GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  Existing gas-based urea plants, which are now getting gas below their full requirement, would be supplied gas so as to enable full capacity utilisation;

  A maximum quantity of 3 mscmd would be supplied to existing gas-based LPG [liquefied petroleum gas or cooking gas] plants;

  Up to 18 mscmd natural gas, being the partial requirement of gas-based power plants lying idle/underutilised and likely to be commissioned during 2008–9, and liquid fuel plants, which are now running on liquid fuel and could switch over to natural gas, would be supplied to power plants;

  A maximum quantity of 5 mscmd would be made available to City Gas Distribution projects for supply of Piped Natural Gas to households and Compressed Natural Gas in the transport sector;

  Any additional gas available, beyond the categories listed above, would be supplied to existing gas-based power plants, as their requirement is more than 18 mscmd.

  All these decisions, which were taken by the EGoM even as court proceedings were on, came as a shock to RNRL. The decisions indicated to Anil that the petroleum ministry was hand-in-glove with RIL and intended to deny RNRL its ‘right’ over RIL’s gas. With the new regulations and directions, RNRL’s price had clearly been rejected, and the government had even decided the recipients of the gas with RNRL excluded from the priority list. All that the EGoM had stated was that RNRL’s claim to KG gas would be considered as and when its power projects were nearer their completion dates.

  Anil was livid. He thought the government was being blatantly unfair for several important reasons. One, he was convinced that under the PSC, the government had no right to fix the price of gas. It could only clear the formula to be used to arrive at a specific price of gas. Anil also sought to draw a distinction between ‘price’ and ‘value’ (as will be subsequently explained). What this implied was that the government was only interested in its share of profit petroleum, which should be decided in accordance with a fair and market-related value of the gas. This was to prevent the contractor (or RIL-Niko) from ascribing a lower value to the gas, thereby increasing in quantitative terms the share of cost petroleum. However, the actual price at which the gas was sold was to be at the sole discretion of the seller (RIL). Anil, therefore, argued that for the purpose of calculating cost and profit petroleum, the government was justified in using the EGoM value of $4.20 per mBtu. It could not, however, prevent RIL from selling the gas at a lower price of $2.34 per mBtu and that actual sales had nothing to do with the government.

  In several interviews, Anil explained the difference between ‘price’ and ‘value’ using an analogy. If you were selling a flat, you could sell it at whatever price you wanted, either below or above the market rate. However, the government, or the relevant authorities, would ascribe a market value to the property in order to calculate the taxes and stamp duty payable. The same norms, he contended, applied to natural resources.

  This was also admitted by the government in response to several questions raised in Parliament. On 30 August 2008, replying to a question, petroleum minister Murli Deora responded that the ‘government does not fix price of gas. The role of the government is to approve the valuation of gas for the purpose of determining the government take (or share of the gas).’ Similarly, the minutes of the EGoM meeting on 12 September 2007 stated that ‘the decision taken in today’s EGoM meeting will be without prejudice to the NTPC vs RIL and RNRL vs RIL court cases, which are at present sub judice.’ Thus, the government had not expressly rejected the price of $2.34 per mBtu. Earlier, in November 2006, a committee of bureaucrats of the MoPNG had presented a report to ‘formulate transparent guidelines for approval of the gas price formula’ under production sharing contracts which categorically recorded that the government’s ‘mandate is not to determine the principles of pricing of natural gas, but merely to suggest transparent guidelines for valuation of natural gas’. It was pointed out that the government had no role to play in fixing prices. At the same time, the PSC contractor, that is, RIL, had the freedom to market its share of cost and profit petroleum. This too was admitted by the government in answers to parliamentary questions and in other official correspondence and documents. The only restriction the PSC imposed on the seller was that all sales had to be at ‘arm’s length’, in other words, the buyer and seller would have to be independent of each other with the market determining prices in order to avoid conflicts of interest. The PSC defined ‘arm’s length’ as ‘sales made freely in the open market between unrelated buyers and sellers’. RNRL’s legal position in court was to reject the government’s argument that the price decided between RIL and RNRL was not at ‘arm’s length’ as RNRL had been a subsidiary of RIL when the family MoU had been signed by the Ambani brothers. According to Anil, the price of $2.34 per mBtu was benchmarked against the RIL-NTPC price, which ‘was the result of international competitive bidding’. RNRL argued that such a price ‘cannot be subject to government approval’ as that ‘would destroy the sanctity of the tender(ing) process itself’. If the government approves a price that is higher or lower than the price discovered through a tendering process, then the process would be totally vitiated, RNRL argued.

  The government’s counter-argument was that the sanctity of the PSC would be destroyed if the price and the value of gas were two different figures. It maintained that the gas had to be sold at the same price at which it had been valued in accordance with an approved formula. RIL argued that if the price and value were considered as separate figures, with price much lower than value, it would amount to RIL absorbing the difference as a loss in its balance sheet and that there was nothing in the MoU or the de-merger agreement that required RIL to give RNRL a huge subsidy. Mukesh indeed felt that this was precisely what Anil wanted, that is, RIL would supply gas at a low price to RNRL, which would in turn sell it to its own associate or group companies or other companies at the prevailing market prices, thereby enabling the latter to earn huge profits at the expense of the former. Obviously, Mukesh did not want Anil to benefit in this manner, especially because this would hurt RIL’s interests.

  Finally, on 15 June 2009, the Bombay High Court gave its final judgement, arriving at the following conclusions on the various contentious issues:

  The family MoU does form the very basis according to which the parties were expected to enter into an agreement in consonance with what was agreed between the parties and that the MoU held salience over the de-merger agreement.

  RIL and its board were fully aware of the settlement between the promoters and, therefore, RIL could not claim that the MoU had no place in the corporate domain.

  The MoU and its contents [were] binding on both parties—RIL and RNRL. Mukesh Ambani and his group of companies and Anil Ambani and his group of companies have already initiated necessary action on the basis of the MoU .

  Moreover, there is a fixed quantum of gas which stands allocated to the Anil Ambani group, that is, 28 mscmd to REL [Reliance Energy Ltd] and in the event [the] NTPC contract does not materialise or is cancelled the entitlement of NTPC to the said extent shall go to the Anil Ambani group.

  The allocation to RNRL cannot be subject to allocation by the government under the PSC nor any allocation of the gas by the government amongst its nominees may affect this assured quantity of allocation and it will have to be from the share of RIL from quota of cost and profit gas.

  Finally, the court said there is no specific provision under the PSC to prevent the contractor from selling the gas at a price lower than the price fixed by the government for valuation of gas to the extent of its share.

  A little over a month after the Bombay High Court judgement, on 9 July 2009, a revealing blog was posted by a certain ‘Sam’, which disclosed the way in which lobbying had taken place. The contents of this blog have never been disputed even after these were quoted by various journalists, including Sucheta Dalal, managing editor, Moneylife. The blog is reproduced in full below3:

  A deeply divided Cabinet is upset with the shenanigans of the Murli Deo
ra controlled Petroleum and Natural Gas Ministry, also known as Mukesh Ambani’s B Team in the capital. With the stakes extremely high in their battle over gas, no stone is being left unturned by Mukesh Ambani and Murli Deora. But this has left senior ruling party politicians fuming for the blatant disregard of the rule of law to ensure that Mukesh Ambani gets his right of way. Forget younger brother Anil Ambani who is fighting him for the gas. Public Sector power utility NTPC [National Thermal Power Corporation] also be damned. NTPC has been waging a running battle with RIL, now lodged in the courts to get its share of KG Basin gas for its Kawas and Gandhar plants. But to no avail; a powerless power ministry has been tripped repeatedly by the all powerful Petroleum Ministry. With the government practically impleading itself in the Ambani gas row to protect Mukesh Ambani’s interests in the gas row, calling the family MoU as null and void in the matter, despite the honourable Maharashtra High Court ruling in favour of Anil Ambani owned Reliance Natural Resources, caution has now been thrown to the winds.

  The government’s law officers are perturbed at the appropriation of absolute power by Reliance Industries. The government’s response in the honourable Supreme Court vetted by RIL officials and presented in a brazen manner by Mohan Parasaran and T.S. Doabia. What has shocked one and all and a senior Cabinet minister has privately even called it a disgrace and a matter of shame is the manner in which Justice Doabia is being allowed to subvert the system. Doabia, a retired justice is incidentally the same man who wrote to SEBI (the Securities and Exchange Board of India) and the Ministry of Finance seeking a probe in the Anil Ambani owned Reliance Power IPO [initial public offering of shares] a couple of years back using the plea that the interest of the public should be protected and the said IPO should not be allowed to proceed. It was proved that the missive was fired off with mala fide intent and both the Ministry of Finance and SEBI threw out the petition and allowed the IPO to go ahead.

  Now the same Doabia is once again leading the charge in the framing of the government affidavit against RNRL. With the prime minister travelling abroad and the Cabinet and senior government law officers not even informed or approached, the Petroleum Ministry is functioning in an arbitrary and unilateral manner. Since the Cabinet has not even approved the strategy adopted by the Petroleum Ministry, it is fair to say that there is consternation in the ranks of the UPA coalition. With the Centre urging the apex court to quash the 15 June Bombay High Court order directing Mukesh Ambani to fulfil his ‘commitment’ and provide gas to Anil Ambani’s RNRL as per an MoU between them, suggesting that it was null and void and that the Ambani brothers could not hold the economy hostage, the pinch is being felt by RNRL and not RIL. Very cleverly, the Centre, read Petroleum Ministry and its Minister Murli Deora is using the Ambani brothers tag to target younger sibling Anil Ambani only. The role of Parasaran and Doabia, noted Anil Ambani baiters in this is also not lost on several top ranking politicians who believe that the younger Ambani might be getting the worst end of the stick.

  What is even more intriguing is that Doabia was the government’s counsel in the RIL-RNRL dispute in the Bombay High Court from the beginning. As senior government counsel in the high profile case, he was instrumental in the government involving itself in what was essentially a dispute between two brothers. CNBC TV 18 reported on November 18, 2007 that Doabia was replaced by [the] then additional solicitor general Mohan Parasaran in the case. Doabia came under fire after NTPC fighting a parallel gas row case against RIL found the senior counsel compromising its own position in the Bombay High Court. Yet, both Doabia and Parasaran have been at the vanguard of the petroleum ministry’s role in adopting an interventionist stance on behalf of Mukesh Ambani. NTPC had trashed the government counsel Doabia’s submission that it had no case against RIL since it did not have a concluded gas supply pact with RIL. NTPC Chairman R.S. Sharma had told the Economic Times (22 August 2008) that the ‘RIL-NTPC agreement was legally valid and concluded one. The counsel’s comments are false and misleading, our lawyers will strongly deny such loose statements in a court of law.’

  Fiction however, is stranger than fact in the gas saga as Mukesh Ambani’s B Team—the petroleum ministry—pulls out all the stops to ensure that RIL and Ambani Sr do not give any gas to the younger brother. A small aside on the RIL-NTPC case, which is shrouded in controversy. On June 18, 2005, the family MoU was inked and RIL pulled the plug on its gas supply agreement with NTPC (a day earlier) on June 17, 2005 by dashing off a letter to NTPC saying that the gas supply agreement was not a concluded one. At every step, there has been subterfuge used by RIL and the petroleum ministry to thwart RNRL.

  The June 2009 Bombay High Court judgment appeared to be a total victory for Anil. Obviously, Mukesh and the government could not accept the situation lying down. They had to fight back. In that sense, the court ruling marked only the beginning of a long-drawn- out legal battle. The next stop for all three parties was the Supreme Court of India, which witnessed the next phase of the drama. There was, however, always more to the battles between the Ambani siblings than met the eye. A corporate captain, who says he is lucky he has never had to compete with the Ambanis, had this to say on condition of anonymity:

  When the Ambanis enter a battlefield, they don’t just aim for a complete victory over their opponent. After they have vanquished their rival, they ensure that subsequent events unfold in such a manner as to create awe, respect and fear for them in order to dissuade potential competitors from thinking about taking them on in the future.

  There is yet another saying about the Ambanis: ‘Once the enemy has been defeated, the victor appears generous—the loser invariably joins hands with his erstwhile adversary, even begging the latter to forgive and forget.’ This, in fact, actually happened with many former rivals of the Reliance group, the most famous of them being Kapal Mehra (of Orkay Mills). The Ambanis were certainly not unhappy when the Indian Express group, which had taken them on, got trifurcated after the death of Ram Nath Goenka in October 1991. Therefore, when Mukesh—with the government on his side, although some would contend that it was really the other way round—defeated Anil in a legal battle that culminated in the Supreme Court verdict of 7 May 2010 (which has been detailed earlier in Chapter 1), one expected something more to happen. It did, indeed.

  It occurred through a series of dramatic events within weeks. The clock turned full circle: five years after Mukesh and Anil split the Reliance group between themselves in June 2005 and embarked on their bitter, messy and aggressive dispute on pricing and access to natural gas from the KG basin, the brothers decided to call a truce.

  On 23 May 2010, a Sunday afternoon, RIL and RNRL issued identical press statements a few days after both the Ambani brothers had independently met prime minister Manmohan Singh and other important politicians. The release stated that the old ‘non-compete’ agreement, which had prevented each brother from getting into the other’s territories, had been scrapped. Now both groups could encroach upon each other’s business lines: RIL could get into telecommunications, power, financial services and entertainment, while RNRL and the other companies in the Anil group could enter areas such as textiles, petrochemicals, and exploration and refining of oil and gas. The only caveat was that under the new ‘non-compete’ agreement, Mukesh would not set up gas-fired power generation plants till the end of March 2022, apart from captive units. The new and simpler non-compete agreement ‘will eliminate any room for further disputes between the groups … on the scope and interpretation of the non-compete obligations’, which would in turn bring about an ‘environment of harmony and collaboration between the groups’ headed by the two Ambani brothers.

  The news drove up the prices of the shares of both companies the following morning. Kokilaben was reportedly inundated with congratulatory messages from Union ministers. Among them were the then finance minister Pranab Mukherjee, the then road transport and highways minister Kamal Nath, the then corporate affairs minister Salman Khurshid, and the then civil aviation minister Prafu
l Patel. Mukherjee, an old acquaintance of Dhirubhai, was effusive about how the new agreement would not merely lead to ‘healthy competition’ but also have a ‘real positive impact on the corporate world’, and that ‘other companies will draw confidence from them as this would mean an end of the rivalry’ between the brothers.

  On 6 June 2010, the board of directors of Anil’s Reliance Communications approved a future sale of 26 per cent stake in the company at a premium price. This was along expected lines after the new non-compete deal was announced. The earlier agreement, which had a clause relating to the right of first refusal, had at one time effectively prevented the younger Ambani from effecting a merger with South African telecommunications group MTN (as discussed in Chapter 3). Under the new agreement, Anil was free to scout for a strategic investor in the telecom venture, something that he desperately needed to do, and fast. On 8 June, Anil dropped a defamation suit claiming Rs 10,000 crore as damages that he had filed against his elder brother in the high court at Mumbai. The suit had been filed in September 2008 just after Mukesh’s RIL had thwarted his attempt to tie up with MTN. Anil had alleged that Mukesh had defamed him in an interview to the New York Times (15 June 2008), which had been reproduced in two leading Indian newspapers. The NYT had quoted Mukesh claiming that what most distinguishes Reliance from its rivals is what [the family’s] friends and associates describe as his “intelligence agency”, a network of lobbyists and spies in New Delhi who they say collect data about the vulnerabilities of the powerful, about the minutiae of bureaucrats’ schedules, about the activities of their competitors.

  Mukesh said in the interview that such activities had been overseen by his brother before they split, and had since been expunged from his tranche of the company. ‘We de-merged all of that,’ Mukesh told the NYT.