Mukesh Wins RNRL RIL war – PSC reigns over MoU
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.
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.