CENTRE STAGE

By: Salil Gupta / K V Gopakumar MBA Class of 2011

RIL RNRL DISPUTE

Family quarrels are bitter things. They don't go according to any rules. They're not like aches or wounds; they're more like splits in the skin that won't heal because there's not enough material. - F. Scott Fitzgerald India is witnessing a fierce corporate battle between the two warring Ambani brothers. The issue has turned into a national debate and many of us (from the Government to the corporate world, and even the common public) are divided on the issue. The raging debate, now being heard in the Supreme Court between the two publically listed companies (RIL and RNRL) which belong to the Ambani brothers - Mukesh and Anil, mainly concerns the supply and pricing of natural gas from the Krishna Godavari basin. The Reliance group had earlier kept Corporate India preoccupied in the year 2004-05 with the younger brother Anil seeking his share of the fortune of his late father Dhirubhai Ambani. It all started with Mukesh Ambani admitting to the media that there were ownership issues between him and his younger brother - the erstwhile vice-chairman Anil Ambani. After a bitter public spat for over 3 months which saw many directors and staff quitting the company amidst huge public drama, the Ambani brothers reached a settlement to split the assets of India's largest private sector conglomerate (then valued at over Rs 100,000 crores). The truce was brokered by their mother Kokilaben in an exercise which was crafted to perfection by family friend and the ICICI honcho KV Kamath. After the split, the companies that came to Mukesh were the flagship Reliance Industries Ltd and IPCL (the petrochemical firm), whereas Anil Ambani came to own Reliance Energy Ltd (Now called RNRL), Reliance Capital and Reliance Infocomm (Telecommunications). At the core of the RIL- RNRL dispute is the validity of a family pact, in deciding the price of gas in which the government, too, has claimed a share. The Issue

Centre- Stage _Sep09

AVANT GARDE, Monthly e-Newsletter by MBA, IIT Kanpur

The oil gas fields, off the Andhra Pradesh coast in the Krishna Godavari basin, were taken up by the Mukesh Ambani-led Reliance Industries, and were one of the biggest discoveries made in Asia in recent years. Anil Ambani (RNRL) wants a part of the gas for his group's power plants, and as per the family pact he claims rights to 28 million standard cu. m of gas a day (mscmd) for 17 years at $2.34 per million British thermal units (mBtu). Quoting the family pact forged in 2005, he also claims a 40 % share in future gas discoveries by RIL. The stand taken by RNRL then was that since NTPC to whom the RIL was supposed to supply gas would be receiving it at $2.34 mBtu, then so should RNRL too. The Government on its part claims that gas is a national asset belonging to the Union of India and hence the government's utilization and pricing policy would be applicable in this case. The Govt. has recommended the price of natural gas from the Krishna Godavari basin at $4.21 per unit. RIL claims that such an arrangement of two pricing schemes a government approved price, and a separate selling price for RNRL would be disastrous and thus it is willing to go with the government approved price. The Different Sides of the Story RNRL The Anil Ambani owned RNRL claims that the two brothers had signed a Memorandum of Understanding (MoU) on June 18, 2005 which entitles RNRL to 28 mmscd of gas from the KG basin at $2.34 mBtu. They claim that the MoU also provides for the Anil Ambani group to get the NTPC entitlement of 12 mscmd in case the contract between RIL and NTPC does not materialize. In addition to this, the Anil Ambani group would also get a 40% stake in future oil explorations by RIL. The Anil Dhirubai Ambani Group (ADAG) needs the gas for its two gas based power plants project situated in Dadri, UP and Shahpur, Maharashtra. ADAG alleges that the cost of production in the KG basin is around $1.41mBtu, and at $4.20 mBtu, RIL is working on a huge profit margin. It also points out that the $4.20 price has been determined by the government keeping its own interests in mind, as it gets a part as per the PSC (Product Sharing Contract) and RIL, being the contractor is free to sell to anyone at a lower price. RNRL has also targeted the Petroleum and Natural Gas ministry, claiming that the officials are trying to help RILs cause by raising the issue of sovereign ownership. RIL Mukesh Ambani Owned RIL is contesting RNRLs claims, saying that it cannot give gas to anybo dy without the approval of the government, which is the owner of all sovereign assets. RIL says that having two prices is akin to a cash transfer to Anil Ambani and would result in major losses for RIL. RIL also contends that neither its board nor its shareholders know of the MoU and therefore are not bound by it. Government The government holds the view that since gas is a national asset, the distribution and pricing of this asset would be decided by the government. According to the gas utilization policy, the fertilizer units should get the first priority for utilization, then the LPG and petrochemical industries, and finally the power industries. Since RNRL has no operational power, it cannot be privy to gas in this case. The government also challenges the MoU signed by the brothers. The governments stand is that the brothers are fighting for something that does not belong to them. Based on the recommendations of a committee led by the present Finance Minister Shri Pranab Mukherjee, the government had settled on the price of natural gas from the Krishna Godavari basin. The Present Status Centre- Stage _Sep09

AVANT GARDE, Monthly e-Newsletter by MBA, IIT Kanpur

The Bombay High Court, in its verdict on June 15, had directed RIL to supply 28 million units of gas from Krishna-Godavari basin at $2.34/mBtu to Anil Ambani's RNRL for 17 years. This price is much lower than the government-approved rate for selling gas from the KG basin. RIL has approached the Supreme Court challenging the Bombay High Courts verdict. The government has also approached the Supreme Court on this issue. There doesnt seem to be a clear cut solution to this problem and a quick end to the dispute is unlikely, but experts have suggested a few solutions to this problem: Since it is Mukesh Ambani who committed to the MoU that binds him to supply gas at the price Anil wants, and by Mukeshs own admission his company or government are not privy to the MoU, it is he or RIL who should compensate the government for loss of revenue from the supply of gas to RNRL at $2.34 mBtu. RNRL can give up its demand for $2.34 mBtu, but continue to have 28 mmscd gas share and 40 % share in future gas discoveries. Allow complete freedom to RIL to price gas and repeal the system of government approval of the gas pricing formula.

Centre- Stage _Sep09

AVANT GARDE, Monthly e-Newsletter by MBA, IIT Kanpur