TaxTMI 
TaxTMI 
2010 (5) TMI 732
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....rder 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. 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 ....
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....e 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 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 l....
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....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 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 D....
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....warded 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 formula for determining the gas price as the basis of valuation of gas ....
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....tter 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 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....
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....ings 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 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 t....
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....mily 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. 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 RI....
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....ferred 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 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 per....
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.... from the fields operated by the Government companies, namely Oil & Natural Gas Corporation (in short 'ONGC') and Oil India Limited (in 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.  ....
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....ions 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 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-discriminator....
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....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....
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....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 ....
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....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; (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 amalgamat....
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....ng 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 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....
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....t 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 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 expr....
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....r 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 ....
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....o 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 u....
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....; 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-a-vis the Company. Instead of the Company reviving the spinning unit as recommended 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 wi....
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....ivision 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, 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 ....
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....rived 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 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. Sectio....
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.... 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: " 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 hand....
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....s. 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 sett....
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....der 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......" 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 ....
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....okilaben 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 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 ....
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.... 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 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 ....
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....herefore, throughout was even under the Scheme to reorganize and segregate the 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....
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....rves 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 ....
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....tion 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 t....
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....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. (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 mater....
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.... 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 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....
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.... the Territorial Waters, the Continental Shelf and 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 throughout the community. 51) In the light of the above, the Executive of the Union of India enjoys its....
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....d 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 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 formu....
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....ll 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 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) ....
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....es, 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-a-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....
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....e 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 determination of price of supply and not only for the determination of the share of the Contractor but also for the Government. Thus....
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....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 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 t....
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....iven 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. 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 PSC (including the Develop....
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....s 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 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 h....
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....t. 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 "natural gas' i....
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.... 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 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 ....
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....nterests. 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. 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 ....
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.... 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 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 Cour....
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.... 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....
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....at the State ought to play a key role in ensuring that all the people are assured, a life informed by liberty, equality, justice 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....
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....inging vast benefits to the few, modest benefits for some, while leaving everybody else, the majority, behind. "... these global imbalances are morally unacceptable and politically unsustainable."1 (emphasis added).[(Quoted in Joseph Stiglitz, Making Globalization Work: The Next Steps to Global Justice, p. 8, AllenLane (2006)]. 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, pass....
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....esources 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.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 political [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.] in nature....... [W]hen compared to....
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....e, it ends up transforming them in a vicious development cycle or "staple trap."[Terry Lynn Karl "Understanding the Resource Curse" in Covering Oil (Open Society Initiative, 2005)] 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 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 ongoing 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 - especi....
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....ion 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) Resources Limited that it is entitled to receive, on account of a p....
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....ansferred, 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. 22.....
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....e 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. 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 Relianc....
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....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 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 th....
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.... 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 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 proces....
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....iven 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 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 agr....
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.... 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, 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 al....
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....tervened 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 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, na....
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....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. 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 ....
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....her, RNRL also contends that 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 pressed by both Shri. Jethmalani and Shri. Rohtagi, is that under the PSC what is shared....
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....ven 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, (2006) 13 SCC 542, and Kusumam Hotels (P) Ltd. v Kerala SEB. (2008) 13 SCC 213. 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. (2004) 2 SCC 663. 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. (1971) 1 SCC 85 2. Binding Nature of MoU: It is the contention of RNRL that the MoU is binding upon all and hence, the main commercial terms 1967 (2) SCR 454 provided in its gas supply section should be faithfully followed, as they relate to the Six Pr....
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....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 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....
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.... 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 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 base....
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....956 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 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 Identifi....
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....illion 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 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 Productio....
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....ce of law. 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 India (1979) 3 SCC 489 and F.C.I. v Kamdhenu Cattle Feed Industries. AIR 1993 SC 1601. 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 1984 (1) SCC 515 and Salar Jung Sugar Mills Ltd. v State of Mysore. 1972 (1) SCC 23, 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....
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....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 is used as a fuel and a feed stock in: (i) pro....
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....prices are 41 Ibid 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. [bid] , [Robert J. Michaels, "Natural Gas Markets and Regulation", in the Concise Encylcopedia of Economics, 2nd Ed]. 77. We have referred to a number of journals, articles and books in this regard, too numerous to all be cited [A ....
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....in India are said to be about 1074 BCM [MoPNG Basic Statistics (2008-2009).]. That may appear to be very large. It is not. United States consumes around 22-23 Trillion Cubic Feet [Energy Information Administration, Dept. of Energy, U.S. Government] of natural gas every year - yes every year. According to MoPNG documents the total global reserves are around 6534 TCF [MoPNG Basic Statistics (2008-2009) citing BP Statistical Review of World Energy, June 2008 & OPEC Annual Statistical Bulletin], 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 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 ....
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....here 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. 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 sector [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]. 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 int....
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.... 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 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 ....
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....n 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" Ibid page 14, para 48 "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." Ibid page 16 para 57 The present PSC is required to be interpreted and understood with this background in mind. 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 t....
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....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. 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 exe....
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.... 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 swee....
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.... zones 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...."[ Joseph L. Sax, Defending the Environment: A Strategy for Citizen Action (1971)]. 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....
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....sion 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. 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 ....
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....s 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 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 t....
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....n 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 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....
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....emain 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 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 o....
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..... 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 21.2 [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], 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....
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....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 other sources etc., could have as well taken place. There would h....
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....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. AIR 1943 FC 75, 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." 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 ri....
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....f 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 of GoI, in which case the GoI would know the actual price. RNRL is taking a clause that is provided to protect the Go....
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.... 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. 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....
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....nd 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 naove 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 con....
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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?: It is absolutely clear that the MoU was executed in the private domain, with the help and aid o....
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....usinesses. 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-a-vis the shareholders. This duty has been a part of broader understanding of company law from the days of Settlement Companies [See part 1.103 - 1.104 of Palmer's Company Law, page 1011, 25th Edn. Vol.1] 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 do....
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....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 interpretation or a....
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....tain 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 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....
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....ntrolling mind of the Company and that once they 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 governme....
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....because they can extend even to suo moto ordering the winding up of the Company. 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 ra....
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....cles, 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 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....
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....ss 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 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 p....
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....ble 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. 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 negoti....