RELIANCE NATURAL RESOURCES LTD v. RELIANCE INDUSTRIES LTD

CIT v Enron Oil and Gas India Ltd. (2008) 305 ITR 75; Kumari Shrilekha Vidyarthi v. State of UP. (1991) 1 SCC 212; Mahabir Auto Stores v. Indian Oil Corpn., (1990) 3 SCC 752; UC of India v Consumer Education & Research Center. (1995) 5 SCC 482; Rai Sahab Ram Jawaya Kapur & Ors. v. State of Punjab, 1995(2) SCR 2; State of Madhya Pradesh v. Thakur Bharat Singh, 1967 (2) SCR 454; Poonam Verma v. DOA. (2007) 13 SCC 154; Union of India & Ors. v. Asian Food Industries, (2006) 13 SCC 542; Kusumam Hotels (P) Ltd. v. Kera/a SEB. (2008) 13 SCC 213; NTPC Ltd. v. G Reshmi Constructions, Builders & Contractors. (2004) 2 SCC 663; Madhav Rao Jivaji Rao Scindia v Union of India (1971) 1 SCC 85; J.K. Industries Ltd. v. Chief Inspector of Factories & Boilers (1966) 6 SCC 665; Indian Bank v .Godhara Nagrik Coop. Credit Society Ltd. (2008) 12 SCC 541; Union of India H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 725 v.

United India Insurance Co. Ltd. (1997) 8 SCC 683; A Assistant Commissioner, Assessment-II, Bangalore & Ors. v. Mis. Velliappa Textiles Ltd. & Ors. AIR 2004 SC 86; L/C v. Escorts Ltd (1989) 1 SCC 264; Mohta Alloy & Steel Works v Mohta Finance & Leasing Co. Ltd. (1997) 89 Comp. Cases 227; S.K. Gupta v. K.P. Jain (1979) 3 SCC 54; Miheer H. B Mafatlal v. Mafatlal Industries. (1997) 1 SCC 579; Meghal Homes (P) Ltd. v. Shree Niwas Gimi K.K. Samiti & Ors. (2007) 7 SCC 753; R.D. Shetty v. International Airports Authority of India (1979) 3 SCC 489; F.C.I. v. Kamdhenu Cattle Feed Industries. AIR 1993 SC 1601; State of Tamil Nadu v. L. Abu c Kavur Bai 1984 (1) SCC 515; Safar Jung Sugar Mills Ltd. v. State of Mysore. 1972 (1) SCC 23 and Association of Natural Gas & Ors. v. Union of India & Ors. 2004 (4) SCC 489, referred to. Lennards Carrying Co. v. Asiatic Petroleum Co. Ltd. D 2924-25 All ER 280; Bou/ting and Anr. v. Association of Cinematography, Television and Allied Technicians (1963) 2 QB 606; R. v.

McDonnell (1966) 1 All ER 193; Tesco Super Markets v. Nattress (1971) UKHL 1; (1972) AC 153; Meridian Global v. Securities Commission (1995) 3 All ER E 918 and H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons (1956) 3 All ER 624, referred to. Handbook of Natural Gas Technology and Business, ed. Parag Diwan and Ashutosh Karnatak, Pentagon Energy Press (2009); Integrated Energy Policy, Report of the Expert F Committee, Planning Commission of India, Got (2006); MoPNG Basic Statistics (2008-2009); MoPNG Basic Statistics (2008-2009) citing BP Statistical Review of World Energy, June 2008 & OPEC Annual Statistical Bulletin; Integrated Energy Policy: Report of the Expert Committee, G Planning Commission of India, GO/ (2006); The Peak of the Oil Age, Energy Policy Vol. 38 (2010); Basic Statistics on Indian Petroleum & Natural Gas, 2008-2009, MoPNG Gol, referred to. H 726 SUPREME COURT REPORTS [2010] 5 S.C.R. A 0 Joseph Stiglitz, Making Globalization Work: The Next Steps to Global Justice, p.

8, Allen Lane (2006); Richard A. Posner: "A Failure of Capitalism: The Crisis of '08 and the· Desc~nt Into Depression': p. xi. Harvard University Press (2009); Joseph E. Stiglitz, Making Natural Resources into a B Blessing rather than a Curse, in "Covering Oil" Ed. Svetlana Tsalik and Anya Schiffrin, Open. Society Institute (2005), p. 13-14; Terry Lynn Karl "Understanding the Resource Curse" in Covering Oil (Open Society Initiative, 2005); Government by Contract.: Outsourcing· And American Democracy, Ed. c Jody Freeman and American Democracy; Cass Sunstein: Free Markets and Social Justice (Oxford University Press, 1997); Robert J. Michaels, "Natural Gas Markets and Regulation", in the Concise Encylcopedia of Economics, 2nd Ed.; Stephen Breyer: Regulation and its Reform, Harvard University Press (1982); Paul Stephen Dempsey: Deregulation and Reregulation - Policy, Politics and Economics in Handbook of Regulation and Administrative Law ed.

David H. Rosenbloom & Richard D. Schwartz, New York (1994); Colin Scott: The Juridification of Relations in the UK Utility Sector in Commercial Regulation & Judicial E Review ed. Julia Black, Peter Muchlinski & Paul Walker, Hart (1998); Cosmo Graham: Regulating Public Utilities - A Constitutional Approach; UNCTAD: Competition in Energy Markets TDIB/COM.21CLP/60 GE. 07-50741 (2007); Gas Regulation: in 35 jurisdictions, Global Competition Review (2006); Energy lnformatioh Administration, Dept. of Energy, U.S. Government; Adam R. Brandt: Testing Hubbert (2006); Aleklett, Hook, Jakobsson, Lardefli, Snowden & Soderberger; Ernest E. Smith & John Dzienkowski, "A Fifty Year Perspective on World Petroleum Arrangements" 24 TEX . • INT'L L. J. 13 (1989); Oswald Whitman Knauth: The Policy of United States Towards Industrial Monopoly, Bibliolife (2010); The great mischiefs 3 to 6 led to nationalization of the oil industry in Mexico, in 1938.

They also led to the first modern declaration that all natural resources belong to the F G H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 727 people as a nation and to be used for national development A and substantively informed the progress in international law, Jed by former colonies, that the people in those lands are the rightful owners and should benefits from the use of such resources; "Alternative Arrangements for Petroleum Development: A Guide for Government Policy-makers and B Negotiators" UN Document No. ST/CTC/43, Sales No. E.82.11.A.22 and UN General Assembly Resolution 523 (vi) of January, 1952, 626 (vii) of December, 1952, 1314 (xiii) of December, 1958, 1515 (xv) of December, 1960 - all specifically referred in Resolution 1803 on Permanent c Sovereignty, referred to.

2.

Article 297 of the Constitution is a special provision which leads to the conclusion that the powers granted to the Union to hold the resources for purposes of the Union casts special obligations over and above D what are normally affixed with respect of all other resources that the Union may be permitted to act upon pursuant to Article 298. Under Article 297 of the Constitution, the Union of India can indeed enter into contracts for the identification, development and E extraction of resources in the geograpt1ic zones specified therein. However, such activities can only be premised on the key therein to unlock those resources: for the purposes of the Union. [Para 96) [888-B-C]

2.

In the light of the public trust elements so F intrinsic to resources under the sea-bed, and the special nature of Article 297, the implications of natural gas for India's energy security, and the imperatives of national including the concepts of egalitarianism development - and promotion of inter-regional parity, the Union of India G cannot enter into a contract that permits extraction of resources in a manner that would abrogate its permanent sovereignty over such resources. It is not just a matter of mere textual provisions in a contract or a statute. It is a matter of Constitutional necessity. With respect to the H 728 SUPREME COURT REPORTS [2010] 5 S.C.R. A natural resources extracted and exploited from the geographic zones specified in Article 297 the Union may not: (1) transfer title of those resources after their extraction unless the Union receives just and proper compensation for "the same; (2) allow a situation to B develop wherein the various users in different sectors could potentially be deprived of access to such resources; (3) allow the extraction of such resources without a clear policy statement of conservation, which takes into account total domestic availability, the requisite c balancing of current needs with those of future generations, and also India's security requirements; (4) allow the extraction and distribution without periodic evaluation of the current distribution and making an assessment of how greater equity can be achieved, as between sectors and also between regions; (5) allow a contractor or any other agency to extract and distribute the resources without the explicit permission of the Union of India, which permission can be granted only pursuant to a rationally framed utilization policy; and (6) no end user may be given any guarantee for continued access E and of use beyond a period to be specified by the 0 Government. [Para 99) [889-B-G; 890-A] Joseph L. Sax, Defending the Environment: A Strategy for Citizen Action (1971) and Peter H. Sand Sovereignty F Bounded: Public Trusteeship for Common Pool Resources; Turnipseed, Roady, Sagarin & Crowder: The Silver Anniversary of the United States Exclusive Economic Zone - Twenty Five Years of Ocean Use and Abuse, and the Possibility of a Blue Wtare Public Trust Doctrine., Energy G Law Quarterly Vol. 36:1 (2009), referred to.

3.1. It is clear that a wide variety of instruments have come to be called Production Sharing Contracts and there is no specific concordance between that title and what is actually shared pursuant to a PSC. In the light of H RELIANCE NATURAL RESOURCEs<J'L TD. v. RELIANCE INDUSTRIES LTD. 729 that discussion and the general acceptance that A revenues are also shared in the context of Production Sharing Contracts, the insistence of RNRL that only production i.e., physical volume of gas can be shared under any production sharing contract may have to be held to be unsustainable. [Para 103] [890-H; 891-A-B] B

3.2. One of the bigger sources of confusion has been the manner in which the word Petroleum has been used in the specific PSC under consideration. The word Petroleum, referring to crude oil or natural gas as the case may be, is used in two senses in different parts of the C PSC: as a physical product and also in terms of the monetized value. However, when the word Petroleum has been used in conjunction with the words Cost and Profit, the definitions in this PSC clearly indicate that reference is to the monetized value of the physical product i.e., the D units of the physical quantity multiplied by the sale price at which the physical quantity is sold at. Article 1.28 of the PSC defines "Cost Petroleum" to mean "the portion of total value of the Crude Oil, Condensate and Natural Gas produced and saved from the Contract Area which E the Contractor is entitled to take in a particular period, for the recovery of Contract Costs as provided in Article 15". Article 1.77 of the PSC defines "Profit Petroleum" to mean "the total value of Crude Oil, Condensate and Natural Gas produced and saved from the Contract Area in a F particular period, as reduced by Cost Petroleum and calculated as 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 contr~ctor is only entitled to cost petroleum and share of Profit Pe~roleum G 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. [Para 104] [891-C-G]

3.

In some previous PSC's the word volume had been used instead of value, but that has been specifically H 730 SUPREME COURT REPORTS [2010] 5 S.C.R. A 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 laid on the floor of the Parliament. This implies that the Government is of the B 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, such Contracts c should be very carefully examined and interpreted so as to not disturb the most obvious meanings ascribable. The two words in question here are "volume" and "value," which need to be appreciated. The word "volume" when used in scientific contexts would normally mean physical dimensions on three coordinate axes; in business and industrial parlance it is also used to reflect the total quantity of some physical produce. The word "value", on the other hand, implicates the meaning of both intrinsic capacity to provide some utility, and also the value derived in the context of exchange in the market place. E The word "value" and the phrase "total value" when used in the context of commerce would normally only reflect the monetized sum that is derived by multiplying the number of units of a physical product with the sale price. [Paras 105, 106] [891-H; 892-A-F] 0 . 3.

In as much as the words "volume" and "value" have different connotations and meanings, though occasionally they may have some overlap, the fact that one was replaced by the other implies that the meaning G ascribable in 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 F H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 731 at a "price. " The words 'produced' and 'saved' are first A 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 B 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 c 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 .concluded that the phrase D "produced and saved" in the PSC encompasses the activity of sale of natural gas. Consequently, the phrases "Total Value", "Cost Petroleum" and "Profit Petroleum" can only be interpreted as having been used to denote the monetary value realized· after the sale of naturai gas at the delivery point. [Para 107] [893-E-H; 894-A-C] E

3.

The change in the wording clearly implies that under the PSC by making the "value" of the natural gas produced, saved and sold as what is to be shared, the intention of the Government was to ensure that the "volume" i.e., the physical quantities remain outside the purview of what is to be shared between the Contractor · and the Government. Consequently, under this PSC, RIL has no rights whatsoever to take physical quantities/ volume of natural gas as a· part of Profit Petroleum or G Cost Petroleum, in as much as the contractor's right to take anything under the PSC can only be from the total value i.e., total revenue received from sale of natural gas. [Para 108] [894-D-E] F P. Ramanatha Aiyar's "Advanced Law Lexicon" (3rd Ed. H 732 SUPREME COURT REPORTS (2010] 5 S.C.R. A .. 2005) and Black's Law Dictionary, referred to. C · 4,1,_ The title pursuant to Article 27.1 of the PSC can pass from the sovereign owner, the people of India, at the . Deliv.ery· Point upon a sale, and not as a matter of offset again!)t 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% ()f 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. If the total volume of natural gas that is produced over the life of the reservoir is very little or not sufficient and the market prices are low, the Contractor would risk not recovering its investments. D Sale of Petroleum, is an integral part of Petroleum Operations and hence selling. of Petroleum is an obligation of the Contractor. The question of an automatic offset of incurred expenditures to effectuate an automatic transfer of title is not contemplated in this PSC at all. The transfer of title can be only to entities within a class of buyers specified by a utilization policy. [Para 111) [895- F-H; 896-A-B] E F G

4.2. In as much as title passes only upon sale at the Del, ivery Point, the true owner, the people of India acting through the Union of India have a sovereign right, that is tempered by public law, in determining the manner in which that sale is effectuated. Public resources cannot be distributed or disposed off in an arbitrary manner. [Para 112) [896-C-D]

5.1. The sale at the Delivery Point takes place when the people of India are still the owners of the natural gas and consequently they have the responsibility of ensuring that they exercise their permanent sovereignty, through their elected government, in order to achieve a H ·-- RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 733 broad set of goals that constitute national development. A While revenue generation is one part of those objectives, that cannot be the only objective of India. Timely utilization, by users spread across many sectors and acr~ss regions as the network of pipelines spreads and conservation are all necessary objectives to be kept in B mind. The fundamental rationale of the PSC is "the overall interests of India" and the obligation of the Contractor is to always be mindful of the rights and interests of India. [Para 114) [896-G-H; 897-A-B]

5.2. Article 21.1 of the PSC makes it very clear that C the sales of Natural Gas have to be in accordance with a Government Utilisation Policy and to the Indian Domestic Market. [Para 1,15) [897-B-C]

5.3. Article 21.1 clearly contemplates that the pool of D eligible buyers of natural gas extends to the whole of Indian domestic market. It doe~ not speak of RIL having a right to unilaterally decide who to sell to. Clearly, under the provisions of Article 21.1 in the PSC, the Board Room of RIL or its internal divisions do not constitute the Indian domestic market. That phrase contemplates the entire, E class of eligible buyers in India. Further, the said Article 21.1 proceeds to state that all proposals of the Contractor for production, which includes the activity of selling, shall take into account Government's utilization policy. It does not say that the Contractor take into account a F government utilization policy only if there is one. It mandates that the extraction and sale can only be in the context of a utilization policy. Without a utilization policy that satisfies the conditions of Article 297 of our Constitution, not even a cubic centimeter of that natural G gas can be sold, let alone the many millions of cubic metres of natural gas that RNRL claims vested in it as a matter of contractual right. Consequently, it is held that under the PSC, unless the Government actually sets out a policy regarding utilization of the natural gas produced, H 734 SUPREME COURT REPORTS [2010] 5 S.C.R. A it cannot be committed or sold to anyone. The freedom to market can only be exercised subject to the utilization policy of the Gol. [Paras 116, 117, 118] [897-E-G; 898-A C]

6.1. The Initial Development Plan (IDP) was only a B proposal as to who could be the potential users. The proposal also specified that there could be other users, especially those who have already started units that needed. natural gas and were stranded. The MoU and the extent of natural gas that RNRL is demanding, completely C denies the rights of those users to a fair access. Over and above that, under the PSC the right to effectuate a utilization policy only vests with the Got. Indeed, it cannot be any other way. The MC of the PSC is not the Got to be able to effectuate decisions which would have the D ramifications of policy, especially over a scarce resource with the kind of implications across the constitutional spectrum. 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 E did not go through then 40 MMSCMD) and the Option V()lumes of 40% of all the gas to be ever produced by RIL under any contract with the Got. The notion that two nominees of the Got 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. [Paras 119, 120] [899-D-H; 899-A-B] F

6.2. The IDP itself was proposed way back in the year 2004 and the production started only in 2009. The fact that G 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 H have as well taken place. There would have been no way RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 735 for the Gol to know who would be the potential users, A what are the needs of the nation, inequities between regions, how the network of pipeline would develop - those and many other such factors play a role in determining the policy. In such circumstances, one cannot imagine how the Gol could have framed a B Utilisation Policy with respect to inter-sectoral needs, the requirements arising from strategic considerations or some other necessary factor that would be needed to be taken into consideration so many years ahead of actual production. [Para 121] [899-C-F] c

7.1. It is not uncommon for government agents to remain silent, even though the instruments under which private parties get rights to exploit natural resources provide otherwise and impose restrictions that are being flouted. This happens many a times, and for obvious D reasons. That cannot become the basis for evisceration of policy making rights of the Gol. And in this case, it involves a scarce resource in such massive quantity, that is almost 50% of what had been available throughout the country for use by all the other users in the previous E decade, that silence by officials of Gol cannot and ought not to be given any weight at all. [Para 122] [900-B-D]

7.2. 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 F 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 G 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. [~ara 124] [900-F-H; 901-A] H 736 SUPREME COURT REPORTS [2010] 5 S.C.R. A Emperor v. Sibnath Banerjee & Ors. AIR 1943 FC 75, distinguished.

8.1. In a lengthy letter to Minister of Fertilisers and Chemicals written by a Senior executive of RNRL in June 2007, it was stated that a number of factors enter into B price determination, including spot, length of supply, quantity, delivery point, price floor, and that even end use must be tal<en into account. Obviously this set of factors is not all inclusive. In a seller's market i.e., where natural gas is in acute shortage, the options given to a buyer can C have a huge bearing on the price. The parameters between NTPC terms and RNRL are of a significantly different order. First, the onerous "take or pay" clause is a part of the NTPC contract but not the gas supply agreements with RNRL. Secondly, NTPC did not get the D option to get quantities of natural gas that were promised to some one else, in the event that contract failed. Nor did NTPC get the right to receive 40% of all future gas supplies that were likely to be produced from any gas fields of RIL. Nor was the price for NTPC fixed in the E confines of a Board room. Moreover, when the MoU was executed, a few years later the prices of natural gas all over the world had risen considerably. If an international tender were floated at that point of time, it would defy logic for RIL to bid at such a low price level. [Para 126] [901-E-H; 902-A-B] F

8.2. The terms of Article 21.6 et. seq. are clear. The first one is a command that all the natural gas produced from KG-06 is to be sold at "arms length sales price", per Article 21.6.1. There is a reason for such a requirement. G Historically, oil companies and sovereigns have bickered over the posted prices and joint off take agreements through which the real value realized is hidden from the sovereign. The requirements of arms length prices and arms length sales are to ensure that the sovereign H receives a fair share of the revenues. However, it may not RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 737 be possible to determine true arms length prices in all A situations, because a market may not have developed properly. [Para 127) [902-C-E]

8.3. 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 8 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 C 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) D have to be read together. Article 21.6.2 (b) provides for a situation in which natural gas is sold to nominees of Gol, - in which case the Got would know the actual price. RNRL is taking a clause. that is provided to protect the Gal, in the event that Gol is unable to determine whether it can E assure to itself that the Contractor has sold or is selling at the stated price and conflating it to a right of RIL. [Para 128] [902-F-H; 903-A]

8.4. With regard to refusal of Gol to approve the proposed sale price on parity with the NTPC bids, it is · F noted that RNRL has not separately challenged it. The rejection was precisely on the ground that it is not a competitive arms length price between two unrelated parties, and was justified. At any rate as there is no provision for sharing physical quantities, the question of G Government fixing the price for its share of gas does not arise. [Para 129] [903-B-C]

The Empowered Group of Ministers framed a utilization policy and also approved the price formula/ H 738 • SUPREME COURT REPOR1TS [2010] 5 S.C.R. A basis submitted by RIL. It was constituted pursuant to Business Rules framed under Article 77(3) and its decisions are treated as the decisions of the Cabinet itself. It is a policy decision of the Government and has force of law since the field is not occupied by any legislation B made by the Parliament. It is needless to state that under Article 73 of the Constitution the powers of the Union executive do extend to matters upon which the Parliament is competent to legislate and are not confined to matters over which the legislation has been Rassed c already. There is no need to dilate further on this issue since there is no independent challenge questioning the validity of EGOM decisions. The collateral attack leveled against EGOM decision cannot be entertained notwithstanding the serious allegations of mala tides made against some Ministries during the course of hearing of this matter. The Government did not surrender its rights under PSC to fix the price by way of approval. - Nor do the decisions of EGOM run counter/to any of the covenants of PSC. The contention that no policy decision could have been taken by the Government E retrospectively effecting the contractual rights needs no further consideration for the simple reason that the decision of EGOM does not run counter to the contract. (Para 130] (903-D-H; 904-A-B] 0 F

1.0.1. In this case, no definitive agreement for gas supply was placed before the shareholders and indeed such an agreement was not even promised or stated to be possible. No sensible person, exercising judgment from within the sphere of "commercial wisdom", could G have arrived at the conclusion that the State in India could abrogate its responsibilities to frame policies for utilization and pricing in the context of production and distribution of an extremely scarce and a vital natural resource and that in the context of such policies supply of gas between RIL and RNRL could not have been ·H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 739 interrupted or abrogated. Consequently, if Clause 19 of A the Scheme were to be read as the imposition of the burden upon RIL to supply natural gas, irrespective of governmental policies with respect to utilization and pricing of natural gas, then it would have to be struck down as a nullity. [Para 134] [905-E-H; 906-A] B

10.2. Clause 19 of the Scheme makes a very important distinction between agreements - which are more concrete - and arrangements - which are amorphous and not certain. The Scheme implicitly contemplated a situation in which the arrangements for C supply of gas may not occur or function to the full extent as desired. Governmental approvals and governmental policies are set in the context of national welfare and constitutional imperatives, and they cannot be said to be within the control of any particular person or company. D It does not mean that the Scheme with respect to the Gas Based Energy Business, which is now RNRL, has ,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 Gol, no shareholder who was not nai've would, could or should have relied on the certitude of natural gas supply from R.IL 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 Cl~use 19 contemplates a complex set of mechanisms F E G H 740 SUPREME COURT REPORTS [2010] 5 S.C.R. A and would involve many broad aspects, with a multitude of smaller parts, that may or may not work, especially because of changed circumstances. Hence, the phrase "suitable arrangements" has to be treated as being amorphous, requiring flexibility, involving uncertainty and 8 even the potential that the results sought may not be achieved or realized. [Para 135] (906-B-H]

10.3. In the Explanatory Statement to the Scheme, while one of the purposes of RNRL as stated in its Memorandum of Association is said to be dealing in the C business of supply of gas, it is only a part of .the total business of buying, selling and distributing a wide spectrum of fuels, with Natural Gas' being just -0ne of them; moreover, on perusal of the second objective of the Memorandum of Asseciation, it is clear that an equally o important purpose of RNRL is to "carry on, manage, supervise and control the business of transmitting, manufacturing, supplying, generating, distributing and dealing in electricity and all forms of energy and power generated by any .. source, whether nuclear, steam, hydro, E or tidal, water, wind, solar, hydrocarbon fuel, 11atural gas or any other form kind or descr~ption. " Consequently one fails to see how RNRL can claim that it was set up only to obtain natural gas from RIL and then to trade V'lith it within the Anil D. Ambani (ADA) Group, or that any one F who reads the Scheme can understand it in that manner. [Para 137] [907 -C-E]

10.4. The arguments made by RNRL that it has not been able to set up the mega gas based power plant at Dadri because it did not get bankable agreements from G RIL are unpersuasive. First and foremost, it woula seem extremely unlikely that bankers do not understand that there are always supply risks associated with natural gas in a country like India, whether that be on account of Gol's policies or otherwise. It is also observed that others H have started gas based energy generation plants and RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 741 they have faced equally serious uncertainties, if not more. A Furthermore, this Court has not been given one single document that shows denial of financing on account of lack of definitive natural gas supplies. Though significant amounts of monies have been raised, both here in India and abroad and yet admittedly not even a brick has been B laid at Dadri for the power project for which natural gas was first sought and RNRL claims its rights begin from. 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 c 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. 0 There is no reason to conflate that general condition which affects everyone in the Indian economy, to an issue of workability of the Scheme itself. [Paras 138, 139] [907-F-H; 191~A-D] In the Estate of Skinner, (1958) 1 W.L.R. 1043, referred E to.

11.1. It is absolutely clear that the MoU was executed in the private domain, with the help and aid of a lawyer and then marked confidential. Further, the individuals, from all indications have only executed it in their F individual capacity and it was not purported to be in exercise of their positions in RIL or any other company of the Reliance Group. It is also very clear that the MoU itself recognizes that the reorganization that the promoters sought would have to be routed through the G Board. The promoters also had the right to apply for a Scheme of Rearrangement under Section 391 of the Companies Act, 1956, in which case the mod-e o1 shareholder approvals and the .classes formed would have been entirely different. The MoU is an agreement H 742 SUPREME COURT REPORTS [201 O] 5 S.C. R. · A between three promoters, and the Scheme is between two million shareholders, all of the same equity class and hence the MoU cannot now be imported into the Scheme. Otherwise the promoters who under the Scheme were the same as any one else would now become special, thereby negating the very concept of class of members with similar interests voting on a proposal .for reorganization. [Para 1401. [908-E-H; 909-A] B issues concerning dealing with various

11.2. The minutes of the meetings of the Board of RIL C reorganization do not reveal anywhere whether the Board as a collective body ever took note of and approved the MoU. This is not a mere technicality. There is a certain legal sanctity associated with it, in the first place, in the form of presumptions that flow from Sections D 193, 194 and 195 of the Companies Act, 1956 that they are an accurate record of the proceedings. The collective decision making, at a conjoint sitting allows for exchange of ideas. The idea of the Board working as a collective is also 'about the process of sharing of views and arriving E at collective decisions to protect and enhance the interests of all the shareholders. And in .the very first meeting, albeit on the same day that the MoU was announced, the various Directors of RIL after thanking Smt. Kokilaben (KDA), quite effectively severed any F umbilical cord that the eventual Scheme might have had with the MoU, when they asserted that any reorganization can only be premised on protection of the value of all the shareholders. There is not even a whisper of protection of a broader class of shareholders in the MoU. This is not G some mere technicality; but a fundamental philosophical and attitudinal approach with regard to arrival at the decision to reorganize the businesses. 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 H .. RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 743 broader understanding of company law from the days of A Settlement Companies 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 8 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. C [Para 141] [909-B-G; 910-A-B],

11.3. 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 .· D and ownership over them was but one. It is also equally obvious that what has been revealed is but a portion of the total document. If such a document were to be filed as a proposal for arrangement, it would have to be thrown out at the very inception. The differences in details of the proposals for demerger as contained in the MoU, when contrasted with that of the Scheme, are staggering. Where no reasons for reorganization are adduced in the MoU, apart from a statement that having settled all the other family and other business related issues the best way forward would be a reorganization, it is the Scheme as framed and approved by the Board which provides the justifications. The Scheme specifies that each of the businesses carry different sets of risks and prospects, and that they could attract different sets of investors, that a focused management is needed to G enhance the prospects of each business, etc. Finally, it is the Board which recommended the Scheme to the shareholders saying that it would benefit them. [Para 142] [911-B-F] E F 744 SUPREME COURT REPORTS [201 OJ 5 S.C.R. A B

11.4. The fact that the Board asked that an analysis of the pros and cons of such a reorganization be undertaken by the Corporate Governance (CG) Committee of Independent Directors, along with the command that they propose a scheme of reorganization if any, with the help of professionals to study the various businesses and the implications with respect to statutory and legal issues, is prima Jacie evidence of independence and application of the iriind. Further, from the record it can be gleaned that the CG Committee with the help of C professionals framed an outline of a Scheme, executed by representatives of both the Mukesh D. Ambai (MDA) and the Anil D. Ambani (ADA) Group and on that count too, it would have to be held that the Scheme was something more and fundamentally different from the D MoU. [Para 143) [910-F-H; 911-A]

11.5. If MoU is considered, it actually runs counter to the entire claim of RNRL that it formed the basis of the Scheme regarding gas supply also in as much as the Board approved a Scheme in which the only provision E with respect to gas supply was for a plan to set some uncrystallised "suitable arrangements" in place. If the Board had agreed to the commercial terms of agreement, as contained in the gas supply section of the MoU, then it would have been mandatory upon them to reveal the F 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 one fails to see how prospective agreements involving such huge value, in G 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. [Para 144) [911-B-F] H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 745

11.6. In as much as the terms and conditions of gas A supply, as specified in the MoU, were not specifically informed to all the shareholders and stakeholders, includin~ in this case the Gol (as a party to the PSC), one simply fail~ to see how the MoU can be read into the Scheme itself. It doesn't matter whether one calls MoU B the guiding light or a tool for interpretation or a foundation - the sheer fact that the terms of gas supply contained in the MoU were withheld from the shareholders implies that it cannot now be imported into the Scheme. The argument that contracts are entered into c all the time, and are treated as day to day affairs for the management and the Board, fails at the point of division of a company. [Para 145] [911-G-H; 912-A-B]

7. The whole purpose of Sectio.n 293 of the Companies Act which prohibits the Board from hiving off D an undertaking without shareholders approvals, is to prevent such transfers being effecuated on a permanent basis without the knowledge of the shareholders. The very essence of the requirement that all material facts be disclosed would have been decimated. Consequently, E the Scheme as propounded by the Board, placed before and approved by shareholders and stakeholders and sanctioned by the court is completely different from the MoU. The MoU may have been the starting point. The end point is significantly, substantially and materially different F from it and it cannot now be brought back in the guise of interpretation. [Para 145] [912-C-E] Palmer's Company Law part 1.103, 1.104, page 1011, 25th Edn. Vol.1, referred to.

The entire gas supply section of the MoU deals primarily with the isst.1e of quantum and by reference to NTPC terms, price and tenure, as has been repeatedly contended by RNRL itself. To now turn around and claim that the governmental approvals mentioned in that H G 746 SUPREME COURT REPORTS [2010] 5 S.C.R. B A section refer to RIL's business of oil production and exploration is untenable. This is further evidenced t.y at least two other factors. The first one relates to r{NRL's total failure to rebut the inferences drpwn from the fact that ADA Group and RNRL's executiv~s had accepted that NTPC draft agreements from May, 2005 were to be the basis for gas supply agreements and those draft NTPC agreements specifically provided for governmental approvals. The second factor, equally striking, is that in the letter dat~d February 28, 2006 in which RNRL strongly c protested the GSMA & GSPA, RNRL did not protest the terms that governmental approvals were required. In the annexure to the said letter, in which differences between the MoU and the gas supply agreements were listed in a tabular form, in item 16 the protest was that with respect to governmental agreements it was not provided that the MDA Group would act in "utmost good faith" and "make best endeavours". Many more of such acts of omission and commission which would demonstrate unequivocally that RNRL and ADA Group always knew that governmental approvals were necessary could be E adduced. It is not necessary to go into all those details. The ADA Group and subsequently RNRL was always aware that under the PSC the Gol had a right to frame policy and approve price formula/basis applicable to the sale of all gas produced from KG-D6. [Para 147] [914-B- 0 F HJ

13.1. Doctrine of Identification as developed by the courts is typically applicable in criminal and tortious liability cases. Even assuming that it is applicable in G 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 portion 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 H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 747 the MoU be mediated through the Board in the form of a A reorganization, and the Board thereafter acted independently. This is amply evidenced by the Board insisting that governmental approvals were necessary for gas supply agreements, which RNRL claims were not a part of the MoU. If that be the case, for the sake of B argument, then it only strengthens the finding that the Board acted independently and provided that "suitable arrangements" needed to be put in place with respect to gas supply. Moreover, it is absolutely clear that the personnel from both ADA and MDA Group participated in c the discussions leading up to the Board resolution approving the Scheme as presented to the shareholders and the stakeholders. The same Scheme was also approved by over 99% of the shareholders, which would mean that ADA himself also approved the Scheme as D presented. Further, given the finding that ADA and ADA Group members knew that government approvals were necessary and these are a part of general business risks that the ADA Group undertook, one fails to see what is left to impute to any one. [Para 149] [915-D-H; 916-A-B] E \

13.2. ADA was a member of the Ambani family and a powerful shareholder who would have obviously had deep connections in the Company's management. To claim that he did not know what was going on with respect to how the Scheme was going to be framed and have the changes made in accordance to what he wanted, if acceptable to others, is simply unacceptable. Further, the active participation of the lawyer - who had framed the MoU and was advising ADA on gas based energy production business -in the relevant Board G meetings in which gas supply agreements were discussed and it was recorded that he concurs with the view of Board members that the same are necessary, implies that ADA was aware of the same. [Para 149] [916- B-D] F H 748 SUPREME COURT REPORTS [2010) 5 S.C.R. A

14.1. However wide the powers of the courts may be, they cannot be so wide as to order supply of gas in contravention of government policies, the constitutional obligations that the Gol must bear in mind when formulating such policies and in contravention of broader B public interest. The Division Bench erred by holding that certain quantum of naturar gas stood allocated to RNRL. The error is on account of both a misinterpretatfon of the PSC and also public law. Apart from that, both the Single Judge and the Division Bench below have erroneously c held that the MoU's gas supply section be read into the Scheme thereby effectively substituting the phrase "suitable arrangements" in Clause 19 to mean the gas supply provisions of the MoU. Those conclusions were erroneous. [Para 153) [917-H; 918-A-C] D S.K. Gupta & Anr. Vs. K.P. Jain & Anr. (1979) 3 SCC 54, held inapplicable. E

14.2. "Fabric" can imply both the end result, and also equally importantly, the processes, procedures and steps that were taken to weave the "fabric" of the Scheme. During the course of weaving of the "fabric", decisions could be taken to leave out certain aspects as unacceptable to the Board or the shareholders and stakeholders or the Court. Further, those processes in obtaining involve certain steps necessarily F shareholders permissions. Such processes are the very essence of the fabric and not just some technicalities that are to be consigned to history and ignored in making modifications. Whatever changes are made can only be minor ones which would not tamper with the essence of the scheme. [Para 156) [919-E-G] G

14.3. In this Scheme, the shareholders & stakeholders of RIL would have broadly understood from the Scheme two things: (1) that the Gas based Energy Resulting! H Company was to engage in the business of supply of RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 749 many different kinds of fuels, in which supply of natural A gas to its affiliate compal)ies is one; and (2) that the Gas based Energy Resulting Company will engage in the business of promoting energy generation business, from using any and all fuels, including natural gas, both from RIL and also from other sources. Nowhere did the B Scheme state that the only fuel that the Gas based Energy Resulting Company would deal with would be natural gas from RIL. To change that meaning would be to begin the process of tearing apart the "basic fabric" of the Scheme. [Para 157] [919~H; 920-A-C] c

14.4. "Basic fabric" of a scheme also implicates the essentiality of common interests between the class of members who have voted together, thinking that they all have the same level of information and the same understanding of the entire class of_ members as to what D 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 E 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 F 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 G higher value to Gol 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 H 750 SUPREME COURT REPORTS [2010] 5 S.C.R. i A interests of both parties and also including the clauses of governmental agreements, would be put in place. Such a conclusion would also follow from the main tenet of the Scheme that the two groups were to function independently of each other. [Para 158] [920-C-H; 921-A] B

14.5. In the instant case by importing the gas supply section into the Scheme, in the guise of interpreting it, the phrase "suitable arrangements" was transformed into "suitable arrangements as agreed upon by the promoters in the gas supply section of the MoU". Such C a modification necessarily tears apart the basic fabric and cannot be permitted. [Para 161] [922-8-C] Case Law Reference: In the judgment of Sathasivam, J: D (2004) 4 sec 489 (CB) relied on (1984) 1 sec 515 (1972) 1 sec 23 referred to referred to E (1989) 3 sec 109 (1979) 3 sec 489 (1993) 1 sec 11 (2001) 1 sec 753 (1997) 1 sec 579 . (1979) 3 sec 54 .... (1976) 3 sec 119 G (1998) 3 sec 573 F AIR 1992 SC 453 (1997) 8 sec 683 AIR 2004 SC 86 -H Para 4 Para 18 Para 20 Para 21 .. Para 23 Para 24 referred to referred to referred to held inapplicable Para 27(A)(vi) referred to Para 28(A)(iv) referred to Para 28(A)(v) referred to Para 28(8)(1) referred to Para 28(8)(2) referred to Para 28(B)(iv) referred to Para 33 referred to Para 33 - RELIANCE NATURAL RESOURCES LTD. v.

RELIANCE INDUSTRIES LTD. 751 (1996) 6 sec 665 referred to Para 33 A referred to Para 33 (1966) 1 All. E.R. 193 (1984) 1. sec 515 (1997) 1 sec 388 (2004) 4 sec 489 relied on referred to relied on Para 50 Para 85 Para 85 Para 85 AIR 1992 SC 522 relied on In the judgment of Sudershan Reddy, J: (2008) 305 ITR 75 referred to Para 55(1) (1991) 1 sec 212 (1990) 3 sec 152 (1995) 5 sec 482 referred to Para 55(1) referred to Para 55(1) referred to Para 55(1)_ 1995(2) SCR 2 referred to Para 55(1) 1967 (2) SCR 454 (2001) 13 sec 154 (2006) 13 sec 542 (2008) 13 sec 213 (2004) 2 sec 663 (1971) 1 sec 85 (1966) 6 sec 665 (2008) 12 sec 541 (1997) 8 sec 683 referred to Para 55(1) referred to Para 55(1) referred to Para 55(1) referred to Para 55(1) referred to Para 55(1) referred to Para 55(1) referred to Para 55(2) referred to Para 55(2) referred to Para 55(2) AIR 2004 SC 86 referred to Para 55(2) (1989) 1 sec 264 referred to Para 55(2) (1997) 89 Comp. referred to Para 55(2) Cases 227 B c D E F G H 752 SUPREME COURT REPORTS [2010] 5 S.C.R. A 2924-25 All ER 280 referred to Para 55(2) (1963) 2 QB 606 referred to Para 55(2) (1966) 1 ALLER 193 referred to Para 55(2) (1971) UKHL 1; referred to Para 55(2) (1972) AC 153 B (1995) 3 ALL ER 918 referred to Para 55(2) (1956) 3 ALL ER 624 referred to Para 55(2) c (1979) 3 sec 54 (1979) 3 sec 54 (1997) 1 sec 579 (2007) 1 sec 753 (1979) 3 sec 489 D AIR 1993 SC 1601 1984 (1) sec 515 E 1912 (1) sec 23 2004 (4) sec 489 referred to Para 55(3) held· inapplicable Para 55(3) referred to referred to Para 63 Para 63 referred to Para 69 referred to referred to referred to referred to Para 69 Para 69 Para 69 Para 69 y AIR 1943 FC 75 distinguished Para 124 CIVIL APPELLATE JURISDICTION: Civil Appeal No(s).

4273 of 2010. F From the Judgment & Order dated 15.06.2009 of the Hogh Court of Judicate at Bombay in Appeal No. 844 of 2007 in Company Application No. 1122 of 2006 in Company Petition G No. 731 of 2005. WITH C.A. Nos. 4274, 4275-4276, 4277 of 2010 & I.A. No. 1 in C.A. Nos. 4280-4281 of 2010. H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. 753 Gopal Subramanium, SG, Mohan Parasaran, Vivek A B Tankha, ASG, Ram Jethmalani, Mukul Rohatgi, Mahesh <lehmalani, Harish N. Salve, Shyam Divan, U.U. Lalit, P.H. Parekh, Dr. Milind Sathe, Rohington, F. Nariman, Dr. Abhishek M. Singhvi, K. Lakshminarayana Rao, Ravi Shankar Prasad, Ranjit Kumar, Mahesh Agarwal, Saurabh Kirpal, Manali Singhal, Rishi Agrawala, Rohma Hameed Radhika Gautam, P.R. Mala, Saurabh Gupta, Diksha Rai (for E.C. Agrawala), Suresh Gupte, F.P. Pooniwala Atul Dayal, Sameer Parekh, Smita Bhargave, E.R. Kumar, Meenakshi Gover, Sumeet Lall, Sumit Goel, Amit Bhandari, Kamal Deep Dayal, Shubhanshu c Padhi, Shakun Sharma, Chetan Rai, Harsh Sahu, Rahul Chugh, Raghav S, Rajat Nair, Aneesh Pattanaik, Sonali Basu Parekh (for M/s.

Parekh & Co.), Dr. Shailendra Sharma, D.L. Chidananda, Gaurav Dhingra, Dayan Krishnan, Gautam Narayan, Arvind K. Sharma, Dr. Harsh K. Pathak, Zoheb D Hussaqin, Alok P. Kumar, C.S. Bhardwaj, Pravin Satale, Rajiv Shankar Dvivedi, Sarojananda Jha, Dharmendra Kr. Sinha, Pallavi Langar, Amrita Bhattachrya, Shelly Shaleja (for M/s. Coac), Kavita Wadia, Kamal Budhiraja, Manu Seshadri, Ira Asthana (for Dua Associates), Suryanaryana Singh, Pragati Neekhra, Monica Sarma, Mahesh Prasad, Senthil Jagdeesan for the appearing parties. E The Judgment of the Court was delivered by P. SATHASIVAM, J.1. I have had the benefit of reading the erudite judgment of my learned Brother, Hon. B. Sudershan Reddy, J. I am unable to share the view expressed by him on some points and must respectfully dissent. F

2. Though the facts and provisions of the relevant law have been set out in the judgment prepared by B. Sudershan Reddy, G J., keeping in view of the importance in the matter, I propose to refer all the details and deliver a separate judgment in the following terms:-

3. Leave granted. H 754 SUPREME COURT REPORTS [2010] 5 S.C.R. A

4. "The people of the entire country have a stake in natural gas and its benefit has to be shared by the whole country. " Association of Natural Gas & Ors. vs. Union of India & Ors. (2004) 4 sec 489 (CB). B

5. Being aggrieved by the judgment and order 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) 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 D 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 E same, all the appeals were heard together and are being disposed of by this common judgment.

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 his two sons Mukesh Ambani and Anil Ambani. In the year 1999, the Government of India announced a New Exploration and Licensing Policy, 1999 (in short "NELP"). This policy provided that various petroleum blocks could be awarded for exploration, development and production of petroleum and gas to private· entities. F G H RELIANCE NATURAL RESOURCES LTD .. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 755 (b) It is the policy of the Government that Petroleum A Resources which may exist in the territorial waters, the continental shelf and the exclusive economic zone of India be discovered and exploited with utmost expedition in the overall interest of India and in accordance with good International Petroleum Industry Practice. B · (c) In the same year, i.e. 1999, RIL has formed a Consortium with NIKO. Their consortium was the successful bidder for Block KG-D6 and was called the Contractor. (d) On

24.03.2000, Reliance Platforms C Communications.com Private Limited was incorporated which was changed to Global Fuel Management Services Limited and now called "Reliance Natural Resources Limited (RNRL). (e) A Production Sharing Contract (in short "PSC") has D been entered into between the Government of India and the Contractor on 12.04.2000. The PSC, as recorded, is within the contract area identified as Block KG DWN-98-3. KG-D6 is situated offshore coasts of Andhra Pradesh in the Indian Ocean. Such blocks are called as "Deep Water Exploration E Blocks". The exploration in such areas require employment of highly skilled and experienced technical personnel and an extremely expensive and time-consuming exercise. As recorded, all exploration expenses required to locate petroleum resources have to be borne by the Contractor. Therefore, the Contractor is bound to incur huge cost and resources for discovery of reserves in the area at their risk.

The exploration activities are still in progress, the first gas deal expected in June, 2008. As per the PSC, all the expenses relating to the exploration, development and production of cost incurred by the Contractor can only be recovered from the petroleum/gas G actually produced and sold by the Contractor. The Contractor has freedom to sell the gas produced from the block subject to the adjustment and the terms of profit sharing between the Government and the RIL as set out in the PSC. F H 756 SUPREME COURT REPORTS [2010] 5 S.C.R. A (f) On 06.07.2002, Mr. Dhirubhai Ambani passed away. Sometime thereafter, differences started between Mukesh Ambani and Anil Ambani over the 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 B 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. c D (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 E and deliver 132 TBtu (means one trillion BTU (British Thermal Unit) or 1000000 MMBTU). NTPC, by letter dated 16.06.2004, confirmed RI L's deal. · (i) In June, 2004, RIL entered into a State Support Agreement with the Government of U.P. to make necessary F arrangements for land, water and other facilities for Dadri Project.

0) In a Board Meeting of Reliance Energy Limited (in short "REL") held on 20.10.2004, which was attended by Mukesh G Ambani and other Directors of RIL, after reviewing the Dadri Project it was recorded that gas from KG Basin would be supplied for the power projects of REL. The Board of REL was assured about the availability of gas, its timing, adequate quality and requested quantity at a competitive price for the project. H ,_ RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 757 {k) On 18.06.2005, the media released a statement A informing the general public that an amicable settlement is arrived at in respect of all disputes between the Ambani Brothers. It was stated that Mukesh Ambani will take over the responsibility for RIL and IPCL and Anil Ambani will take over the responsibility for Reliance lnfocomm Ltd., Reliance Energy B Ltd._ and Reliance Capital Ltd.

On the same day, Anil Ambani resigned as Joint Managing Director of RIL. (I) Both the brothers with the mediation of their mother Mrs. Kokilaben Dhirubhai Ambani arrived at a Memorandum of · C Understanding (MoU)/family arrangement dated 18.06.2005 and accordingly resolved their disputes amicably. Based upon the said MoU, both the brothers and the officials of RIL and other group companies, made various discussions, exchanged correspondences, e-mails and held conferences and meetings to implement the MoU and to resolve the disputes and to divide D the various companies by a Scheme of Arrangement. (m) On 11.08.2005, RNRL was acquired by RIL for the purpose of de-merger. The name was changed to Global Fuel Management Services. RIL (de-merged company) moved a E petition in the Bombay High Court bearing No. 731/2005 dated 24.10.2005 to obtain a sanction of Scheme of Arrangement (the Scheme) between RIL and four other companies viz., (i) Reliance Energy Ventures Limited, (ii) Global Fuel Management Services Limited, (iii) Reliance Capital Ventures Limited and F (iv) Reliance Communication Ventures Limited.

By order dated 09.12.2005, the Company Judge, Bombay High Court has granted sanction to the Scheme and inter alia directed that the shareholders of RIL would hold shares in each of the resulting companies in the ratio of 1:1 in addition to the shares held in G the parent company (RIL). The scheme provides that RIL successfully bid for off-shore oil and gas fields; strategic investment in RIL which has engaged in power projects, in order to use part of gas discovered for the generation of power; ¥ appropriate gas supply arrangement will be entered into H 758 SUPREME COURT REPORTS [2010] 5 S.C.R. A 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 B 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.

C D (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 E Ventures Limited. (iv) Telecommunication Undertakings/Reliance Communication Ventures Limited. F The De-merged company-Reliance Industries Limited (RIL) is to retain all other businesses including Petrochemicals, refining, oil and gas exploration and production, textile and other business. The Scheme became effective from 21.12.2005. G (o) A draft of GSMA (Gas Sale Master Agreement) and GSPA (Gas Sale Purchase Agreement) were e-mailed by an official of RIL to sole nominee of Anil Dhirubhai Ambani Group on the Board of RIL on 11.01.2006, drafts of GSMA and GSPA were approved by the Board of RIL at a time when the Board H . of RNRL was under the control of Mukesh Ambani.

The • RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 759 nominee of Anil Dhirubhai Ambani Group had raised objections A but the same were overruled. There was no sufficient time given to RNRL to read the draft. No independent or legal advise could be taken on behalf of RNRL. Basic clauses to the agreements are the bone of contention of the present litigation. Both the agreements alleged to have also been settled and executed B on 12.01.2006. On the same day, a letter addressed by Mr. J.P. Chalasani, the nominee of ADAG on the Board of RNRL to other Directors on the Board of RNRL namely, Mr. Sandip Tandon and Mr. L.V. Merchant who were the nominees of Mukesh Ambani/RIL, stating therein that the proceeding in the c Board Meeting held on 11.01.2006 to consider the agreement with RIL in terms of the Scheme were illegal and void. By another letter dated 13.01.2006, a request was made to take the contents of letter dated 12.01.2006 with regard to the agenda-item No.8 (gas supply agreement) and be made part 0 of the minutes of the Board Meeting.

(p) On 13.01.2006 by a letter addressed to Shri Chalasani, the minutes of the Board of Directors held on 11.01.2006 were informed that it would be tabled at the meeting of 13.01.2006. Some of the objections, as raised by Chalasani, E were also recorded. On 26.01.2006, the GSPA copy was made available to ADAG for the first time. On 27 .01.2006, the shares of the RNRL to the shareholders of RIL were allotted. F (q) On 07.02.2006, the Board of the RNRL was re- constituted in order to hand over the management and control of the resulting companies to Mr. Anil Ambani. On 14.02.2006, a letter addressed by RIL to the RNRL stating that a proforma gas sale and purchase agreement (GSPA) has been annexed to the above GSMA. The proforma contains the terms and G conditions as mentioned in the GSPA signed by RIL on 12.12.2005 and forwarded 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 H 760 SUPREME COURT REPORTS [2010] 5 S.C.R. A 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 'Jr de-merging the business.

A . 8 suitable draft agreement in c~., ipliance 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. C (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 D 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 under the PSC. (t) With these details, RNRL on 07.11.2006/08.11.2006, filed a Company application No. 1122 of 2006 under Section 392 of the Companies Act, 1956 (hereinafter referred to as "the Act") before the High Court of Bombay in which the following prayers were made: "(a) Order and Direct RIL to take all necessary steps in order to ensure actual supply of 28 MMSCMD or 40 MMSCMD of gas to RNRL on the NTPC Contract Terms and as per the commercial aspect set out in Para 8.3 hereinabove.

(b) Order and Direct RIL to execute an amendment to the Gas Supply Master Agreement dated January 12, 2006 and to the Form of Gas Sale and Purchase Agreement attached in Schedule 3.2 thereto, to bring them in line with the Gas Supply Master Agreement and Form of Gas Sale E F G H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 761 and Purchase Agreement as se1 out in Ex. J to this A Application. p a r (c) restrain RIL from creating any third t y interests or rights in respect of i) 28 MMSCMD of Gas to be supplied to the Applicant; (ii) 12 MMSCMD to be 8 supplied to the Applicant on firm basis in case NTPC Contract does not materialize; and/or entering into any contract(s) and/or use or supply to any third party the said · gas (28 MMSCMD or 40 MMSCMD, as the case may be) · which is required to be supplied to the Applicant under the C Scheme. (d) pending the hearing and final disposal of the application, direct RIL to supply the said 28 MMSCMD or 40 MMSCMD gas, as the case may be, to the applicant on the same terms as per NTPC Contract. (e) ad-interim reliefs in terms of prayer (c) and (d) above. (f) Such further orders be passed and/or directions be given as this Hon'ble Court may deems fit and proper. " D E

In the said application of RNRL, it was highlighted that to make the Scheme as sanctioned by the High Court, effective and workable, it is necessary to direct the amendments and alterations to the GSMA dated 12.01.2006 and draft GSPA annexed to the GSMA, as both do not result in effective transfer F of the business sought to be demerged and are not in compliance with the terms of the Scheme of Arrangement in its letter 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, ~NRL . G prayed for Company Courts' intervention to ensure that the Scheme is implemented effectively.

In addition to the above particulars, RNRL placed the following additional materials in support of their stand: H 762 SUPREME COURT REPORTS [2010) 5 S.C.R. A (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 fC!lr reorganization of the Reliance Group including the B D\!Sinesses 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 C 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 RI L's current and future gas fields for various projects of Reliance-Anil Dhirubhai Group.

9. The case of RIL:- F (a) A Scheme for the demerger of a large company with majority of shares being held by the public and by institutions, has to be in larger public interest as well as in the interest of the company. It must necessarily safeguard the interest of large body of shareholders of the Demerged Company as also the shareholders of the Resulting Companies. Any settlement of the G disputes stated to have taken place between or amongst the promoters has, as a necessity, to abide by the final decision of the Board of the Demerged Company and such adaptations as may be necessary to protect and further the interests of the large body of shareholders or public interest. H 766 SUPREME COURT REPORTS [2010) 5 S.C.R. A (b) Once the Scheme as was placed before and duly approved by; the shareholders (99% shareholders approved the Scheme) which suggests that the Scheme had the support not merely of the General Body of shareholders but also the members of the promoters' family-all anterior or underlying B agreements become irrelevant.

The senior-most member of the family 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 c 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 D 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 E 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.

F (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 RIL in relation to exploration and production of gas from various gas-fields as also the provisions of the Production G Sharing Contract (PSC). Significantly, the Production Sharing Contract for Block KG-D6 was executed way back in the year 2000. Being Board managed company, the business and affairs of RIL are under control and supervision of the Board of Directors and in fact the Minutes of the Board meeting clearly show that in all matters in which Shri Mukesh Ambani was or H could be said to be an interested director, he had refrained from RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 767 participating in the deliberations and voting on the resolutions. A The terms and conditions on which the gas was to be supplied to the power plants of Reliance Patalganga Power Limited and REL was to be at the discretion by the Board of Directors of the Demerged Company who were not bound by any "agreement" as between two groups of promoters.

The Board B of Directors of Demerged Company was obliged ·and in fact had at all times kept the interests of the general body of shareholders as being a paramount importance and had taken such decisions as in the best judgment of the Board, accorded to their duty as the Board with the shareholders interests being c of utmost importance.

After considering the claim of both the parties viz., RNRL and RIL the "Company Judge has arrived at the following conclusions": 0 "184. The conclusions are: (1) The present company application under Section 392 of the Companies Act is maintainable. (2) The Company Court, however, under Section 392 of E · the Companies Act cannot direct or dictate to maintain or amend or modify and/or insist for a particular clause or clauses of such gas supply agreement or such other commercial agreement/contract. F (3) The GSMA as formed and finalized in the Board of Director's Meeting of RIL on 11.01.2007 and modified on 12.01.2007 is in breach of the Scheme. (4) The MoU (Memorandum of Understanding/Family Arrangement) and its content are binding to both parties G RIL and RNRL and all the concerned, Mr. Mukesh Ambani and his group of Companies and Mr. Anil Ambani and his group of Companies have already acted upon at the pre and post stages of the MoU and the pre and post stages of the Scheme accordingly. H 768 SUPREME COURT REPORTS [2010] 5 S.C.R. A. B c D E F (5) The term "suitable arrangement" as referred in the Scheme needs to read and interpret by taking into account the terms of the MoU as well as the Scheme as referred 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 contracUagreement 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 permitted the G Union of India to intervene and put forth their stand.

12. The Division Bench framed the following "issues for consideration": (1) Whether the Company Court has jurisdiction to entertain the Application filed by RNRL under the Companies Act, 1956? H • RELIANCE NATURAL RESOURCES LTD. v. RELIANCE tNDUSTRIES LTD. [P. SATHASIVAM, J.] 769 (2) What is a "suitable arrangement" between the two A Companies in the matter of supply of gas for the power projects of the Resulting Companies and its affiliates?

Answers by the Division Bench: (a) The Division Bench has answered the first issue in the · affirmative. The reasoning of the Division Bench, however, is different from that of the Single Judge. The Company Judge had held that the Application was maintainable under Section 392 read with Section 394 of the Companies Act. The Division Bench however found the Company Application to be C maintainable on the basis of Clauses 17, 18, 20 to 24 of the Scheme of Demerger itself. B (b) On the second issue, the Division Bench held as follows: (i) The suitable arrangement was required to be made by engrafting the MoU on the GSMA, (ii) As far as the fixation of price is concerned, the Government has the power to fix the price, but only for its "take" of the gas, and (iii) Although the Government could lay down the Gas Utilization Policy, such Utilization Policy would apply only to the gas available for allocation after certain quantity of gas which according to the Division Bench, "stood allocated" to RNRL as per the MoU. The Gas Utilization Policy could apply only to the balance quantities. D E F (iv) There was nothing in the PSC that prevented the Contractor from selling gas at a price lower than the price G approved by the Government and RIL could fulfill its obligation of supply of gas at a price of US$ 2.34 per mmbtu.

Aggrieved by the above directions/conclusions RNRL, RIL as well as U.0.1. have filed these appeals by way of special H 770 SUPREME COURT REPORTS [2010] 5 S.C.R. A leave petition before this Court.

Heard Mis Ram Jethmalani and Mr. Mukul Rohatgi, Mr. Ravi Shankar Prasad, learned senior counsel for RNRL, M/s Harish N. Salve, and Mr. Rohington F. Nariman, learned senior counsel for RIL and Mr. Gopal Subramanium, learned Solicitor General, M/s Mohan Parasaran and Mr. Vivek Tankha, Additional Solicitor General for the Union of India. 8

Historical background: c Up to the early 90's, prior to the NELP and pre-NELP years, natural gas was being produced only 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 0 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. E 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 F 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, G a PSU, and did not have marketing freedom as regards natural gas. The pre-NELP regime was replaced by the NELP regime under which the PSC relevant to the present case was entered into between a Joint Venture composed of RIL and NIKO H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 771 Resources Limited and the Government of India. In the NELP- A · 1 PSC, marketing freedom has been given to the contractor to a limited extent subject to the overall regulation of the Government.

Constitutional and other statutory Provisions: 8 "Article 297. Things of value within territorial waters or continental shelf and resources of the exclusive economic zone to vest in the Union- (1) All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive C economic zone, of India shall vest in the Union and be held for the purposes of the Union. (2) All other resources of the exclusive economic zone of India shall also vest in the Union and be held for the D purposes of the Union. (3) The limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by Parliament. "

Article 39(b) of the Constitution envisages that the State shall, in particular, direct its policy towards securing the ownership and control of material resources of the community as so distributed as best to sub-serve the common good. E F

This Court, in the case of State of Tamil Nadu vs. L. Abu Kavur Bai, (1984) 1 SCC 515 at 549 held that the expression 'distribute' under Article 39(b) cannot but be given full play as it fulfills the basic purpose of re-structuring the G economic order. It embraces the entire material resources of the community. Its goal is so to undertake distribution as best to sub-serve the common good. It re-organizes by such distribution the ownership and control. To distribute, would mean, to allot, to divide into classes or into groups and embraces arrangements, classification, placement, disposition, H 772 SUPREME COURT REPORTS [2010) 5 S.C.R. A apportionment, the system of disbursing goods throughout the community. 8 C

In Safar Jung Sugar Mills Ltd. etc. vs. State of Mysore & Ors., (1972) 1 SCC 23 at page 36 paragraph 38, this Court held as under: "38 ............ Delimiting areas for transactions or pa11fes or denotin'g price for transactions 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. "

In Tinsukhia, Electric Supply Company Ltd. vs. State D 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. E

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. F

In Ramana Dayaram Sheffy vs. International Airport Authority of India & Ors, (1979) 3 SCC 489, this Court has pointed out that : G " ........ The power or discretion of the Government in the matter of grant of larg_ess including award of jobs, contracts, quotas, licences etc., must be confined and structured by rational, relevant and non-discriminatory standard or norm and if the Government departs from such standard or norm in any particular case or cases, the action of the Government would be liable to be struck do~n. RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 773 unless it can be shown by the Government that the A departure was not arbitrary, but was based on some valid principle which in itself was not irrational, unreasonable or discriminatory "

In Food Corporation of India vs. Mis Kamdhenu Cattle 8 Feed Industries, (1993) 1 SCC 71, this Court observed as follows: "In contractual sphere as in all other State actions, the State and all its instrumentalities have to conform to Article 14 of the Constitution of which non-arbitrariness is a C significant facet. There is no unfettered discretion in public law ; A public authority possesses powers only to use them for public good. This imposes the duty to act fairly and to adopt a procedure which is 'fairplay in action' .......... "

The Oil Fields (Regulation & Development) Act, 1948 and the Petroleum and Natural Gas Rules, 1959, make provisions, inter alia, for the regulation of petroleum operation and grant of licence and leases for exploration, development and production of petroleum in India. The Territorial Waters, Continental Shelf, Exclusive Economic Zone and Maritime Zones Act, 1976 provides for the grant or a licence of Letter of Authority by the Government to explore and exploit the resources of the Continental Shelf and Exclusive Economic Zone and any Petroleum operation. D ,, E F

Under the Companies Act, there are no provisions except Sections 391 to 394 which deal with the procedure and power of the Company Court to sanction the Scheme which falls within the ambit of requirements as contemplated under these sections. Since the Company Judge as well as the Division G Bench of the High Court proceeded on the basis that it has ample power and jurisdiction to supervise the Scheme as sanctioned under Sections 391 to 394 of the Companies Act, it is but proper to refer those sections which are as under: H 774 SUPREME COURT REPORTS [2010] 5 S.C.R. "391. Power to compromise or make arrangements with creditors and members (1) Where a compromise or arrangement is proposed (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them, the Tribunal may, on the application of the company or of any creditor or member of the company or, in the case of a company which is 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 sµch 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 b~. 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 to the company, such A B c D E F G H RELIANCE NATURAL RESOURCES LTD. v.

392. Power of Tribunal to enforce compromise and arrangement : (1) Where the Tribunal makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it- (a) shall -have power to supervise the carrying out of the G compromise or an arrangement; and (b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or H 776 SUPREME COURT REPORTS [2010] 5 S.C.R. A B c D E F G H arrangement as it may consider necessary for the proper working of the compromise or arrangement. (2) If the Tribunal aforesaid is satisfied that a compromise or an arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order made under section 433 of this Act. (3) The provisions of this section shall, so far as may be, also apply to a company in respect of vvhich an order has been made before the commencement of the Companies (Amendment) Act, 2001 sanctioning a compromise 'Or an · arrangement.

393. Information as to compromises or arrangements with creditors and members - (1) Where a meeting of creditors or any ~lass-0f 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, managiflg director or manager of the company, whether in their capacity as such or as members_ OJ 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 RELIANCE NATURAL RESOURCES LTD. v.

RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 777 such a statement as aforesaid or a notification of A 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 the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the C company's directors. B (3) Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or D members entitled to attend the meeting, every creditor or member so entitled shall, on making an application in the manner indicated by the notice, be furnished by the company, free of charge, with a copy of the statement.

(4) Where default is made in complying 'with any of the requirements of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty thousand rupees; and for the purpose of this sub~section any liquidator of the company and any trustee of a deed for securing the issue of debentures of Jhe company shall be deemed to be an officer of the company: E F Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the G refusal of any other person, being a director, managing director, manager or trustee for debenture holders, to supply the necessary particulars as to his material interests. H 778 SUPREME COURT REPORTS [2010] 5 S.C.R. A B C D E F G (5) Every director, managing director, or manager of the company, and every trustee for debenture holders ot the company, shall give notice to the company of such matters relating to himself as may be necessary for the purposes of this section; and if he fails to do so, he shall be punishable with fine which may extend to five thousand rupees.

394. Provisions for facilitating reconstruction and amalgamation of companies (1) Where an application is made fo the Tribunal under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal- (a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and (b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this 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; H (ii) the allotment or appropriation by the transferee RELIANCE NATURAL RESOURCES LTD. v.

RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 779 company of any shares, debentures policies, or A 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) (iv) (v) (vi) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; B the dissolution, without winding up, of any transferor company; 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 such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out: c D Provided that no compromise or arrangement proposed E for the purposes of, or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies; shall be sanctioned by the Tribunal unless the Court has received a report from the Registrar that the affairs of the company have not been F conducted in a manner prejudicial to the interests of its members or to public interest: Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by the . Tribunal unless the Official Liquidator has, on scrutiny of G the books and papers of the company, made a report to the Tribunal thaNhe affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.

H 780 SUPREME COURT REPORTS [2010] 5 S.C.Ft A 8 c D E F G H · (2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order; that property shall be transferred to and vest in and those liabilities shall be transferred to and become the liabilities of the transferee company and in the case of any: property, if the order so directs, freed from any charge Which is, by virtue of the compromise or arrangement, to cease to have effect. (3) Within thirty days after the making of an order under this section, every company in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration. If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees. (4) In this section~ (a) "property" includes property rights and powers of every description; and "liabilities" includes duties of every description; and (b) "Transferee company" does not include any company other than a company within the meaning of this Act; but "transferor company" includes any body corporate, whether a company within the meaning of this Act or not.

394A. Notice to be given to Central Government for appl~aUons under secUons 391 and 394 The Tribunal shall give notice of every application made to it under section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections. "

ISSUES ARISING IN THE PRESENT APPEALS: RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 781 ·(a) Whether the Company Petition filed by RNRL u)1der A 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? 8 (c) Whether the MoU entered into amongst the family C 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 D 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 "suitab~ arrangement" as E 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 F an unequivocal stipulation for Government approval for quantity, tenure and price, whether it is open to RNRL to now contend that the Government approval for supply of gas is not required and further that the provision requiring Government approvals should G be deleted from the GSMA/GSPA? (g) Whether it is necessary for this Court to go into the interpretation of the provisions of the PSC? (h) i.

All these issues can be answered in the following broad headings: (A) Maintainability of the company petition: (i) It has been argued before this Court that the original company application was not maintainable as the Company Judge (single Judge) did not have any jurisdiction. It has been argued that the jurisdiction of the Court can only be found under Section 394 of the Act and Section 392 is completely inapplicable. RIL has argued this because the wording of both the provisions suggests that Section 392 provides much wider . power to the Court with re~spect to making additions in the Scheme. Section 392 (1)(b) states that the Court "may give such directions in regard to any matter or making such modifications in the compromise or arrangement as it may consider RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 783 B necessary for the proper working of the compromise or A arrangement".

However further question remains whet.her the Court has jurisdiction like an appellate authority to minutely scrutinise the scheme and to arrive at an independent B 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 C 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 D 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 parties concerned.

It was argued on behalf of the respondents that under Section 392 of the Act, the court has the power to make modifications in the compromise or arrangement as it may consider necessary and this power would include the F power to approve what has been put forward by LBPL who has come forward to discharge the liabilities of the Company on the rights in the properties of the Company other than in the office building and in the godown, being given to it for development and sale. As we read Section G 392 of the Act, it only gives power to the court to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. This is only a power that enables the court to provide for proper working of H 788 SUPREME COURT REPORTS [2010] 5 S.C.R. A 8 c .D E F G H compromise or arrangement, it cannot be understood as a power to make substantial modifications in the scheme approved by the members in a meeting called in terms of Section 391 of the Act.

A modification in the arrangement that may be considered necessary for the proper working of the compromise or arrangement cannot be taken as the same as a modification in the compromise or arrangement itself and any such modification in the scheme or arrangement or an essential term thereof must go back to the General Meeting in terms of Section 391 of the Act and a fresh approval obtained therefor. The fact that no member or creditor opposed it in court cannot be considered as a substitute for following the requirements of Section 391 :>f the Companies Act for approval of the compromise or arrangement as now modified or proposed to be modified.

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.

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 RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 789 Company will have nothing to do with the mill lands and A the whole of the mill lands will pass on to LBPL on LBPL paying a value of Rs 97.50 crores to SCML and LBPL will start an industry of its own in that property. This cannot be considered to be a modification in the scheme necessary for the proper working of the compromise or arrangement. B This is a modification of the scheme itself. Same is the position regarding the provision of replacing the resolution passed that if any surplus amounts are available, SCML would start a viable industry in any part of the State of Maharashtra, by a commitment that SCML would establish c an industry in any part of the State of Maharashtra on an investment of Rs 20 crores.

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 hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term "family" has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spes succession is so that future disputes are sealed for ever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest · of the country. The courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the D E F G H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 795 same on technical or trivial grounds. Where the courts find A that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement under B which he has himself enjoyed some material benefits ....... .

17. In Krishna Bihari/al v. Gulabchand, 1971 1 ·SCC 837, it was pointed out that the word "family" had a very wide connotation and could not be confined only to a group of persons who were recognised by law as having a right C of succession or claiming to have a share.

19. Thus it would appear from a review of the decisions analysed above that the courts have taken a very liberal and broad view of the validity of the family D settlement and have always tried to uphold it and maintain it. The central idea in the approach made by the courts is that if by consent of parties a matter has been settled, it should not be allowed to be reopened by the parties to the agreement on frivolous or untenable grounds. E 42 .......... As observed by this Court in T. V.R. Subbu Chetty's Family Charities case, that if a person having full knowledge of his right as a possible reversioner enters into a transaction which settles his claim as well as the claim of the opponents at the relevant time, he cannot be permitted to go back on that agreement when reversion actually falls open. "

2. K.K. Modi vs. 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 F G H 796 SUPREME COURT REPORTS [2010] 5 S.C.R. A B c D E F G H 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. ..... .

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 settled and adjusted. Where it has become necessary to split any of the existing companies, this has also been provided for in the Memorandum of Understanding. It is a complete settlement, providing how assets are to be valued, how they are to be divided, how a scheme for dividing some of the specified companies has to be prepared and who has to do this work. In order to obviate any dispute, the parties have agreed that the entire working out of this agreement will be subject to such directions as the Chairman, IFCI may give pertaining to the implementation of the Memorandum of Understanding.

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 H 798 SUPREME COURT REPORTS [2010) 5 S.C.R. A 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 B between the shareholders is not binding on the company unless the company adopts it and it is incorporated in the Articles of Association. Based on the above principles, he pointed out that the de-merger Scheme was based on the .MoU and be treated as guidance to the term suitable arrangement. He also pointed c out that a family arrangement or the MoU has not been referred to at any stage in the Scheme or in any representation made to the Stock Exchange and the same is contrary to the RNRL's own. pleading and their case. Mr. Harish Salve also relied on various exerts from some of the letters/e-mails from Exhibit "F" filed by RNRL. Some of the letters/e-mail dated 30.07.2005 from Mr. Harish Shah (RIL) to Mr. Venkat Rao (REL); e-mail dated 06.10.2005 from Mr. Cyril Shroff to Mr. Sandeep Tandon/ RIL; e-mail dated 29.11.2005 from Mr. Cyril Shroff to Mr. Anil Ambani; e-mail dated 14.12.2005 from RIL to Mr. J.P. Chalasani and e-mail dated 27 .12.2005 from Mr. Sandeep E Tandon (RIL) to Mr. Venkat Ponanda etc. but not disputed the contents of the letters or correspondences and e-mails referred therein. The existence of letters/correspondence and e'lmails remain unchallenged. 0 F

In the light of the stand taken by both ~ides, this Col\rt analysed the contents of MoU and the subsequent arrangement-' after_ exchange of various letters/e-mails as well as· deliberations among the officials of both the entities. It is clear that both parties acted upon the said family arrangement/Mou G dated 18.06.2005. The above referred letters and e-mails, further confirmed that there is an arrangement made and agreed between the RIL and ADAG (RNRL), it is also clear and show that the discussion between the group of officials was intended to expedite the implementation of the MoU by H producing a "suitable arrangement". Though copy of the MoU RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 799 B was not part of the record before the Company Judge, by A consent, the above extracted portion was placed before the Division Bench at the time of hearing of the appeal. It cannot be accepted that neither RIL nor its Board Members were aware of the contents of the MOU. In fact, the Company Judge has pointed out that a specific reference was made in the Company Application No. 1122 of 2006 and there is no specific denial by the RIL. The Press Release at the instance of their mother Smt. Kokilaben Ambani (Exh. "D") about the family arrangement/MOU cannot be over-looked. It is clear that because of the efforts of Smt. Kokilaben Ambani, the mother c 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 D 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. E

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 F 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 contents thereof were not known to the Board. G The correspondence contained in Exhibit F of the Company Application, at best, goes to show that MoU was the broad structure on which the demerger was to be worked out.

On the other hand, learned senior counsel appearing H 800 SUPREME COURT REPORTS [2010] 5 S.C.R. A B for the RNRL demonstrated the existence, effect, sanctity and the binding nature of MoU. It is their definite case that the existence of MoU was specifically pleaded in para 6.6 of the Company Petition. Learned Company Judge found that the MoU existed and that the terms of MoU had to be implemented. Inasmuch as the relevant part of MoU concerning the gas business have already been placed before the Division Bench in appeal with the consent of the parties and the relevant terms relating to price, tenure, volume etc. are admitted between the parties, it is only the interpretation thereof which is to be c considered. Further, the MoU itself seeks to divide the business into two groups i.e. Anil Ambani Group and Mukesh Ambani Group wherein both individuals would control and supervise various businesses through various corporate entities. The implementation of the Mou resulted in the scheme under D Section 391 of the Act before the Company Court. Apart from this, it was pointed out that the Board of RIL made a public announcement on 18.06.2005 i.e. soon after the execution of MoU on the same day publicly acknowledging, with gratitude to their mother, Smt. Kokilaben that a settlement of disputes has been reached between the members of the family. Further, E Exhibit F reflects the knowledge of the terms of MoU with the senior officials of both sides wherein efforts were being made to work out mutually negotiated GSMA/GSPA which would be in line with MoU. G F

Apart from the above factual details, Mr. Ram Jethmalani, learned senior counsel appearing for RNRL explained the Doctrine of Identification and submitted the family arrangement was arrived at and signed by Smt. Kokilaben Ambani, Shri Mukesh Ambani and Shri Anil Ambani. Among the three, Shri Mukesh Ambani was and is the Chairman and Managing Director of RIL. As per the Doctrine of Identification, a company is identified with such of its key personnel through whom it works. Mr. Jethmalani further pointed out that his actions are deemed to be action of the company itself, hence, H RIL b deemed to be aware of and bound by the actions of the RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 801 Managing Director. In support of the principle "Doctrine of A 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- //, Bangalore & Ors. vs. Mis Velliappa Textiles Ltd. & Ors, AIR 2004 SC 86 para 16, R. vs. Mc Donnell, (1966) 1 All. E.R. 8 193 at page 196 & 202, J.K. Industries Ltd. & Ors. vs. Chief Inspector of Factories and Boilers & Ors. (1996) 6 SCC 665 paragraphs 44 & 45.

In the light of the stand taken by RIL and RNRL, the contents of various clauses in MoU particularly with regard to C distribution of gas and also the conclusion arrived by the Company Judge and the Division Bench of the High Court have been carefully verified.

Firstly, the MoU is not technically binding between RIL D 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 E RNRL, the companies have more than three million shareholders, in such a situation, one cannot make the companies' personality the same as that of persons involved.

Secondly, in the light of the conduct of Mukesh Ambani, Chairman of RIL, MoU was definitely the instrument which was the basis of the scheme. Therefore, it can be used as an external aid for the interpretation of "suitable agreement" under the scheme. To put it clear, the MoU is one of the ways in which the intention of the parties can be made clear with regard to what was considered suitable. Nevertheless, there is no specific G requirement that the GSMA must confirm completely with the Mou. F

Thirdly, it must be pointed out that apart from the MoU, "suitable arrangement" must be understood in the context of H . ' 802 SUPREME COURT REPORTS [2010] 5 S.C.R. A government policies, production sharing contract (PSC) betWeen RIL and the Government, national interest and interest of the shareholders. Therefore, in our view MoU is one of the means of construing suitability of the arrangement and not the sole means. B ffiL

Subsequent to the formation of the Scheme, the Board of Directors of RIL framed the GSMA and GSPA. As per the Scheme clause VIII and sub-clause (xvii), the Board of Directors C of each of the resulting companies to be re-constituted in such manner as is agreed betWeen each resulting companies and Anil Ambani and thereupon each of the resulting companies shall be controlled and managed by Anil Ambani. The demerged company constituting the remaining Undertakings D shall continue to be controlled and managed by Mukesh D. Ambani. As per the preamble of the Scheme and even otherwise the RIL being contractor in pursuance to the PSC, remained under the control of Mukesh D. Ambani having object to commence the production and sale of gas and further as E REL has announced setting up of Gas Based Power Generation of India. RIL proposed to use part of its gas discovered for the generation of power for which purpose an appropriate gas supply arrangement agreed to be entered into between RIL and Global Fuel Management Services Limited (now RNRL) pursuant to which gas agreed to be supplied to REL for their power projects including Reliance Patalganga Power Limited, for the generation of power.

It was pointed out by the learned senior counsel for the F RNRL that pending the decisions and discussion on various aspects of gas supply agreement hurriedly in spite of objection by them, the Board on 12.01.2006 took a decision by majority and approved the GSMA and GSPA. It was contended by RNRL that such decision cannot be said to be bona fide. The G Resolution dated 12.01.2006 without new Board of Directors of resulting companies is not as per the agreed terms of the Scheme. It was also their claim that the decision as taken hurriedly on 12.01.2006 raises various doubts and it is one sided and it safeguards only the interest of RIL and not in the H 804 SUPREME COURT REPORTS [2010] 5 S.C.R. A interest of RNRL or resulting companies as it was by the Board of Directors of the RIL, the trustee company after the Scheme, but before the nomination or formation of Board of Directors of RNRL. It was argued that the procedure as followed to adopt or resolve or execute the GSMA was unfair and unjust. In those B circumstances, it was projected before the Company Judge as well as the Division Bench that whether the parties have committed any breach of clauses of the Scheme which is creating hurdle.

The Division Bench has concluded that the allocation C of gas to RNRL for its resulting companies, i.e., supply of gas for power project of Reliance Patalganga Power Limited and REL with the Gas Based Energy Resulting Company, a suitable arrangement which is required tci be made by incorporating the same in the GSMA and GSPA according to the MoU reached D between the parties on 18.06.2005. It is useful to extract the relevant portion of the MoU relating to gas supply which reads as under: E • F G H "II. (i) GAS Supply An expert international firm will be appointed to evaluate the nature and extent of gas reserves 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.

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 D 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 E 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. F (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 G an expert in such things.

On the very same issue, after analyzing all tile materials, the Division Bench agreed with the Company Judge that MoU was binding on the parties by giving different reasons. H 810 SUPREME COURT REPORTS [2010] 5 S.C.R. A On this conclusion, the Division Bench ruled that all the aspects of GSMA relating to supply of gas, tenure, pricing etc. must then be the same as provided under the MOU. The Division Bench also held that there is no absolute freedom to market the, gas as argued by RNRL. Under Articles 21.6.2(b} and (c) of the B PSC, the Government shall regulate the sale on the basis of a formula. But at the same time, the Division Bench held that there is nothing in the PSC to restrict the sale of gas by the contractor at a price lesser than that approved by the Government. In those circumstances, the Division Bench has concluded that the c Contractor has freedom to sell gas at arms length pr;r;e to the benefits of the parties to the PSC out of their share of profit gas to which Article 21.6 of the PSC applies. The Division Be.nch has finally held that "suitable arrangement" should be entered into by the parties on the basis of the MOU. D

On consideration of the above analysis, it is quite reasonable that the test must be formulated to determine what "suitable arrangement" means. The determination of "suitable arrangement" must not only include the MoU but other considerations also. Among various considerations, the prime E aspect relates to the role of the Government, the proper interpretation of PSC relating to pricing and valuation, national interest relating to the interest of consumers and protection of natural resources. At the same time, the other consideration must relate to the interest of RNRL, i.e., whether the GSMA results in RNRL becoming a shell company and whether the GSMA is a bankable agreement. F

Insofar as the workability of GSMA, RNRL has fourfold objection$. They are: 1) that the "suitable arrangement" under the scheme is nothing but the MoU; 2) that the GSMA is not a bankable agreement; 3) malafide on the part of RIL to bring in an illegal gas agreement; 4) Pursuant to the stand of the RIL and its response, RNRL has raised six points of protestation. The GSMA was put into the place in pursuance of Clause 19 of the scheme. Clause 19 of the scheme provides that in order G H RELIANCE NATURAL RESOURCES LTD. v. i-\ELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 811 to effectuate the demerger or RIL, a suitable agreement has A to be formulated. In other words, the position of RNRL is that "suitable arrangement" within the meaning of 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. GSM.\ 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. B D SUITABLE ARRANGEMENT:

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 arrangerr.ent must be suitable for E 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 national and public interest. F

There is a need to construct a suitable arrangement under Clause 19. Th.e broader construction of suitable arrangement is that the arrangement must be suitable not only for RIL and RNRL but also suitable with respect to the government's interest under PSC, in consonance with the decisions of EGOM or any other gas utilization policy as well G as larger national interest. This is because gas is an essential natural resource and is not owned by either RIL or RNRL. The Government holds this natural resource as a trust for the people of the country. Supply of gas is a matter of national interest and in the present case, due to the very nature of the companies H 812 SUPREME COURT REPORTS [2010] 5 S.C.R. involved, there are huge number of shareholders and people who will be indirectly affected by the policies of the companies. Therefore, the arrangement flowing from Clause 19 must be suitable for interest of all the above-mentioned persons.

Keeping the said object in mind, Clause 19 must be interpreted by taking into account 1) the interest of RNRL as reflected by the MoU; 2) the interest of the shareholders of RIL and RNRL; 3) the obligations of RIL under PSC; 4) the national policy of gas including the decisions of EGOM and Gas Utilization Policy; and 5) broader national and public interest. (0) PRODUCTION SHARING CONTRACT CPSC):

Some of the salient features of the PSC are as follows: (i) Clause 6 of the Preamble makes it clear that discovery and exploitation will be in the over all interest of India. (ii) Article 8.3(k) makes the contractor is to be mindful of the rights and interest of the people of India in the conduct of petroleum operations. (iii) Article 10. 7(c) (iii) the contractor is duty bourid to · ensure that the production area does not suffer any excessive rate of decline of production or an excessive loss of reservoir pressure. (iv) Article 32.2 makes it clear that the contractor is not entitled to exercise the rights, privileges and duties within the contract in a manner which contravenes the laws of India. (v) Article 21 (1) mandates that the discovery and . production of riatur(i!I gas shall be in the context of government's policy for the utilization of natural gas. The above clauses in the form of articles make it clear that PSC is subject to the Constitution of India, A 8 c D E F G H RELIANCE 'NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 813 the Oil Fields Act, 1948, the Petroleum and Natural A Gas Rules, 1959, the Territorial Waters, the Continental Shelf and Exclusive Economic Zone and other Maritime Zones Act, 1976 and also the gas utilization policy. B (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 C Government till the time the natural gas reaches the delivery point as defined in the PSC.

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 D reaches the delivery point and thus, RIL has no right to dispose of the same without the express approval of the Union of India.

This Court in State of Tamil Nadu vs. L. Abu Kavur Bai, (1984) 1 sec 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 through out the community. E

In the light of the above, the Executive of the Union of F India enjoys its Constitutional powers under Article 73 and Article 77 (3) in order to fulfill the objectives of the Directive Principles of State Policy relating to distribution of Natural Gas. This Natural Gas is a material resource under Article 39(b). in view of this, along with the contemplation of a Government's G Policy for the utilization of Natural Gas under Article 21.1 and the decision of this Court referred to above, the Executive decided that distribution would include within its ambit acquisition, including acquisition of private owned material resources. The framing of the "Gas Utilization Policy" in H 814 SUPREME COURT REPORTS [2010] 5 S.C.R. '· A identifying the priority sectors, and allocating the requisite quantities in accordance with the needs of the said sectors and subjecting marketing freedom to the order of priority and guidelines framed is very much in accordance with law. Consequently, Article 21.1 and Article 21-.3-shoutd oe read In B consonance with the 'Gas Utilization Policy and the latter is neither inconsistent with the provisions of the Constitution, nor the Oil Field Regulation Act, 1948, Petroleum and Natural Gas Rules 1959 and the Articles of the Production Sharing Contract referred to above. c

52. To put it clear, both in terms of the Gas Utilization Policy and the Production Sharing Cohtract, Government in the capacity as an Executive of the Union can regulate and distribute the manner of sale of Natura1 Gas through allotments and allocation which would sub-serve the best interest of the D country. E

At the outset, it is to be noted that the price determined by the Government is not the subject matter of either the Company Application nor 1s it an issue which arises out of the impugned judgment. There is no duly constituted proceeding where any challenge has been laid to Government Policy, price fixation, grant or refusal of approval. Further, without such a proceeding in existence and without NTPC being a party in the present proceedings, any issue touching upon the validity of F price fixation or price formula does not arise.

54. The price of $ 4.20/mmbtu is based on the formula approved by the Government under its powers pursuant to the terms of the PSC. The policy of the Government is not under challenge or adjudication before the Court. G

55. Mr. Gopal Subramanium, learned Solicitor General explained that up to early 1990s, prior to NELP and pre-NELP years, gas was being produced only from the fields operated by the Government companies, viz., ONGC and OIL, out of H blocks which were given to these companies by the RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASiVAM, J.] 815 Government on nomination basis. Such gas was subjected to A 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 B 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 c 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 D basis and certain blocks were awarded to them under a Production Sharing Contract. The pricing formula was specifically mentioned in such contracts. This was a major departure from a cost-plus or APM regime. It was thought that without this, private investment will not take place. Pre-NELP E regime was further improved to NELP regime. Sourcing of investment, technology and efficient operations from companies within ·the country and from outside on a level playing field with domestic public sector companies was the main feature of the NELP regime and, therefore, the 'arm's length' price, which is another name for market price, was introduced in the PSCs of NELP. Exploration and production of oil and gas is associated with considerable risk and no investment would have come if product prices were subjected to cost-plus or administered price regime.

So, the NELP pricing regime provides for arm's length price which is another G name for market price. But since the gas market is not fully developed unlike markets for crude oil, it is stipulated in the PSC that there will be a formula or basis for the determination of the prices Which shall be approved by the Government prior to sale and for granting this approval, Government can not be H F 816 SUPREME COURT REPORTS [2010] 5 S.C.R. A arbitrary but shall take into account the prevailing policy, if any, on pricing of natural gas, including any linkages with traded liquid fuels. The relevant PSC provisions in NELP-1 which guide the pricing of KG 0-6 gas, are as follows: "Article 21.6.1 - The Contractor shall endeavour to sell all Natural Gas produced and saved from the Contract Area at arms-length prices to the benefits of Parties to the Contract. Article 21.6.2 - Notwithstanding the provision of Article 21.6.1, Natural Gas produced from the Contract Area shall be valued for the purposes of this Contract as follows: (a) Gas which is used as per Article 21.2 or flared with the approval of the Government or re-injected or sold to the Government pursuant to Article 21.4.5 shall be ascribed a zero value; (b) Gas which is sold to the Government or any other Government nominee shall be valued at the prices actually obtained; and (c) Gas which is sold or disposed of otherwise than in accordance with paragraph (a) or (b) shall be valued on the basis of competitive arms length sales in the region for similar sales under similar conditions.

Article 21.6.3 - The formula or basis on which the prices shall be determined pursuant to Articles 21.6.2 (b) or (c) shall 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:_ B c D E F G H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 817 It is further pointed out that in accordance with this approach, A 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 Governmen't's rights and obligations under the PSC. RIL submitted a formula based on Arm's Length B 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 c 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. It is further pointed out that the said exercise was D undertaken by the government on an independent application of mind and government differed from the Contractor and the contractor relented leading to a lower price being fixed at $4.2 instead of $4.32 claimed by the contractor. This formula is valid for 5 years as per the EGOM decision. According to the E formula, the price may vary between US $ 4.2 to US $ 2.5/ mmbtu during a period of 5 years. With crude prices of US $ 60/barrel or more, the price will be US $ 4.2/mmbtu; for US $ 25/barrel, it will be US $ 2.5/mmbtu. The formula, thus, imposes a ceiling on gas price at US $ 4.2/mmbtu. EGOM also decided F on gas utilization policy in May 2008 whereby the priority sector and consumers were decided.

57. It is also brought to the notice of this Court that EGOM consisted of the Chairman (External Affairs Minister), who was a' very senior Minister in the Council of Ministers, Ministers of G the consuming sectors (such as Fertilizer and Power), the Minister from producing Sector (i.e., Petroleum & Natural Gas), and the Ministers in charge of Ministry of Finance, Law and Corporate Affairs, besides Planning Commission. H 818 SUPREME COURT REPORTS [2010] 5 S.C.R. A

The pricing formula/basis as per the PSC has to be: (a) Firstly on arm's length basis, (b) Secondly, to the benefit of the contractor as well as the Government; (c) Thirdly, having linkages with traded liquid fuels, and (d) Fourthly, Government will have to perform Regulator's fcmclion till one is appointed for the purpose.

The following table will indicate ttie pricing prevalent in India in respect of gases from other fields (excluding, of course, the gas from the Government companies' fields, which are at administered prices): (in US$/mmbtu) PMT (weighted) Rawa Rawa Satellite Lakshmi Weighted average

5.51

3.5

4.3

4.75

5.28 B c D E F 60) The fixation of price arose before the EGOM only in August, 2007 when the price formula was considered. As shown above, all prices prevailing in India and abroad indicated a price which was in the region of $ 4.2. The Contractor had G asked the Government to approve it for RNRL in 2006, but the Government rejected it as it was a related party transaction. 'Arms length sales' has been defined in Article 1.8 of the PSC as follows: H "Arms Length Sales" means sales made freely in the open market, in freely convertible currencies, between willing RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 819 and unrelated sellers and buyers and in which such buyers A 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 B 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 c normal commercial practices. "

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 D in the present proceedings to interpret the PSC.

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 E of_40 mmscmd of gas was decided upon in the months of May, 2008 in terms of sectors and units to which gas would be supplied. As the production stabalized and further volumes of gas were known to become available, the government recently decided on the utilization of a further volume of 19.826 (+0.875) F mmscmd on firm basis + 30.00 mmscmd on fallback basis in October, 2009. As emphasized earlier, it is up to the owner (the Government) to decide as to how to utilize the gas and at what price it can be sold and this has been done in accordance with Production Sharing Contract (PSC) which has a statutory basis. G The PSC under Article 21.1 makes it clear that the Contractor is bound by the Government's policy for utilization of natural gas.

The position is that under Article 21.6.1 of the PSC, the gas must be sold at an arm's length price. Article 21.6.2 states that notwithstanding 21.6.1, if the gas is sold not to the H 820 SUPREME COURT REPORTS [2010) 5 S.C.R. A Government or its nominee, it must be sold on the basis of "competitive arm's length sales in the region for similar sales under similarconditions", Importantly, Article 21.6.3 states that the basis on which such prices are to be determined shall be approved by the Government prior to the sale. In the present B case, the formula submitted by RIL was looked into by EGOM and examined by the Committee of Secretaries and PM's Economic Advisory Council. Due to this the price was determined to be $ 4.20, on the basis of the formula, price , equivalentto 2.5 +(Crude Price-2l))0.15. c

Another important consideration to be kept in mind is that the PSC overrides any other contract which may be entered into for the supply for gas. This prineiple flows from the following a) the natural. resource, gas, is held by the · Government and trust on behalf the people. Therefore, for legal D purposes, the Government owns the gas till it reaches its final consumer; b) the PSC is the basis on which the contractor exercises his right over the supply of gas. Since ~t is the very basis of such a right, the contractor does not have the competent power to give any rights which do not accrue to it E under the PSC.

One of the main purposes of the PSC is pricing and distribution of gas. Though there is ''freedom of trade". within the PSC, but this freedom is exercised by the contractor through F a transparent bidding· process and non-interference of the Government in the administration of gas supply. As a matter of policy also, the 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 G 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.

It is also relevant to answer a fundamental question that H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 821 is whether the power of the Government under the PSC to A . q~termine 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 B 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 C 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 keeping the objectives of the PSC in mind, it would not be possible to restrict the power of the D Government. (2) The arrangement in pursuance of Clause 19 of the Scheme must be suitable for the shareholders-of RIL as well. The position of RIL is that if gas is sold E at $2.34 that is at a price lower than the one decided by the Government, there will be a disconnect between the actual amount which the Contractor will earn from the sale of gas and the amount which will be deemed to have been earned F by the Contractor under the PSC. Due to this, the Contractor would be losing out on its own profits which RIL claims would be halved. It is also the grievance of RIL that the Court must take into account the fact that the PSC provides for the G legitimate rights of the Contractor to earn certain profits. If these profits are reduced to such a degree, it would affect the interest of the shareholders of RIL. (3) On the other hand, the posjtion of RNRL as argued H 822 SUPREME COURT REPORTS [2010] 5 S.C.R. A B . before us is that the GSMA is not suitable for them because it was not a bankable contract and that the MoU is the suitable arrangement. The question remains whether the GSMA is unsuitable due to it not being a bankable contract or it reducing RNRL to a shell company. BANKABLE CONTRACT:

The question of bankability has been argued in detail by RIL. Mr. Salve, learned senior counsel pointed out that GSMA C cannot be considered a non-bankable contract. On behalf of RIL, it was pointed out that the question of bankability has to be seen in the context of the Power Project that would be and or should be promoted by the RNRL. There is no evidence whatsoever to show that financing of any power project ~as D declined because gas supply arrangement was considered to be non-bankable. It bears emphasis that under the GSMA in respect of specific power projects, a GSPA qua that project would be entered into. ·F E

Normally, a banker financing a non-recourse project (i.e_ a situation where the finance for the project can only be recovered from the project and not from the assets of the owner df the project beyond those of the project itself) would insist on full security not only from the physical assets but also from revenue streams (normally the sale price of electricity would be required to be put in escrow) a• well as firm supply contract of scarce resources like coal supply or gas supply or other such valuable 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 G 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". H RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 823

RNRL's case is that the project being promoted require A 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 B understanding either in the MoU or in the Scheme.

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 C its power project. Obviously to secure finance for a project RNRL would inter alia have to establish that gas was available for that project on suitable terms. For that purpose, RIL had proposed in the GSMA that it would enter into a specific gas supply contract that would have a definite tenure, definite price D and definite quantity. The submission that the GSMA is not a bankable agreement has to be seen in this context.

It was pointed out by RIL that whether or not the contract is bankable is not a question of law but a question of fact. There E are two ways to determine this, namely - (a) by way of fact evidence showing that banks/ financial institutions/Funding agencies had rejected the project on account of unsuitability of certain clause of GSMA; or F (b) ·expert evidence suggesting that on the basis of such GSMA it could not be possible for RNRL to raise funds for the gas based power project.

It was further pointed out that RNRL has acted in furtherance of GSMA. It applied for grant of permission to lay· pipelines on an assertion that the GSMA is a suitable and valid 1binding contract. In its letter dated 18th December, 2006 after filing of the petition RNRL sought Government's approval for H G 824 SUPREME COURT REPORTS [2010] 5 S.C.R. A laying pipeline. RNRL has acted under the price approval clause of the GSMA by seeking approval of the price of US $ 2.34. RNRL had also moved the Government for seeking approval of the price of US $ 2.34 by their letter dated 17th July, 2007. B

While RNRL had all along been contending that for want of bankable gas supply agreement it could not establish a power plant including Dadri. In fact, money has already been raised$ 510 m for Dadri Plant by way of External Commercial Borrowings. This position was candidly accepted by RNRL. C Reliance Power Ltd., the company that is now promoting Dadri has raised Rs.11000 crores from the public. The shortage of funds is an excuse - it is simply not true.

Furthermore, according to RIL, it is a fact that other gas D based power plants has been set up in the country without having any long term supply of gas contrary to what is being alleged by RNRL. It is, therefore, submitted that the contention that GSMA is not a bankable document is without any factual basis. E F G

RNRL has enumerated the following main elements which have, according to them, resulted in the agreement being not bankable :-

3. Price- price of US $ 2.34 wrongly subjected to government approval Term- as per the formula (clause 3b) given 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. 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. H

4. Capping of liability- clause 14.3 (i) of the GSMA RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 825 limits the liability of the seller i.e. RIL to maximum A 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 8 basis for determination of the government's share in Profit petroleum under the PSC, the GSMA then will stand annulled.

In view of all these arguments and counter-arguments regarding the unsustainability of the arrangement under the C 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 D policies, including the over-riding effect of the PSC (including the Development Plan under Article 10.7), EGOM decisions and other related national policies. (E) ROLE OF GOVERNMENT:

Though in the earlier part, we have adverted to certain aspects about the government's role since the above issue is relevant for disposal of the dispute between the two entities, it would be beneficial to once again narrate certain facts and decide the issue. E F

In 1999, NELP announced to award petroleum blocks for exploration, development, production of petroleum and natural gas. RIL with NIKO were the successful bidders for block KG-D6. Pursuant to the same, the government and the G contractor (RIL & NIKO) entered into a Production Sharing Contract (PSC). In 2002, RIL & NIKO announced discovery of significant result from KG-06 b.lock.

In 2003, NTPC floated a, global tender for supply of gas H 826 SUPREME COURT REPORTS [2010] 5 S.C.R. A to their power projects. RIL succeeded in its bid to sell, transport and deliver 132 Trillion British thermal unit (TBtu) or 1000000 MMBTU. NTPC confirmed the same on 16th June 2004. In a board meeting of Reliance Energy Limited (REL) held in 2004 which was attended by Mukesh Ambani and other members B of RIL recorded that gas from KG basin would be supplied for the power projects of REL. In 2005, MoU was arrived at by both the parties and Anil Ambani resigned as a Joint Managing Director of RIL. Thereafter, a scheme of arrangement was moved C!nd the companies decided to move Bombay High c Court for sanction of the scheme of demerger. The High Court approved the scheme. The scheme provided that an appropriate gas supply arrangement will be entered into between RIL and RNRL.

The learned Company Judge in his order has D concluded that the GSMA is not in terms of the scheme. MoU is binding on both partiE)s. The terms as mentioned in MoU and GSMA need to be suitable for both the parties subject to government policies and national and international practice in supply of gas or such other products. The Company Judge further said that such a contract is subject to government's approval in view of NELP & PSC, but keeping in view the several factors including freedom and right to the contractor/ RIL and the limited and restricted scope of interference in such commercial aspects, unless, it is breach of any public policy E F or interest.

\/Vhen the matter was taken up before the Division Bench, the Division Bench had permitted the Union of India to join as intervener in the appeals for the limited purpose of G 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. H

Before the Division Bench, on behalf of the Union of RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 827 India, it was submitted that India has been facing a chronic A 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 c 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 how natural resources which are national assets vesting in the Government of India are to be dealt with and that the price which has been arrived at is binding on the contractor and no party can raise a challenge regarding the same in a company petition. D B

The Division Bench, by the impugned order, has concluded the terms as mentioned in the MoU and GSMA need to be modified suitably for both the parties subject to the E government's policies and national, international practice in supply of gas and such other products. The contract of such nature is subject to government's approval in view of NELP and PSC and such related government policies, but keeping in view the several factors including the freedom and the right of the F 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. As regards the tenure of the gas supply, the Division Bench observed that the MoU clearly carves out that the NTPC G supply agreement would be a general guidance for the same and shall as far as possible be the basis for such contracts and the terms of such contracts will be no less favorable than those of NTPC contract. The NTPC contract clearly provides 17 years . as Jhe period for which RIL will supply gas. With regard to the H 828 SUPREME COURT REPORTS [2010] 5 S.C.R. A price at which the gas has to be supplied to REL for all its projects including its affiliates would be subject to and under the terms of production Sharing contract which REL has entered with the ministry of petroleum and NIKO resources limited on 12th April, 2000. In terms of article 21.6.3 the contractor shall B be at the liberty to market the gas but then the same will have to be regulated on the basis of formula on which the price shall be determined pursuant to articles 21.6.2 (b) and (c) to be approved by the government prior to the sale of natural gas to the consumer/buyer. The Division Bench has made it clear that there is no specific provision under the production sharing contract to prevent the contractor to sell the gas at lesser price than what is fixed by the government for valuation of gas to the extent of its share and further observed that that the contractor has freedom to sell gas at arm's length prices to the benefit of the parties to the production sharing contract out of their share of Profit gas to which art. 21.6 Of the PSC applies. C 0

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 E Public Trust Doctrine (PTO). Even though this doctrine has been applied in cases dealing with environmental jurisprudence, it has its broader application.