A case study on RIL vs.

RNRL dispute
Legal Aspects of Business

- By Aparajita Sharma (R230207017)

Page 2 of 6

Brief Summary Power shortage, in India, is not unheard of. Such grim is the outlook that India is expected to miss its 2012 power generation target by nothing less than 60%. Hence India, once again, started to look at Natural Gas to cater for this deficiency. Successful exploration of gas from KG basin was widely anticipated as a solution to all lacunas persisting today. As a result, India or Reliance Power planned a under construction, gas fired power plant, one of the single largest gas fired power plant (5500 MW) in the world, in Dadri, UP. However complications started immediately after the death of Mr. Dhirubhai Ambani. Family feud between Ambani sons Mr. Mukesh and Mr. Anil unveiled for public interpretation. Considering the mammoth size of Reliance conglomerate then Rs 100,000 Crore, about 2% of Indias economy a lot was at stake, it was imperative to reach an amicable and agreeable solution to the dispute. Mother Kokilaben played an important part to reach at amicable solution. The agreement contained a clause named Gas Supply Master Agreement (GSMA). According to GSMA, RIL (part of Mukesh Ambani group) was to supply gas at subsidized rate of $2.34 per million British thermal units (mmbtu) for a period of 17 years. The amount of gas would be equivalent to 28 Million Metric Standard Cubic Meter Per Day (mmscmd) from the KG basin. Reliance Natural Resource Ltd. (RNRL) Of Anil Ambani in 2006 claimed that Reliance Industries Ltd. (RIL) Of Mukesh Ambani had reneged on part of a promise under the demerger agreement to supply gas from Krishna-Godavari basin to the RNRLs planned power stations. RIL then argued the agreement was subject to government approval and that in 2007, a ministerial committee set a price of $4.29/mmBtu. The feud was never settled for good. It was painfully visible by the fact that RIL was never intending to supply gas at a contractual price when it will be making a loss. In November 2008, RNRL filed company application, over gas supply, taking dispute with RIL to court. The Bombay High Court upheld the maintainability of RNRLs plea and asked RIL to supply gas to the latter. The court asked the two parties to enter into an agreement within a month along the stipulated ruling. The HC also said the parties can approach Kokilaben Ambani the mother of the estranged industrialists Anil and Mukesh Ambani to reach an arrangement. Following this, both the companies RIL and RNRL moved to Supreme Court. It admitted the petitions. Such a dramatic turn of events forced the GOI to take a stand. The government has filed the affidavit as an intervener which means that it gets to assist the court in coming to a conclusion. Oil and petroleum ministry filed a petition in court claiming that KG basin and its natural assets are public property, and hence, no MOU regarding the same is legally valid unless the GOI has consented to the MOU. On this ground, it requested the Apex court to declare the MOU null and void. Supreme court

Page 3 of 6

hearing will be on the 20th October regarding this case. TimeLine * July 2002 - Dhirubhai Ambani, a school teacher's son and founder of the Reliance business empire, dies. Mukesh Ambani becomes chairman and managing director of Reliance Industries Ltd, and Anil Ambani is made vice-chairman. * Nov 2004 - Feud between the brothers becomes public. * June 2005 - Family reaches a settlement to split the Reliance group in a deal brokered by their homemaker mother, Kokilaben. Memorandum of Understanding was signed between the brothers, which included provision of providing natural gas from RIL to RNRL at lower prices. * 2006 - Formal split takes place, with Mukesh taking control of flagship Reliance Industries, with interests in petrochemicals, oil and gas exploration, refining and textiles. He has since launched a retail venture. Anil gets telecoms, power, entertainment and financial services. The Anil Dhirubhai Ambani Group includes Reliance Communications Ltd, Reliance Infrastructure Ltd, Reliance Capital Ltd, Reliance Natural Resources Ltd (RNRL), and Reliance Power Ltd. * December, 2006 RNRL goes to Bombay High court against RIL on Krishna- Godavari Natural gas issue. * June 15, 2009 - Mumbai's High Court directs Reliance Industries and RNRL to enter a gas supply agreement within a month. Notwithstanding Government policies and the provisions of the PSC, the order observes that the provisions of the MOU are binding on the parties. The MOU, as per the judgment, provides that 12 mmscmd will be given to NTPC, 28 mmscmd will be given to RNRL and the remaining, at the option of ADAG, will be shared between RIL and RNRL in the ratio of 60:40. The MOU also stipulates that this share of gas will be applicable to gas not only from reserves of KG D-6 field, but also from other fields to be explored and operated by RIL, even consequent to future bidding by RIL. * July 18, 2009 - The government filed a petition before the Supreme Court, made a case for scrapping the gas supply agreement between RIL & RNRL. * July 23, 2009 - The Petroleum Ministry filed a special leave petition, seeking direction for declaring as 'null and void' a memorandum of understanding between RIL and RNRL that provides for gas supply.

Page 4 of 6

* October 20, 2009 - The Supreme Court will hear the government's petition for admissibility, as also the cross-appeals by RIL and RNRL.

AGREEMENTS OR CONTRACTS PRESENT IN RELIANCE GAS ROW Production Sharing Contract (PSC) between RIL and Government: Under the government's New Exploration and Licensing Policy (NELP) there is a production sharing contract (PSC) between RIL and Government signed in April 2006, which sets out the terms and conditions under which RIL operates its lease of Gas fields in KG-D6, including the share of revenues that would accrue to the Government. MOU between RIL and RNRL: In 2005, RNRL and RIL signed a memorandum of understanding (MOU) on the terms under which gas would be supplied for the RNRLs Dadri power project in UP. This MOU specified that the price at which the gas would be supplied would be the same as the price at which RIL would supply gas to an NTPC project. In 2004, RIL made successful bid for NTPC to supply gas at a price of $2.34 per mmbtu. LEGAL COMPLICATIONS INVOLVED IN THE CASE: Contract Act: Contract & MOU A contract is an agreement, enforceable by law. Every promise and every set of promises forming the consideration for each other is an agreement. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. A memorandum of understanding (MOU) is a legal document describing a bilateral agreement between parties. It expresses a convergence of will between the parties, indicating an intended common line of action, rather than a legal commitment. It is a more formal alternative to a gentlemens agreement, but generally lacks the bind power of a contract. However in some cases, depending on the exact wording, MOUs can have the binding power of a contract; as a matter of law, contracts do not need to be labeled as such to be legally binding. Whether

Page 5 of 6

or not a document constitutes a binding contract depends only on the presence or absence of welldefined legal elements in the text proper of the document.

Sales of Goods Act Oil and petroleum ministry filed a petition in court claiming that KG basin and its natural assets are public property. On this ground, we cannot treat Natural gas under the sales of goods act. Hence price determination of Natural gas between Family business agreements might not be considered as valid.

Model production sharing contract The governments stance in the Reliance Industries Ltd (RIL) case against Anil Ambanis Reliance Natural Resources Ltd (RNRL) is that the agreement between RIL-RNRL to supply gas has no legal sanctity since RIL had to get the contract approved of by the government first. The Production Sharing Contract (PSC) which governs the rights and obligations of both the government and winning bidders like RIL is quite clear on this. The model PSC issued for the current round of the New Exploration and Licensing Policy (NELP-VIII). Clause 21.3 says the contractor has the freedom to market the gas as per Government Policy for utilization of gas among different sectors and 21.3.1 elaborates on this, saying the Government may from time to time frame policy for utilization of gas among different sectors. The problem, however, is that this is not the PSC that RIL signed with the government in 2000. That contract, under the NELP-I, gave unrestricted freedom to the contractor (RIL) to sell and the governments role was restricted to ensuring it got its proper share of the profits. In other words, it would appear that the government changed the model PSC (the changes first came about in NELP-VII in 2007) terms around the same time that the RIL-RNRL fight was heating up this is when the petroleum ministry said it had the right to reject the RIL-RNRL contract under the PSC. If the ministry has this right, the RIL-RNRL case goes for a toss while RIL maintains it cannot sell any gas from the KG Basin without the ministrys explicit approval, RNRL contends the ministry has no such rights under the PSC.

Future Course

Page 6 of 6

With RNRL challenging RILs decision on reneging the agreement and latters equally ferocious rejoinder; with NTPC filing a court case against RIL; with government allegedly favouring RIL and yet not taken a firm stand and putting a leg down on either parties; with other stakeholders (customers) of KG basin gas Gautami group, a power plant owner in AP moving to apex court for continuance of gas supply to other non-disputing parties the situation couldnt get more murkier. Until the government, or the apex court, decides in favour of either parties, its not just a national loss in form of worsening power situation but a loss to both RIL and RNRL loss of revenue, increased time and other costs associated with litigation; a loss to the stakeholders associated with the business of extraction and supply of gas, of power generation business and of other consumers of KG basin gas. It is absolutely necessary for both the companies to reach on common ground to save all the losses. But it looks a distinct possibility now with the Anil Ambanis attack on RIL through aggressive newspaper advertisements. Government needs to take fair & firm stand on this case to save huge losses. However, the most important isit is the shareholders who would benefit with a solution and consumers who will benefit with an uninterrupted supply of gas.

CONCLUSIONS Supreme Court verdict will entirely depend on the answer of the following questions. 1. Is there any consideration involved in the MOU to consider it as a valid contract? (Supreme Court might ask to produce complete MOU to conclude on this part as both brothers have produced only certain part of MOU in front of the court.) 2. Can we consider Natural Gas which is a public property under sales of goods act? (Stand of petroleum ministry will play important part in deciding on this issue.) 3. Can Government force laws of new act on this contract which was based on the old act? (Firm stand from government & Supreme Court is required to assure that there are no extraordinary losses or supernormal profit to either party.)