7 May 2010

Role of Government all pervasive in Gas Pricing: Supreme Court in Ambani Brothers dispute

Holding that "in a constitutional democracy like ours, the national assets belong to the people" and "the Government holds such natural resources in trust. Legally, therefore, the Government owns such assets for the purposes of developing them in the interests of the people. In the present case, the Government owns the gas till it reaches its ultimate consumer". Therefore when the Government has prescribed a mechanism under the 'Production Sharing Contract', it "shall over-ride any other contractual obligation between the Contractor and any other party". Thus in the Supreme Court was concluded the feud between the Mukesh Ambani led Reliance Industries Limited and Anil Ambani led Reliance Natural Resources Ltd. on the issue of price of gas excavated from the KG Basin. 

By a 2:1 majority (of Chief Justice and Justice P. Sathasivam as against Justice B. Sudershan Reddy, who authored the minority decision) the Supreme Court in a decision delivered today has declared that the Memorandum of Understanding entered into between the two brothers could not bind the companies, which were owned by the shareholders and in any case the price at which gas could be sold by Reliance Industries Ltd. (which had obtained the tender for exploration at the KG Basin) was subject to the Production Sharing Agreement entered into by RIL with the Government of India in terms of which the Government could specify the price at which gas at had to be hold by RIL.

In the ultimate analysis, the Bench by majority concluded as under;

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 Court for necessary orders.
c) While renegotiating the terms of GSMA, the following must be kept in mind:
1) The terms of the PSC shall have an over-riding effect;
2) The parties cannot violate the policy of the Government in the form of the Gas Utilization Policy and national interests;
3) The parties should take into account the MoU, even though it is not legally binding, it is a commitment which reflects the good interests of both the parties;
d) The parties must restrict their negotiations within the conditions of the Government policy, as reflected inter alia by the Gas Utilization Policy and EGOM decisions.
Another interesting facet to be noted in the majority decision is the invocation of 'doctrine of public trust' by the Supreme Court to give the Government an upper hand in such matters wherein national assets are involved. In this regard the Supreme Court inter alia observed as under;
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' is included in Entry 53 of List I. Thus, the legislative history and the definition of 'petroleum', 'petroleum products' and 'mineral oil resources' contained in various legislations and books and the national interest involved in the equitable distribution of natural gas amongst the States - all these factors lead to the inescapable conclusion that "natural gas" in raw and liquefied form is petroleum product and part of mineral oil resource, which needs to be regulated by the Union.
With relation to the Public Trust Doctrine, this court in M.C. Mehta v. Kamal Nath (1997) 1 SCC 388 held: 
17. The Public Trust Doctrine primarily rests on the principle that certain resources like air, sea, waters and the forests have such a great importance to the people as a whole that it would be wholly unjustified to make them a subject of private ownership. The said resources being a gift of nature. They should be made freely available to everyone irrespective of the status in life. 
The doctrine enjoins upon the Government to protect the resources for the enjoyment of the general public rather than to permit then- use for private ownership or commercial purposes.
27. Our legal system-based on English Common Law - includes the public trust doctrine as part of its jurisprudence. The State is the trustee of all natural resources which are by nature meant for public use and enjoyment. Public at large is beneficiary of the seashore, running waters, airs, forests and ecologically fragile lands. The State as a trustee is under a legal duty to protect the natural resources. These resources meant for public use cannot be converted into private ownership. This doctrine is part of Indian law and finds application in the present case as well. It is thus the duty of the Government to provide complete protection to the natural resources as a trustee of the people at large. 
86) RIL’s right of distribution is based on the PSC, which itself is derived from the power of the Government under the constitutional provisions. Thus the very basis of RIL’s mandate is the constitutional concepts that have been discussed by now, including Article 297, Articles 14 and 39(b) and the Public Trust Doctrine. Therefore, it would be beyond the power of RIL to do something which even the Government is not allowed to do. The transactions between RIL and RNRL are subject to the over-riding role 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

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