GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  Reliance Natural Resources Limited issued a series of front-page advertisements in most leading Indian newspapers claiming that the government, especially the petroleum ministry, was favouring RIL and that its policies were causing huge losses to the exchequer. The advertising campaign is believed to have cost RNRL Rs 15 crore, or the equivalent of $3 million.

  The Bombay High Court judgement provoked strong reactions. The then Andhra Pradesh chief minister, late Y.S. Rajasekhara Reddy, said that the dispute over the supply of KG gas was not an issue that should be settled by the Ambani matriarch, that the Union government should instead prioritise who should get the gas (whether power plants, fertiliser manufacturers, or other industrial units) and at what price. The then secretary in the ministry of fertilisers, Atul Chaturvedi, wrote to R.S. Pandey, his counterpart in the petroleum ministry, that a family settlement should not ‘override the sovereign right of the government to formulate policies aimed at the larger public interest’.

  Petroleum minister Murli Deora then contended that the gas did not belong to either of the two Ambani brothers, but to the government. The minister would have been more accurate had he stated that the gas belonged to the people of India. The crucial question, therefore, was whether the government was indeed acting on behalf of the people of India as a custodian of national resources, or as a partisan participant. If indeed the gas belonged to the government and the contract between RIL and RNRL was less than favourable to the larger public interest, why had the government not cancelled the contract?

  While Mukesh maintained a stoic silence during most of these public debates, his senior executives kept pointing out that the gas deal between the brothers required ‘government approval’ and that this was mentioned in the family agreement. In fact, the family agreement had added that Mukesh would help Anil in whatever way he could to obtain these approvals. They maintained that it was Anil who was afflicted with ‘greed’ and wanted to earn huge profits by buying the gas at $2.34 per mBtu from Mukesh and then selling it in the open market for $4.20 per mBtu (the government-approved price). The underlying implication was that Anil was less than keen on setting up the Dadri power project and that little progress had been made in this regard. Sources close to Mukesh alleged that Anil was covertly interested in trading in gas and not in establishing a project to generate electricity. Those sympathetic to Anil responded that funds could not be raised from banks to set up the power project unless gas supplies were tied up. In September 2009, RIL’s head of exploration and gas business, P.M.S. Prasad, sought to refute all charges against his company, including allegations of ‘gold-plating’, which are discussed later in the book.

  The Supreme Court had to decide, among other things, whether the contract between RIL and RNRL was valid in terms of Indian contract laws, whether the family settlement that led to the reorganisation and division of RIL and the Reliance group’s assets was legally binding on the government and, most importantly, whether the price of gas should be $2.34 per mBtu or $4.20 per mBtu. The decision of the highest court of the land would go far beyond the contractual dispute between the two companies, and determine the fate and financial fortunes of several fertiliser and power companies, including the state-owned NTPC which was hopeful of using substantial quantities of gas from the KG basin at relatively inexpensive rates to generate electricity. India’s highest court also had to interpret the validity of a PSC between the government, which is the custodian of all natural resources in the country, and a private operator (RIL) that had been granted permission to extract that resource.

  On 20 July 2009, the Supreme Court stated that it would begin hearing the case from 1 September, but began only on 20 October that year. In between, on 11 October, after a visit to the holy shrine of Badrinath in the Himalayas, Anil made an offer to his brother to amicably resolve their differences. Mukesh responded by getting RIL to issue a formal statement which, while welcoming the move, pointed out that the dispute under litigation was not just a family dispute, and hoped that ‘overtures for rapprochement are in no way related to the ongoing hearing of the case’. The legal battle was about to begin in right earnest.

  There was high drama during the initial hearings. The three-judge bench of the Supreme Court was headed by the then Chief Justice of India, K.G. Balakrishnan, and included Justice R.V. Raveendran, who asked several probing questions of lawyers representing the Union government as well as RIL’s counsel Harish Salve. Suddenly, on 4 November, Justice Raveendran sprang a surprise by withdrawing from the case after disclosing that he was lately made aware of the fact that his daughter was employed with a Bengaluru-based firm called AZB Associates, which had acted as a consultant to RIL for global acquisitions. Even before the court hearings could commence, he had offered to opt out, saying that he held shares in both RIL and RNRL. But lawyers on both sides had urged him to continue, and Justice Raveendran had agreed. However, this time round, even though the lawyers made the same plea, the judge seemed to have made up his mind to recuse himself from the hearings. Justice Raveendran remarked: ‘I know my conscience is clear. But justice should not only be done, but also be seen to be done for upholding the respect and dignity of the institution.… I wish somebody would have brought it to my notice earlier. That is the tradition of this court.’

  On the same day, another judge of the Supreme Court, Justice Markandey Katju (who went on to become chairman of the Press Council of India), who was hearing another case that involved RIL and the government-owned Bharat Petroleum, too withdrew from that case citing his wife’s ownership of shares in RIL. Later, it was revealed that his wife had invested in two mutual fund schemes managed by the Anil Ambani-controlled Reliance Capital, and had no shares in RIL. The hearings on the RIL-RNRL case continued with the appointment of a new judge to the bench, Justice B. Sudershan Reddy.

  Less than a month earlier, on 9 September, while replying to RIL’s petition, RNRL had alleged that the Mukesh group was changing its position on the memorandum of understanding (MoU) drawn up as part of the settlement that had laid down specific rules for the de-merger of assets and businesses of the undivided Reliance group. A few days later, on 16 September, RNRL asked the court to implead the public sector NTPC as a party in the dispute because it believed its own interests coincided with those of NTPC. Two days later, the court was urged to dismiss the government’s petition. On 1 October, NTPC received a setback when the Supreme Court dismissed its appeal challenging the Bombay High Court order allowing RIL to amend its petition in a separate legal dispute with NTPC on the price of KG gas.

  On 6 October, challenging the Bombay High Court judgement, RIL sought to undermine RNRL’s claims to the gas on the ground that the latter had not been able to set up a power plant ready to receive gas. On 20 October, as the Supreme Court commenced hearings in the dispute, RIL’s lawyer Salve argued that the family agreement was not binding as it had not been shown to the board of directors of RIL. He added that RIL could not supply gas at $2.34 per mBtu as that would be tantamount to violating government policy. Even as the Supreme Court suggested arbitration proceedings as an option to resolve the dispute, RIL argued that the higher price of gas would help the government earn higher revenue.

  On 25 November, when it was the turn of RNRL to argue its position in the case, Anil Ambani made a sudden appearance in the Supreme Court even as his team of lawyers, led by Ram Jethmalani, MP, argued that the dispute could be resolved within the parameters of the family settlement. RNRL claimed that RIL was not correct in contending that gas supply was dependent on the Dadri project being set up. On 2 December, the government filed an affidavit in the Supreme Court seeking to protect the interests of NTPC, which was engaged, like RNRL, in a legal dispute with RIL on gas pricing. The government, represented by the solicitor-general of India, Gopal Subramaniam, claimed that different wings of the government, notably the petroleum and power ministries, were not in conflict with each other, and that the government did not favour one brother over the other. On 8 December,
RNRL filed a fresh affidavit arguing that there would be no loss to the government if KG gas was sold at $2.34 per mBtu instead of a price of $4.20 per mBtu and that the higher price decided by the EGoM would merely serve to increase RIL’s own profits.

  On 18 December 2009, the last day of the hearings in the Supreme Court, sparks flew as lawyers representing both RIL and RNRL made impassioned pleas before the bench of three judges. It was, however, solicitor-general Subramaniam who seemed to be the most agitated because, as he said, ‘the government had been perforce compelled to be present in the dispute and that we do not again want to be subject to such lateral attacks’. Reacting to RNRL’s lawyer Jethmalani describing Subramaniam’s submissions as a ‘mock fight’, the solicitor- general retorted that a ‘mockery’ had been sought to be made of the government’s position. He added: ‘I want to borrow an expression used by Mr [Harish] Salve [RIL’s lawyer] to say that this was [a] trial by ambush for the government. If [there is] any person who actually has reason to complain, it is the government of India.’

  Subramaniam said the government had ‘beaten down’ the price offered by RIL from $4.33 per mBtu to $4.20 per mBtu, to which RNRL’s counsel Mukul Rohatgi sarcastically remarked that the government had ‘beaten down’ the contractor’s price by only 13 cents. The solicitor-general remained unfazed and justified the price fixed by the EGoM:

  The EGoM looked into the formula of the contractor [RIL] and took a decision independent of the contractor…There is a lot of worry. So many facts, figures, prices, costs have been quoted here in interpretation of what was intended by the Empowered Group of Ministers. Price distribution of the EGoM cannot laterally be made the subject of this fight. Only we, the authors, have the right to interpret…

  The solicitor-general described the production sharing contract as a ‘novel instrument’ and urged the court to preserve its sanctity, adding that over 300 similar PSCs had been signed by the government. ‘Title to the natural gas under the PSC vests with the government and does not automatically pass to the contractor … the government is the sole owner of the gas. The contractor is only an agent.…A person asked to paint the Supreme Court building cannot claim to have 50 per cent share in the building,’ he argued, claiming that both sides had shown ‘disregard to the sovereignty of the government’. He concluded: ‘It is my property. I pay 100 per cent costs on my property. There may be allocations, understandings on my property. This is not just a case between persons A and B alone.’

  The Supreme Court then reserved its judgement on the dispute and said it would be delivered on the morning of 7 May 2010. It was truly Judgement Day for both the Ambani brothers as well as the government. On that day, when Anil Ambani, with a red tilak on his forehead, entered the court he seemed confident and sure of himself. When he left, he looked shattered. Many sympathised with him. His elder brother Mukesh was absent from the court; perhaps he did not wish to overreact in the way he did when he pumped his fist in the air each time Sachin Tendulkar smashed a boundary during an Indian Premier League cricket match for Mumbai Indians, a team he and his family own.

  Anil’s body language said it all that muggy morning as he walked past the row of television cameras and jostling journalists waiting impatiently outside the premises of the Supreme Court. He did not respond to any of the questions thrown at him. The fifty-one-year-old long-distance runner was always the underdog in the bitter battle for control of India’s natural gas resources. He had valiantly chosen to take on his elder sibling and, with him, the might of the government establishment. He would have to wait to fight another day.

  Although Mukesh, barely two years older than his estranged sibling, was conspicuous by his absence, his lawyers—led by Harish Salve and including Abhishek Manu Singhvi (who doubles up as an official spokesperson of the Indian National Congress party when he is not in his black robes)—and his top executives were predictably exultant. The three-judge bench of the Supreme Court led by the outgoing Chief Justice of India, K.G. Balakrishnan, had ruled in favour of the company Mukesh heads.

  Barely a few kilometres away, in Shastri Bhavan, a nondescript building housing various ministries and departments of the government of India, minister Murli Deora, not exactly in the pink of health, issued a terse statement while the top bureaucrat in the MoPNG, petroleum secretary S. Sundareshan, provided more detailed answers. The minister, who had been publicly accused by Anil of acting in a partisan manner and against national interests, merely said: ‘The gas belongs to the nation … not to any company or individual. The Supreme Court has upheld our stand.’

  It was hardly surprising that RIL’s shares zoomed while the value of the RNRL scrip, as also other companies in Anil’s group like Reliance Power, crashed on the stock exchanges that Friday afternoon. However, what minister Deora or his senior bureaucrats did not tell the media that day or thereafter was that the judgement of the apex court was more than just a victory for RIL, or the government. The text of the judgement, which ran into 268 pages, also contained a sharp indictment of the government’s policy of privatising control over the country’s natural resources. The battle, dubbed a modern- day Mahabharata, was not yet over. One episode had ended. Another was about to begin.

  The judgement highlighted crucial lacunae in the Indian government’s policies on utilisation of natural resources and ensuring energy security. Paragraph 87 of the majority judgement delivered by Chief Justice K.G. Balakrishnan and Justice P. Sathasivam (excluding Justice B. Sudershan Reddy) stated:

  It is relevant to note that the Constitution envisages exploration, extraction and supply of gas to be within the domain of government functions. It is the duty of the Union to make sure that these resources are used for the benefit of the citizens of the country. Due to shortage of funds and technical know-how, the government has privatized such activities through the mechanism provided under the PSC (production sharing contract). It would have been ideal for the PSUs (public sector undertakings) 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.

  One could quibble with a sentence in the paragraph quoted. It can be contended that the government allowed private companies to enter the oil and gas exploration and extraction business not on account of paucity of funds or inadequate knowhow. The money could have been raised and the technology bought by the profitable public sector companies, such as the ONGC and OIL, had the government really wanted this. More significant than the majority judgement was the observation by Justice B. Sudershan Reddy, who disagreed with the two other judges on the bench on a few points in the judgement. One of these was the issue of the ‘resource curse’ that afflicts India and other developing countries. This is what he said:

  A small portion of our population, over the past two decades, has been chanting incessantly for increased privatization of the material resources of the community, and some of them even doubt whether the goals of equality and social justice are capable of being addressed directly. They argue that economic growth will eventually trickle down and lift everyone up. For those at the bottom of the economic and social pyramid, it appears that the nation has forsaken those goals as unattainable at best and unworthy at worst. The neo-liberal agenda has increasingly eviscerated the state of stature and power, bringing vast benefits to the few, modest benefits for some, while leaving everybody else, the majority, behind… .

  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….History has repeatedly shown that a culture of uncontained greed along with uncontrolled
markets leads to disasters.…Historically, and all across the globe, predatory forms of capitalism seem to organize themselves, first and foremost, around the extractive industries that seek to exploit the vast, but exhaustible, natural resources. Water, forests, minerals and oil—they are all being privatized; and not being satisfied, the voices that speak for predatory capitalism seek more….

  As regards government policy, the penultimate paragraph of Justice

  B. Sudershan Reddy’s judgement observed:

  Before we part with the case, we consider it appropriate to observe and remind the GoI (government of India) that it is high time it frames a comprehensive policy/suitable legislation with regard to [the] energy security of India and supply of natural gas under production-sharing contracts.

  It was evident from the judgement that glaring gaps exist in India’s energy policy framework. To point out that the government has a legal right over India’s natural resources (including its natural gas) and that no private agreement, including the one signed between the two Ambani brothers and their mother in June 2005, can override such a sovereign right, is a no-brainer. There were more important questions that remained unanswered. Is the government, as custodian of the resources that belong to the people of India, acting in a way that benefits the majority? Or are its policies primarily aimed at promoting powerful business interests? How have the policies of economic liberalisation and privatisation degenerated into different forms of crony capitalism?

  The answers to some of these questions were embedded within the fine print of the order itself. The politics of the judgement were clear. The government had won. Mukesh was richer by a few thousand crore rupees and Anil apparently vanquished. However, as everyone grew obsessed with these ‘clear’ signals that emanated from the Supreme Court, the subtle signs went unnoticed. In fact, the 2:1 majority order was a win-win only for Indian politicians. The Supreme Court had upheld the government’s case on the grounds that policymakers have the right to decide the price, quantity, and tenure of supply of gas and also the industry sectors to which it is allotted. Any private agreement has to be interpreted within the ambit of government policy. In effect, only the politicians could decide how the gas would be sold and at what price. In one stroke, the apex court had given overriding powers to India’s policymakers to decide on every aspect relating to India’s natural resources. Thus, it turned back to an extent the trend of government policy of giving greater importance to the private sector. For both the Ambani brothers as well as the government, this was an all-important case which would lay down the future parameters of official policy and delineate the way in which the natural resources of the nation would be utilised and valued. As our story progresses, among other things, new light will be shown on these developments through insights provided by the late Subir Raha, chairman of ONGC, in his last-ever interview (before cancer consumed him).