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Mukesh Wins RNRL RIL war – PSC reigns over MoU

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On which stock did you bet your money on? RIL or RNRL? Or Are you from the stable of those old shareholders of Reliance Industries who holds stakes in shares of both the group companies, post de-merger?

Finally, India’s Supreme Court has issued its verdict for the RIL-RNRL case related to the gas-pricing dispute in favor of Reliance Industries.

The long pending corporate battle had rattled the investors of both the companies as their stock prices had been under-performing the over-all markets on the back of lurking danger of likely unfavorable verdict on the gas and MoU dispute.

The verdict comes as a bit of a surprise to me as the hearing had gone in the favor of RNRL in the Bombay High Court, before being challenged by the RIL in the apex court.

Mukesh-Anil-Ambani-RIL-RNRL

The case in the Supreme Court was heard by a three-judge bench. Ironically, two judges of the bench had given contrary verdicts. But, the case drifts in favour of RIL’s in the ratio of 2:1, what with a decisive vote from the Chief Justice K.G. Balakrishnan going in favour of hearing pronounced by Justice Sathasivan.

The nature of judgment with a close finish by vote-out shows how intricate and inter-connected the gas-dispute case was with broad ramifications for investors and policy makers alike.

In the landmark judgment, the Supreme Court has directed that the Production Sharing Contract overrides all contracts including MoU signed by Ambani brothers in 2005 as a part of de-merger clause. Further, the apex court said that the government is the legal owner of the gas and is eligible for deciding on the pricing of the gas.

According to the MoU signed by Ambani brothers during the de-merger, the agreement required RIL to supply 28 million cubic meters of gas for 17 years at $2.34 mmBtu. However, the MoU came under dispute subsequently in 2007 on government setting up a price of $4.20 mmBtu for gas contracts in the KG Basin.

According to me, the verdict may earn more revenue for the government on account of higher prices of gas sale at $4.20 mmBtu, but it will increase the cost of running power projects which are slated to use gas proceeds as their process input. This will ultimately increase the power costs for the final consumers.

Allowing gas prices to be regulated by the government as its owner, could well be a point of concern for the foreign investors in the liberated country such as India where the government would continue to play a predominant role in setting prices. This case verdict is expected to have wide policy ramifications on the future regulatory issues on gas pricing.

Finally, I feel that the lower prices of the gas would have benefited the energy-deficient Indian economy much more than it would actually put government at advantage by earning a small part of that extra revenue, while a major part of the total proceeds goes to RIL.

Even as the latest ruling on gas pricing is not a life-changing event for RIL company prospects, it could be well be a disaster for ADAG Group counters such RNRL and to some even extent even Reliance Power which is said to be the likely recipient of the gas proceeds from the KG Basin proceeds.

This can be gauged from the sharp slump being witnessed by RNRL share prices by a whooping 24%, just as I am writing over here. Reliance Power is down by 9% on the negative verdict in RNRL’s favour while RIL is mildly positive with a smart 3% gain on the Indian bourses.

Mr Ambani Junior, Any plans of new media campaign against the SC Ruling? Well, not much can be done now.

  1. Altaf Rahman says

    When their dad died, they had great difficulty deviding their wealth. As they can not take 50-50 share in all companies and wanted to devide companies, the asset values of different companies are not allowing them to devide.
    Then they agreed to a formula that the major assets (RIL and the then existing RPL) will go to Mukhesh while all other smaller assets will go to Anil. Even then Mukhesh assets were bigger than the other. So as a compensation, they agreed that Mukhesh controlled RIL will sell gas at a cheaper rate to Anil controlled RNRL for 17 years (they assumed that the imbalance will be sorted out by then). After taking possession of their agreed companies Mukhesh has gone back on word (to supply gas at cheaper rate to RNRL). He brought in Govt and may be Govt is right in asserting its right over the national resources.
    Now if we keep the question of Govt securing its right aside and look to the question of how the wealth is to be devided, it is obvious that Mukhesh has taken over more than his share of Reliance. If he can not compensate from cheaper gas (on the basis of which he took major part of the then Reliance empire) how he is going to compensate Anil. Is he going to give Anil a share in RIL?
    Another point of legal importance : If RIL is only an operator and can not decide on gas price, how RIL bid to NTPC in 2005 to supply gas at cheaper rate? Now that the prices are more Mukhesh do not want to honor the deal. (He is now bringing in Govt saying that Govt is sole owner and he is a mere operator). If he knows that Govt is sole owner, how did he participate in bid and how did he promise Anil that he will supply cheap gas.
    This goes on to shows that Mukhesh is a cheater all the while.
    Majority of the people do not know what happened in 2005 (all the above) and may be thinking that RNRL want to take major part of KG Gas at cheaper rates on flimsy grounds. But if they know what happened in 2005, they will have a birds eye view of the events.

    I am not a RNRL supporter, just wondering the legal implications of wealth division in such circumstances. Suppose if “A” asks “B” 100 rupees, and assures as soon as “C” pays me I will return your 100. First of all “B” should know complete details of the deal between “A” and “C”. “B” should be taking a risk if he hands over his 100 to “A” assuming that “C” has to give “A” 100 and “C” will actually pay “A”. Even if “C” pays to “A”, there is no guarantee that “A” will return “B” the 100.
    So there must be clarity. Before giving 100, “B” should get legal paper work done before giving “A” 100. (Assuming that courts will protect the dignity of legal paper work)
    Otherwise “B” will be weeping like Anil while the laws of the land can not do any thing to “A” (Mukhesh)

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