MoU

reached between the parties on 18.06.2005. It is useful to

extract the relevant portion of the MoU relating to gas supply

which reads as under:

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“II. GAS Supply

(i) An expert international firm will be appointed to evaluate the nature and extent of gas reserves particularly at KGD6 and all other gas fields from which RIL produces gas from which gas could be supplied to Reliance Energy Limited (“REL”), for all its projects (including without limitation its proposed Dadri Power Project). The expert shall be appointed by ICICI Bank Limited in consultation with both groups (who must agree within 72 hours hereof) and if they are unable to agree, an international energy consultancy firm, as may be nominated by the energy/E&P department of ICICI Bank Limited will nominate an international expert who will carry out this survey and provide an independent report. Such international consultancy firm shall not have any conflict of interest. The report of such agency could consider the DGH letter as one of the inputs and its decision shall be final as to the quantity and nature of reserve (including matters such as P, P2, P3 reserves) and this would be the factual basis for the rest of the decisions. The Mukesh Ambani Group will now move expeditiously for facilitating such verification and is to provide all information for this purpose.

(ii) On the assumption that only 12 MMSCD is the current P1 reserve and other reserves are in the stages of discovery, arrangements as to quantity of “net gas” (RIL’s entitlement of gas as reduced by the quantity of the gas required for operation and transportation ) are as follows:

(a) The first right would be to NTPC under its existing draft supply agreement to the extent of 12 MMSCD. This would be for delivery on the west coast. In the event that the NTPC contract does not materialize or its cancelled, the entitlement of NTPC to the said extent shall go to the Anil Ambani Group in addition to its entitlement of 28 MMSCD in (b) below.

71

(b) Thereafter, and subject to availability of adequate P1 reserves the next 28 MMSCD would go to REL. No sooner the P1 reserves (determined as per (i) above), are identified (whether from KGD6 or elsewhere), this would be included in a binding gas supply agreement in favour of REL. This would be at prices no greater than NTPC prices.

(c) Thereafter and for the entire future of the balance reserves (including new discoveries of gas from new explorations and/or bids as may be submitted from time to time), the quantity of gas would, at the option of the Anil Ambani Group (exercised from time to time), be split in the ratio of 60:40 with 60% to Mukesh Ambani Group and 40% to Anil Ambani Group. Subject to the above, after the 28 MMSCD to REL, the next order of priority would be of RIL for its captive consumption for Mukesh Ambani Group Companies to the extent of a maximum of 25 MMSCD. Such 25 MMSCD will be set off against 60% entitlement of the Mukesh Ambani Group. An expert appointed by ICICI Bank Limited will provide guidance, within a period of 45 days from this MOU, on the appropriateness of the amount of 25 MMSCD or captive consumption, and in the event that the amount considered necessary by such expert is materially less than 25 MMSCD, Kokilaben will reconsider the issue. Thereafter, the next order of priority would be at Anil Ambani Group’s option, go to Anil Ambani Group. All such gas shall be supplied at market rates. By way of examples:

• If the P1 reserves are identified at 60 MMSCD, the sequence would be NTPC-12, REL-28 and RIL (captive)- 20.

• In case the reserves are 100, the sequence would be NTPC-12, REL-28,

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RIL(captive)-25, Anil Ambani Group (second installment)-16.67 and in so far as the balance 18.33 is concerned, the same would be shared in the ratio of 60:40. This shall be an option but not an obligation.

(iii) For the first 28 MMSCD, the price and the commercial terms shall be the same as those applicable to NTPC.

(iv) REL shall have the option to set up its own pipeline from the gas field to its plant at its own cost. This shall not make a difference to the price for the gas supplied by RIL to REL.

(v) REL shall have the option to take delivery of gas at Kakinada on the East Coast and may construct its own pipeline. However, REL would still have to pay the transportation cost for supply to the West Coast even if the facility is not used, but will have the right to deal with the capacity as it deems fit and to sell or assign the same to another party, on the West Coast or otherwise.

(vi) 50% of the commitment for supply of gas would be supplied in the financial year 2008-09 and the balance 50% in 2009-10.

(vii) As soon as the P1 reserves are identified, a binding gas supply agreement, in accordance with international best practices, bankable in the international financial market would be finalized and entered into, not later than 45 days from the date of this MoU. As stated above, the NTPC supply agreement would be a general guidance for the same and shall as far as possible be the basis for such contracts, and the terms of such contracts shall be no less favourable than those of the NTPC contract. Mukesh will provide the Production Sharing Contract and also correspondence with NTPC and the latest version of the draft contract to the

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Anil Ambani Group. The gas supply working group to discuss details.

(viii) Kokilaben recognizes that a long terms, stable source of gas from RIL, which has the largest find of gas, was absolutely essential for the growth plans of the Anil Ambani Group and in order to enable Anil to carry REL to even greater heights. Kokilaben has, therefore, specially stressed and impressed upon Mukesh and Mukesh shall personally ensure that at the time of finalization of the binding gas supply agreement the terms provide the required conform and stability in these agreements, even if that means some departure from the NTPC standard.

(ix) The gas supply/option agreements would be between RIL and a 100% subsidiary of RIL, which would be demerge to the Anil Ambani Group as part of the Scheme of Arrangement. Such agreements would not be with REL.

(x) The gas supplied to the Anil Ambani Group by the Mukesh Ambani Group shall not be used for trading, other than trading within the Anil Ambani Group.

(xi) Swapping of gas is permitted.

(xii) (a) In relation to applicable governmental and statutory approvals, without in any manner mitigating RIL’s responsibility to jointly work towards obtaining such approvals, RIL will, if so required by the Anil Ambani Group, give an irrevocable Power of Attorney to the Anil Ambani Group/REL to apply for an obtain all such governmental and regulatory approvals as are necessary on its behalf.

(b) The definitive agreements will reflect that the Mukesh Ambani Group will act in utmost good faith and will make best endeavours to work for and obtain such approvals. If there is any action taken in bad faith for not obtaining/scuttling the obtaining of such approvals, Kokilaben reserves her ability to

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intervene again and the Anil Ambani Group would also have a claim for damages.”

A perusal of above-mentioned clauses show that there is a

fixed quantum of gas which stands allocated to RNRL, i.e.,

28MMSCD to REL and in the event NTPC contract does not

materialize or is cancelled, the entitlement of NTPC to the said

extent shall go to the RNRL in addition to its entitlement of 28

MMSCD in addition to this allocation from the cost and profit

gas which will be available for sharing with the Union of India

by RIL. It is further seen that for entire future of the balance

reserves the quantity of gas be shared in the ratio of 60:40,

i.e., 60 % to Mukesh Ambani Group and 40% to Anil Ambani

Group.

41) On going through the materials placed by RNRL, RIL, the

Company Judge and the Division Bench reached the following

conclusions:

(a) GSMA/GSPA was hurriedly framed which reflects

mala fides on the part of RIL.

(b) There is no fraud on the part of RIL in terms of Section

17 of the Contract Act as alleged by RNRL.

75

(c) The dispute in the present case is about conditions of

supply (rate, quantity, tenure etc.) and the non-

compliance of the GSMA with MoU.

(d) GSMA/GSPA is not “suitable arrangement” as they are

not true to the MoU.

(e) The Court, under Section 392, does not have the

power to add clauses and/or amend clauses.

(f) The parties must negotiate the contents of “suitable

arrangement” in the Scheme, since the Court is not an

expert in such things.

42) On the very same issue, after analyzing all the materials,

the Division Bench agreed with the Company Judge that MoU

was binding on the parties by giving different reasons. On this

conclusion, the Division Bench ruled that all the aspects of

GSMA relating to supply of gas, tenure, pricing etc. must then

be the same as provided under the MOU. The Division Bench

also held that there is no absolute freedom to market the gas

as argued by RNRL. Under Articles 21.6.2(b) and (c) of the

PSC, the Government shall regulate the sale on the basis of a

formula. But at the same time, the Division Bench held that

76

there is nothing in the PSC to restrict the sale of gas by the

contractor at a price lesser than that approved by the

Government. In those circumstances, the Division Bench has

concluded that the Contractor has freedom to sell gas at arms

length price to the benefits of the parties to the PSC out of

their share of profit gas to which Article 21.6 of the PSC

applies. The Division Bench has finally held that “suitable

arrangement” should be entered into by the parties on the

basis of the MOU.

43) On consideration of the above analysis, it is quite

reasonable that the test must be formulated to determine what

“suitable arrangement” means. The determination of “suitable

arrangement” must not only include the MoU but other

considerations also. Among various considerations, the prime

aspect relates to the role of the Government, the proper

interpretation of PSC relating to pricing and valuation,

national interest relating to the interest of consumers and

protection of natural resources. At the same time, the other

consideration must relate to the interest of RNRL, i.e., whether

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the GSMA results in RNRL becoming a shell company and

whether the GSMA is a bankable agreement.

44) Insofar as the workability of GSMA, RNRL has fourfold

objections. They are: 1) that the “suitable arrangement” under

the scheme is nothing but the MoU; 2) that the GSMA is not a

bankable agreement; 3) malafide on the part of RIL to bring in

an illegal gas agreement; 4) Pursuant to the stand of the RIL

and its response, RNRL has raised six points of protestation.

The GSMA was put into the place in pursuance of Clause 19 of

the scheme. Clause 19 of the scheme provides that in order to

effectuate the demerger or RIL, a suitable agreement has to be

formulated. In other words, the position of RNRL is that

“suitable arrangement” within the meaning of Clause 19 is

supposed to be the MoU. Such an arrangement must be

suitable for RNRL. According to RNRL, since GSMA is not a

replication of the conditions of the MoU and that it is not a

bankable agreement it will reduce RNRL into a shell company.

GSMA violates the scheme and must be replaced taking into

account the various points of protestation raised by them. On

the other hand, it is the claim of RIL that since the MoU is not

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a binding document, there is no requirement that the GSMA

must replicate the MoU. Further, they questioned the stand of

RNRL that the GSMA is not suitable for RNRL. Further, they

put-forth their case that the GSMA is in consonance with the

obligations of RIL to the Government under the BSE and the

requirements flowing from the decisions of EGOM.

SUITABLE ARRANGEMENT:

45) Suitable Arrangement under Clause 19 of the scheme

must not be merely suitable for RIL alone. In other words, it

has a broader meaning. Such an arrangement must be

suitable for the interest of shareholders of RNRL as reflected

by MoU and RIL, the obligations of RIL under the PSC, the

National Policy of gas including the decisions of EGOM and

Gas Utilization Policy (GUP) and the broader national and

public interest.

46) There is a need to construct a suitable arrangement

under Clause 19. The broader construction of suitable

arrangement is that the arrangement must be suitable not

only for RIL and RNRL but also suitable with respect to the

government’s interest under PSC, in consonance with the

79

decisions of EGOM or any other gas utilization policy as well

as larger national interest. This is because gas is an essential

natural resource and is not owned by either RIL or RNRL. The

Government holds this natural resource as a trust for the

people of the country. Supply of gas is a matter of national

interest and in the present case, due to the very nature of the

companies involved, there are huge number of shareholders

and people who will be indirectly affected by the policies of the

companies. Therefore, the arrangement flowing from Clause

19 must be suitable for interest of all the above-mentioned

persons.

47) Keeping the said object in mind, Clause 19 must be

interpreted by taking into account 1) the interest of RNRL as

reflected by the MoU; 2) the interest of the shareholders of RIL

and RNRL; 3) the obligations of RIL under PSC; 4) the national

policy of gas including the decisions of EGOM and Gas

Utilization Policy; and 5) broader national and public interest.

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(D) PRODUCTION SHARING CONTRACT (PSC):

48) Some of the salient features of the PSC are as follows:

i) Clause 6 of the Preamble makes it clear that discovery

and exploitation will be in the over all interest of India.

ii) Article 8.3(k) makes the contractor is to be mindful of the

rights and interest of the people of India in the conduct of

petroleum operations.

iii) Article 10.7(c) (iii) the contractor is duty bound to ensure

that the production area does not suffer any excessive rate of

decline of production or an excessive loss of reservoir

pressure.

iv) Article 32.2 makes it clear that the contractor is not

entitled to exercise the rights, privileges and duties within the

contract in a manner which contravenes the laws of India.

v) Article 21(1) mandates that the discovery and production

of natural gas shall be in the context of government’s policy for

the utilization of natural gas. The above clauses in the form of

articles make it clear that PSC is subject to the Constitution of

India, the Oil Fields Act, 1948, the Petroleum and Natural Gas

Rules, 1959, the Territorial Waters, the Continental Shelf and

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Exclusive Economic Zone and other Maritime Zones Act, 1976

and also the gas utilization policy.

vi) Article 27(1) deals with title to petroleum under the

contract areas as well as natural gas produced and saved from

the contract area vests with the Government unless such title

has passed in terms of PSC. As per Clause (2), title remains

with the Government till the time the natural gas reaches the

delivery point as defined in the PSC.

49) Therefore, it is not permissible for RIL to enter into a

contract with RNRL to supply fixed quantity of gas as the gas

continues to be the property of the government till the time it

reaches the delivery point and thus, RIL has no right to

dispose of the same without the express approval of the Union

of India.

50) This Court in State of Tamil Nadu vs. L. Abu Kavur

Bai, (1984) 1 SCC 515 at 549 held “to distribute would mean

to allot, to divide into classes or into groups and embraces

arrangements, classification, placement, disposition,

apportionment and the system of disbursing goods through

out the community.

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51) In the light of the above, the Executive of the Union of

India enjoys its Constitutional powers under Article 73 and

Article 77 (3) in order to fulfill the objectives of the Directive

Principles of State Policy relating to distribution of Natural

Gas. This Natural Gas is a material resource under Article

39(b). in view of this, along with the contemplation of a

Government’s Policy for the utilization of Natural Gas under

Article 21.1 and the decision of this Court referred to above,

the Executive decided that distribution would include within

its ambit acquisition, including acquisition of private owned

material resources. The framing of the “Gas Utilization Policy”

in identifying the priority sectors, and allocating the requisite

quantities in accordance with the needs of the said sectors

and subjecting marketing freedom to the order of priority and

guidelines framed is very much in accordance with law.

Consequently, Article 21.1 and Article 21.3 should be read in

consonance with the Gas Utilization Policy and the latter is

neither inconsistent with the provisions of the Constitution,

nor the Oil Field Regulation Act, 1948, Petroleum and Natural

83

Gas Rules 1959 and the Articles of the Production Sharing

Contract referred to above.

52) To put it clear, both in terms of the Gas Utilization Policy

and the Production Sharing Contract, Government in the

capacity as an Executive of the Union can regulate and

distribute the manner of sale of Natural Gas through

allotments and allocation which would sub-serve the best

interest of the country.

53) At the outset, it is to be noted that the price determined

by the Government is not the subject matter of either the

Company Application nor is it an issue which arises out of the

impugned judgment. There is no duly constituted proceeding

where any challenge has been laid to Government Policy, price

fixation, grant or refusal of approval. Further, without such a

proceeding in existence and without NTPC being a party in the

present proceedings, any issue touching upon the validity of

price fixation or price formula does not arise.

54) The price of $ 4.20/mmbtu is based on the formula

approved by the Government under its powers pursuant to the

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terms of the PSC. The policy of the Government is not under

challenge or adjudication before the Court.

55) Mr. Gopal Subramanium, learned Solicitor General

explained that up to early 1990s, prior to NELP and pre-NELP

years, gas was being produced only from the fields operated by

the Government companies, viz., ONGC and OIL, out of blocks

which were given to these companies by the Government on

nomination basis. Such gas was subjected to administered

price regime. This was because, firstly, the fields were given on

nomination basis and not on competition basis and secondly,

to the Government companies which are subject to directions

of the Government. Government, at that time, was guided

primarily by the needs of the consumers who naturally liked to

get the gas as cheap as possible. Therefore, the basis for

Administered Price Mechanism (APM) pricing was cost-plus.

Cost of production plus marginal profits as may be determined

by Government was the sale price. Fields were given to

Government-owned companies on nomination basis till early

1990s. There was, however, the problem of augmenting the

production. Exploration and Production was at the core of

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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

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developed unlike markets for crude oil, it is stipulated in the

PSC that there will be a formula or basis for the determination

of the prices which shall be approved by the Government prior

to sale and for granting this approval, Government can not be

arbitrary but shall take into account the prevailing policy, if

any, on pricing of natural gas, including any linkages with

traded liquid fuels. The relevant PSC provisions in NELP-I

which guide the pricing of KG D-6 gas, are as follows:

“Article 21.6.1 – The Contractor shall endeavour to sell all Natural Gas produced and saved from the Contract Area at arms-length prices to the benefits of Parties to the Contract.

Article 21.6.2 – Notwithstanding the provision of Article 21.6.1, Natural Gas produced from the Contract Area shall be valued for the purposes of this Contract as follows:

(a) Gas which is used as per Article 21.2 or flared with the approval of the Government or re-injected or sold to the Government pursuant to Article 21.4.5 shall be ascribed a zero value;

(b) Gas which is sold to the Government or any other Government nominee shall be valued at the prices actually obtained; and

(c) Gas which is sold or disposed of otherwise than in accordance with paragraph (a) or (b) shall be valued on the basis of competitive arms length sales in the region for similar sales under similar conditions.

Article 21.6.3 – The formula or basis on which the prices shall be determined pursuant to Articles 21.6.2 (b) or (c) shall be approved by the Government prior to the sale of Natural Gas to the consumers/buyers. For granting this approval Government shall take into account the prevailing

87

policy, if any, on pricing of Natural Gas including any linkages with traded liquid fuels, and it may delegate or assign this function to a regulatory authority as and when such an authority is in existence.”

It is further pointed out that in accordance with this approach,

Government asked the Contractor to submit a formula on

arm’s length basis. EGOM was constituted by the

Government of India in August, 2007 which looked into the

pricing and utilization of gas in terms of the Government’s

rights and obligations under the PSC. RIL submitted a

formula based on Arm’s Length principle, having obtained

quotations from users of gas. The proposal of RIL was

examined by Committee of Secretaries (COS) and later by PM’s

Economic Advisory Council. EGOM, assisted by their views,

approved a newly suggested formula with certain

modifications, on 12/09/2007. The price formula approved by

the EGOM which is to be applicable uniformly to all sectors is

as follows:

Price (in US$ per mmbtu) = 2.5 + (Crude Price 0.15 – 25)

56) It is further pointed out that the said exercise was

undertaken by the government on an independent application

of mind and government differed from the Contractor and the 88

contractor relented leading to a lower price being fixed at $4.2

instead of $4.32 claimed by the contractor. This formula is

valid for 5 years as per the EGOM decision. According to the

formula, the price may vary between US $ 4.2 to US $

2.5/mmbtu during a period of 5 years. With crude prices of

US $ 60/barrel or more, the price will be US $ 4.2/mmbtu; for

US $ 25/barrel, it will be US $ 2.5/mmbtu. The formula,

thus, imposes a ceiling on gas price at US $ 4.2/mmbtu.

EGOM also decided on gas utilization policy in May 2008

whereby the priority sector and consumers were decided.

57) It is also brought to the notice of this Court that EGOM

consisted of the Chairman (External Affairs Minister), who was

a very senior Minister in the Council of Ministers, Ministers of

the consuming sectors (such as Fertilizer and Power), the

Minister from producing Sector (i.e., Petroleum & Natural

Gas), and the Ministers in charge of Ministry of Finance, Law

and Corporate Affairs, besides Planning Commission.

58) The pricing formula/basis as per the PSC has to be:

a) Firstly on arm’s length basis,

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b) Secondly, to the benefit of the contractor as well as the

Government;

c) Thirdly, having linkages with traded liquid fuels, and

d) Fourthly, Government will have to perform Regulator’s

function till one is appointed for the purpose.

59) The following table will indicate the pricing prevalent in

India in respect of gases from other fields (excluding, of

course, the gas from the Government companies’ fields, which

are at administered prices):

(in US$/mmbtu)

PMT (weighted) 5.51 Rawa 3.5 Rawa Satellite 4.3 Lakshmi 4.75 Weighted average 5.28

60) The fixation of price arose before the EGOM only in

August, 2007 when the price formula was considered. As

shown above, all prices prevailing in India and abroad

indicated a price which was in the region of $ 4.2. The

Contractor had asked the Government to approve it for RNRL

in 2006, but the Government rejected it as it was a related

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party transaction. ‘Arms length sales’ has been defined in

Article 1.8 of the PSC as follows:

“Arms Length Sales” means sales made freely in the open market, in freely convertible currencies, between willing and unrelated sellers and buyers and in which such buyers an sellers have no contractual or other relationship directly or indirectly, or any common or joint interest as is reasonably likely to influence selling prices and shall, inter alia, exclude sales (whether direct or indirect, through brokers or otherwise) involving Affiliates, sales between Companies which are Parties to this Contract, sales between governments and government-owned entities, counter trades, restricted or distress sales, sales involving barter arrangements and generally any transactions motivated in whole or in part by considerations other than normal commercial practices.”

61) Mr. Gopal Subramanium reiterated that the submissions

made pertaining to the PSC are without prejudice to the stand

of the Government vis-à-vis NTPC and also without prejudice

to the submission that this Court is not called upon in the

present proceedings to interpret the PSC.

62) In the case on hand, Price formula was approved by

Government in September, 2007 when it was expected that

gas would be produced from the basin in June, 2008. The

utilization of 40 mmscmd of gas was decided upon in the

months of May, 2008 in terms of sectors and units to which 91

gas would be supplied. As the production stabalized and

further volumes of gas were known to become available, the

government recently decided on the utilization of a further

volume of 19.826 (+0.875) mmscmd on firm basis + 30.00

mmscmd on fallback basis in October, 2009. As emphasized

earlier, it is up to the owner (the Government) to decide as to

how to utilize the gas and at what price it can be sold and this

has been done in accordance with Production Sharing

Contract (PSC) which has a statutory basis. The PSC under

Article 21.1 makes it clear that the Contractor is bound by the

Government’s policy for utilization of natural gas.

63) The position is that under Article 21.6.1 of the PSC, the

gas must be sold at an arm’s length price. Article 21.6.2

states that notwithstanding 21.6.1, if the gas is sold not to the

Government or its nominee, it must be sold on the basis of

“competitive arm’s length sales in the region for similar sales

under similar conditions”. Importantly, Article 21.6.3 states

that the basis on which such prices are to be determined shall

be approved by the Government prior to the sale. In the

present case, the formula submitted by RIL was looked into by

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EGOM and examined by the Committee of Secretaries and

PM’s Economic Advisory Council. Due to this the price was

determined to be $ 4.20, on the basis of the formula, price

equivalent to 2.5 + (Crude Price-25)0.15.

64) Another important consideration to be kept in mind is

that the PSC overrides any other contract which may be

entered into for the supply for gas. This principle flows from

the following a) the natural resource, gas, is held by the

Government and trust on behalf the people. Therefore, for

legal purposes, the Government owns the gas till it reaches its

final consumer; b) the PSC is the basis on which the

contractor exercises his right over the supply of gas. Since it

is the very basis of such a right, the contractor does not have

the competent power to give any rights which do not accrue to

it under the PSC.

65) One of the main purposes of the PSC is pricing and

distribution of gas. Though there is “freedom of trade” within

the PSC, but this freedom is exercised by the contractor

through a transparent bidding process and non-interference of

the Government in the administration of gas supply. As a

93

matter of policy also, the Government must be free to

determine the valuation formula as well as the price.

Therefore, keeping these considerations in mind, the

Government’s interpretation of the PSC as has been lucidly

demonstrated by the learned Solicitor General is valid. Thus

the Government has the power to determine valuation as well

as price for the purpose of the PSC.

66) It is also relevant to answer a fundamental question that

is whether the power of the Government under the PSC to

determine the valuation as well as pricing is the selling price

or is it the price only for the determination of the share of the

Government or is it the price at which RIL must sell the gas to

RNRL. The Division Bench of the High Court has held that

even if the price is to be determined by the Government, there

is no reason why RIL cannot sell the gas to RNRL at a lower

price than that. This position is unsustainable for two

reasons:

1) The power of the Government under the PSC is quite

broad and includes the power to regulate the price and

distribution of gas. Such a power requires

94

determination of price of supply and not only for the

determination of the share of the Contractor but also

for the Government. Thus keeping the objectives of

the PSC in mind, it would not be possible to restrict

the power of the Government.

2) The arrangement in pursuance of Clause 19 of the

Scheme must be suitable for the shareholders of RIL

as well. The position of RIL is that if gas is sold at

$2.34 that is at a price lower than the one decided by

the Government, there will be a disconnect between

the actual amount which the Contractor will earn from

the sale of gas and the amount which will be deemed

to have been earned by the Contractor under the PSC.

Due to this, the Contractor would be losing out on its

own profits which RIL claims would be halved. It is

also the grievance of RIL that the Court must take into

account the fact that the PSC provides for the

legitimate rights of the Contractor to earn certain

profits. If these profits are reduced to such a degree, it

would affect the interest of the shareholders of RIL.

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

shell company.

BANKABLE CONTRACT:

67) The question of bankability has been argued in detail by

RIL. Mr. Salve, learned senior counsel pointed out that GSMA

cannot be considered a non-bankable contract. On behalf of

RIL, it was pointed out that the question of bankability has to

be seen in the context of the Power Project that would be and

or should be promoted by the RNRL. There is no evidence

whatsoever to show that financing of any power project was

declined because gas supply arrangement was considered to

be non-bankable. It bears emphasis that under the GSMA in

respect of specific power projects, a GSPA qua that project

would be entered into.

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68) Normally, a banker financing a non-recourse project (i.e.

a situation where the finance for the project can only be

recovered from the project and not from the assets of the

owner of the project beyond those of the project itself) would

insist on full security not only from the physical assets but

also from revenue streams (normally the sale price of

electricity would be required to be put in escrow) as well as

firm supply contract of scarce resources like coal supply or gas

supply or other such valuable resources supply contract. The

banker could assign this resource to some other liquid buyer

and thereby recover its debt. Similarly, if the banker is unable

to recover its debt because of the default by raw-material

supplier (on which the project is based), the banker could

directly recover the liquidated damages, in repayment of its

debts from such raw material supplier. These are general

features of “banker contracts”.

69) RNRL’s case is that the project being promoted require

bankable contracts because they were “non recourse projects”

i.e. these projects would be self sustainable project which were

by themselves to be commercially and economically feasible

97

not requiring any support or guarantee from the parent i.e. no

recourse to parent company in case of default. There is no

such understanding either in the MoU or in the Scheme.

70) RIL facilitates for production of gas and REL’s Dadri

power plant was to be completed in the same time frame.

When RIL has put its equity and also borrowed money and

completed the project, RNRL is not even in initial stage of

construction of its power project. Obviously to secure finance

for a project RNRL would inter alia have to establish that gas

was available for that project on suitable terms. For that

purpose, RIL had proposed in the GSMA that it would enter

into a specific gas supply contract that would have a definite

tenure, definite price and definite quantity. The submission

that the GSMA is not a bankable agreement has to be seen in

this context.

71) It was pointed out by RIL that whether or not the

contract is bankable is not a question of law but a question of

fact. There are two ways to determine this, namely –

a) by way of fact evidence showing that

banks/financial institutions/Funding agencies had

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rejected the project on account of unsuitability of

certain clause of GSMA; or

b) expert evidence suggesting that on the basis of such

GSMA it could not be possible for RNRL to raise

funds for the gas based power project.

72) It was further pointed out that RNRL has acted in

furtherance of GSMA. It applied for grant of permission to lay

pipelines on an assertion that the GSMA is a suitable and

valid binding contract. In its letter dated 18th December, 2006

after filing of the petition RNRL sought Government’s approval

for laying pipeline. RNRL has acted under the price approval

clause of the GSMA by seeking approval of the price of US $

2.34. RNRL had also moved the Government for seeking

approval of the price of US $ 2.34 by their letter dated 17th

July, 2007.

73) While RNRL had all along been contending that for want

of bankable gas supply agreement it could not establish a

power plant including Dadri. In fact, money has already been

raised $ 510 m for Dadri Plant by way of External Commercial

Borrowings. This position was candidly accepted by RNRL.

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Reliance Power Ltd., the company that is now promoting Dadri

has raised Rs.11000 crores from the public. The shortage of

funds is an excuse – it is simply not true.

74) Furthermore, according to RIL, it is a fact that other gas

based power plants has been set up in the country without

having any long term supply of gas contrary to what is being

alleged by RNRL. It is, therefore, submitted that the

contention that GSMA is not a bankable document is without

any factual basis.

75) RNRL has enumerated the following main elements which

have, according to them, resulted in the agreement being not

bankable :-

1. Price - price of US $ 2.34 wrongly subjected to

government approval

2. Term - as per the formula (clause 3b) given in the GSMA,

the term of supply comes to be just 1 to 4 years instead

of 17 years. Whereas the NTPC contract contains a clear

period of 17 years.

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3. Quantity- as per the formula in clause 3.1 (c) of the

GSMA, RNRL would receive only 6 MMSCMD of gas

instead of 28 even if the total production is 38.

4. 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.

5. By quoting clause 13.8 and 13.9 of the GSMA submitted

that as a result of these clauses if the government does

not accept the price which is the basis for determination

of the government’s share in Profit petroleum under the

PSC, the GSMA then will stand annulled.

76) In view of all these arguments and counter-arguments

regarding the unsustainability of the arrangement under the

GSMA, we hold that it is not proper for the court under

Sections 391-394 to make modifications of this nature in the

Scheme. These changes must be arrived at by the parties

themselves through negotiation. Furthermore, we hold that

such negotiations must be done within the ambit of the

Government policies, including the over-riding effect of the

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PSC (including the Development Plan under Article 10.7),

EGOM decisions and other related national policies.

(E) ROLE OF GOVERNMENT:

77) Though in the earlier part, we have adverted to certain

aspects about the government’s role since the above issue is

relevant for disposal of the dispute between the two entities, it

would be beneficial to once again narrate certain facts and

decide the issue.

78) In 1999, NELP announced to award petroleum blocks for

exploration, development, production of petroleum and

natural gas. RIL with NIKO were the successful bidders for

block KG-D6. Pursuant to the same, the government and the

contractor (RIL & NIKO) entered into a Production Sharing

Contract (PSC). In 2002, RIL & NIKO announced discovery of

significant result from KG-D6 block.

79) In 2003, NTPC floated a global tender for supply of gas to

their power projects. RIL succeeded in its bid to sell, transport

and deliver 132 Trillion British thermal unit (TBtu) or 1000000

MMBTU. NTPC confirmed the same on 16th June 2004. In a

board meeting of Reliance Energy Limited (REL) held in 2004

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.

80) The learned Company Judge in his order has concluded

that the GSMA is not in terms of the scheme. MoU is binding

on both parties. The terms as mentioned in MoU and GSMA

need to be suitable for both the parties subject to government

policies and national and international practice in supply of

gas or such other products. The Company Judge further said

that such a contract is subject to government’s approval in

view of NELP & PSC, but keeping in view the several factors

including freedom and right to the contractor/RIL and the

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limited and restricted scope of interference in such commercial

aspects, unless, it is breach of any public policy or interest.

81) When the matter was taken up before the Division

Bench, the Division Bench had permitted the Union of India to

join as intervener in the appeals for the limited purpose of

assisting the court in the matter relating to Production

Sharing Contract between the union and the RIL with

particular emphasis to Article 21 of the contract as the

Division Bench was of the view that the pricing and

distribution of gas has far reaching consequences.

82) Before the Division Bench, on behalf of the Union of

India, it was submitted that India has been facing a chronic

shortage of natural gas due to demand and paucity of supply.

Under NELP, the government has given contractors the

freedom to market gas as well as oil in India in accordance

with the terms and conditions provided in the PSCs. This

freedom is not absolute and certain restrictions have been

imposed upon viz; the prices at which the sale takes place

have to be arms-length prices and are subject to approval by

the government. The gas can only be sold in accordance with

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the government approved price formula and the approved gas

utilization policy. The stand of the government was that the

Government of India continues to be the owner of the gas till

the delivery point. It was further pointed out that by private

negotiations no party can decide as to how natural resources

which are national assets vesting in the Government of India

are to be dealt with and that the price which has been arrived

at is binding on the contractor and no party can raise a

challenge regarding the same in a company petition.

83) The Division Bench, by the impugned order, has

concluded the terms as mentioned in the MoU and GSMA need

to be modified suitably for both the parties subject to the

government’s policies and national, international practice in

supply of gas and such other products. The contract of such

nature is subject to government’s approval in view of NELP

and PSC and such related government policies, but keeping in

view the several factors including the freedom and the right of

the contractor/RIL and the limited and restricted scope of

interference in such permissible commercial aspects of the

contractor, unless, it is in breach of any public policy and

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public interest. As regards the tenure of the gas supply, the

Division Bench observed that the MoU clearly carves out that

the NTPC supply agreement would be a general guidance for

the same and shall as far as possible be the basis for such

contracts and the terms of such contracts will be no less

favorable than those of NTPC contract. The NTPC contract

clearly provides 17 years as the period for which RIL will

supply gas. With regard to the price at which the gas has to

be supplied to REL for all its projects including its affiliates

would be subject to and under the terms of production

Sharing contract which REL has entered with the ministry of

petroleum and NIKO resources limited on 12th April, 2000. In

terms of article 21.6.3 the contractor shall be at the liberty to

market the gas but then the same will have to be regulated on

the basis of formula on which the price shall be determined

pursuant to articles 21.6.2 (b) and (c) to be approved by the

government prior to the sale of natural gas to the

consumer/buyer. The Division Bench has made it clear that

there is no specific provision under the production sharing

contract to prevent the contractor to sell the gas at lesser price

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than what is fixed by the government for valuation of gas to

the extent of its share and further observed that that the

contractor has freedom to sell gas at arm’s length prices to the

benefit of the parties to the production sharing contract out of

their share of Profit gas to which art. 21.6 Of the PSC applies.

84) It must be noted that the constitutional mandate is that

the natural resources belong to the people of this country.

The nature of the word “vest” must be seen in the context of

the Public Trust Doctrine (PTD). Even though this doctrine has

been applied in cases dealing with environmental

jurisprudence, it has its broader application.

85) Constitution Bench of this Court in Association of

Natural Gas v. Union of India (2004) 4 SCC 489, while

quoting Re: Cauvery Water Dispute Tribunal AIR 1992 SC

522 held that:

45. In Re: Cauvery Water Dispute Tribunal (Supra) the right to flowing water of rivers was described as a right 'publici juris', i.e. a right of public. So also the people of the entire country has a stake in the natural gas and its benefit has to be shared by the whole country. There should be just and reasonable use of natural gas for national development. If one State alone is allowed to extract and use natural gas, then other States will be deprived of its equitable share. This position goes on to fortify the stand adopted by the Union and will be a pointer to the conclusion that

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"natural gas' is included in Entry 53 of List I. Thus, the legislative history and the definition of 'petroleum', 'petroleum products' and 'mineral oil resources' contained in various legislations and books and the national interest involved in the equitable distribution of natural gas amongst the States - all these factors lead to the inescapable conclusion that "natural gas" in raw and liquefied form is petroleum product and part of mineral oil resource, which needs to be regulated by the Union.

With relation to the Public Trust Doctrine, this court in

M.C. Mehta v. Kamal Nath (1997) 1 SCC 388 held:

17. The Public Trust Doctrine primarily rests on the principle that certain resources like air, sea, waters and the forests have such a great importance to the people as a whole that it would be wholly unjustified to make them a subject of private ownership. The said resources being a gift of nature. They should be made freely available to everyone irrespective of the status in life. The doctrine enjoins upon the Government to protect the resources for the enjoyment of the general public rather than to permit then- use for private ownership or commercial purposes.

27. Our legal system-based on English Common Law - includes the public trust doctrine as part of its jurisprudence. The State is the trustee of all natural resources which are by nature meant for public use and enjoyment. Public at large is beneficiary of the 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.

This doctrine is part of Indian law and finds application in the

present case as well. It is thus the duty of the Government to

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provide complete protection to the natural resources as a

trustee of the people at large.

86) RIL’s right of distribution is based on the PSC, which

itself is derived from the power of the Government under the

constitutional provisions. Thus the very basis of RIL’s mandate

is the constitutional concepts that have been discussed by

now, including Article 297, Articles 14 and 39(b) and the

Public Trust Doctrine. Therefore, it would be beyond the power

of RIL to do something which even the Government is not

allowed to do. The transactions between RIL and RNRL are

subject to the over-riding role of the Government.

87) It is relevant to note that the Constitution envisages

exploration, extraction and supply of gas to be within the

domain of governmental functions. It is the duty of the Union

to make sure that these resources are used for the benefit of

the citizens of this country. Due to shortage of funds and

technical know-how, the Government has privatized such

activities through the mechanism provided under the PSC. It

would have been ideal for the PSUs to handle such projects

exclusively. It is commendable that private entrepreneurial

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efforts are available, but the nature of the profits gained from

such activities can ideally belong to the State which is in a

better position to distribute them for the best interests of the

people. Nevertheless, even if private parties are employed for

such purposes, they must be accountable to the constitutional

set-up.

88) The statutory scheme of control of natural resources is

governed by a combined reading of the Oil Fields (Regulation

and Development) Act, 1948; the Petroleum and Natural Gas

Rules, 1959; and Maritime Zones Act.

89) As pointed out earlier, the proper interpretation of PSC

gives the power to the Government not only to determine the

basis of valuation of gas, but also its price. According to Article

21 of PSC, before the contractor sells the gas, the price of such

gas must be approved by the Government.

90) It has been argued by RNRL that the decision of the

EGOM (Empowered Group of Ministers) does not apply to the

rights of RNRL under the Scheme. This argument is based on

the text of the decision which states that the pricing decided

upon by EGOM is “without prejudice” to the rights of the

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parties in the two cases pending before the Bombay High

Court, i.e. RIL v. NTPC and RIL v. RNRL. This is contested by

both the Government and RIL. This position of RNRL is

unsustainable. As pointed out by RIL the right interpretation

of “without prejudice” in the EGOM decision is that even

though EGOM intended it resolution on pricing to apply to

RNRL, it left the question of the rights of the parties accruing

from the MoU, the Scheme or the interpretation of PSC to the

court. In other words, the court is to determine whether the

Government has the power to determine the valuation and

pricing of the gas. This determination by the court is not

affected by the EGOM decision, as it would depend solely on

the interpretation of the provisions of the PSC itself. But once

it is determined that the Government does have the power to

determine the price of gas, EGOM’s decision regarding the

price would be applicable. The same goes for the general gas

utilization policy and the policy of the Government with regard

to pricing. Therefore, once the PSC is read to give power to the

Government to determine the price of gas, these policy

statements will be applicable.

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91) From the above analysis, the following are the broad

sustainable conclusions which can be derived from the

position of the Union:

1) The natural resources are vested with the Government

as a matter of trust in the name of the people of India.

Thus, it is the solemn duty of the State to protect the

national interest.

2) Even though exploration, extraction and exploitation of

natural resources are within the domain of

governmental function, the Government has decided to

privatize some of its functions. For this reason, the

constitutional restrictions on the government would

equally apply to the private players in this process.

Natural resources must always be used in the

interests of the country, and not private interests.

3) The broader constitutional principles, the statutory

scheme as well as the proper interpretation of the PSC

mandates the Government to determine the price of

the gas before it is supplied by the contractor.

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4) The policy of the Government, including the Gas

Utilization Policy and the decision of EGOM would be

applicable to the pricing in the present case.

5) The Government cannot be divested of its supervisory

powers to regulate the supply and distribution of gas.

92) Summary of our conclusions:

A. Question of Maintainability of the Company Application

RNRL filed an application under the Companies Act arguing

that GSMA put in place by RIL does not satisfy the Scheme of

demerger. The Scheme under question was approved by the

Company Court on the previous occasion under Sections 392

and 394. Therefore, contrary to RIL’s argument, Sections 392

and 394 are applicable.

Further, the power of the court under Sections 391 to 394 of

the Companies Act is wide enough to make necessary changes

for working of the Scheme. This power is specific to the facts

and circumstances of the case at hand. Nevertheless, this

power does not extend to making any substantial or

substantive changes to the Scheme.

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Therefore, the Company Court enjoys jurisdiction to entertain

the application under Sections 392 and 394 of the Companies

Act.

B. Binding Nature of the Memorandum of Understanding

The MoU was signed as a private family arrangement or

understanding between the two brothers, Mukesh and Anil

Ambani, and their mother. Contents of the MoU were not

made public, and even in the present proceedings, they were

revealed in parts. Clearly, the MoU does not fall under the

corporate domain - it was neither approved by the

shareholders, nor was it attached to the scheme. Therefore,

technically, the MoU is not legally binding.

Nevertheless, cognizance can be taken of the fact that the

MoU formed the backdrop of the Scheme, and therefore,

contents of the Scheme have to be interpreted in the light of

the MoU.

C. Considerations to determine “suitable arrangement” under Clause 19 of the Scheme.

“Suitable arrangement” under clause 19 of the Scheme must

not be merely suitable for RIL. It has a broader meaning. Such

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an arrangement must be suitable for the interests of the

shareholders of RNRL as reflected by the MoU, and RIL; the

obligation of RIL under the PSC; the national policy on gas

including the decisions of EGOM and the Gas Utilization

Policy; and the broader national and public interest.

D. Proper Interpretation of the PSC

The objective of the PSC inter alia is to regulate the supply and

distribution of gas. Keeping this objective in mind, Article 21

of the PSC must be interpreted to give the power to the

Government to determine both the valuation and price of gas.

It is not feasible to restrict the power of the Government in

such matters of national importance, especially when the

governing contract, the PSC, also provides for it.

E. Role of the Government

In a constitutional democracy like ours, the national assets

belong to the people. The Government holds such natural

resources in trust. Legally, therefore, the Government owns

such assets for the purposes of developing them in the

interests of the people. In the present case, the Government

owns the gas till it reaches its ultimate consumer.

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A mechanism is provided under the PSC between the

Government and the Contractor (RIL, in the present case). The

PSC shall over-ride any other contractual obligation between

the Contractor and any other party.

F. Relief

a) Though the Contractor (RIL) has the marketing freedom

to sell the product from the contract area to other consumers,

this freedom is not absolute. The price at which the produce

will be sold to the consumer would be subject to government’s

approval. The tenure of such contracts can’t be such that it

vitiates the development plan as approved by the government.

Therefore, the GSMA and the GSPA entered into with RNRL

should fix the price, quantity and tenure in accordance with

the PSC.

b) The EGOM has already set the price of gas for the

purpose of the PSC. The parties must abide by this, and other

conditions placed by the Government policy. The GSMA/GSPA

deeply affects the interests of the shareholders of both the

companies. These interests must be balanced. This balance

cannot be struck by the court as the court does not have the

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power under Sections 391-394 to create new conditions under

the scheme. In view of the same, RIL is directed to initiate

renegotiation with RNRL within six weeks the terms of the

GSMA so that their interests are safeguarded and finalize the

same within eight weeks thereafter and the resultant decision

be placed before the Company Court for necessary orders.

c) While renegotiating the terms of GSMA, the following

must be kept in mind:

1) The terms of the PSC shall have an over-riding effect;

2) The parties cannot violate the policy of the Government

in the form of the Gas Utilization Policy and national

interests;

3) The parties should take into account the MoU, even

though it is not legally binding, it is a commitment which

reflects the good interests of both the parties;

d) The parties must restrict their negotiations within the

conditions of the Government policy, as reflected inter alia by

the Gas Utilization Policy and EGOM decisions.

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93) With the above directions/observations, all the appeals

and I.A. No.1 are disposed of. No order as to costs.

.…….…….……………………CJI. (K.G. BALAKRISHNAN)

....…………………………………J. (P. SATHASIVAM)

NEW DELHI, MAY 7, 2010.

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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4273 OF 2010 ARISING OUT OF

SPECIAL LEAVE PETITION (CIVIL) NO. 14997 OF 2009

RELIANCE NATURAL RESOURCES LTD. ….APPELLANT

VERSUS

RELIANCE INDUSTRIES LTD. …..RESPONDENT

WITH

CIVIL APPEAL NO.4274 OF 2010 ARISING OUT OF

SPECIAL LEAVE PETITION (CIVIL) NO. 15033 OF 2009

RELIANCE NATURAL RESOURCES LTD. ….APPELLANT

VERSUS

RELIANCE INDUSTRIES LTD. ….RESPONDENT

WITH

CIVIL APPEAL NOs. 4275-4276 OF 2010 ARISING OUT OF

SPECIAL LEAVE PETITION (CIVIL) NOs. 15063-64 OF 2009

RELIANCE INDUSTRIES LTD. ….APPELLANT VERSUS

RELIANCE NATURAL RESOURCES LTD. ….RESPONDENT

119

WITH

CIVIL APPEAL NO. 4277 OF 2010 ARISING OUT OF

SPECIAL LEAVE PETITION (CIVIL) NO. 18929 OF 2009

UNION OF INDIA ….APPELLANT

VERSUS

RELIANCE INDUSTRIES LTD. & ANR. ….RESPONDENTS

WITH

I.A. NO. 1

IN

CIVIL APPEAL NOs.4280-4281 OF 2010 ARISING OUT OF

SPECIAL LEAVE PETITION (CIVIL) Nos.14414-14415/2010 @ CC 16126-16127 OF 2009

VISHWESHWAR MADHAVRAO RASTE ….APPELLANT

VERSUS

RELIANCE INDUSTRIES LTD. & ORS. …..RESPONDENTS

JUDGMENT

B. SUDERSHAN REDDY, J.

I.A. No. 1 for permission to file Special Leave Petition

is allowed.

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2. We grant special leave and proceed to dispose of all

the appeals.

PART I

PROLOGUE

“Jus publicum privatorum pactis mutari non potest.”

Public law cannot be changed by private pacts.

- Digest of Justinian

“Political democracy cannot last unless there is at its base social democracy…. On the social plane, we have in India a society based on the principle of graded inequality, which means elevation of some and degradation of others. On the economic plane, we have a society in which there are some who have immense wealth as against many who live in abject poverty…. How long shall we continue to live this life of contradictions? How long shall we continue to deny equality in our social and economic life? If we continue to deny it for long, we will do so only by putting our political democracy in peril. We must remove this contradiction at the earliest possible moment or else those who suffer from inequality will blow up the structure of political democracy which this Assembly has so laboriously built up”.

3. Those who know the Constitutional history of India

recognize the above to be the wise words of Dr. Ambedkar, one

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of our founding fathers. Those who are concerned about the

welfare of our people, and the future of our nation, his second

warning will always be a matter of intense intellectual disquiet:

“Indeed if I may say so, if things go wrong under the new

Constitution, the reason will not be that we had a bad

Constitution. What we will have to say is that Man was vile.” It is

never enough to have a written constitution. We need people

who, in the course of working the Constitution, to borrow a

memorable phrase from Granville Austin, will exhibit qualities of

great integrity and a deeply felt ethical urgency to ameliorate the

social and economic conditions in which our people live and

suffer. That obligation arises from the very politico-constitutional

ideals and structures upon which the State has been formed and

the future of the nation premised. In disputes such as the one

before this Court, the lens of the Constitution has to be used to

examine the implications with respect to achievements of such

ideals and the strength of our institutions. The power that is

vested in the State, and exercised by its agents, is the power of

all the people and not just of those with great wealth and status.

The vesting of such powers is an act of faith and of trust, two

qualities that are to be earned, sustained and nurtured.

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Continuance of such faith and trust undoubtedly depends, in the

least, on the belief that people have that such powers are being

exercised to further the Constitutional goals. To the extent that

the people begin to believe that their faith and trust were

misplaced, and that their collective powers are being improperly

used for the benefit of the few, as opposed to being used for

public welfare and interests, one may reasonably conclude that

at least the effective functioning of the State would have been

compromised. Those with knowledge of history, and an

inclination to learn from, it would necessarily be concerned about

the situation today and potential consequences in the future. For

them the words of Dr. Ambedkar would appear to be prescient

and wise.

4. The wisdom of the ages, garnered through eons of

humanity’s collective struggles to find for all a life of dignity and

fraternity – a dignity that arises from and is informed by liberty,

equality, and justice in all walks of life and a fraternity that seeks

to promote such dignity for all is the fire in which the

Constitution of India has been forged. The very structure and

text of the Constitution, when viewed through the lens of history

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and the working of the instrument itself, clearly demonstrates

that it crystallizes collective human wisdom in its triadic ethical

foundations. Those foundations are: (i) the Preamble that soars

in eloquence in its articulation of collective human aspirations as

national goals and sets out the raison d’etre for the nation itself;

(ii) the Fundamental Rights, that provide various necessary

freedoms for the individuals and social groups, and places upon

the State certain affirmative obligations to eliminate those

institutional and socio-economic conditions limiting such

freedoms, so that all can strive towards the achievement of the

goals set forth in the Preamble; and (3) the Directive Principles

of State Policy, fundamental to governance and necessary for the

achievement of all round socio-economic development so that

the goals of the Preamble can be secured, and the effective

exercise of the Fundamental Rights by all can be ensured.

5. It was recognized early in our struggle for freedom

that, as India awakens politically an explosive situation could

develop if the contradictions were not resolved soon. Thus, it was

felt that the State ought to play a key role in ensuring that all the

people are assured, a life informed by liberty, equality, justice

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and fraternity, so that their dignity, as individuals and as social

beings, can be secured. To this effect, the State has been given

the powers to place reasonable restrictions even on the

Fundamental Rights of the individuals for the achievement of

broader good for all, the powers to enact socio-economic

legislation to effectuate re-distribution of wealth and ensure

equitable access to material resources and to frame policies that

ameliorate the harsh consequences of the civil and the market

spheres of social action that people participate in. Where such

power is vested in trust by the people, it implies, as a necessary

corollary, a trust that such powers will be fully used to further

the Constitutional goals within the four corners of Constitutional

permissibility. Availability of such powers to use, in a practical

sense, implies that those powers have not been abjured or

derogated from.

6. The dawn of independence evoked much hope; and

also much anxiety, especially amongst scholars and observers

from the West, about the feasibility of the experiment of India as

a Constitutional democracy. Yet, in our seventh decade of

freedom and the sixtieth year of constituting ourselves as a

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Sovereign, Socialist, Secular, Democratic Republic, it is apparent

that we have survived, and indeed by and large flourished as a

political democracy. In part, this was surely on account of the

great moral integrity and wisdom that our founding fathers and

early political leadership brought to the table, and the efforts

they put in towards building the institutions of our democracy.

Additionally, credit must also go to the socio-political and

economic policies initiated and implemented, of course with

varying degree of success and failure, for sustaining the hope

that the promises enshrined in the Constitution are at least being

sought to be achieved. However, a much larger measure of credit

ought to go to the people: those people who turn up in ever

larger numbers to the voting booths and continue to retain trust

in the basic principles of democracy, notwithstanding their

abysmal lot in life. Yet, when the State attempts to alleviate just

a part of the burden of their continued dehumanized condition,

such attempts are decried as populist by the elite of this country.

7. So, willy-nilly, we come back to the question asked by

Dr. Ambedkar: how long will our people bear the contradictions

of endemic and gross inequalities? An aspiring and youthful

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population can be a great boost to the economy and the society.

It would be tautological to state that the GDP would grow rapidly

with a larger proportion of the people in the productive phases of

their lives. But, the same youth unemployed or underemployed,

malnourished and without the capacity or hope to lead or achieve

a dignified life, can be the most dangerous of all forces.

8. A small portion of our population, over the past two

decades, has been chanting incessantly for increased

privatization of the material resources of the community, and

some of them even doubt whether the goals of equality and

social justice are capable of being addressed directly. They argue

that economic growth will eventually trickle down and lift

everyone up. For those at the bottom of the economic and social

pyramid, it appears that the Nation has forsaken those goals as

unattainable at best and unworthy at worst. The neo-liberal

agenda has increasingly eviscerated the State of stature and

power, bringing vast benefits to the few, modest benefits for

some, while leaving everybody else, the majority, behind.

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“… these global imbalances are morally unacceptable and politically unsustainable.”1 (emphasis added).

9. We have heard a lot about free markets and freedom

to market. We must confess that we were perplexed by the

extent to which it was pressed that contractual arrangements

between private parties with the State and amongst themselves

could displace the obligations of the State to the people

themselves. Judge Richard Posner, one of the doyens of the free

market ideology and responsible for building the intellectual

foundations of the neo-liberal segments of the law and economics

jurisprudence, had this to say about the recent global financial

crisis and it is worth quoting him in-extenso:

“Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government’s myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, be in a depression. We are learning from it that we need a more active and intelligent government to keep our model of capitalist economy from running

1 Quoted in Joseph Stiglitz, Making Globalization Work: The Next Steps to Global Justice, p. 8, Allen Lane (2006).

128

off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience—the self- healing powers—of laissez-faire capitalism”.2

10. History has repeatedly shown that a culture of

uncontained greed along with uncontrolled markets leads to

disasters. Human rationality, with respect to pursuit of lucre, is

essentially short run. So long as there appear to be possibilities

of making profits, especially windfall profits, the fears that the

competitors would reap them will drive businesses into taking

greater and greater risks; in fact, even by self-enforcement of

blindness to the potential for market collapse. To say that it was

a failure of regulation is trite. Markets failed because regulation

had practically ceased to exist. Finally veering around to the view

that regulation of markets is absolutely essential, after spending

a lifetime arguing for the opposite, and noting that the capacity

for self-regulation was highly over-rated, Judge Posner in his own

inimitable manner says:

“If you’re worried that lions are eating too many zebras, you don’t say to the lions, ‘You’re eating too many zebras’. You have

2 Richard A. Posner: “A Failure of Capitalism: The Crisis of ’08 and the Descent Into Depression”, p. xi. Harvard University Press (2009).

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to build a fence around the lions. They’re not going to build it.”3

11. Historically, and all across the globe, predatory forms

of capitalism seem to organize themselves, first and foremost,

around the extractive industries that seek to exploit the vast, but

exhaustible, natural resources. Water, forests, minerals and oil -

they are all being privatized; and not yet satisfied, the voices

that speak for predatory capitalism seek more, ignoring the

lessons from history and current experiences. One of the lessons

of history is that, barring a few, most of the countries endowed

with vast and easily exploitable natural resources have fared far

worse than those with smaller endowments, on almost every

social and economic indicia. As Joseph Stiglitz points out:

“[T]here is a curious phenomenon….. ‘resource curse.’ It appears, that on average, resource rich countries have performed worse than those with smaller endowments – quite the opposite of what might have been expected………..[B]ut even when countries as a whole have done fairly well, resource rich countries are often marked by large inequality: rich countries with poor people… ….. [T]wo-thirds of the people” in an oil rich country that is also a member of a global oil producing countries group “live in poverty as

3 Richard A. Posner, ibid.

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the fruits of the country’s oil bounty go to a minority…… These puzzles cry out for an explanation, one that will allow countries to do something to undo the resource curse….. We understand in particular that much of the problem is political4 in nature……. [W]hen compared to countries dependant on the export of agricultural commodities, mineral and oil exporting countries suffer from unusually high poverty, poor health care, widespread malnutrition, high rates of child mortality, low life expectancy, and poor educational performance – all of which are surprising findings given the revenue streams of resource-rich countries.” 5

12. We draw attention to this problem, because, even

though it is often associated with those countries that depend

mostly on earnings from export of natural resources, similar

effects can also arise from activities within the domestic

economy. Take the case of India itself. We cannot by any stretch

of imagination claim that we are a resource poor country. Yet, as

we cast a glance across the face of our land, the greater

incidence of social unrest, and movements for greater self

determination, seem to occur by and large in states and regions

that have plenty of natural wealth and paradoxically suffer from

low levels of human development. We hasten to add that we are

4 The word political is being used in a technical sense to denote the state and all of its institutions, rather than merely political parties or to denounce the normative desirability of democratic political processes.

5 Joseph E. Stiglitz, Making Natural Resources into a Blessing rather than a Curse, in “Covering Oil” Ed. Svetlana Tsalik and Anya Schiffrin, Open Society Institute (2005), p. 13-14.

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not suggesting that absence of resources would lead to a better

situation. Rather, it is to point out that the problems arise

because exploitation of those resources occurs without

appropriate supervision by the State as to the rates of

exploitation, equitable distribution of the wealth it generates,

collusions between the extractive industry and some agents of

the State and the consequent evisceration of the moral authority

of the institutions of the State.

13. The crux of the problem is, as Prof. Terry Lynn Karl

says:

“….utilizing petroleum wealth effectively is not easy…… Because the institutional setting is generally incapable of dealing with economic manifestations of resource curse, it ends up transforming them in a vicious development cycle or “staple trap.”6

14. One would have expected, that with the resources

being owned by the people as a nation, it would be the State

public institutions that would actually operate the extraction

industry. For a few decades that was the case, and it was beset

by problems of administrative apathy and even pilferage. Over

6 Terry Lynn Karl “Understanding the Resource Curse” in Covering Oil (Open Society Initiative, 2005).

132

the past two decades vast tracts of Nation’s resources have again

begun to be licensed for exploitation by private parties. Be that

as it may, it must be emphasized that the on going process

cannot dispense with the role to be played by the State. Strong

State institutions are even more necessary when we are dealing

with Nation’s resources and we allow contractors to exploit them.

15. The law is for the benefit of the people. Even where it

does not work in its full measure all the time, the public nature of

law is still capable of exerting moral authority and bringing

comfort to the people. But, when law is pushed into unseen

categories, effectively hidden from public gaze, it raises suspicion

- especially when it purports to deal with the collective resources

of the people. When the threshold of public scrutiny is crossed, it

raises vital issues regarding our continued fealty to democratic

values, constitutionalism, accountability, transparency and the

rule of law. Jody Freeman and Martha Minnow write:

“[T]he primary concern, voiced in recent years by critics in public policy circles and in academia, is that the ubiquity of governance by private contractors strikingly outstrips our legal and political capacities of oversight meant to ensure that the contractors’

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execution of those governmental functions complies with democratic norms.”7

16. We are not saying that markets have no role to play in

a developing economy or that private initiative be suppressed

and that all markets are essentially and only tools for

expropriation and continuance of social injustices. We are stating

that our Constitution posits that markets can be inimical to social

justice, especially when left unregulated. Laissez faire market is a

myth and it is, as Prof. Cass Sunstein points out:

“….a grotesque misdescription of what free markets actually require and entail. Free markets depend for their existence on law…… moreover, the law that underlies free markets is coercive in the sense that in addition to facilitating individual transactions, it stops people from doing many things they would like to do. This point is not by any means a critique of free markets. But it suggests that markets should be understood as a legal construct, to be evaluated on the basis of whether they promote human interests, rather than as a part of nature and the natural order….. markets are a tool, to be used when they promote human purposes, and to be abandoned when they fail to do so… Achievement of social justice is a higher value than the protection of free markets; markets

7 Government by Contract: Outsourcing And American Democracy, Ed. Jody Freeman and American Democracy.

134

are mere instruments to be evaluated by their effects.”8

17. The Constitution of India postulates that monopolies,

created by an inequitable distribution of resources and their

concentration in the hands of the few, are inimical to democracy

and the values of equality and justice in all spheres of social

action. They were the lessons of history. While large economic

organizations might be necessary to accomplish certain kinds of

tasks, it is imperative that the State always be watchful that they

do not take over the essential functions of the State, especially of

policy formulation. In its dealings with such entities, the State

should always be mindful that it does not convey that its public

law duties could be bought or abrogated in any manner.

18. One may ask why in a Company Petition such a

discussion of constitutional values has had to come about. Such

is the nature of the dispute itself. The Company Petition, and the

Scheme of Arrangement that it arises from, ostensibly, are to be

dealt under Sections 391 through 394 of the Companies Act; but,

involve at their foundations, a claim by Reliance Natural

8 Cass Sunstein: Free Markets and Social Justice (Oxford University Press, 1997)

135

Resources Limited that it is entitled to receive, on account of a

private pact between members of the Ambani family, vast

quantities of natural gas, amounting to a significant portion of

what would be available for the entire country, at a low price and

for a long time, de-hors any policy made by the Government of

India. It claims that the GoI has a right to enter into and has

actually entered into a contract that allows, Reliance Industry

Limited to produce and decide how to use a precious and a

scarce natural resource belonging to the people of this nation

without any governmental supervision. Further, RNRL also

claims, that its vested interest in such vast quantities of natural

gas is such, that subsequently framed governmental policy

cannot have a bearing on such an entitlement irrespective of

public interest implications.

19. Apart from the above, this particular case also

implicates aspects of accountability of members of the

managements of corporations, who are also promoters and

powerful shareholders, to the Board of Directors and other

shareholders. One of the principal claims of RNRL in this case is

that a private pact between the family members of the Ambani

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family can bind the Board and the Company, in the context of

reorganization of the company without the shareholders having

any knowledge of the extent of value that is actually likely to be

demerged, even if such likely value runs into many thousands of

crores of rupees and possibly hundred fold more than the assets

and liabilities that were actually shown as being demerged in the

Scheme document placed before the shareholders.

20. For a long time now, it has been well recognized that

the modern industrial and post-industrial corporations control

such a large extent of economic and social spheres that their

activities necessarily have a wide and pervasive impact on the

lives of most of the people of the country. We recognize that, in

many normal instances, when issues of public interest are not

apparent on the face of the record, then a Company Petition is

normally, and rightly, treated as a matter of corporate law.

However, when the conflict involves the right to use vast swaths

of a national natural resource that is owned by the people, public

law is necessarily implicated to a small or a large extent. Further,

when publicly listed companies, with many millions of

shareholders of ordinary people, do not reveal the full extent of

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value that is to be transferred, it would obviously implicate the

broader principles of corporate law.

21. That is why we began this section with an epigraph, “Jus

publicum privatorum pactis mutari non potest” from the Digest of

Justinian. Natural Gas belongs to the people of India, and vests

in the Union of India, to be held for the purposes of the Union.

The Constitution of India commands the Government to frame

policy to prevent the distribution of such resources in a manner

that may be inimical to national development. Ultimately, the

residual owners of a company are its shareholders, and they

have a right to know what is happening to the company and its

assets, including assets by way of contractual rights, so that they

can take an informed decision about a proposal that is put up for

their consideration. For the past three hundred years of evolution

of corporate law, the principal theme has been the protection of

those who give their wealth and resources in trust to a company.

Managements and Board of Directors of companies have a

fiduciary responsibility to the shareholders, and neither the

processes nor the substantive objectives of protection of the

shareholders can be derogated from.

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22. A number of acronyms have been used in this

judgment. A glossary is annexed herewith for referral.

23. It is with the above observations we shall now

proceed to consider the facts and the issues that arise for our

consideration.

PART II

THE FACTUAL MATRIX

24. In April 2000, a consortium of companies, Reliance

Industries Limited and NIKO, together forming the Contractor,

entered into a Production Sharing Contract with the Union of

India to explore for and produce Petroleum, which includes both

crude oil and natural gas as applicable, in a block KG-DWN-98/3,

located off the eastern sea shore of Andhra Pradesh. This block

has been referred to as KG-D6 by the parties and we shall adopt

that nomenclature; however, the judgment and decision shall be

understood as being applicable to the entire KG-DWN-98/3 block.

25. In 2002, RIL announced the discovery of a very large

reservoir of natural gas in KG-D6. In the same year Shri.

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Dhirubhai Ambani, the founder of RIL, passed away and

subsequently the management of RIL was led by Mukesh D.

Ambani, the elder son, as the Chairman and Managing Director

and Anil D. Ambani, the younger son, as the Vice-Chairman and

Joint Managing Director. On May 21, 2003, RIL submitted its

conclusions to GoI that the reservoir discovered was a

commercial discovery, which was subsequently certified to be so

by GoI on 10.01.2004.

26. In May 2004, RIL submitted to the Management

Committee of the PSC an Initial Development Plan, inter-alia,

describing the nature of the discovery, the potential extent of

natural gas that could be extracted, the kind of infrastructure and

expenditure necessary for the same, and the potential market for

natural gas in India. It was stated that natural gas produced from

KG-D6 could be used by entities operating in the power and

fertilizer sectors located in Andhra Pradesh, Maharashtra,

Karnataka, Gujarat and Uttar Pradesh. It was stated that such

users could use up to 82 MMSCMD of natural gas. It was also

stated that NTPC’s demand could be as much as 17 MMSCMD.

The production of natural gas was projected to be possibly 40

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MMSCMD and that it could go up to 80 MMSCMD a few years

later. It was also stated that natural gas supply in India was

highly constrained and the short fall had led to many units that

use natural gas as a fuel or feedstock being stranded. RIL also

stated that it expected to be the exclusive agent for selling

natural gas produced from KG-D6. This Initial Development Plan

was approved by the Management Committee of the PSC in

November 2004. The GoI issued a Petroleum Mining Lease with

respect to KG-D6 on 02.03.2005.

27. In the meantime, in mid 2003 RIL bid in response to

an international tender floated by the National Thermal Power

Corporation and won the bid on the substantial terms that it

would supply 12 MMSCMD, for seventeen years, at a well head

price of USD 2.34/mmBtu, plus transportation and marketing

charges for a total of USD 3.18/mmBtu at the Delivery Point at

Kakinada. Negotiations began to execute a full fledged gas

supply and purchase agreement and various drafts were

produced, including the drafts of May, 2005 in which

governmental approvals were stated to be required for RIL to

supply natural gas to NTPC.

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28. From the record it is also clear that between 2002 and

2005 various discussions were conducted in RIL and the Reliance

Group about using the natural gas that was likely to be produced

from KG-D6, to support various internal business divisions and

undertakings, such as petro-chemicals, captive power plants, the

power plant of Reliance Patalganga Power Limited and power

plants to be set up by Reliance Energy Limited. An

announcement was made that a 3500 MW power generating

plant was to be set up in Dadri, Uttar Pradesh using natural gas.

29. On July 27, 2004, in a Board Meeting of RIL it was

decided that, in light of the fast emerging opportunities and

exigencies and to facilitate quick response, all the powers of the

Board be vested in MDA except those powers that the Board was

required, by the Companies Act, 1956 and the Articles of

Association, to retain. This exacerbated an already festering

dispute between the two brothers, necessitating the intervention

of their mother, Smt. Kokilaben D. Ambani leading to a

Memorandum of Understanding, dated June 18, 2005, that was

drafted with the help of lawyers and marked strictly confidential.

Only a portion of the MoU was placed on record in the later

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stages of proceedings before the Division Bench. It is an

admitted fact that it has been executed by and between the

mother and her two sons only.

30. The MoU provided that - with disputes between the

brothers, the other matters of family assets, and interests in

various businesses being settled - the best way forward would be

by way of a scheme of reorganization in which the energy

producing, financial services and the telecommunications

divisions were to be demerged to the ADA Group for ownership

and control. The remaining divisions were to be with the MDA

Group, including petroleum exploration and production division.

The MoU specifically provided that the approvals of statutory and

regulatory bodies, the shareholders and the boards of Directors

of various companies would be conditions precedent for

operationalising the reorganization. It was also specifically stated

that personnel of both MDA Group and ADA Group would

participate in the process of preparation of the Scheme so that

their mutual interests could be protected. It was also agreed that

the same lawyer who drafted the MoU would also draft the

Scheme.

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31. In addition, the MoU also had a section titled “Gas

Supply” in which it was provided that, from all P1 reserves of

existing and any future gas fields from which RIL may produce

natural gas: (i) 12 MMSCMD would be supplied to NTPC;

however, if the contract did not go through, then that would be

supplied to the ADA Group; (ii) in addition, another 28 MMSCMD

would be supplied to REL. The quantity of gas referred to in (ii)

was to be at a price no greater than the price for supply of gas to

NTPC and the terms of such supply were to be the same as to

NTPC and even surpass them to provide ADA Group an added

level of comfort. Further, with respect to all other future

production of natural gas by RIL, under any contract and in any

gas field, it was to be split in a 60:40 ratio between the MDA

Group and the ADA Group. This right was an option right

exercisable by the ADA Group and to be supplied to it at the then

prevailing market prices and has been referred to as the Option

Volumes by the parties. The gas supplied to ADA Group was only

meant for trading within the group.

32. In addition to the above, and in the same section “Gas

Supply”, it was also stated, after KDA exhorted her elder son to

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ensure that stability was given to the ADA Group with respect to

gas supply, that the MDA Group would act in “utmost good faith”

and exert their “best endeavours” to work for and obtain all the

necessary governmental and regulatory approvals. It was also

provided that the ADA Group would be given an irrevocable

power of attorney to be able to independently pursue the same,

though that was not to mitigate the burden to be borne by the

MDA Group. KDA reserved the right to intervene and it was

stated that ADA Group would have a right to damages in the

event that MDA Group did not act in good faith. The binding gas

supply agreements were to be executed within 45 days.

33. KDA issued a press statement, the day that the MoU

was executed, stating that the differences between her sons were

settled and that ADA will be responsible for Reliance Infocom,

Reliance Energy and Reliance Capital. On the same day the Board

of Directors of RIL also met. The minutes reveal that MDA stated

in broad terms the terms of the settlement – that the energy,

telecom and financial businesses were to be demerged to ADA,

with himself remaining in charge of the other businesses.

Thereupon he placed a copy of the press statement of KDA and

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left the meeting stating potential conflict of interest issues. Other

Directors continued and after expressing their thanks to KDA, it

was recorded that some Directors felt that any reorganization be

undertaken only if it is in the best interests of all the

shareholders. To this effect it was resolved that a Corporate

Governance and Stakeholders Interface Committee comprising

independent Directors examine in depth all the issues relevant

for reorganization and suggest a proposal to the Board, including

any scheme. It was also resolved that the said committee of

independent Directors also be assisted by professionals, such as

chartered accountants, solicitors, merchant bankers etc.,

including the lawyer who had drafted the MoU.

34. Based upon such authorization the CG Group

proceeded to perform its assigned duties, assisted by various

professionals, and with the active participation of personnel of

both ADA and MDA groups. On August 3, 2005 Term Sheets were

prepared and executed by representatives of the two groups and

it was provided therein that the Scheme would be based on the

terms agreed. With regard to the principal disclosures to be

made in the scheme, it was decided that one of them would be

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about the fuel agreement for supply of gas that was to be

executed. It was also provided that the Scheme would be framed

in such a manner that the Resulting Companies, which were all to

be 100% subsidiaries of RIL, would be listed on the same stock

exchanges as RIL, and that after issuance of shares by the

Resulting Companies to RIL’s shareholders they would then cease

to be subsidiaries of RIL. The CG Committee formulated the

Scheme’s rationale of the demerger as one of substantial benefits

that would accrue to the Resulting Companies on account of

focused attention.

35. On August 5, 2005 the Board of Directors of RIL met

and the CG Committee presented its recommendations. Some

outside professionals from the fields of law, accounting and

finance also rendered their opinions and provided inputs. The

minutes of the meeting show that one of the Directors of RIL

particularly stated and emphasised that the gas supply

agreement should specifically state that price and terms and

conditions shall be subject to Central Government’s approval. It

is also recorded that all those present, including Cyril Shroff, who

had prepared the MoU, was in charge of preparing the Scheme

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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.

36. A Company Application for reorganisation of RIL was

filed in September 2005 in the High Court and based on its

directions, meetings of the shareholders and the stakeholders

under the aegis of a retired High Court Judge were conducted on

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October 21, 2005. The Scheme as presented was approved near

unanimously by the shareholders and the stakeholders.

Subsequently, the High Court sanctioned the Scheme on

December 09, 2005. The MoU and the terms in it relating to gas

supply do not find any mention in any of the petitions as well as

the sanctioned Scheme.

37. Beginning on June 30, 2005 representatives of both

the groups started negotiating the terms of gas supply

agreements. Voluminous correspondence (Exh. F) ensued,

mostly in the form of emails. Neither prior to the filing of the

Scheme nor thereafter could the two groups arrive at any

agreement. It is clear from the correspondence, that even until

end of February, 2006 there was no controversy that was raised

regarding the requirement of governmental approvals. The draft

NTPC-GSPAs of May, 2005 containing the requirement of

governmental approvals had been handed over to the ADA Group

and it was agreed by an ADA Representative that it would form

the basis for negotiation of gas supply agreements.

38. On January 12, 2006 a meeting of the Board of

Directors of RNRL was called for, in which, a Gas Supply Master

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Agreement and a model Gas Sale and Purchase Agreement,

approved by the Board of RIL, were placed for consideration of

the Board of RNRL. Two Directors, both nominees of the MDA

Group, voted to accept the said gas supply agreements, and one

Director, the sole nominee of the ADA Group, strongly protested.

The said nominee of ADA Group also wrote a letter protesting the

same, and, inter-alia, alleged that he had been given the gas

supply agreements the previous night, had no time to properly

read through them, no one in the ADA Group got a chance to vet

them and further that the gas supply agreements were illegal

because they should have been executed by RNRL only after ADA

Group was fully in charge of RNRL.

39. On January 27, 2006, RNRL was listed on the stock

exchanges that RIL was listed on and the shares of RNRL were

given to the shareholders of RIL as provided for in the Scheme.

In particular, each shareholder of RIL was given one share of

RNRL for each of the shares he/she/it held with RIL, except

certain specified shareholders of RIL as provided for in the

Scheme. On February 7, 2006 RNRL was handed over to the ADA

Group for focused leadership of ADA after reconstitution of the

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Board of RNRL as per the wishes of ADA and ADA Group.

Thereafter on February 28, 2006 a letter was written by RNRL to

RIL alleging various malafide actions by RIL with respect to gas

supply agreements, amongst other things.

40. In April, 2006, RIL applied to MoPNG for approval of

the the well-head price of USD 2.34/mmBtu for the natural gas

to be supplied to RNRL on the grounds that it was the same as

the agreed price for supply of gas to NTPC. The MoPNG rejected

it on July 27, 2006 and the same was communicated by RIL to

RNRL. In the meanwhile, RNRL had also written to MoPNG asking

for the approval of the same, though in the letter RNRL stated

that the GoI’s rights with respect to price formula/basis are only

with respect to the valuation that GoI might wish to place on

natural gas to determine its share of profit petroleum.

41. In the meanwhile RNRL was also writing to a number

of governmental, statutory and regulatory bodies regarding the

status of its gas supply agreements with RIL. In its statements

made with respect to issuance of Global Depository Receipts, in

Luxembourg, RNRL specifically stated that gas supply

agreements including price formula/basis would be subject to

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governmental approvals and if approved it would then be able to

sell it to end customers at market prices.

42. On August 1, 2006 the MoPNG constituted a

Committee to “Formulate Transparent Guidelines for Approving

Gas Price Formula/Basis” for giving Government Approval under

the PSC for the same. On August 17, 2006, the said Pricing

Committee issued letters to various stakeholders, seeking their

comments and thereupon submitted its report in November

2006.

43. On November 8, 2006, RNRL filed Company

Application under Section 392 of the Companies Act, 1956

seeking directions from the High Court to order RIL to change the

gas supply agreements in a certain specific manner. According to

RNRL, the gas supply agreements were not bankable in

international financial markets, did not demerge the business of

supply of gas to gas based energy producing companies within

the ADA Group and thereby the very purpose for which RNRL had

been set up was negated. Further, RNRL also claimed that unless

the said changes were made, the Scheme would be unworkable

and hence the reliefs as prayed for. RIL countered that the

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Company Application of 2006 was not maintainable, as the

clauses that were being sought to be changed were not

unconscionable, and the jurisdiction under Section 392 was only

to ensure that the Scheme as presented to the shareholders and

stakeholders was implemented and not to substitute better terms

or to frame a better Scheme. According to RIL, Clause 19 of the

Scheme provided that suitable arrangements with respect to gas

supply were to be made and the gas supply agreements put in

place by it were suitable because they protected the interests of

both RIL and RNRL. Further, RIL also took the affirmative

defense that under the PSC it was obligated to obtain approvals

of the government. The MoU was not pleaded specifically by

RNRL, though in the pleadings it raised issues about what had

been promised to it which could be linked to the MoU. The

correspondence between the two groups after the MoU,

regarding the gas supply agreements were placed on record and

analysed.

44. In May 2007, RIL submitted a price formula/basis to

the MoPNG for its approval so that all gas from KG-D6 could be

sold at a price derived from that formula. Around the same time,

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RNRL also made a representation to the Ministry of Chemicals

and Fertilizers that the Government should put in place a

Utilisation Policy which RNRL stated was a right of the GoI under

the PSC and also take its share of profit petroleum in kind and

distribute the same to power and fertilizer sectors at a

reasonable price.

45. Be that as it may, in August 2007 an Empowered

Group of Ministers, consisting of Senior Cabinet Ministers, was

constituted by the GoI, which met in a series of meetings

(numbering six in all) between August 27, 2007 and January 8,

2009. The substantive decisions taken were: (i) acceptance of

the price formula/basis submitted by RIL, based on, inter-alia, an

evaluation by the Prime Ministers Economic Advisory Council that

the price band that would be derived pursuant to the price

formula/basis was comparable to prices at which non-APM

regime natural gas prices were prevailing. The formula was

modified to set an upper limit to the crude oil at USD 60 and set

the biddable factor to zero so that the alleged non-transparency

aspect could be mitigated; (ii) set in place an Utilisation Policy

that specified the sectoral allocations and priority list of the

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sectors; (iii) that all users should be in a position to consume gas

right away or within a short period of time and that there was to

be no reservation of gas; and (iv) the policy was to be effective

for five years.

46. While the EGOM meetings were being held the

litigation between RIL and NTPC, and RIL and RNRL were in

various stages before the High Court. It appears that while

exercising its sovereign right to frame policy of national

importance, EGOM was also sensitive to the issue of decisions to

be made by the concerned courts, and hence noted that the

decisions of EGOM would be without prejudice to the rights of the

litigants as decided by the Courts.

47. A final order and judgment was passed, on

15.10.2007, by the Learned Company Judge. The judgment held:

the Application under Section 392 to be maintainable, that the

Company Court was not competent to dictate the specific

changes sought, that the GSMA was in breach of the Scheme,

that the MoU was binding on both parties, and that “suitable

arrangements” in Clause 19 of the Scheme had to be read in light

of the MoU and that it was necessary for the Scheme. The

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Learned Company Judge also held that such gas supply contracts

would be subject to Government’s approval, pursuant to NELP

and PSC and it was further held that Government should

normally approve such contracts unless clearly in breach of public

policy and public interest. The Learned Company Judge then

ordered the parties to renegotiate.

48. Both sides filed appeals before the Division Bench

against the said judgment. As a number of interim orders were

passed at the stage of the proceedings before the Learned Single

Judge and then later on before the Division Bench, the GoI

intervened in the proceedings as it had been realized that it had

a vital stake because the dispute involved issues that could affect

national development, national interest and also GoI’s revenues.

49. The Division Bench disposed off the appeals of RIL and

RNRL by its order and judgment dated 15.06.2009. The decision

at the level of the Division Bench turned, it seems, on the fact

that a portion of the MoU was jointly tendered by RIL and RNRL

and apperception of the Division Bench that under the PSC, RIL is

entitled to a physical share of natural gas, as a part of cost gas

and profit gas. Further, the Division Bench seemingly agreed with

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the conclusions of the Learned Company Judge and then

departed from it. Substantively it was held that a fixed quantum

of 28 MMSCMD plus 12 MMSCMD in the event that NTPC contract

did not fructify stood allocated and to be supplied for use in any

of REL’s power projects, and that the allocations made were a

class apart in themselves. The price of supply was to be in

accordance with the PSC – but as there was no clause in the PSC

prohibiting RIL from selling it at a price lower than that arising

from the price formula/approved by the Government, natural

gas up to the first 40 MMSCMD at a well head price of USD

2.34/mmBtu of natural gas stands allocated to RNRL, as RIL

would still make profits at that price point. Further, the Division

Bench also ordered the parties to renegotiate with respect to

issues regarding identity, definition of affiliate and limitation of

liability to make the gas supply agreements bankable.

50. There is considerable confusion as to what the Division

Bench ordered with respect to Utilisation Policy and its

applicability with respect to the Option Volumes of natural gas

provided for in the MoU. The three parties to this case have

urged three different interpretations regarding the same.

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51. Aggrieved by the said Judgment and Order of the

Division Bench all the parties have approached this Court in

appeal by way of special leave. The Union of India which was

allowed to intervene before the Division Bench, being aggrieved

by certain findings, has also preferred an appeal against the

Judgment and Order of the Division Bench. After initially raising

objections, the Learned Senior Counsel appearing for RNRL, Shri.

Ram Jethmalani withdrew his objections to leave being granted.

Further, in as much as on the face of the record it would appear

that the PSC, to which the UoI is a party, has been interpreted

without the GoI having had an opportunity to be properly

impleaded and present its case and the potentially serious public

interest implications that arise therefrom, leave has been granted

to the UoI.

52. Now we shall proceed to summarise the contentions of

the parties made during the oral hearings spanning 27 days and

in the many thousands of pages of written documents. A number

of authorities were also cited by each of the counsel in support of

their arguments. We make it clear that we shall advert only to

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those submissions and citations which are necessary for disposal

of these appeals.

PART III

SUMMARY OF THE SUBMISSIONS OF THE PARTIES:

53. Though the first party to file a special leave petition

in these proceedings was RIL, and it is Shri Harish Salve, the

learned senior counsel for RIL who led the arguments, because of

the fact that it was RNRL’s petition and the main attack was

initiated by RNRL in the courts below, we consider it appropriate

and convenient to note their submissions first. While there is a

welter of facts and arguments it would also be quite clear that

there has been a set of consistent themes flowing right through

this case. In addition, at the earlier stages of proceedings the

public interest and public law elements were not properly before

the courts. Though late, with the entry of Union of India as a

full fledged party to the case, the issue of public interest and

welfare has also come to be crystallized.

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CONTENTIONS OF RNRL:

54. The line of argument that RNRL has taken in the

course of these proceedings can be gleaned from the Six

Protested Points they have raised about the underlying gas

supply agreements. They are about Price, Quantity, Tenure,

Identity of Buyer, Definition of Affiliate and Limitation of Liability.

We note each one of them below as substantively argued by Shri.

Mukul Rohtagi, learned senior counsel appearing on behalf of

RNRL.

1. Price: The natural gas that is to be supplied to it, not

including the Option Volumes, should be at a fixed price of

USD 2.34/mmBtu well head cost plus marketing margins

and transportation charges at the delivery point for a total

of USD 3.18/mmBtu. Contemporaneously, while various

commitments were being made by RIL between 2002 to

2005 to the gas based energy producing division while it

was a part of RIL, a bid was offered on the international

tender floated by NTPC at the said price. In as much as that

was the only contemporaneous arms length and a market

160

determined price, it is contended that the same price should

apply to RNRL as it is the derivative of and the successor in

interest to that gas based energy producing division.

2. Quantity: The quantum that RNRL should receive 28

MMSCMD plus, in the event that NTPC’s contract does not

go through, an additional 12 MMSCMD. It is argued that the

size of the gas based energy producing plant, at Dadri, of

7500 MW of generating capacity is the first determinant of

the requirement of 28 MMSCMD. The other 12 MMSCMD is

based on the required supplies for RPPL and other gas

based energy producing plants it had proposed to set up.

According to RNRL these were commitments that RIL had

made prior to the demerger and even prior to the MoU and

hence ought to honour them.

3. Tenure: The tenure should be a firm 17 years, as that was

the term that had been promised to NTPC and that the

provision regarding the same should be as stated in the

draft agreements with NTPC.

161

4. Identity of Buyer: In as much as the gas supply agreements

mandate that it nominate an affiliate from within the ADA

Group that is engaged in gas based energy production as a

buyer, and the gas is directly supplied to it and payments

made to RIL are also from that quarter, the very purpose

for which RNRL has been set up, to supply gas to gas based

energy producing companies and thus promoting the

setting up of such companies, would be negated. It is

contended by RNRL that a fair reading of the Scheme would

reveal the same.

5. Definition of an Affiliate: According to RNRL the definition of

an affiliate should not require 51% ownership, but rather

the definition as contained in either the PSC or the NTPC

draft agreements. It is argued that by restricting its

nominees to only those companies in which RNRL owns at

least 51%, the freedom of RNRL to set up gas based energy

producing companies is automatically restricted and in as

much such a restriction was not placed on NTPC it should

be accordingly changed. Further, RNRL also contends that

162

the definition of affiliate as provided for in the PSC could

also be appropriate.

6. Limitation of Liability: The promise made to RNRL was that

gas would be supplied to it from any of the gas fields given

to RIL by GoI, and consequently it should be possible to

draft a liability clause that becomes operative in the event

that there is no gas available at any of the gas fields or for

reasons beyond the control of RIL.

55. The three themes that RNRL presses are and they

relate to Government Approvals, binding nature of the MoU and

maintainability in seeking the reliefs claimed as above.

1. Government Approvals: In its claimed reliefs, RNRL seeks

the deletion of Section 13.9 of the GSMA and Clauses (d) and (e)

of Schedule 3.2 of the GSPA, which substantively deal with the

issue of approval of the price formula/basis and also of

applicability of governmental utilization policy or any other

powers of the GoI to curtail production or otherwise prevent RIL

from supplying natural gas. The first contention of RNRL, as

163

pressed by both Shri. Jethmalani and Shri. Rohtagi, is that under

the PSC what is shared between RIL and UoI are physical

quantities of natural gas, and that is what a PSC means – sharing

of production. For this proposition reliance is placed on CIT v

Enron Oil and Gas India Ltd.9 Further, it is also argued that

because the Contractor expends monies on exploration,

development and production and is allowed to recover its costs

first, it should be deemed that the title to natural gas to the

extent of cost and profit petroleum pass to the Contractor at the

Delivery Point when natural gas is first brought on-shore. To this

effect they rely upon the provisions of Article 27.2 of the PSC.

Consequently, they also argue that the approval of price

formula/basis in Article 21.6.3 of the PSC is only to facilitate GoI

in placing a value on natural gas so that its share to physical

quantity of natural gas under the Profit Petroleum component can

be calculated. They also argue that if GoI is allowed to determine

price and also frame a utilization policy, then the absolute

freedom to market, as promised in NELP and in Article 21.3 of

the PSC would become otiose.

9 (2008) 305 ITR 75

164

Alternately, it is also argued by Shri. Jethmalani and Shri.

Mukul Rohtagi that, even if one were to assume that the title

does not pass through to the Contractor and that the GoI did

have such rights, when the binding commitments were made by

RIL to RNRL, there was no utilization policy in place,

consequently RIL was free to find its own buyers under the

marketing freedom promised by NELP, the only policy in place.

Moreover, it is argued, the GoI knew about supply of natural gas

to RNRL in as much as it was specifically mentioned in the IDP

approved by the MC of the PSC. Arguing that the State has to act

justly, fairly and reasonably even in contractual field, they have

relied upon Kumari Shrilekha Vidyarthi v State of U.P.,10 Mahabir

Auto Stores v Indian Oil Corpn.,11 LIC of India v Consumer

Education & Research Center.12 Further, they also argue that

EGOM decisions cannot be held to be applicable in a manner that

would affect its pre-existing contractual rights with RIL as

executive action cannot interfere with contractual rights. To this

effect they rely upon Rai Sahab Ram Jawaya Kapur & Ors. v

State of Punjab,13 State of Madhya Pradesh v Thakur Bharat

10 (1991) 1 SCC 212 11 (1990) 3 SCC 752 12 (1995) 5 SCC 482 13 1995(2) SCR 2.

165

Singh,14 and Poonam Verma v DDA.15 Even if one were to

consider EGOM decisions as policy, it cannot have retrospective

effect and to this effect they placed reliance on Union of India &

Ors. v Asian Food Industries,16 and Kusumam Hotels (P) Ltd. v

Kerala SEB.17 Moreover, in as much as in the EGOM minutes it is

clearly recorded that their decisions are without prejudice to the

rights of RNRL in the court cases, RNRL’s rights were beyond the

pale of EGOM’s decision. For interpretation of the expression

“without prejudice” they relied upon NTPC Ltd. v Reshmi

Constructions, Builders & Contractors.18 Finally, arguing that

Article 297 of the Constitution does not give sovereign rights to

GoI with respect to dealings with its own citizens to change

contractual rights and that sovereignty is restricted to the sphere

within the international context, Shri. Jethmalani relied upon

Madhav Rao Jivaji Rao Scindia v Union of India.19

2. Binding Nature of MoU: It is the contention of RNRL that the

MoU is binding upon all and hence, the main commercial terms

14 1967 (2) SCR 454 15 (2007) 13 SCC 154 16 (2006) 13 SCC 542 17 (2008) 13 SCC 213 18 (2004) 2 SCC 663 19 (1971) 1 SCC 85

166

provided in its gas supply section should be faithfully followed, as

they relate to the Six Protested Points. Shri. Jethmalani argues

that at the time of the execution of the MoU, MDA was not just

the Chairman and M.D., but also armed with all the powers of the

Board. Consequently, he was the controlling mind of the

Company. To this effect he pressed the Doctrine of Identification

to state that MDA’s actions should be deemed to be the actions

of the Company, and the Board. He relied upon Lennards

Carrying Co. v Asiatic Petroleum Co. Ltd.20, Boulting and Anr. v

Association of Cinematography, Television and Allied

Technicians21, R. Vs. McDonnell 22, Tesco Super Markets v

Nattrass23, Meridian Global v Securities Commission24, J.K.

Industries Ltd. v Chief Inspector of Factories & Boilers25, Indian

Bank v Godhara Nagrik Coop. Credit Society Ltd.26, H.L. Bolton

(Engineering) Co. Ltd. v T.J. Graham & Sons27, Union of India v

United India Insurance Co. Ltd.28, Assistant Commissioner,

Assessment-II, Bangalore & Ors. v M/s. Velliappa Textiles Ltd. &

20 2924-25 AllER 280 21 (1963) 2 QB 606 22 (1966) 1 ALLER 193 23 (1971) UKHL 1; (1972) AC 153 24 (1995) 3 ALL ER 918 25 (1966) 6 SCC 665 26 (2008) 12 SCC 541 27 (1956) 3 ALL ER 624 28 (1997) 8 SCC 683

167

Ors.29 It was argued that the terms of gas supply, which are in

the nature of day to day agreements entered into by the

Management and hence need not have been placed before the

shareholders for approval and that the powers of a Director to

enter into contracts are very wide and reliance is placed on LIC

v. Escorts Ltd30 and Mohta Alloy & Steel Works v Mohta Finance

& Leasing Co. Ltd.31

3. Maintainability: It was also argued by the Learned Senior

Counsel for RNRL that the power of the Company Court is of the

widest amplitude and that in fact it is the duty of the court to

ensure that the Scheme is fully implemented and the only

limitation on the powers of the court is that it cannot change the

character, purpose or basic structure of the Scheme. He relied

on S.K. Gupta v K.P. Jain32

CONTENTIONS OF RIL:

29 AIR 2004 SC 86 30 (1989) 1 SCC 264 31 (1997) 89 Comp. Cases 227 32 (1979) 3 SCC 54

168

56. RIL’s position with regard to the Six Protested Points

was argued by Shri. Harish Salve as follows:

The basic contention of RIL is that under the PSC the GoI

has the right to approve the price formula/basis on which sales

can be effectuated, pursuant to Art. 21.6 et. seq. Additionally, it

says that ordering it to supply at USD 2.34 mmBtu well head

price even if the valuation placed by GoI is much higher is

misconceived, because it cannot recover its interest costs and its

investments are recouped over a long time frame, its rate of

return which is very, very modest will be threatened and that it

would amount to RIL subsidizing RNRL, which was never

contemplated in the Scheme. The Scheme cannot be changed to

the detriment of shareholders of RIL.

It was submitted that RIL can commit to supply only that

amount of gas as have been certified to be proven reserves. In

early 2006, the total amount of natural gas in gas field that

would be required to commit 28 MMSCMD and the Option

Volumes had not yet been certified; and it was not known

169

whether P1 reserves were available beyond the 12 MMSCMD

needed for NTPC.

RIL contends that the kind of certitude that is being

demanded by RNRL could have been given by it only if certified

and proven reserves were known. Further Shri Salve submitted

that as and when new reserves became known, new GSPA’s

would then be executed with a nominee of RNRL. In fact it is

RIL’s contention that if certified reserves were known and firm

commitments had been made, given that the project in Dadri, in

2006, was nowhere near completion, RNRL would have had to

suffer the very onerous “take or pay” clauses in the Industry.

Shri Salve also argued that in any event it cannot commit

supplies beyond the validity of the Mining Lease which expires in

2025.

It was argued by Shri. Salve that the protest of RNRL about

limitation of liability was in fact frivolous and that the clause is

being protested by only selectively reading it. The phrase “short

fall” in the clause in the GSMA, RIL says, refers to non-

170

availability of natural gas and not a voluntary shutting of gas

supply by RIL.

RIL contents that the Scheme itself postulates supply of gas

only to power plants of REL and RPPL. However, the fact that

GSMA has included a definition of affiliate so that it can take on

the higher responsibility of supplying gas even to power

generating units started by entities other than REL and RPPL

provided RNRL owned at least 51% of that company

demonstrates the good intentions of RIL. It further contends

that in fact the GSMA is more flexible than the Scheme or for

that matter the MoU and hence, on that count RNRL has no right

to contend that the definition of affiliate should be wider than

what was provided in the GSMA.

It was submitted that the GSMA and GSPA fully comply with

the requirements of Clause 19 of the Scheme, which requires

that arrangements be entered into with RNRL for supply of gas to

the power plants of REL and RPPL. Under the GSMA, RNRL would

have the right to nominate affiliates to whom gas is required to

be supplied under different GSPAs. The GSPA’s are to be entered

171

into with companies who are engaged in generation of electricity

like the REL. RIL also further contends that the Scheme does not

contemplate RNRL purchasing the gas and selling the same to its

affiliates at a profit. RIL says that the buyers under the Scheme

were to be companies which actually own and operate power

plants and moreover under the PSC the title can only pass to the

end consumer at the delivery point. It was stated that the

scheme envisaged that RNRL take delivery of gas at the delivery

point on behalf of the buyers and arrange for its transportation to

the ultimate consumption point and for this purpose charge a

marketing margin which must be nominal and the transportation

charges incurred. The submission was that the very names Gas

based Energy Undertaking suggests that the value arises, not

from trading of gas, but from generating energy from gas. Shri

Salve explained that the procedure that RIL put in place,

whereby the GSMA is with RNRL and the GSPA with its nominee

company that is actually starting a gas based electricity

generating plant, would make it bankable for both the power

generating company as well as RIL. It was his contention that in

the event that RIL did not get paid and with “take or pay”

penalty not being there, then it would at least have a company

172

with some actual assets against which it can proceed to collect.

57. With regard to the issue of bankability of the GSMA

and GSPA, it was submitted that RNRL has not shown one

single document or produced any evidence suggesting that they

are not bankable in the international financial spheres. It was

submitted that contrary to RNRL’s assertions that they are not

bankable, RNRL has in fact raised substantial funds, both

domestically and abroad. RIL also contends that even though

such huge sums of money have been raised, not a brick has been

laid so far to begin the construction of the Dadri power plant in

Uttar Pradesh. It was also stated that by entering into GSPA’s

with the nominee companies that would be setting up gas based

power plants, it would actually make the agreements bankable

because it is the nominee companies which need to raise monies

to establish the power plants.

58. Shri Salve argued that as a matter of both law and

logic, within the context of the scope of this litigation, the rights

of RNRL vis-a-vis RIL cannot transcend the rights possessed by

RIL and actually demerged by RIL. The rights of the UoI with

respect to approval of the price formula – and thereby affecting

173

the price - and to frame a government utilization policy

effectively delimits RIL’s own rights as to what it can do with the

natural gas. It is mandatory that RIL strictly remain within those

boundaries. The width and nature of GoI’s control can be

discerned from its continuing and constant role in overseeing

activities in all aspects and phases of the Petroleum Operations.

Further, Shri. Salve says that what RIL gets is not a physical

share but only a share of the value, that the title only passes to

the end user and purchaser at the Delivery Point and not to RIL

when natural gas is extracted and that RIL can really only act as

an agent of UoI.

59. According to Shri. Salve, what was approved by the

shareholders and formed the basis for sanction of the Scheme,

has in fact been propounded by the Board. The minutes of the

Board meetings and the discussions recorded clearly show that

the Board sought the opinion of the CG Committee and outside

professionals in deciding whether to go with the reorganization or

not, and also the nature of the Scheme that was to be put

together. It is clear from the record that the Board acted

independently and collectively. What it did not include in the

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Scheme therefore cannot now be said to be a part of the Scheme

itself. With respect to gas supply agreements, the Board had

clearly recognized that they were not permissible without

governmental approvals, and in fact the personnel of ADA Group

knew this and so did the lawyer who put the scheme together,

drafted the MoU and was advising ADA.

60. Shri. Salve argued that the MoU was a confidential

document from the private domain of the promoters and was

executed in the context of settlement of family disputes. In as

much as the MoU was never placed before the Board or the

shareholders, it cannot be deemed to have been approved by

them. According to Shri. Salve, Sections 193, 194 and 195 of the

Companies Act, 1956 raise the presumption that the record of

the proceedings of the meetings of the Board are accurate The

minutes of the Board were never challenged and were never put

in issue in any proceeding.

61. With respect to the Doctrine of Identification, Shri

Salve argues that it has no relevance in the context of the facts

of these cases. The resolutions of the Board vesting vast powers

upon MDA themselves speak of the fact that the powers which

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the Board was required to retain, by the Companies Act, 1956

and the Articles of Association, it did so. Under Section 293 of

the Companies Act, the Board cannot sell off or otherwise dispose

off an undertaking without the consent of the shareholders.

Consequently, the Board cannot relieve itself of the powers with

respect to matters that only it can take a decision on. The record

clearly indicates that Directors acted independently and that the

Board applied its collective mind after obtaining the necessary

inputs and recommendations of the CG Committee and other

professionals and accordingly had the Scheme prepared and

recommended to the shareholders. Consequently it is not MDA

who acted but the Board itself. Hence, the Doctrine of

Identification which arises in cases involving torts and criminal

liability has no application here.

62. MoU is an antecedent document that should not have been

considered by the Courts below. Even if considered, the MoU

itself contemplated that the actions necessary to start the

process of reorganization had conditions precedent which

included approvals by the Board and the shareholders. Further,

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the MoU itself also shows that governmental approvals were

always known to be necessary.

63. RNRL’s Application Not-Maintainable: According to

Shri. Salve and Learned Senior Counsel Shri. R. F. Nariman, the

powers of the Company Court under Section 392 cannot be

greater than the powers under Section 391 of the Companies

Act, 1956. The width of the powers of the Company Court are

that of an umpire, ensuring that the rules of the game are fair,

and then allowing the parties to inter-se decide the appropriate

terms of commercial exchange. The Court pursuant to Section

391, for instance, cannot compel the parties to substitute a

Scheme approved by the members of the classes required to

approve the Scheme with what the Court feels is a better one.

Shri. Nariman relied upon Miheer H. Mafatlal v Mafatlal

Industries.33 Consequently, under Section 392 the Court cannot

impose its own wisdom, and change the basic fabric of the

Scheme itself. Reliance was placed on S.K. Gupta (supra).

Further, Shri Nariman also argued that in search of modification,

it is impermissible to substitute a portion of the Scheme with a

33 (1997) 1 SCC 579.

177

new Scheme. Reliance was placed on Meghal Homes (P) Ltd. V

Shree Niwas Girni K.K. Samiti & Ors.34 According to RIL there is

nothing unconscionable in the six clauses that have been

protested and hence also the application by RNRL was not

maintainable.

64. Scope of Clause 19 of the Scheme: Shri. Rohinton

Nariman argues that what was provided for in Clause 19 with

respect to the gas supply was a “suitable arrangement,” which

means an uncrystallized arrangement to be negotiated. This,

according to Shri Nariman is to be contrasted with the

crystallized agreements and rights to use Reliance brand logo

etc. which are also found in Clause 19 and this difference must

be interpreted to be intentional. Further, according to Shri.

Nariman the “suitable arrangements” with respect to gas supply

were to be between the Demerged Company owned by two

million shareholders and the Gas Based Resulting Company,

whereas the MoU on the other hand is between three

shareholders out of two million shareholders and consequently it

cannot now be said that the gas supply provisions of MoU

34 (2007) 7 SCC 753

178

constitutes the phrase ‘suitable arrangement’. Shri Nariman also

argued that what is contemplated in Sections 391-394 of the

Companies Act, 1956 is an arrangement between the company

and a class of shareholders. The present Scheme treats all equity

shareholders as a class. The MoU was between three

shareholders and has nothing to do with the entire class of

shareholders who approved this Scheme. Further, Shri Nariman

also argued that if the MoU were known to the Board, then the

fact that the terms and conditions of the gas supply contained

therein were kept out, indicates that the act of omission was

deliberate and hence foreign to the Scheme.

CONTENTIONS OF THE UNION OF INDIA:

65. According to Learned Solicitor General, Shri. Gopal

Subramaniam, there are two kinds of Production Sharing

Contracts, one in which physical produce is shared and the other

in which revenue is shared. He relied on a book “International

Petroleum Fiscal Systems and Production Sharing Contracts” by

Daniel Johnston.

179

66. The Learned Solicitor General, presenting a synoptic

view of the history of oil production contracts, from early

concessions to modern day arrangements, says that the PSC’s

evolved to give the State greater control over all aspects of

petroleum operations. This includes the right to determine the

expenses to be incurred, the rates of production, the equipment

to be used and also which markets to sell to or not to sell to.

Further, the Learned Solicitor General submits that PSC’s have

many aspects which are negotiated and the specific set of rights

given, in terms of recoupment of costs, the extent and

delineation of such costs determines the particular bargain

struck. Hence, an assumption or conclusion that because a

contract is titled “Production Sharing Contract”, physical

quantities of the produce are to be shared would be erroneous.

The specific terms of the contract ought to be determinative,

rather than a general assumption.

67. According to the Learned Solicitor General the concept

of Permanent Sovereignty over natural resources is a widely

accepted one in international law and UN General Assembly

Resolution 1803 of 1962 specifically recognizes the same.

180

Further, it was also argued that, in fact, forms of PSC developed

as a result of such a resolution. Under the new contractual

systems in the petroleum industry, as opposed to the historical

concessions given by Persia for instance, the ownership of the

resource vests and continues to vest with the sovereign until it is

disposed off. It was pointed that Article 297 of the Constitution

declares that minerals and other resources underlying the ocean

vest in the Union of India. Learned Solicitor General specifically

stated in his oral arguments that the PSC was placed on the floor

of the Parliament.

68. It was argued that the EGOM decisions, regarding the

utilization of natural gas and the price formula/basis, have never

been challenged independently and that the present litigation is

an attempt, in a seeming internecine war, to waylay GoI policies

in a Company Petition. Learned Additional Solicitor General Shri.

Mohan Parasaran points to Articles 77(3) and 73 of the

Constitution and argues that the powers of EGOM are not merely

traceable to the PSC but also to the powers flowing from such

Constitutional provisions and its policy decisions have the force of

law.

181

69. Arguing that distribution of national property and

state largesse has to adhere to the dictates of Article 14 of the

Constitution, Shri. Mohan Parasaran says that if the GoI had

effectuated the distribution of natural gas in the manner in

which it is being claimed to have been allocated by the MoU, in

secret and without it being offered to others, it would be liable to

be struck down by the courts. To this effect he relies on R.D.

Shetty v. International Airports Authority of India35 and F.C.I. v

Kamdhenu Cattle Feed Industries.36 Further, Shri. Parasaran also

argued that the State is enjoined to distribute the material

resources in a manner that promotes common good. In this

regard he assails the demands of RNRL for a reservation of gas

that places vast amounts of it in the hands of one entity as being

detrimental to common good. He relied on State of Tamil Nadu v.

L. Abu Kavur Bai 37 and Salar Jung Sugar Mills Ltd. v State of

Mysore.38 Shri. Mohan Parasaran also stated that natural gas is to

be used for national development and placed reliance on

Association of Natural Gas & Ors. v. Union of India & Ors. 39

35 (1979) 3 SCC 489 36 AIR 1993 SC 1601. 37 1984 (1) SCC 515 38 1972 (1) SCC 23. 39 2004 (4) SCC 489

182

70. Learned Additional Solicitor General Shri. Vivek

Tankha explained that natural gas is a very scarce resource in

India and that many units which could use it have been stranded

on account of its non-availability. In fact, he pointed out that, a

Chief Minister and others have also written to GoI with regard to

non-availability of natural gas from KG-D6 on account of the

claimed reservation of natural gas by RNRL. Additionally, he

submitted that the market for natural gas in India is

undeveloped. Shri. Tankha pointed out that the network of

pipelines that can transport natural gas in India is very small in

comparison to developed Nations. This, he pointed out, means

that many regions of the country cannot get access, and

reservation of such huge amounts of gas by one entity would

mean that other regions would not be able to access such gas

after pipeline is developed there. He also stated that while some

new discoveries have been made, some of the older fields are

likely to run out of natural gas. In light of such factors, Shri

Tankha argued that, it is very important for GoI to be able to

monitor and frame policy for utilization of natural gas. It was

emphatically stated by him, and also by Shri. Mohan Parasaran,

183

that any marketing freedom under the PSC can be only pursuant

to a gas utilization policy put in place by the GoI.

71. Shri Mohan Parasaran analysed Articles 27.1, 27.2, in

conjunction with Article 21.1 and posited that title to PSC can

pass to an end user only upon sale, and such sales have to be in

accordance with a utilization policy. With respect to what is

shared between the contractor and the GoI, he argues that it is

revenue. To this effect he also drew our attention to the fact that

the PSC considered by this Court in CIT v Enron Oil & Gas India

Ltd. (supra) – is different from the PSC in hand, and hence that

case is not applicable.

72. Shri. Mohan Parasaran interpreted Article 21.6 to

mean that arms length prices and the price formula therein as

being applicable with respect to all gas produced and sold from

KG-D6.

PART IV

WHOSE GAS IS IT ANYWAY? WHETHER A CONTRACTOR

BECOMES THE OWNER OF THE GAS?

73. Shorn of all the details and lengthy submissions and

contentions we shall now proceed to consider the relevant and

184

substantive issues that are required to be dealt with. It may be

necessary to have a bird’s eye-view about the importance of the

natural gas and the evolution of the PSCs. We also set forth a

broad and a brief overview of the political economy of natural gas

industry and the evolution of the various arrangements between

sovereign nations and oil companies.

74. Natural Gas is a mixture of hydrocarbons, but mostly

methane and is a primary source of energy. It is formed by the

conjuncture of a random set of factors – biological, physical,

chemical & geological – intersecting precisely to trap the formed

gas in underground cisterns (See: Association of Natural Gas).

The known reservoirs across the globe are randomly distributed.

Those regions that have many large reservoirs are considered to

have been favored by the cosmic dice. The difficulties of

exploration and mining, and the location specificity of reservoirs

have a direct bearing on identification of those reservoirs,

extraction from them and subsequently distribution of natural

gas. Its gaseous nature makes it expensive and difficult to store

and transport. Between continents it is shipped in the form of

LNG; and overland it is transported by pressurized pipelines. It

185

is used as a fuel and a feed stock in: (i) production of fertilisers,

(ii) generation of power, (iii) transportation, (iv) households,

and (v) production of various products such as petro-chemicals,

textiles, sponge iron etc. Its low carbon content, relative to other

fossil fuels, implies that its use may help in combating global

warming problems. Availability at an attractive price point could

potentially induce entities in those sectors to switch to using

natural gas. However, because it is also an exhaustible and non-

renewable resource, there is an imperative need to conserve it.

Such conservation can be achieved by restricting the amount

available and also by modulating the price. Because the

differences in relative abilities to pay varies between different

sectors, in conditions of extreme scarcity, it is likely that certain

sectors could out-bid others and corner the entire available

quantities in unregulated markets; and that could lead to a

shortage of supply to vulnerable sectors like fertilisers, power,

transportation and households. Availability of natural gas to each

of those sectors raises thorny questions of equality and quality of

life issues40.

40 Handbook of Natural Gas Technology and Business, ed. Parag Diwan and Ashutosh Karnatak, Pentagon Energy Press (2009).

186

75. The size, scale, scope and nature of a market for

natural gas is a function of the total supplies, the level of demand

and relative abilities to pay by different user segments, the

length and density of network of pipelines, the number of

producers, distributors and retailers etc. One of the critical

features of a properly developed market for natural gas would be

the network of large capacity pipelines that can carry it to

different regions, and then a further local network to distribute it

to end users41. Further, where that large capacity pipeline goes

to, determines which regions get natural gas. In a large country,

if many regions are left without access, then inter-regional

conflicts could develop, especially if competition for primary

energy sources intensifies.

76. All of these factors play a role in classifying a market

as developed or undeveloped. The market for natural gas in

United States is considered to be the most developed, with

historically large supplies being available, hundreds of producers,

many lakhs of miles of pipeline and dense local networks.

Consequently spot markets have developed, in which prices are

41 Ibid.

187

determined and are sensitive to various factors, including factors

such as prices of alternative fuels and peak demand. In other

jurisdictions with such features being less developed, prices have

been set through formulae linked to prices of alternate fuels,

including crude. Historically natural gas industry has been highly

regulated and it is only over past three decades that there has

been a greater dependence on market forces to effectuate

market coordination. Different jurisdictions have chosen different

paths, with variations regarding which of the various stages of

the value chain from production to end user access are

regulated. The mechanisms for such regulation also vary from

direct state commands to setting of rules and allowing private

players to operate with relative freedom within those set of rules.

The choices made seem to depend on various historical events,

and factors and already established institutions and rules. 42, 43

77. We have referred to a number of journals, articles and

books in this regard, too numerous to all be cited44, and one 42 Ibid. 43 Robert J. Michaels, “Natural Gas Markets and Regulation”, in the Concise Encylcopedia of Economics,

2nd Ed. 44 A small sample: Stephen Breyer: Regulation and its Reform, Harvard University Press (1982); Paul

Stephen Dempsey: Deregulation and Reregulation – Policy, Politics and Economics in Handbook of Regulation and Administrative Law ed. David H. Rosenbloom & Richard D. Schwartz, New York (1994); Colin Scott: The Juridification of Relations in the UK Utility Sector in Commercial Regulation & Judicial Review ed. Julia Black, Peter Muchlinski & Paul Walker, Hart (1998); Cosmo Graham: Regulating Public Utilities – A Constitutional Approach; UNCTAD: Competition in Energy Markets

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thing stands out: there are no completely unregulated free

markets for natural gas anywhere in the world. By framing an

overarching analytical framework, it can be observed that every

jurisdiction grapples with three sets of issues relating to

ensuring: (1) adequate supplies to meet overall energy and

industrial needs; (2) equitable access across all sectors,

especially those which have implications for quality of life; and

(3) equitable pricing, even if market forces are allowed to play a

much larger role. Three more issues are emerging with respect to

ensuring: (4) energy security of the nation; (5) energy defense

links; and (6) inter-generational equities. Under conditions of

scarcity, these latter factors may indicate a greater need for

emphasis on conservation as opposed to current consumption. It

would appear that markets, with their emphasis on current

consumption and short run profits may lead to faster depletion,

and consequently necessitate far greater and indeed a primary

role for the State in coordination and making choices between

different objectives and value premises. While markets and

private initiatives have an important role in garnering financial

TD/B/COM.2/CLP/60 GE. 07-50741 (2007); Gas Regulation: in 35 jurisdictions, Global Competition Review (2006); and Handbook of Natural Gas Technology & Business, supra note 40. Also see Integrated Energy Policy – Report of the Expert Committee, Planning Commission of India, GoI (2006).

189

resources, developing and bringing new technologies to practical

use, expanding the infrastructure, and increasing supplies by

identification of and extraction from new sources, if unmonitored

and completely unregulated markets are also capable of causing

great inequities, in access, overpricing and sometimes even

under pricing (if externalities, such as environmental costs, are

not taken into account) the resources.

78. It would be a gross understatement to say that India’s

identified reserves and availability of natural gas for domestic

consumption are very small. The total proven and identified

reserves of natural gas in India are said to be about 1074 BCM45.

That may appear to be very large. It is not. United States

consumes around 22-23 Trillion Cubic Feet46 of natural gas every

year – yes every year. According to MoPNG documents the total

global reserves are around 6534 TCF47, and our access to those

global reserves are very limited, because of relatively

underdeveloped shipping infrastructure for transport of LNG and

the difficulties in laying international and undersea pipelines for

45 MoPNG Basic Statistics (2008-2009). 46 Energy Information Administration, Dept. of Energy, U.S. Government. 47 MoPNG Basic Statistics (2008-2009) citing BP Statistical Review of World Energy, June 2008 &

OPEC Annual Statistical Bulletin.

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its transport from better endowed regions such as the Middle

East. While some new discoveries, such as the one in KG Basin,

have raised hopes of the supply constraints easing somewhat, we

should always remember given India’s extremely low – in fact

de-humanized – per-capita consumption levels of energy, such

easing of constraints only implies an easing with respect to the

pressure of immediate and effective demand, and not with

respect to potential demand that could arise with economic

growth and certainly not in relation to the kind of levels of

consumption that would enable our people to live with a

modicum of dignity. As the Planning Commission has stated,

India’s energy challenge is of a fundamental order with

immediate resonance in respects of our constitutional goals,

internal and external security. India’s energy security cannot be

taken for granted – that would be disastrous, ethically

impermissible and a fraud on the Constitution. Planning

Commission also warns that the hubris of having large coal

reserves is unwarranted; according to it, much of that coal is un-

extractable and clean coal technologies are only possibilities and

not certainties. 48

48 Integrated Energy Policy: Report of the Expert Committee, supra note 44

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79. If, as many scholars state, oil production has peaked

or will peak in the future49, India will increasingly have to

compete for primary sources of energy and this may lead to 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.

80. The network of pipelines for transport of natural gas

is very small in length in India, of a few thousand kilometers

only, and the density is also very low51. Except for a few states,

and that too a few small regions in those states, access to

natural gas in the rest of the country is non-existent. It is not a

wonder that at least one Chief Minister wrote to the GoI in the

49 Adam R. Brandt: Testing Hubbert (2006); Aleklett, Hook, Jakobsson, Lardelli, Snowden & Soderberger: The Peak of the Oil Age, Energy Policy Vol. 38 (2010). There are of course many more articles in the public domain regarding this. There are of course industry experts who do not agree.

50 Integrated Energy Report, supra note 44. 51 See Basic Statistics on Indian Petroleum & Natural Gas, 2008-2009, MoPNG GoI.

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middle of the last decade protesting about non-availability of new

natural gas discovered off the sea shore of that state’s coast for

various units located in that state which had already been started

and lying stranded on account of lack of domestic supplies of

natural gas.

81. Historically, oil production had been undertaken by

major oil producing companies in the private sector52. Their

relationship with sovereign owners of such petroleum resources

has changed over one hundred years of struggle of the

sovereigns. These struggles reveal nine zones of problems or

great mischiefs that can occur: (1) of oil companies not

producing even after discovery and not relinquishing the area of

exploration; (2) of oil companies forming into pools and trusts to

reduce production levels and keep the market prices at a high

level;53 (3) of oil companies financing armed revolutions and

interfering in political aspects; (4)of oil companies claiming

ownership rights over the areas in which oil could be produced

from; (5) of oil companies claiming permanent rights to extract

52 Ernest E. Smith & John Dzienkowski, “A Fifty Year Perspective on World Petroleum Arrangements” 24 TEX. INT'L L. J. 13 (1989). This is a broad survey of the history of this industry post nationalization of Mexican Oil Industry and the citations therein are very valuable resources.

53 In United States legislature and courts combated with development of anti-trust jurisprudence. See Ernest E. Smith & John Dzienkowski, ibid. Also see Oswald Whitman Knauth: The Policy of United States Towards Industrial Monopoly, Bibliolife (2010).

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petroleum resources in-situ and taking the physical quantities

away for marketing elsewhere; (6) of under development of

facilities for refining the petroleum and the Nation not having

access to channels to market and distribute the resources;54 (7)

of deception by oil companies via low posted prices, and thereby

reducing the royalty payments to the sovereign owners and

reaping higher rewards in downstream activities that were also

controlled by the oil companies; (8) sovereign owners not having

any rights to determine what levels of production can take place

and without rights in management of petroleum operations; and

(9) joint off take agreements between oil companies and

downstream divisions amongst them that controlled production,

at an international level, keeping posted prices low so that even

if sovereigns tried to take over the industry, they could be beaten

down with production from elsewhere.55

82. In response to such great mischiefs, different types of

arrangements have emerged between sovereign nations and oil

producing companies. The philosophical and operational

54 The great mischiefs 3 to 6 led to nationalization of the oil industry in Mexico, in 1938. They also led to the first modern declaration that all natural resources belong to the people as a nation and to be used for national development and substantively informed the progress in international law , led by former colonies, that the people in those lands are the rightful owners and should benefits from the use of such resources.

55 Ernest E. Smith & John Dzienkowski, supra note 52.

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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

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depends upon historical discoveries already made and extracted

from) etc., would play a role in the particular bargain as Learned

Solicitor General Shri. Gopal Subramaniam stressed.

83. Scholars and experts divide the modern agreements

between sovereign nations and oil companies into specific types

of agreements. However, as experts point out, there is often a

considerable overlap. As Prof. Ernest E. Smith and John S.

Dzienkowski point out:

“....there are four basic arrangements between host countries and multinational oil companies…. (1) the concession; (2)the production sharing agreement; (3) the participation agreement, and (4) the service contract. Although each of these four arrangements can be used to accomplish the same purpose, they are conceptually different from each other. They provide for different levels of control by the company, different compensation arrangements, and different levels of state oil company involvement. It is important to note, however, that some existing agreements have borrowed clauses and concepts from two or more of the types of arrangements. Thus precise categorization of a particular country’s arrangements is not always possible.”56

56 Ernest E. Smith & John Dzienkowski, supra note 52

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84. The principal themes in production sharing contracts

would appear to be that the sovereignty over the petroleum

produced continues to be with the nation, and the contractor

bears varying levels of and forms of risk with respect to

exploration activities and what is allowed to be recovered as

costs (called Contract Costs) and to what extent in each year

(called Cost Petroleum). According to Daniel Johnston, who was

cited by Learned Solicitor General, Gopal Subramaniam:

“contractual arrangements are divided into service contracts and production contracts. The difference between them depends on whether or not the contractor receives compensation in cash or in kind (crude). This is a rather modest distinction and, as a result, systems on both branches are commonly referred to as PSC’s or sometimes production sharing agreements (PSA’s)”

85. One authentic source has been the United Nations. In

a document titled “Alternative Arrangements for Petroleum

Development: A Guide for Government Policy-makers and

Negotiators”57 published by the United Nations Centre on

Transnational Corporations it has been stated:

57 UN Document No. ST/CTC/43, Sales No. E.82.II.A.22

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“almost all forms of agreements between Governments of host countries and foreign oil companies increasingly reflect the Government’s objectives of greater participation, greater control over operations and a greater share.”58

“Sharing of net revenue generated by petroleum exploitation has been a constant source of conflict between Governments and oil companies….. A certain proportion of the gross revenue must be set aside to repay capital costs of exploitation and field development to meet current operating costs…. The remainder of sales revenue is then available to provide a return to the oil company and to provide income to the State. The Government, in its role as sovereign and, in most cases, as owner of the petroleum resource, expects to retain the bulk of such rent and to restrict profits of oil companies to that which is required to attract the companies investment”59

“Even more variety appears in the provisions that determine how net revenue is shared if production is undertaken. Inspite of the variety, most payments can be classified in one of two types: payments based on profitability and payments based on production.”60

The present PSC is required to be interpreted and understood

with this background in mind.

58 Ibid page 5, para 15. 59 Ibid page 14, para 48 60 Ibid page 16 para 57

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86. We now turn to an analysis of the constitutional and

statutory matrix in which the question “whose gas is it anyway?”

needs to be addressed.

87. The natural gas, under dispute in these proceedings, is

being mined from deep beneath the sea bed, off the eastern

shore of India. Thus, it is a resource that falls squarely within the

purview of Article 297 of the Constitution of India and is explicitly

noted so in the PSC. Article 297 of the Constitution declares that

“All lands, minerals and other things of value underlying the

ocean within the territorial waters or the continental shelf or the

exclusive economic zone shall vest in the Union, to be held for

the purposes of the Union”. This Article of the Constitution is

unique as it is the only such provision in the Constitution that

addresses a particular inclusive set of potential resources in a

particular class of geographic zones. It goes on to say that the

limits of those geographic zones “shall be such as may be

specified, from time to time, by or under any law made by

Parliament.” We need to appreciate the purport and meaning of

Article 297 of our Constitution as increasingly these resources in

the geographic zones specified by it are going to be tapped,

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because of technological developments enhancing the capacities

of the nation.

88. While the word “vest” could normally partake of at least a

portion of the full bundle of rights associated with ownership, the

phrase “shall vest” as used in Article 297 of the Constitution

implies a deliberate, and not an incidental, act by a body at the

various constitutional moments that have informed our

Constitution. That body is the people as a nation. It is now a well

established principle of jurisprudence that the true owners of

“natural wealth and resources” are the people as a nation. U.N.

General Assembly Resolution 1803 (XVII) of December 1962

states that the “right of the people and nations to permanent

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.

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89. Those instructions are inscribed, nay genetically encoded

and hardwired, in the commands “to be held” “for the purposes

of the Union.” The core and pure purport of the word “hold” is to

conserve, to preserve and to keep in place and it only secondarily

means ‘use’ or ‘disposal’. The fact that the phrase “be held” is

used in Article 297 of the Constitution, whereas in Article 298 of

the Constitution, in its immediate neighborhood, the word “hold”

is used in conjunction with abilities to “acquire” and “dispose” is

significant and a clear indication of the intent of the supreme

drafter of the Constitution – the people. The use of a series of

words in a Constitutional setting clearly implies that they are

being used precisely, so that overlapping meanings are to be set

aside and the purer and the core meanings be delineated. The

phrase “be held” when viewed along with the phrase “shall vest”,

which vesting was done by the people as a nation, can only mean

that it was used as a lock to conserve, to preserve and to keep in

place. And the key to that lock is also there in the same Article of

the Constitution: “purposes of the Union” which can only mean

the integrity, unity and development of the nation.

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90. Within the context of international law, there has emerged

a body of thought under the broad rubric of Human Rights, that

the people as the true owners of natural wealth and resources,

ought to exercise a “permanent sovereignty” i.e., the power to

make laws, over such resources to ensure national development

and well being of the people. The responsible use of such natural

resources for the well-being of the people of a nation has been

seen as an important aspect of maintenance of international

peace and a part of their right to “self determination”61. Further,

these rights of the people as Nations have been secured by

many struggles for self-determination over millennia. Those

rights encompass the freedom of self-determination through a

democratic order within the boundaries of the nation-state and

the imperative of such self-determination in inter-se and yet

interdependent zones of co-existence between nation-states.

91. In Association of Natural Gas (supra), a Constitution Bench

speaking through Balakrishnan, J.( as he then was) said:

“…. The people of the entire country has a stake in the natural gas and its benefit has to

61 . See UN General Assembly Resolution 523 (vi) of January, 1952, 626 (vii) of December, 1952, 1314 (xiii) of December, 1958, 1515 (xv) of December, 1960 – all specifically referred in Resolution 1803 on Permanent Sovereignty

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be shared by the whole country. There should be just and reasonable use of natural gas for national development.”

92. Article 38 of the Constitution, a Directive Principle of

State Policy, states that: “(1) State shall strive to promote the

welfare of the people by securing and promoting as effectively as

it may a social order in which justice, social, economic and

political, shall inform all the institutions of the national life.” And

further it is stated that the “State shall, in particular, strive to

minimize the inequalities in income and endeavour to eliminate

inequalities in status, facilities and opportunities, not only

amongst individuals but also amongst groups of people residing

in different areas or engaged in different vocations.” Thus, we

can see that Article 38, though not enforceable in any court, but

nevertheless fundamental in governance, codifies a part what the

Preamble sets forth as the goal of the nation i.e. national

development as both a process and a situation in which

conditions of complete justice prevail. These conditions are

essential for maintenance of social order in which our people can

live with dignity and fraternity. National Development has been

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conceived as welfare of the people; a concept of welfare that

subsumes within itself the benefits of the conditions of justice.

93. The structure of our Constitution is not such that it

permits the reading of each of the Directive Principles of State

Policy, that have been framed for the achievement of conditions

of social, economic and political justice in isolation. The structural

lines of logic, of ethical imperatives of the State and the lessons

of history flow from one to the other. In the quest for national

development and unity of the nation, it was felt that the

“ownership and control of the material resources of the

community” if distributed in a manner that does not result in

common good, it would lead to derogation from the quest for

national development and the unity of the nation. Consequently,

Article 39(b) of the Constitution should be construed in light of

Article 38 of the Constitution and be understood as placing an

affirmative obligation upon the State to ensure that distribution

of material resources of the community does not result in

heightening of inequalities amongst people and amongst

regions. In line with the logic of the Constitutional matrix just

enunciated, and in the sweep of the quest for national

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development and unity, is another provision. In as much as

inequalities between people and regions of the nation are inimical

to those goals, Article 39(c) posits that the “operation of the

economic system” when left unattended and unregulated, leads

to “concentration of wealth and means of production to the

common detriment” and commands the State to ensure that the

same does not occur.

94. The concept of equality, a necessary condition for

achievement of justice, is inherent in the concept of national

development that we have adopted as a nation. India was never

meant to be a mere land in which the desires and the actions of

the rich and the mighty take precedence over the needs of the

people. The ambit and sweep of our egalitarian ideal inheres

within itself the necessity of inter-generational equity. Our

Constitutional jurisprudence recognizes this and makes

sustainable development and protection of the environment a

pre-condition for the use of nature. The concept of people as a

nation does not include just the living; it includes those who are

unborn and waiting to be instantiated. Conservation of resources,

especially scarce ones, is both a matter of efficient use to

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alleviate the suffering of the living and also of ensuring that such

use does not lead to diminishment of the prospects of their use

by future generations.

95. The statutory matrix dealing with natural gas and

other petroleum resources also clearly indicates the importance

of such permanence of sovereignty. The Territorial Waters

Continental Shelf, Exclusive Economic Zone and Other Maritime

Zones Act, 1976, the Oilfields (Regulation & Development) Act,

1948 and the Petroleum and Natural Gas Rules, 1959, all

emphasise the importance and duty of the GoI to conserve and

develop mineral oils, including natural gas.

96. As we have noted above, Article 297 of the

Constitution is a special provision which leads us to conclude that

the powers granted to the Union to hold the resources for

purposes of the Union casts special obligations over and above

what are normally affixed with respect of all other resources that

the Union may be permitted to act upon pursuant to Article 298.

We hold that under Article 297 of the Constitution, the Union of

India can indeed enter into contracts for the identification,

development and extraction of resources in the geographic zones

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specified therein. However, such activities can only be premised

on the key therein to unlock those resources: for the purposes of

the Union.

97. Much of the jurisprudence regarding restrictions of

powers of the State in using natural resources has arisen from

the concept of “public trust.” Prof. Joseph Sax has said:

“[t]he idea of a public trusteeship rests upon three related principles. First that certain interests….. have such importance to the citizenry as a whole that it would be unwise to make them the subject of private ownership. Second that they partake so much of the bounty of nature, rather than of individual enterprise, that they should be made freely available to the entire citizenry, without regard to economic status. And finally, that it is a principal purpose of government to promote the interests of the general public rather than to redistribute public goods from public uses to restricted private benefits….”62

98. The concept of public trust actually finds its genesis

with respect to the ocean and waters, and some have even

traced this concept to the Ch’in Dynasty in China (249-207 BC)

and the Roman Justinian Institutes. This has been extended

substantially, and the broader notion now is that the State really

62 Joseph L. Sax, Defending the Environment: A Strategy for Citizen Action (1971).

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is acting only in a fiduciary capacity. “The message is simple: the

sovereign rights of the nation-states over certain environmental

resources are not proprietary, but fiduciary.”63

99. In light of the public trust elements so intrinsic to resources

under the sea-bed, and the special nature of Article 297, the

implications of natural gas for India’s energy security, and the

imperatives of national development – including the concepts of

egalitarianism and promotion of inter-regional parity, we hold

that the Union of India cannot enter into a contract that permits

extraction of resources in a manner that would abrogate its

permanent sovereignty over such resources. It is not just a

matter of mere textual provisions in a contract or a statute. It is

a matter of Constitutional necessity. We hold that with respect to

the natural resources extracted and exploited from the

geographic zones specified in Article 297 the Union may not: (1)

transfer title of those resources after their extraction unless the

Union receives just and proper compensation for the same; (2)

allow a situation to develop wherein the various users in different

63 Peter H. Sand Sovereignty Bounded: Public Trusteeship for Common Pool Resources. Also seeTurnipseed, Roady, Sagarin & Crowder: The Silver Anniversary of the United States Exclusive Economic Zone – Twenty Five Years of Ocean Use and Abuse, and the Possibility of a Blue Wtare Public Trust Doctrine., Energy Law Quarterly Vol. 36:1 (2009).

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sectors could potentially be deprived of access to such resources;

(3) allow the extraction of such resources without a clear policy

statement of conservation, which takes into account total

domestic availability, the requisite balancing of current needs

with those of future generations, and also India’s security

requirements; (4) allow the extraction and distribution without

periodic evaluation of the current distribution and making an

assessment of how greater equity can be achieved, as between

sectors and also between regions; (5) allow a contractor or any

other agency to extract and distribute the resources without the

explicit permission of the Union of India, which permission can be

granted only pursuant to a rationally framed utilization policy;

and (6) no end user may be given any guarantee for continued

access and of use beyond a period to be specified by the

Government.

100. Any contract including a PSC which does not take into

its ambit stated principles may itself become vulnerable and fall

foul of Article 14 of the Constitution.

101. Based on the above discussion, we now turn our

attention to the specific PSC under consideration in this case.

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From a broad consideration of the provisions therein, as

discussed below, we cannot on the face of it deem that the PSC

is in contravention of the Constitutional values enunciated above.

The subsequent policy decisions of GoI in no manner derogate

from covenants of the PSC.

102. The PSC itself specifically recognizes that the interests

of India are of paramount importance. Recital 6 of the PSC states

that the “Government desires that the petroleum resources…… be

discovered and exploited with utmost expedition in the overall

interests of India and in accordance with Good International

Petroleum Industry Practices”. Further, the PSC also places an

affirmative obligation on the Contractor, in Article 8.3(k) to “be

always mindful of the rights and interests of India in the conduct

of Petroleum Operations”. Article 32.2 specifically states that

nothing in the PSC shall “entitle the Contractor to exercise the

rights, privileges and powers conferred upon it in a manner which

will contravene the laws of India.” We fail to appreciate, given

such a clear linkage between the PSC and the constitutional

imperatives, Shri Jethmalani’s argument that GoI’s policy

initiatives violate the terms of the PSC and sanctity of contracts.

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103. Does a Production Sharing Contract only mean a

sharing of physical quantity of natural gas as contended by

RNRL? What does this PSC provide?

As discussed earlier, it is clear that a wide variety of

instruments have come to be called Production Sharing Contracts

and there is no specific concordance between that title and what

is actually shared pursuant to a PSC. In light of that discussion

and the general acceptance that revenues are also shared in the

context of Production Sharing Contracts, the insistence of RNRL

that only production i.e., physical volume of gas can be shared

under any production sharing contract may have to be held to be

unsustainable.

104. One of the bigger sources of confusion has been the

manner in which the word Petroleum has been used in the

specific PSC under consideration. The word Petroleum, referring

to crude oil or natural gas as the case may be, is used in two

senses in different parts of the PSC: as a physical product and

also in terms of the monetized value. However, when the word

Petroleum has been used in conjunction with the words Cost and

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Profit, the definitions in this PSC clearly indicate that reference is

to the monetized value of the physical product i.e., the units of

the physical quantity multiplied by the sale price at which the

physical quantity is sold at. Article 1.28 of the PSC defines “Cost

Petroleum” to mean “the portion of total value of the Crude Oil,

Condensate and Natural Gas produced and saved from the

Contract Area which the Contractor is entitled to take in a

particular period, for the recovery of Contract Costs as provided

in Article 15”. Article 1.77 of the PSC defines “Profit Petroleum”

to mean “the total value of Crude Oil, Condensate and Natural

Gas produced and saved from the Contract Area in a particular

period, as reduced by Cost Petroleum and calculated as provided

in Article 16.” Reading Articles 2.2, 8, 15 and 16 of the PSC

together, it would have to be concluded that under this PSC the

contractor is only entitled to cost petroleum and share of Profit

Petroleum in terms of realized value from sale of Petroleum i.e.

natural gas in this case, and not to a share in physical quantities

of Petroleum.

105. As pointed out by the Learned Additional Solicitor

General, Shri. Mohan Parasaran, in some previous PSC’s the

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word volume had been used instead of value, but that has been

specifically changed. The change in the wording is of great

significance. PSC’s and such instruments are model contracts

that are developed and written to reflect particular policy

decisions and we have been informed by the counsel of UoI that

it was laid on the floor of the Parliament. This implies that the

Government is of the view, that the entire range of activities

being contemplated by the Policy and the PSC itself to be of such

importance that they also be noticed and commented upon, and

if necessary acted upon, by the Parliament as a whole.

Consequently, we are of the opinion and hold that such Contracts

be very carefully examined and interpreted so as to not disturb

the most obvious meanings ascribable. The two words in

question here are “volume” and “value,” which need to be

appreciated.

106. The word “volume” when used in scientific contexts

would normally mean physical dimensions on three coordinate

axes; in business and industrial parlance it is also used to reflect

the total quantity of some physical produce. The word “value”, on

the other hand, implicates the meaning of both intrinsic capacity

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to provide some utility, and also the value derived in the context

of exchange in the market place. The word “value” and the

phrase “total value” when used in the context of commerce

would normally only reflect the monetized sum that is derived by

multiplying the number of units of a physical product with the

sale price. This distinction is clearly stated in P. Ramanatha

Aiyar’s “Advanced Law Lexicon” (3rd Ed. 2005) as follows:

“Volume: “…Term often confused with turnover, although in some instances they may be used to mean the same thing. Strictly, volume is the number of units traded, whereas turnover refers to the value of the units traded. On the commodities market, however, volume refers to the quantity of soft commodities traded, and turnover refers to the tonnage of metals traded over a particular period of time.”…. Number of units traded (as opposed to turnover, which is the value of the units traded, although the terms are sometimes interchanged). (International Accounting)

Whereas, Value is said to be : “The expression “VALUE” in relation to any goods shall be deemed to be the wholesale cash price for which such goods of the like kind and quality are sold or are capable of being sold for delivery at the place of manufacture and at the time of their removal therefrom……”

Also, according to Black’s Law Dictionary, Value is said to be:

“1. The significance, desirability or utility of something. (as a noun).

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2. The monetary worth or price of something; the amount of goods, services or money that something will command in an exchange. 2. The significance, desirability, or utility of something. 3. Sufficient contractual consideration. (Black, 7th

Edn. 1999)”

107. In as much as the words “volume” and “value” have

different connotations and meanings, though occasionally they

may have some overlap, the fact that one was replaced by the

other implies that the meaning ascribable in the context of this

PSC should eliminate the overlap. Consequently it can only be

understood that the word “value” is being used, in the PSC, to

mean the monetized value of the physical quantity that is a

resultant of multiplying the quantity of Petroleum (crude oil or

natural gas) produced, saved and sold in the market (as

discussed below) at a “price.” The words produced and saved

are first used in the phrase “Petroleum Operations” defined in

Art. 1.74 of the PSC, wherein it is stated that Petroleum

Operations mean, as “the context may require, Exploration

Operations, Development Operations or Production Operations or

any combination of two or more of such operations, including

construction, operation and maintenance of all necessary

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facilities….. environmental protection, transportation, storage,

sale or disposition of Petroleum to the Delivery Point…. And all

other incidental operations or activities as may be necessary.”

Further Article 21.6.1 specifically states that the Contractor “….

shall endeavour to sell all Natural Gas produced and saved…”

This indicates that the entire set of all Petroleum Operations are

to end in a sale at the Delivery Point; so it has to be concluded

that the phrase “produced and saved” in the PSC encompasses

the activity of sale of natural gas. Consequently, the phrases

“Total Value”, “Cost Petroleum” and “Profit Petroleum” can only

be interpreted as having been used to denote the monetary value

realized after the sale of natural gas at the delivery point.

108. The change in the wording clearly implies that under

the PSC by making the “value” of the natural gas produced,

saved and sold as what is to be shared, the intention of the

Government was to ensure that the “volume” i.e., the physical

quantities remain outside the purview of what is to be shared

between the Contractor and the Government. Consequently,

under this PSC, RIL has no rights whatsoever to take physical

quantities/volume of natural gas as a part of Profit Petroleum or

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Cost Petroleum, in as much as the contractor’s right to take

anything under the PSC can only be from the total value i.e.,

total revenue received from sale of natural gas.

109. The decision in Commissioner of Income Tax,

Dehradun (supra), relied upon by the Learned Senior Counsels

for RNRL is inapposite in the instant matter, for the reason that

the PSC that was under consideration in that particular case,

Cost Petroleum (Article 1.24 therein) and Profit Petroleum (Art.

1.69 therein) were defined in terms of volume and not value. The

observation of this Court in that decision that in Production

Sharing Contracts what is shared is physical oil was based on

that specific PSC. We have verified that contract also which was

placed before us and we do find the difference as submitted by

Shri Mohan Parasaran.

110. Under the PSC does the title get transferred to

Contractor on account of it expending monies on exploration,

development and production?

According to the Learned Senior Counsel for RNRL, in as

much as Article 27.2 of the PSC specifies that title “to Petroleum

to which the Contractor is entitled under this Contract and title to

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Petroleum sold by the Companies shall pass to the relevant buyer

party at the Delivery Point…..” it indicates that the title

automatically passes to the Contractor on account of the

Contractor having expended monies for exploration, development

and production activities. This is only a partial reading of the

PSC. Article 27.1 states that the “Government is the sole owner

of Petroleum underlying the Contract Area and shall remain the

sole owner of Petroleum produced pursuant to the provisions of

this Contract except as regards that part of Crude Oil,

Condensate, or Gas the title whereof has passed to the

Contractor or any other person in accordance with the provisions

of this Contract.” These clauses do not state that the title passes

through the contractor as an offset. Offset cannot be read into

these clauses by implications. All Petroleum Operations are

directed towards selling of Petroleum i.e. natural gas in this case

at the Delivery Point as discussed earlier.

111. The title pursuant to Article 27.1 of the PSC can pass

from the sovereign owner, the people of India, at the Delivery

Point upon a sale, and not as a matter of offset against any

incurred expenditure by RIL. The rights of RIL under the PSC are

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to recover its costs first, from sale of Petroleum, and that too

only up to a maximum of 90% of each year’s total value realised

from sale. In as much as the contractor under such a PSC takes

the risk that exploration costs cannot be recovered unless

petroleum is discovered in commercially exploitable form, this is

a continuation of the risk. For instance, the reservoir could stop

producing or its production could start to decline precipitously. If

the total volume of natural gas that is produced over the life of

the reservoir is very little or not sufficient and the market prices

are low, the Contractor would risk not recovering its investments.

Sale of Petroleum, is an integral part of Petroleum Operations

and hence selling of Petroleum is an obligation of the Contractor.

The question of an automatic offset of incurred expenditures to

effectuate an automatic transfer of title is not contemplated in

this PSC at all. The transfer of title can be only to entities within

a class of buyers specified by a utilization policy as discussed

below.

112. It should be noted, that in as much as title passes

only upon sale at the Delivery Point, the true owner, the people

of India acting through the Union of India have a sovereign right,

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that is tempered by public law, in determining the manner in

which that sale is effectuated. Public resources cannot be

distributed or disposed off in an arbitrary manner.

113. Does the GoI have the right to frame a Utilisation

Policy under this PSC?

RNRL has repeatedly argued that in as much as NELP

promised the freedom to market to the contractors and that is

what is provided in Article 21.3 of the PSC, and no other

utilization policy was put in place, RIL had the right to commit to

sell natural gas at its sole discretion. They argue that in this case

RIL chose to commit to RNRL, via the MoU and the Scheme.

Therefore, according to RNRL’s counsel, the GoI should not have

any right to interfere in this contractual commitment.

114. We disagree. The sale at the Delivery Point takes

place when the people of India are still the owners of the natural

gas and consequently they have the responsibility of ensuring

that they exercise their permanent sovereignty, through their

elected government, in order to achieve a broad set of goals that

constitute national development. While revenue generation is one

part of those objectives, that cannot be the only objective of

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India. Timely utilization, by users spread across many sectors

and across regions as the network of pipelines spreads and

conservation are all necessary objectives to be kept in mind. The

fundamental rationale of the PSC is “the overall interests of

India” and the obligation of the Contractor is to always be

mindful of the rights and interests of India.

115. Article 21.1 of the PSC makes it very clear that the

sales of Natural Gas have to be in accordance with a Government

Utilisation Policy and to the Indian Domestic Market.

“Subject to Article 21.264, the Indian domestic market shall have the first call on the utilization of Natural Gas discovered and produced from the Contract Area. Accordingly any proposal by the Contractor relating to Discovery and production of Natural Gas from the Contract Area shall be made in the context of the Government’s policy for the utilization of Natural Gas and shall take into account the objectives of the Government to develop its resources in the most efficient manner and to promote conservation measures.”

116. Article 21.1 clearly contemplates that the pool of

eligible buyers of natural gas extends to the whole of Indian

64 Article 21.2 gives the right to the Contractor to use a small part of the Natural Gas produced from the Contract Area for purposes of Petroleum Operations such as reinjection for pressure maintenance in Oil Fields, gas lifting and captive power generation required for Petroleum Operations i.e. for technical purposes of extraction and saving of natural gas.

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domestic market. It does not speak of RIL having a right to

unilaterally decide who to sell to. Clearly, under the provisions

of Article 21.1 in the PSC, the Board Room of RIL or its internal

divisions do not constitute the Indian domestic market. That

phrase contemplates the entire class of eligible buyers in India.

117. Further, the said Article 21.1 proceeds to state that all

proposals of the Contractor for production, which includes the

activity of selling, shall take into account Government’s utilization

policy. We note that it does not say that the Contractor take into

account a government utilization policy only if there is one. It

mandates that the extraction and sale can only be in the context

of a utilization policy. Without a utilization policy that satisfies

the conditions of Article 297 of our Constitution, not even a cubic

centimeter of that natural gas can be sold, let alone the many

millions of cubic metres of natural gas that RNRL claims vested in

it as a matter of contractual right.

118. Consequently, we hold that under the PSC, unless the

Government actually sets out a policy regarding utilization of the

natural gas produced, it cannot be committed or sold to anyone.

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The freedom to market can only be exercised subject to the

utilization policy of the GoI.

119. Of what purport the approval by the MC of the PSC of

the Initial Development Plan?

RNRL also contends that because the Initial

Development Plan was approved by the MC of the PSC, and that

plan had specifically stated that natural gas produced from 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.

Secondly, the proposal also specified that there could be other

users, especially those who have already started units that

needed natural gas and were stranded. The MoU and the extent

of natural gas that RNRL is demanding, completely denies the

rights of those users to a fair access.

120. Over and above that, under the PSC the right to

effectuate a utilization policy only vests with the GoI. Indeed, it

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cannot be any other way. The MC of the PSC is not the GoI to be

able to effectuate decisions which would have the ramifications of

policy, especially over a scarce resource with the kind of

implications across the constitutional spectrum that we have

delineated in this decision so far. In the instant case, what RNRL

had demanded, as of the first time that it filed the Company

Application was for 28 MMSCMD (and in the event that NTPC

contract did not go through then 40 MMSCMD) and the Option

Volumes of 40% of all the gas to be ever produced by RIL under

any contract with the GoI. The notion that two nominees of the

GoI can effectuate policy decisions of such a nature, in the

context of their role as members of the Management Committee

to effectuate the working of a PSC, is simply untenable and

impermissible.

121. The IDP itself was proposed way back in the year

2004 and the production started only in 2009. The fact that there

was no Government Utilisation Policy in place has a direct

connection to that lengthy gap. Over such a time frame, many

new developments, including the increase of supply of gas,

newer sources, depletion of older sources, availability of gas from

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other sources etc., could have as well taken place. There would

have been no way for the GoI to know who would be the

potential users, what are the needs of the nation, inequities

between regions, how the network of pipeline would develop –

those and many other such factors play a role in determining the

policy. In such circumstances, one cannot imagine how the GoI

could have framed a Utilisation Policy with respect to 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.

122. The Silence and the Noise of Various Government

Officials:

The Learned Senior Counsel for RNRL also argued, very

vehemently, that the GoI had remained silent for a very long

time, and even though it knew that RIL was making

commitments to its internal divisions, said and did nothing. From

this, they attempted to draw the implication that the GoI had

agreed to RIL making such commitments to its own internal

divisions. They went even further. They claimed that in the

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atmosphere of such a silence, RIL and the gas based energy

producing division within RIL could make and indeed have made

such allocations and that such a silence implies that rights have

vested in them. That is an unsustainable argument. It is not

uncommon for government agents to remain silent, even though

the instruments under which private parties get rights to exploit

natural resources provide otherwise and impose restrictions that

are being flouted. This happens many a times, and for obvious

reasons. That cannot become the basis for evisceration of policy

making rights of the GoI. And in this case, it involves a scarce

resource in such massive quantity, that is almost 50% of what

had been available throughout the country for use by all the

other users in the previous decade, that silence by officials of GoI

cannot and ought not to be given any weight at all.

123. It was also argued by the learned senior counsel for

RNRL that various utterances by senior officials and replies by

some Ministers in the Parliament indicate that the Government

knew that the PSC provided the kinds of rights to RIL that RNRL

claims in order to sustain its demands. The short answer to that,

in the context of this case is: it does not matter. At best, they

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may suggest that the Ministers concerned may need better

advisors from the permanent machinery.

124. The courts cannot be solely guided by the replies

given by Ministers in the Parliament, in response to queries by

Members, to appreciate and interpret the covenants in the PSC.

When the covenants evidently carry a plain meaning which could

be gathered from what the instrument itself has said, such

responses cannot be used to interpret the terms of a contract.

The answers, at the most, may reflect the opinion of an

individual minister and they would have no bearing on the

interpretations to be placed by the courts. At any rate, the courts

are not bound by the answers so given to interpret the

instruments. The decision in Emperor v Sibnath Banerjee &

Ors.65, relied upon by Shri Jethmalani is not an authority for the

proposition that the courts are bound by such statements made

in the House in response to queries by members. The decision

merely holds that such answers were “admissible under Sections

17, 18 and 20 of the Indian Evidence Act.”

65 .AIR 1943 FC 75

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125. Is the Price Formula/Basis For Valuation to determine

government Share or For Sale of All Natural Gas?

It was argued on behalf of RNRL that the provisions of

Article 21.6 titled “Valuation” can be read to mean that the right

of the GoI to approve a “price formula/basis” is only to enable it

to place a value on natural gas to be able to determine its own

physical share of the natural gas, and that consequently, RIL was

free to sell it at whatever price it may to sell it at, so long as the

price is an “arms length price.” RNRL also claims that the price

fixed with respect to commitments to supply natural gas at USD

2.34/mmBtu well head price should apply, because that was the

only contemporaneous arms length price that was available for a

determination of what price RNRL should be paying.

126. This is yet another strained interpretation that defies

credulity. In a lengthy letter to Minister of Fertilisers and

Chemicals written by a Senior executive of RNRL in June 2007, it

was stated that a number of factors enter into price

determination, including spot, length of supply, quantity, delivery

point, price floor, and that even end use must be taken into

account. Obviously this set of factors is not all inclusive. In a

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seller’s market i.e., where natural gas is in acute shortage, the

options given to a buyer can have a huge bearing on the price.

The parameters between NTPC terms and RNRL are of a

significantly different order. First, the onerous “take or pay”

clause is a part of the NTPC contract but not the gas supply

agreements with RNRL, as repeatedly pointed out by Shri Salve.

Secondly, NTPC did not get the option to get quantities of natural

gas that were promised to some one else, in the event that

contract failed. Nor did NTPC get the right to receive 40% of all

future gas supplies that were likely to be produced from any gas

fields of RIL. Nor was the price for NTPC fixed in the confines of

a Board room. Moreover, when the MoU was executed, a few

years later the prices of natural gas all over the world had risen

considerably. If an international tender were floated at that point

of time, it would defy logic for RIL to bid at such a low price

level.

127. The terms of Article 21.6 et. seq. are clear. The first

one is a command that all the natural gas produced from KG-D6

is to be sold at “arms length sales price”, per Article 21.6.1.

There is a reason for such a requirement. Historically, oil

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companies and sovereigns have bickered over the posted prices

and joint off take agreements through which the real value

realized is hidden from the sovereign. The requirements of arms

length prices and arms length sales are to ensure that the

sovereign receives a fair share of the revenues. However, it may

not be possible to determine true arms length prices in all

situations, because a market may not have developed properly.

128. A spot market for natural gas for instance, which is

possible when a large quantity of natural gas is available in a

region, and distributed through a dense network of pipelines,

would be the best source for determination of arms length sales

prices because numerous transactions take place and records are

kept of the prices. Where such arms length prices are not

available or a sizable class of comparable transactions in the

recent past is also not available such as the one provided in

Article 21.6.2 (c), other methods have been chosen, including

formulas that link prices to basket of fuel oils or even to crude oil

as provided for in Article 21.6.3. All three Articles i.e., 21.6.1,

21.6.3 and 21.6.2(c) have to be read together. Article 21.6.2 (b)

provides for a situation in which natural gas is sold to nominees

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of GoI, in which case the GoI would know the actual price. RNRL

is taking a clause that is provided to protect the GoI, in the event

that GoI is unable to determine whether it can assure to itself

that the Contractor has sold or is selling at the stated price and

conflating it to a right of RIL.

129. With regard to refusal of GoI to approve the proposed

sale price on parity with the NTPC bids, it is noted that RNRL has

not separately challenged it. The rejection was precisely on the

ground that it is not a competitive arms length price between two

unrelated parties, and was justified. At any rate as there is no

provision for sharing physical quantities, the question of

Government fixing the price for its share of gas does not arise.

EGOM Decisions:

130. The Empowered Group of Ministers framed a

utilization policy and also approved the price formula/basis

submitted by RIL. It was constituted pursuant to Business Rules

framed under Article 77(3) and its decisions are treated as the

decisions of the Cabinet itself. It is a policy decision of the

Government and has force of law since the field is not occupied

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by any legislation made by the Parliament. It is needless to state

that under Article 73 of the Constitution the powers of the Union

executive do extend to matters upon which the Parliament is

competent to legislate and are not confined to matters over

which the legislation has been passed already. There is no need

to dilate further on this issue since there is no independent

challenge questioning the validity of EGOM decisions. The

collateral attack leveled against EGOM decision cannot be

entertained notwithstanding the serious allegations of mala fides

made against some Ministries during the course of hearing of this

matter. The Government did not surrender its rights under PSC

to fix the price by way of approval. Nor do the decisions of EGOM

run counter to any of the covenants of PSC. The contention that

no policy decision could have been taken by the Government

retrospectively effecting the contractual rights needs no further

consideration for the simple reason that the decision of EGOM

does not run counter to the contract. The decisions cited in this

regard are not required to be gone into.

PART V

WHOSE COMPANY IS IT ANYWAY?

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131. We would have thought that the answer to this

question was settled in the early stages of evolution of corporate

form of organization. However, where an atmosphere of privilege

and of secrecy is allowed to be all pervasive, trust and capacity

for fiduciary action would consequently decline and this question

would have to be asked again. Whether it be social life or the

hurly burly of action in economic sphere, neither law nor force

can sustain a path of growth and development, if the capacity to

trust is consistently undercut by surreptitious activities.

132. Be that as it may, we now turn to some of the issues

that come up for our consideration with respect to matters

internal to RIL. They are not dispositive as to the main elements

of these proceedings, in as much as both Shri. Harish Salve and

Shri. Mukul Rohtagi had submitted that the issue of

governmental approvals was the key to the entire dispute. We

have already expressed our view about that set of questions.

Nevertheless, certain aspects of law and questions remain, on

account of the decisions of the courts below. We turn to those

issues.

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133. Of What Purport the “Gas Supply Arrangements” in

Clause 19 of the Scheme From the Perspective of Section 391?:

It has been a widely accepted principle that companies can

only transfer such rights, powers, duties and property as are

capable of being lawfully transferred by a party to a scheme; and

this determination has to be made as if the Companies Act, 1956

itself did not exist. Way back in 1958, Sachs J., had enunciated

that principle. Specifically he held, and it is worth quoting him in-

extenso:

“… It is not necessary in a scheme to exclude specifically from its operation things incapable of such transfer, as general words in the scheme and any order in furtherance thereof must be taken to operate in a manner not repugnant to the general law…… If, however, on a proper construction of the terms of a scheme, some part of it happens, by inadvertence, expressly to order an act which, had there been no scheme, the parties could not, either in relation to the interests of third parties or otherwise, bind themselves to do, then that part of the scheme would, in my view, have to be treated as a nullity in so far as it purports so to order. To my mind, this latter principle equally applies where a scheme expressly prohibits an act which the parties could not, under general law…. bind themselves to refrain from doing.”66

66 In the Estate of Skinner, (1958) 1 W.L.R. 1043.

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134. In this case, no definitive agreement for gas supply

was placed before the shareholders and indeed such an

agreement was not even promised or stated to be possible. No

sensible person, exercising judgment from within the sphere of

“commercial wisdom”, could have arrived at the conclusion that

the State in India could abrogate its responsibilities to frame

policies for utilization and pricing in the context of production and

distribution of an extremely scarce and a vital natural resource

and that in the context of such policies supply of gas between RIL

and RNRL could not have been interrupted or abrogated.

Consequently, if Clause 19 of the Scheme were to be read as the

imposition of the burden upon RIL to supply natural gas,

irrespective of governmental policies with respect to utilization

and pricing of natural gas, then it would have to be struck down

as a nullity.

135. Clause 19 of the Scheme makes a very important

distinction between agreements - which are more concrete - and

arrangements - which are amorphous and not certain. The

Scheme implicitly contemplated a situation in which the

arrangements for supply of gas may not occur or function to the

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full extent as desired. Governmental approvals and governmental

policies are set in the context of national welfare and

constitutional imperatives, and they cannot be said to be within

the control of any particular person or company. Does that mean

then that the Scheme with respect to the Gas Based Energy

Business, which is now RNRL, has become unworkable? We hold

that it has not become unworkable, but only that one part of the

Scheme, which was in any case in the nature of a contingent and

a highly uncertain event, has not come to pass for now on

account of events and powers beyond the capacity of those who

proposed the Scheme. Given the acute scarcity of natural gas in

India, and given the constitutional imperatives on the GoI, no

shareholder who was not naïve would, could or should have

relied on the certitude of natural gas supply from RIL to RNRL.

Clause 19 of the Scheme provides that “suitable arrangements”

would have to be made with respect to gas supply as opposed to

the more definitive “suitable agreements” with regard to “right to

use the Reliance logo” in the same clause. The word arrangement

as used in this context clearly only indicates a potential that may

or may not be realized and that is the only way it could have

been interpreted. The word ‘arrangements’ as used in Clause 19

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contemplates a complex set of mechanisms and would involve

many broad aspects, with a multitude of smaller parts, that may

or may not work, especially because of changed circumstances.

Hence, the phrase “suitable arrangements” has to be treated as

being amorphous, requiring flexibility, involving uncertainty and

even the potential that the results sought may not be achieved

or realized.

136. RNRL has argued vehemently that it will become a

shell company if it does not get natural gas from RIL and trade

with it, as it claims that was its main purpose and also claims

that would be a fair construction of the purport of the Scheme. A

Scheme must be understood and interpreted exactly in terms of

how a shareholder and a stakeholder who voted for it and

received shares after the demerger would have understood it.

137. In the Explanatory Statement to the Scheme, while

one of the purposes of RNRL as stated in its Memorandum of

Association is said to be dealing in the business of supply of gas,

it is only a part of the total business of buying, selling and

distributing a wide spectrum of fuels, with Natural Gas being just

one of them; moreover, when we turn to the second objective of

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the Memorandum of Association, it is clear that an equally

important purpose of RNRL is to “carry on, manage, supervise

and control the business of transmitting, manufacturing,

supplying, generating, distributing and dealing in electricity and

all forms of energy and power generated by any source, whether

nuclear, steam, hydro, or tidal, water, wind, solar, hydrocarbon

fuel, natural gas or any other form kind or description.”

Consequently we fail to see how RNRL can claim that it was set

up only to obtain natural gas from RIL and then to trade with it

within the ADA Group, or that any one who reads the Scheme

can understand it in that manner.

138. The arguments made by RNRL that it has not been

able to set up the mega gas based power plant at Dadri because

it did not get bankable agreements from RIL are unpersuasive.

First and foremost, it would seem extremely unlikely that

bankers do not understand that there are always supply risks

associated with natural gas in a country like India, whether that

be on account of GoI’s policies or otherwise. It is also observed

that others have started gas based energy generation plants and

they have faced equally serious uncertainties, if not more.

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Furthermore, we have not been given one single document that

shows denial of financing on account of lack of definitive natural

gas supplies. Additionally, we were also informed that significant

amounts of monies have been raised, and accepted as a fact by

RNRL’s counsel, both here in India and abroad and yet

admittedly not even a brick has been laid at Dadri for the power

project for which natural gas was first sought and RNRL claims its

rights begin from.

139. RNRL also filed an information document for the

issuance of its GDR’s at Luxembourg in which it specifically

claimed that the risks that it would face include the fact that

Governmental Approvals for gas supply arrangements with RIL

may not come through. These are business risks associated with

scarcity of natural gas and the necessity of national policy. These

risks are attendant upon every entity that wants to rapidly

expand. We see no reason to conflate that general condition

which affects everyone in the Indian economy, to an issue of

workability of the Scheme itself.

140. Can the MoU be binding on the company?:

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It is absolutely clear that the MoU was executed in the

private domain, with the help and aid of a lawyer and then

marked confidential. Further, the individuals, from all indications

have only executed it in their individual capacity and it was not

purported to be in exercise of their positions in RIL or any other

company of the Reliance Group. It is also very clear that the MoU

itself recognizes that the reorganization that the promoters

sought would have to be routed through the Board. The

promoters also had the right to apply for a Scheme of

Rearrangement under Section 391 of the Companies Act, 1956,

in which case the mode of shareholder approvals and the classes

formed would have been entirely different. As Shri. Rohinton

Nariman points out, the MoU is an agreement between three

promoters, and the Scheme is between two million shareholders,

all of the same equity class and hence the MoU cannot now be

imported into the Scheme. Otherwise the promoters who under

the Scheme were the same as any one else would now become

special, thereby negating the very concept of class of members

with similar interests voting on a proposal for reorganization.

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141. The minutes of the meetings of the Board of RIL

dealing with various issues concerning the reorganization do not

reveal anywhere whether the Board as a collective body ever

took note of and approved the MoU. This is not a mere

technicality. There is a certain legal sanctity associated with it, in

the first place, in the form of presumptions that flow from

Sections 193, 194 and 195 of the Companies Act, 1956 that they

are an accurate record of the proceedings. The collective decision

making, at a conjoint sitting allows for exchange of ideas. The

idea of the Board working as a collective is also about the

process of sharing of views and arriving at collective decisions to

protect and enhance the interests of all the shareholders. And in

the very first meeting, albeit on the same day that the MoU was

announced, the various Directors of RIL after thanking KDA, quite

effectively severed any umbilical cord that the eventual Scheme

might have had with the MoU, when they asserted that any

reorganization can only be premised on protection of the value of

all the shareholders. There is not even a whisper of protection of

a broader class of shareholders in the MoU. This is not some

mere technicality; but a fundamental philosophical and attitudinal

approach with regard to arrival at the decision to reorganize the

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businesses. The duty to protect the interests of the shareholders

is cast upon the Board, and the Board has to act in a fiduciary

capacity vis-à-vis the shareholders. This duty has been a part of

broader understanding of company law from the days of

Settlement Companies67 that were the precursors of joint stock

companies. What RNRL is demanding, by implications that follow

the insertion of the gas supply section of the MoU in Clause 19 of

the Scheme, is that the Board of RIL only acted at the behest of

the promoters and were mere rubber stamps of the decisions of

the promoters. Acceptance of such demands would destroy the

fabric of company law itself and the foundations of trust, faith

and honest dealing with the shareholders. The actions of the

Board of RIL clearly indicate that it did not conceive its role in

that manner.

142. It is quite obvious, from the MoU itself, that the

promoters family had a number of personal issues to settle,

amongst which the issue relating to businesses and ownership

over them was but one. It is also equally obvious that what has

been revealed is but a portion of the total document. If such a

67 See part 1.103 – 1.104 of Palmer’s Company Law, page 1011, 25th Edn. Vol.1.

242

document were to be filed as a proposal for arrangement, it

would have to be thrown out at the very inception. The

differences in details of the proposals for demerger as contained

in the MoU, when contrasted with that of the Scheme, are

staggering. Where no reasons for reorganization are adduced in

the MoU, apart from a statement that having settled all the other

family and other business related issues the best way forward

would be a reorganization, it is the Scheme as framed and

approved by the Board which provides the justifications. The

Scheme specifies that each of the businesses carry different sets

of risks and prospects, and that they could attract different sets

of investors, that a focused management is needed to enhance

the prospects of each business, etc. Finally, it is the Board which

recommended the Scheme to the shareholders saying that it

would benefit them.

143. The fact that the Board asked that an analysis of the

pros and cons of such a reorganization be undertaken by the CG

Committee of Independent Directors, along with the command

that they propose a scheme of reorganization if any, with the

help of professionals to study the various businesses and the

243

implications with respect to statutory and legal issues, is prima

facie evidence of independence and application of the mind.

Further, from the record it can be gleaned that the CG

Committee with the help of professionals framed an outline of a

Scheme, executed by representatives of both the MDA and the

ADA Group and on that count too, it would have to be held that

the Scheme was something more and fundamentally different

from the MoU.

144. Clinchingly, with respect to the most contentious

aspect - governmental approvals - which RNRL claims were not

necessary, the minutes reveal that the Board actually

commanded that it be made sure that any gas supply

agreements, including terms of price, tenure etc., be subject to

such approvals. Moreover, if MoU is considered, it actually runs

counter to the entire claim of RNRL that it formed the basis of the

Scheme regarding gas supply also in as much as the Board

approved a Scheme in which the only provision with respect to

gas supply was for a plan to set some uncrystallised “suitable

arrangements” in place. If the Board had agreed to the

commercial terms of agreement, as contained in the gas supply

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section of the MoU, then it would have been mandatory upon

them to reveal the same to the shareholders of RIL, because of

the sheer scale of monetary value of the gas supply contracts.

RNRL itself claims that the potential monetary value of such gas

supply arrangements could run into many thousands of crores of

rupees, and we fail to see how prospective agreements involving

such huge value, in which commercial terms are claimed to have

been settled, cannot be revealed to the shareholders in the

context of a scheme of arrangement. No rationale or justification

can support such a proposition.

145. The Companies (Amendment) Act, 1965, based on the

recommendations of Daphtary-Sastri Committee specifically

provided that the applicants for a scheme shall “disclose by

affidavit all material facts”. (See: Section 391(2) of the

Companies Act, 1956). In as much as the terms and conditions of

gas supply, as specified in the MoU, were not specifically

informed to all the shareholders and stakeholders, including in

this case the GoI (as a party to the PSC), we simply fail to see

how the MoU can be read into the Scheme itself. It doesn’t

matter whether one calls MoU the guiding light or a tool for

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interpretation or a foundation – the sheer fact that the terms of

gas supply contained in the MoU were withheld from the

shareholders implies that it cannot now be imported into the

Scheme. The argument that contracts are entered into all the

time, and are treated as day to day affairs for the management

and the Board, fails at the point of division of a company. Where,

in regular times a shareholder or a stakeholder can demand and

obtain information and have time to try and monitor such

contracts and the actions of the management, the act of hiving

off an undertaking is a much more crucial point, when the

shareholders have to be even more careful about the transfer of

value. The whole purpose of Section 293 which prohibits the

Board from hiving off an undertaking without shareholders

approvals, is to prevent such transfers being effectuated on a

permanent basis without the knowledge of the shareholders. The

very essence of the requirement that all material facts be

disclosed would have been decimated. Consequently, we hold

that the Scheme as propounded by the Board, placed before and

approved by shareholders and stakeholders and sanctioned by

the court is completely different from the MoU. The MoU may

have been the starting point. The end point is significantly,

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substantially and materially different from it and it cannot now be

brought back in the guise of interpretation.

146. Does the MoU support the contentions of RNRL with

respect to governmental approvals?

The provisions of Paragraph xii (a) and (b) of the Gas

Supply section of the MoU, makes it abundantly clear that the

two brothers who executed the MoU understood that the gas

allocation set forth in it would require governmental approvals.

The said paragraphs state as follows:

“Xii(a): In relation to applicable governmental and statutory approvals, without in any manner mitigating RIL’s responsibility to jointly work towards obtaining such approvals, RIL will, if so required by the Anil Ambani Group, give an irrevocable Power of Attorney to the Anil Ambani Group/REL to apply for and obtain such governmental and regulatory approvals as are necessary on its behalf.

(b) The definitive agreements will reflect that the Mukesh Ambani Group will act in utmost good faith and will make best endeavours to work for and obtain such approvals. If there is any action taken in bad faith for not obtaining/scuttling the obtaining of such approvals, Kokilaben reserves her ability to intervene again

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.

Harish Salve repeatedly challenged that RNRL had singularly

failed to explain this provision which so clearly demonstrates that

ADA was aware that governmental approvals would be necessary

for the kind of gas supply agreements that had been

contemplated in the MoU. At first, we heard an argument by

RNRL that the said paragraphs do not relate to gas supply as

such, but general governmental and statutory approvals with

respect to reorganization. When pointed out that general

approvals were provided for separately in the section of the MoU

dealing with “Manner of Business Segregation”, we next heard

the arguments from RNRL’s counsel that these relate to laying of

pipes and make other arrangements for transport of natural gas

from Kakinada. Finally, in the written submissions given to us

after the hearings ended, this is what the counsel for RNRL

submitted on page 43 of their written submissions:

“8.GOVERNMENT/STATUTORY APPROVAL CLAUSES IN THE MOU:

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i) Contrary to what is falsely contended by RIL, MOU did not provide that the commercial terms of supply of gas would require Government/statutory approval.

ii) MOU merely referred to applicable regulatory and other approvals as RIL would require to engage in and carry on the gas exploration and production business.”

These defenses of RNRL absolutely hold no water. The

entire gas supply section of the MoU deals primarily with the

issue of quantum and by reference to NTPC terms, price and

tenure, as has been repeatedly contended by RNRL itself. To

now turn around and claim that the governmental approvals

mentioned in that section refer to RIL’s business of oil production

and exploration is untenable. This is further evidenced by at

least two other factors. The first one relates to RNRL’s total

failure to rebut the inferences drawn by Shri Harish Salve from

the fact that ADA Group and RNRL’s executives had accepted

that NTPC draft agreements from May, 2005 were to be the basis

for gas supply agreements and those draft NTPC agreements

specifically provided for governmental approvals. The second

factor, equally striking, is that in the letter dated February 28,

2006 in which RNRL strongly protested the GSMA & GSPA,

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RNRL did not protest the terms that governmental approvals

were required. In the annexure to the said letter, in which

differences between the MoU and the gas supply agreements

were listed in a tabular form, in item 16 the protest was that

with respect to governmental agreements it was not provided

that the MDA Group would act in “utmost good faith” and “make

best endeavours”. Many more of such acts of omission and

commission which would demonstrate unequivocally that RNRL

and ADA Group always knew that governmental approvals were

necessary could be adduced. We do not consider it to be

necessary to go into all those details. We conclude that ADA

Group and subsequently RNRL was always aware that under the

PSC the GoI had a right to frame policy and approve price

formula/basis applicable to the sale of all gas produced from KG-

D6.

DOCTRINE OF IDENTIFICATION:

148. Shri. Jethmalani went to some lengths in arguing that

the Doctrine of Identification has immediate and crucial relevance

in this case. As explained by him, there are certain individuals,

who are the controlling mind of the Company and that once they

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.

149. We disagree. Doctrine of Identification as developed

by the courts is typically applicable in criminal and tortious

liability cases. Even assuming that it is applicable in matters such

as this case, nothing really turns upon it in the factual matrix of

this case. It is a fact that the Board in mid 2004 had vested a

substantial portions of its powers on MDA but retained the

powers that only it could exercise. The crucial fact is that ADA

had agreed that the agreements entered into with MDA as a part

of the MoU be mediated through the Board in the form of a

reorganization, and the Board thereafter acted independently.

This is amply evidenced by the Board insisting that governmental

approvals were necessary for gas supply agreements, which

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.

Further, given the finding above by us that ADA and ADA Group

members knew that government approvals were necessary and

these are a part of general business risks that the ADA Group

undertook, we fail to see what is left to impute to any one.

Further, ADA was a member of the Ambani family and a powerful

shareholder who would have obviously had deep connections in

the Company’s management. To claim that he did not know what

was going on with respect to how the Scheme was going to be

framed and have the changes made in accordance to what he

wanted, if acceptable to others, is simply unacceptable. Further,

the active participation of the lawyer - who had framed the MoU

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and was advising ADA on gas based energy production business

-in the relevant Board meetings in which gas supply agreements

were discussed and it was recorded that he concurs with the view

of Board members that the same are necessary, implies that

ADA was aware of the same.

150. Over and above all of that, the matter turns upon

Governmental approvals. How can anyone be held liable and then

that liability be extended to the company, on a matter such as

securing governmental approvals and that too with matters that

involve major policy decisions? What exactly are RNRL, its board,

ADA Group and ADA asking that MDA and RIL should have done?

For the view we have taken in the matter it may not be

necessary to refer any of the decisions upon which both the

parties relied upon in support of their submissions.

MAINTAINABILITY:

151. The learned Senior Counsel for RNRL have contended

that the powers of the Court, under Section 392 of the

Companies Act, are of the of the widest amplitude, much wider

than the powers under Section 391, because they can extend

even to suo moto ordering the winding up of the Company.

253

Consequently, they argue that the courts must exercise such

powers to fully implement the Scheme to effectuate the scheme

one way or the other. They relied upon S.K. Gupta (supra).

152. Shri. Nariman argued that Section 392 of the

Companies Act, 1956 appears to have been enacted to bring the

provisions of Section 391 on par with the provisions of Section

394. To this effect he pointed out to the differences between

Section 394, which he stated was a complete code because it

included powers of supervision in the post-sanction scenario, and

Section 391 which does not have similar provisions. Mr. Nariman,

relying on the decision of this court in Miheer H. Mafatlal (supra)

submitted that the company court’s jurisdiction is peripheral and

supervisory and not appellate, and further that the power to

enforce a compromise or an arrangement by way of modification

does not extend to substantive modifications to the scheme itself

as approved by the shareholders. The power of modification,

pursuant to Section 392, cannot be greater than the power to

sanction the scheme. In this regard he also argued that the ratio

of S.K. Gupta (supra) should be construed to be that courts

have the power to modify terms of the scheme to remove

254

impediments and the like to make the scheme function properly

so long as the basic fabric of the scheme is not affected.

According to Shri Nariman, the judgment of this Court in Meghal

Homes (P) Ltd. (supra) sets out the correct position in which it

was stated in para 54 that:

“… Section 392 of the Act… only gives power to the Court to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement… it cannot be understood as a power to make substantial modifications in the scheme approved by the members in a meeting called in terms of Section 391 of the Act.”

153. However wide the powers of the courts may be, they

cannot be so wide as to order supply of gas in contravention of

government policies, the constitutional obligations that the GoI

must bear in mind when formulating such policies and in

contravention of broader public interest. The Division Bench

erred by holding that certain quantum of natural gas stood

allocated to RNRL. The error is on account of both a

misinterpretation of the PSC and also public law. Apart from that,

both the Learned Single Judge and the Division Bench below

have erroneously held that the MoU’s gas supply section be read

255

into the Scheme thereby effectively substituting the phrase

“suitable arrangements” in Clause 19 to mean the gas supply

provisions of the MoU. We hold that those conclusions were

erroneous. We disagree with the propositions of Learned Counsel

for RNRL that the ratio in S.K. Gupta (supra) would support such

a result.

154. The ratio of S.K. Gupta (supra) is that under Section

392 the Courts have the duty of continuous supervision to make

the Scheme workable by removing the hitches, obstacles or

impediments as necessary to ensure the proper functioning of

the Scheme. Further, while the Court does state that the powers

of the court are of the widest amplitude, including the power to

modify a provision of the scheme, it also does hold that the same

can only be exercised so as to ensue the proper working of the

Scheme and further, that such powers may not be exercised in a

manner that would alter the “basic fabric” of the scheme. The

removal of obstacles, impediments or hitches cannot be held to

mean wholesale changes in the scheme itself and go beyond the

confines of what the shareholders, the stakeholders and the

256

courts that sanctioned the scheme would have understood the

provisions of the scheme to mean.

155. It is true that in paragraph 26 of the said decision it

was stated that if “something can be omitted or something can

be added to a scheme of compromise by the Court, on its own

motion or on the application of a person interested in the affairs

of the company” then there ought not to be any justification for

restricting the meaning of the word of modification and whittle

down the powers of the court. However, the next paragraph

holds the key to the judgment that the “basic fabric” of the

scheme ought not to be changed. The limit on the powers of the

Court to modify by way of even additions or omissions as

contemplated is that the “basic fabric” of the Scheme cannot be

changed; and according to the said decision, even before a court

could embark upon a mission of suggesting modifications it has

to first determine what “modifications are necessary to make the

compromise or arrangement workable.” Any such determination

first has to arrive at a conclusion that the Scheme has become

unworkable in its entirety or in a portion thereof. Arrangements,

by their very nature are complex processes involving many

elements that may or may not work. In fact in S.K. Gupta

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(supra) this court recognized that to be the very reason why the

legislature in India has given such a power to the courts; and

such power can be exercised only to order those minimal

modifications that would bring the aspect that is not working into

a functional zone, with the proviso that at any rate such a

modification cannot lead to a change of the “basic fabric” of the

Scheme.

156. What does the expression “basic fabric” mean?

“Fabric” can imply both the end result, and also equally

importantly, the processes, procedures and steps that were

taken to weave the “fabric” of the Scheme. During the course of

weaving of the “fabric”, decisions could be taken to leave out

certain aspects as unacceptable to the Board or the shareholders

and stakeholders or the Court. Further, those processes

necessarily involve certain steps in obtaining shareholders

permissions. Such processes are the very essence of the fabric

and not just some technicalities that are to be consigned to

history and ignored in making modifications. Whatever changes

are made can only be minor ones which would not tamper with

the essence of the scheme.

258

157. In this Scheme, the shareholders & stakeholders of

RIL would have broadly understood from the Scheme two things:

(1) that the Gas based Energy Resulting Company was to engage

in the business of supply of many different kinds of fuels, in

which supply of natural gas to its affiliate companies is one; and

(2) that the Gas based Energy Resulting Company will engage in

the business of promoting energy generation business, from

using any and all fuels, including natural gas, both from RIL and

also from other sources. Nowhere did the Scheme state that the

only fuel that the Gas based Energy Resulting Company would

deal with would be natural gas from RIL. To change that meaning

would be to begin the process of tearing apart the “basic fabric”

of the Scheme.

158. “Basic fabric” of a scheme also implicates the

essentiality of common interests between the class of members

who have voted together, thinking that they all have the same

level of information and the same understanding of the entire

class of members as to what the Scheme entails. That

understanding would certainly not have comprehended the claims

that RNRL is putting forward in these proceedings: (i) that the

intent was to actually share the benefits of the production and

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.

159. If the question regarding what would make the

Scheme work had been framed properly by the courts below and

they had appreciated the role of the courts better then this case

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.

160. The Learned Counsel for RNRL objected to reliance of

RIL on the ratio of Miheer H. Mafatlal (supra), on the ground that

it only pertains to the situation at the time of sanction of the

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scheme and that the ratio of Megal Homes (supra) cannot be

relied upon as S.K. Gupta (supra) a three judge decision,

suggests otherwise. In light of the discussion above we do not

see how, in the context of this case, the ratio of S.K. Gupta

(supra) is different from that of Meghal Homes (supra): they

both speak of the same thing, that the basic fabric of the scheme

cannot be changed. Which aspect of that basic fabric the courts

may deal with could vary, but certainly the processes that protect

the shareholders, their rights to know what is being transferred

and the sanctity of the class of members who have voted

together cannot be derogated from.

161. In the instant case by importing the gas supply

section into the Scheme, in the guise of interpreting it, the

phrase “suitable arrangements” was transformed into “suitable

arrangements as agreed upon by the promoters in the gas supply

section of the MoU”. Such a modification necessarily tears apart

the basic fabric and cannot be permitted.

162. For the view that we have taken it is not necessary to

go into the protested points regarding the Identity of the Buyer,

Definition of Affiliate and Limitation of Liability.

262

CONCLUSIONS:

163. In the result, we hold that:

(i) both the learned Single Judge and the Division Bench

committed a serious error in exercising jurisdiction in

the manner they did under Section 392 of the

Companies Act, 1956, for such interference has

resulted in the provisions of a document (MoU) which

was not before the shareholders supersede the

Scheme of Arrangement. Such a document could not

have been read into and incorporated in the Scheme

propounded by the Board, approved by the

shareholders and sanctioned by the Company Court;

(ii) the courts below having rightly directed the parties to

negotiate, and further having rightly refused to grant

the prayers in the Company Application, however, fell

into error directing the MoU to be binding and the

basis for further negotiations between the parties.

MoU is a private pact between the members of

Ambani family which is not binding on RIL;

263

(iii) the EGOM decisions, regarding the utilization of the

natural gas and the price formula/basis etc. do not

suffer from any legal or constitutional infirmities.

They shall apply to all supplies of natural gas under

the PSC. The parties are bound by the governmental

policy and approvals regarding price, quantity and

tenure for supply of gas;

(iv) under the PSC in issue the Contractor (RIL) does not

become the owner of natural gas, and there is nothing

like specified physical quantities of natural gas to be

shared by the GoI and the Contractor;

(v) we, accordingly, direct the parties to renegotiate as

to the suitable arrangements for supply of gas de-hors

the MoU. Such renegotiations shall be within the

framework of governmental policy and approvals

regarding price, quantity and tenure for supply of gas.

The renegotiations shall commence within eight weeks

from today at the initiative of RIL and shall be

completed within a period of six weeks from the day

of commencement of negotiations.

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Accordingly, the judgments of the learned Single

Judge and the Division Bench of the Bombay High Court are set

aside and we dispose of all the appeals without any order as to

costs. Intervention Applications do not require any adjudication.

They are also accordingly disposed of.

164. Before we part with the case, we consider it

appropriate to observe and remind the GoI that it is high time it

frames a comprehensive policy/suitable legislation with regard to

energy security of India and supply of natural gas under

production sharing contracts.

165. What remains for us is to place our appreciation on

record of the invaluable assistance rendered by Sarvashri Ram

Jethmalani, Harish N. Salve, Mukul Rohatgi, R.F. Nariman and

Ravi Shankar Prasad, all learned senior counsel appearing on

behalf of the parties. We also acknowledge a very dispassionate

assistance rendered by learned Solicitor General and his team of

Additional Solicitors General.

………………………………..J. (B. SUDERSHAN REDDY)

NEW DELHI,

265

MAY 07, 2010.

266

ANNEXURE

GLOSSARY OF TERMS

ADA : Anil D. Ambani

APM : Administered Price Mechanism

BCF : Billion Cubic Feet

BCM : Billion Cubic Meters

CG : Corporate Governance

CNG : Compressed Natural Gas

DGH : Directorate General of Hydrocarbons

EGOM : Empowered Group of Ministers

GoI : Government of India

GSMA : Gas Sales & Master Agreement

GSPA : Gas Sale & Purchase Agreement

GUP : Gas Utilization Policy

IDP : Initial Development Plan

KDA : Smt. Kokilaben Dhirubhai Ambani

KG-DWN-98/3 : KG-D6

LNG : Liquefied Natural Gas

MC : Management Committee

MDA : Mukesh D. Ambani

mmBtu : Million British Thermal Units

267

MMSCMD : Million Standard Cubic Meters Per Day

MoPNG : Ministry of Petroleum and Natural Gas

MoU : Memorandum of Understanding

NELP : New Exploration Licensing Policy

NTPC : National Thermal Power Corporation

P1 Reserves : Proven Reserves

P2 Reserves : Probable Reserves

P3 Reserves : Possible Reserves

PNG : Petroleum and Natural Gas

PSC : Production Sharing Contract

PSU : Public Sector Undertaking

REL : Reliance Energy Limited

RIL : Reliance Industries Limited

RNRL : Reliance Natural Resources Limited

RPPL : Reliance Patalganga Power Limited

Scheme : Scheme of Arrangement

SCF : Standard Cubic Feet

TCF : Trillion Cubic Feet

TBtu : Trillion British Thermal Units

UoI : Union of India

USD : United State Dollar

268

RELIANCE NATURAL RESOURCES LTD. Vs RELIANCE INDUSTRIES LTD.

RELIANCE NATURAL RESOURCES LTD. Vs RELIANCE INDUSTRIES LTD.

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