RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD.

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A (Civil Appeal No. 4273 of 2010) MAY 7, 2010 B

Companies Act, 1956: c Sections 193, 194, 195, 293, 391, 392, 393 and 394 - Gas Sales & Master Agreement (GSMA) - Entered into by Reliance Natural Resources Limited (RNRL) with Reliance Industries (RIL) on the basis of Memorandum of D Understanding (MoU) arrived at between Ambani brothers - Scheme approved by Company Court - Hence Sections 392 and 394 applicable - Power of the Court under Sections 391 to 394 wide enough to make necessary changes in the Scheme - How&er, the power does not extend to making any substantial or substantive changes to the Scheme - The said E MoU does not fall under the corporate domain - Neither approved by the shareholders nor attached to the Scheme -: Thus technically the MoU is not binding - Nevertheless the MoU formed the backdrop of the Scheme - Hence contents of the Scheme to be interpreted in the light of the MoU - F Suitable arrangement under Clause 19 of the Scheme - Must be suitable for the interests of shareholders of RNRL and RIL as also the obligation of RIL under the Production Sharing Contract (PSC) and the broader national and public interest - Article 21 of the PSC must be interpreted to give the power G to the Government to determine both the valuation and price of Gas - Government owns the gas till it reaches its ultimate consumer - PSC shall override any other contractual obligation between the Contractor and any other party - Gas Sales & Master Agreement (GSMA) and Gas Sale & H 704

RELIANCE NATURAL RESOURCES LTD. v. 705 RELIANCE INDUSTRIES LTD. Purchase Agreement (GSPA) entered into with RNRL should A fix the price, quantity and tenure in accordance with PAC - Empowered Group of Ministers (EGOM) has already set the price of gas for the purpose of PSC - Parties must abide by this and other conditions placed by the Government policy - Interests of the shareholders must be balanced - This B balance cannot be struck by the Court as the Court does not have the power under Sections 391 to 394 to create new conditions under the Scheme - RIL directed to initiate renegotiation with RNRL within six weeks so that the interests of the shareholders are safeguarded and finalise the same c within eight weeks thereafter - Resultant decision should be placed before the Company Court for necessary orders - Constitution of India, 1950 -Article. 14, 39(b), 73, 77(3), 291, 298 - Oil field (Regulation & Development) Act, 1948 - Territorial Waters Continental Shelf, Exclusive Economic 0 Zone and other Maritime Zones Act, 1976 - Petroleum and Natural Gas Rules, 1959. Constitution of India, 1950: Directive Principles of State Policy - Article 39(b) - Natural gas is a mate/'.ial resource-_.,,.,__ Natural resources are E vested with the Government as a matter of trust in the name of the people of India - It is the solemn duty of the State to protect the national interest - Natural resources must always be used in the interests of th-e country, and not private interests - Articles 73, 77(3). F Doctrines: Public Trust Doctrine - Doctrine of Identification - Applicability of. The appeals have been filed against the judgment G and order of the Division Bench of the High Court of Bombay passed in Appeal in Company Application and in Company Petition filed by Reliance Natural Resources Ltd. (RNRL) and Reliance Industries Limited (RIL). The Union of India has filed the SLP against the same H

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A common order passed by the Division Bench of the Bombay High Court. The matter mainly relates to Gas Utilisation Po-licy and the Pricing Policy of the Government and the Memorandum of Understanding (MOU) entered into amongst the family members of the 8 promoter and its effect on RIL, apart from certain ancillary issues. In view of the rival contentions, the following issues arose for consideration: (a) Wh~ther the Company Petition filed by RNRL c und~r Section 392 of the Companies Act, was maintainable? (b) Even if the Company Petition was maintainable,· whether the challenge raised by D RNRL to the GSMA, that it is not a "suitable arrangement" was maintainable particularly in view ~f the fact that on merits, the Company Judge had found, these objections to be unsustainable? E (c) Whether the MoU entered into amongst the family members of the Promoter was binding upon the corporate entity - RIL? (d) Whether the terms of the MoU are required_ to be incorporated in the GSMA as held by the F Division Bench? (e) Whether the provisions in the GSMA requiring Government approval for supply of gas to RNRL is unreasonable and that its inclusion renders lhe GSMA as not a "suitable G arrangemeR-1:" as contended by RNRL? {f) Having insisted upon a Gas Sale and Purchase Agreement (GSPA) in conformity with the NTPC draft GSPA dated 12th May, H 2005 which· contained an unequivocal

" RELIANCE NATURAL RESOURCES LTD. v. 707 RELIANCE INDUSTRIES LTD. 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 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? i. Whether the approval of the Government is c (h) required to the price at which gas is sold by the contractor under the PSC? ii. Whether the Government has the right to regulate the distribution of gas produced D which it has exercised by putting in place the Gas Utilization Policy under which sectoral and consumer-wise priorities (to the quantities specified) have been identified and notified to RIL? E iii. Whether the Contractor has a physical share in the gas produced and saved which it can deal with at its own volition? (i) In view of the Gas Utilization Policy and the F Pricing Policy of the Government, whether the "Suitable Arrangement" for supply of gas to Dadri Power Plant of REL can only be on the same terms as are applicable to other anottees of gas and that too to the extent of the quantity of gas that may be allocated by the G. Government as and when the Dadri Power Plant is ready to receive gas? Disposing of the matters, the Court H

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RELIANCE NATURAL RESOURCES LTD. v. 709 RELIANCE INDUSTRIES LTD. the Scheme which fall within the ambit of the requirements as contemplated under these sections. In the absence of any other provisions except Section 392, it is difficult to accept the contention that the present application under Section 392 of the Companies Act is without jurisdiction. On the other hand, Section 391 to B Section 394 has ample power and jurisdiction to supervise the scheme as sanctioned under the Companies A!:t. As rightly observed by the Company Judge, the exigencies, facts and circumstances, play dominant role in passing appropriate order under c Sections 391 to 394 after sanctioning of the Scheme. The Company Court is not powerless and can never become functus officio. Sections 391 to 394 are interconnected and it can pass appropriate order for sanctioning of any Scheme including of arrangement, demerger, merger and D amalgamation. Therefore, the application filed by RNRL under Section 392 is maintainable. [Para 28(xii)] [792-B• E] Association of Natural Gas & Ors. vs. Union of India & Ors. (2004) 4 sec 489 (CB), relied on. E Meghal homes (P) Ltd. vs. Shree Niwas Girni K.K. Samiti & Ors. (2007) 7 SCC 753, held inapplicable. State of Tamil Nadu vs. L. Abu Kavur Bai, (1984) 1 SCC 515; Safar Jung Sugar Mills Ltd. etc. vs. State of Mysore & F Ors., (1972) 1 SCC 23; Tinsukhia Electric Supply Company Ltd. vs. State of Assam & Ors., (1989) 3 SCC 709; Ramana Dayaram Shetty vs. International Airport Authority of India & Ors, (1979) 3 SCC 489; Food Corporation of India vs. Mis Kamdhenu Cattle Feed Industries, (1993) 1 SCC 71; Miheer H. Mafatlal vs. Mafatla/ Industries Limited (1997) 1 SCC 579 G and S.K. Gupta & Anr. Vs. K.P. Jain & Anr. (1979) 3 SCC 54, referred to. (B) Memorandum of Understanding (MoU) 2.¹. It is clear that both parties acted upon the said H

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A family arrangement/Mou dated 18.06.2005. The letters and e-mails, further confirmed that there is an arrangement made and agreed between the Reliance Industries Limited (RIL) and Anil Ambani Group (RNRL), it is also clear and show that the discussion between the B group of officials was intended to expedite the implementation of the MoU by producing a "suitable arrangement". Though copy of the MoU was not part of the record before the Company Judge, by consent, the relevant portion was placed before the Division Bench at c 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 20'06 and there is no specific denial by the RIL. The Press Release at the 0 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 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 sharehold.ers have agreed for the Scheme. Further it was demonstrated that after execution of MoU, both the parties have been entering into contracts and agreements as an independent entity. Except the gas supply agreement all other companies as found are working and running their affairs smoothly. [Para 30] [798-G-H; 799-A-E] G 2.2. The MoU is not technically binding between RIL and RNRL It is not in dispute that MoU is between three persons and the personality of the company must be construed separate from these persons. In the light of the conduct of Mukesh Ambani, Chairman of RIL, MoU was definitely the instrument which was the basis of the

RELIANCE NATURAL RESOURCES LTD. v. 711 RELIANCE INDUSTRIES LTD. scheme. Therefore, it can be used .as an external aid for A 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 requirement that the Gas Sales and B Master Agreement (GSMA) must conform completely with the MoU. [Paras 35, 36] [801-G-E] 2.3. Apart from the MoU, "suitable arrangement" must be understood in the context of government policies, Production Sharing Contract (PSC) between RIL C and the Government, national interest and interest of the shareholders. Therefore, ~his court is of the view that MoU is one of the means of construing suitability of the arrangement and not the sole means. [Para 37] -[801-H; 802-A-B] D Kale & Ors. vs. Deputy Director of Consolidation & Ors., (1976) 3 SCC 119; K.K. Modi vs. K.N. Modi & Ors., (1998) 3 SCC 573; V.B. Rangaraj vs. V.B. Gopalkrishnan & Ors. AIR 1992 SC 453; Union of India vs. United India Insurance Co. Ltd. (1997) 8 SCC 683; Assistant Commissioner, E Assessment-II, Bangalore & Ors. vs. Mis Velliappa Textiles Ltd. & Ors, AIR 2004 SC 86 and J.K. Industries Ltd. & Ors. vs. Chief Inspector of Factories and Boilers & Ors. (1996) 6 sec 665, referred to. F R. vs. Mc Donnell, (1966) 1 All. E.R. 193, referred to. (C) Gas Sales & Master Agreement (GSMA) and Gas Sales & Purchase Agreement (GSPA) - whether they qualify as suitable arrangement: 3.¹. The determination of "suitable arrangement" G must not only include the MoU but other considerations also. Among various considerations, the prime aspect relates to the role of the Government, the proper interpretation of Production Sharing Contract (PSC) relating to pricing and valuation, national interest relating H

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A 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. [Para 43] B [810-D-F] 3.2. The GSMA was put into the place in pursuance of Clause 19 of the scheme. Clause 19 of the scheme provides that in order to effectuate the demerger or RIL, a suitable agreement has 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. GSMA violates the scheme and must be replaced taking into account the various points of protestation raised by them. On the other hand, it is the claim of RIL that since the Mou is not a binding document, there is no requirement that the GSMA must replicate the MoU. [Para 44] [810-H; 811-A-D] SUITABLE ARRANGEMENT: 3.3. There is a need to construct a suitable arrangement under Clause 19. The 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 Empowered Group of Ministers (EGOM) or any other gas utilization policy as well 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 involved, there are

RELIANCE NATURAL RESOURCES LTD. v. 713 RELIANCE INDUSTRIES LTD. 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 B 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. [Paras 46, 47) [811- c F-H; 812-A-B] (D) PRODUCTION SHARING CONTRACT CPSC): 4.¹. It is not permissible for RIL to enter into a contract with RNRL to supply fixed quantity of gas as the D gas continues to be the property of the government _till the time it reaches the delivery point and thus, RIL has no right to dispose of the same without the express approval of the Union of India. [Para 49) [813-D] 4.2. The Executive of the Union of India enjoys its E 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 F Government's Policy for the utilization of Natural Gas under Article 21.¹, 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 identifying the G 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 should be read in consonance with the Gas Utilization Policy and the H

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A 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. To put it clear, both in terms of the Gas Utilization Policy and the Production B Sharing Contract, Government in the capacity as an Executive of the Union can regulate and distribute the manner of sale of Natural Gas through allotments and allocation which would sub-serve the best interest of the country. [Paras 51 and 52] [813-F-H; 814-A-D] C 4.3. The price determined by the Government is not the subject matter of either the Company Application nor is 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 price fixation or price formula does not arise. 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. [Paras 53 and 54] [814-C-F] 4.⁴. In the instant case, the price formula was approved by Government in September, 2007 when it was expected that gas would be produced from the basin in June, 2008. The utilization of 40 mmscmd of gas was decided upon in the months of May, 2008 in terms of sectors and units to which gas would be supplied. As the production stabilized 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) mmscmd on firm basis + 30.⁰ mmscmd on tailback basis in October, 2009. As emphasized earlier, it is up to the owner (the Government) to decide as to how

RELIANCE NATURAL RESOURCES LTD. v. 715 RELIANCE INDUSTRIES LTD. 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. The PSC under Article 21.¹ makes it clear that the Contractor is bound by the Government's policy for utilization of natural gas. [Para 62] [819-E-G] B 4.5. 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 Government or its nominee, it must be sold on the basis of "competitive arm's length sales in the region for similar sales under similar conditions". 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 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 equivalent to 2.5 + (Crude Price-25)0.15. Another important consideration to be kept in mind is that the PSC E overrides any other contract which may be entered into for the supply for gas. This principle flows from the following a) the natural resource, gas, is held by the Government and trust on behalf the people. Therefore, for legal purposes, the Government owns the gas till it F reaches its final consumer; b) the PSC is the basis on which the contractor exercises his right over the supply of gas. Since it 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 under the PSC. [Paras G 63, 64] [819-H; 820-A-E] 4.6. 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 a transparent bidding process H

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A and non-interference of the Governmen• in the administration of gas supply. As a matter of P<>it:Y also, the Government must be free to determine the J81uation formula as well as the price. Therefore, keepi111g these considerations in mind, the Government's interpretation B of the PSC is valid. Thus the Government has tu power to determine valuation as well as price for the purpose of the PSC. [Para 65) [820-F-G] State of Tamil Nadu vs. L. Abu Kavur Bai, (198') 1 SCC 515, relied on. c 4.7. The power of the Government under t.. PSC is quite bread and includes the power to regulate fte price and distribution of gas. Such a power .quir~s determination of price of supply and not onlj for the determination of the share of the Contractor but also for the Government. Thus keeping the objectives ofJhe P"SC in mind, it would not be possible to restrict the1· wer of the Government. The arrangement in purs nee of Clause 19 of the Scheme must be suitabl or the shareholders of RIL as well. The position of RU.:, that if gas is sold at $2.34 that is at a price lower thaii the one decided by the Government, there will be a d+onnect between the actual amount which the Contractor.ill earn from the sale of gas and the amount which will ~deemed to have been earned by the Contractor under Vte PSC. F Due to this, the Contractor would be losing out ot its own profits which RIL claims would be halved. It is flso the grievance of RIL that the Court must take into Jccount the fact that the PSC provides for the legitimate ;ghts of the Contractor to earn certain profits. If these P•fits are reduced to such a degree, it would affect the i'*rest of the shareholders of RIL. [Para 66(1)(2)) [821-C-G] BANKABLE CONTRACT: . 5.¹. While RNRL had all along been contending that for want of bankable gas supply agreement it could not

RELIANCE NATURAL RESOURCES LTD. v. 717 RELIANCE INDUSTRIES LTD. establish a power plant including Dadri. In fact, money has already been raised to the extent of $ 510 m for Dadri Plant by way of External Commercial Borrowings. This position was candidly accepted by RNRL. 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 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, and that the contention that <f SMA is not a c bankable document is without any factual basis. [Paras 73, 74] [824-B-D] 5.2. In view of all the arguments and counter- arguments regarding the unsustainability of the arrangem~nt under the GSMA, it is not proper for the D 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, such negotiations must be done within the ambit of the Government policies, including the over- E riding effect of the PSC (including the Development Plan under Article 10.7), EGOM decisions and other related national policies. [Para 76] [825-C-D] (E) ROLE OF GOVERNMENT: F 6.¹. 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'1 must be seen in the context of the Public Trust Doctrine (PTO). Even though this doctrine has been applied in cases dealing with environmental jurisprudence, it has its broader G application. This doctrine is part of Indian law and finds application in the present case as well. It is thus the duty of the Government to provide complete protection to the natural resources as a trustee of the people at large. [Paras 84, 85) [828-E; 829-H; 830-A] H

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7. The natural resources are vested with the Government as a matter of trust in the name of the people of India. Thus, it is the solemn duty of the State to protect the national interest. Even though exploration, extraction

RELIANCE NATURAL RESOURCES LTD. v. 719 RELIANCE INDUSTRIES LTD. and exploitation of natural resources are within the domain of governmental function, the Government has decided to privatize some of its functions. For this reason, the constitutional restrictions on the government would equally apply to the private players in this process. Natural resources must always be used in the interests of the country, and not private interests. The broader constitutional principles, the statutory scheme as well as the proper interpretation of the PSC mandates the Government to determine the price of the gas before it is supplied by the contractor. The policy of the Government, C including the Gas Utilization Policy and the decision of EGOM would be applicable to the pricing in the present case. The Government cannot be divested of its supervisory powers to. regulate the supply and distribution of gas. [Para 91] (831-G-H; 831-A-E] D 8.¹. Though the Contractor (RIL) has the marketing freed')m to sell the product from the contract area to other consumers, this freedom is not absolute. The price at which the produce will be sold to the consumer would be subject to government's approval. The tenure of such contracts can't be such that it vitiates the development plan as approved by the government. Therefore, the GSMA and the GSPA entered into with RNRL should fix the price, quantity and tenure in :::ccordance with the PSC. [Para 92(F)(a)] [835-E-F] 8.2. The EGOM has already set the price of gas for the purpose of the PSC. The parties must abide by this, and other conditions placed by the Government policy. The GSMA/GSPA deeply affects the interests of the shareholders of both the companies. These interests must be balanced. This balance cannot be struck by the court as the court does not have the power under Sections 391-394 to create new conditions under the scheme. In view of the same, RIL is directed to initiate renegotiation with RNRL within six weeks the terms of the H

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A GSMA so that their interests are safeguarded and finalize the same within eight weeks thereafter and the resultant decision be placed before the Company Court for necessary orders. [Para 92(F)(b)] [834-G-H; 835-A] 8.3. While renegotiating the terms of GSMA, the B following must be kept in mind: (1) The terms of the PSC shall have an over-riding effect; (2) The parties cannot violate the policy of the Government in the form of the Gas Utilization c Policy and national interests; (3) The parties should take into account the MoU, even though it is not legally binding, it is a commitment which reflects the good interests of both the parties; [Para 92(F)(c)] [835-B-D] D 8.⁴. The parties must restrict their negotiations within the conditions of the Government policy, as reflected inter alia by the Gas Utilization Policy and EGOM decisions. [Para 92(F)(d)] [835-D-E] E Per (Sudershan Reddy, J.): (Sathasivam, J. and Balakrishnan, CJI expressing dissent on (i) exercise of jurisdiction u/s 352 of Companies Act. 1956 and (ii) nature of the MoU and not taking it into account the renegotiations): F 1.¹. There are no completely unregulated free markets for natural gas anywhere in the world. By framing an overarching analytical framework, it can be observed that every jurisdiction grapples with three sets of issues relating to ensuring: (1) adequate supplies to meet overall energy and industrial needs; (2) equitable access across all sectors, especially those which have implications for quality of life; and (3) equitable pricing, even if market forces are allowed to play a much larger role. Three more issues are emerging with respect to ensuring: energy security of the nation; energy defense links; and inter-generational equities. Under conditions

RELIANCE NATURAL RESOURCES LTD. v. 721 RELIANCE INDUSTRIES LTD. of scarcity, these latter factors may indicate a greater need for emphasis on conservation a.s opposed to current consumption. It would appear that markets, with their emphasis on current consumption and short run profits may lead to faster depletion, and consequently necessitate far greater and indeed a primary role for the B State in coordination and making choices between different objectives and value premises. While markets and private initiatives have an important role in garnering financial resources, developing and bringing new technologies to practical use, expanding the c infrastructure, and increasing supplies by identification of and e:ltraction from new sources, if unmonitored and completely unregulated markets are also capable of causing great inequities, in access, overpricing and sometimes even under pricing (if externalities, such as environmental costs, are not taken into account) the resources. [Para 77] [877-A-E] · 1.2. The principal themes in production sharing contracts would appear to be that the sovereignty over the petroleum produced continues to be with the nation, and the contractor bears varying levels of and forms of risk with respect to exploration activities and what is allowed to be recovered as costs (called Contract Costs) .and to what extent in each year (called Cost Petroleum). [Para 84] [882-B-C] F 1.3. The natural gas, under dispute in these proceedings, is being mined from deep beneath the sea bed, off the eastern shore of India. Thus, it is a resource that falls squarely within the purview of Article 297 of the Constitution of India and is explicitly noted so in the PSC. G Article 297 of the Constitution declares that "All lands, minerals and other things of value underlying the ocean within the territorial waters or the continental shelf or the exclusive economic zone shall vest in the Union, to be held for the purposes of the Union". This Article of the H

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A Constitution is unique as it is the only such provision in the Constitution that addresses a particular inclusive set of potential resources in a particular class of geographic zones. It goes on to say that the limits of those geographic zones "shall be such as may be specified, from s time to time, by or under any law made by Parliament." One needs to appreciate the purport and meaning of Article 297 of our Constitution as increasingly these resources in the geographic zones specified by it are going to be tapped, because of technological developments c enhancing the capacities of the nation. [Para 87] [883-E- H; 884-A-B] 1.⁴. While the word "vest" could normally partake of at least a portion of the full bundle of rights associated with ownership, the phrase "shall vest" as used in Article o 297 of the Constitution implies a deliberate, and not an incidental act by a body at the various constitutional moments that have informed our Constitution. That body is the people as a nation. It is now a well established principle of jurisprudence that the true owners of "natural E wealth and resources" are the people as a nation. It is the people of India, the true owners, who have vested, the inclusive set of potential resources in a particular class of geographic zones, in the Union, and that it is an act of trust and of faith, with a specific set of instructions. F Those instructions are inscribed, nay genetically encoded and hardwired, in the commands "to be held" "for the purposes of the Union." The core and pure purport of the word "hold" is to conserve, to preserve and to keep in place and it only secondarily means 'use' or 'disposal'. The fact that the phrase "be held" is used G in Article 297 of the Constitution, whereas in Article 298 of the Constitution, in its immediate neighborhood, the word "hold" is used in conjunction with abilities to "acquire" and "dispose" is significant and a clear indication of the intent of the supreme drafter of the H

RELIANCE NATURAL RESOURCES LTD. v. 723 RELIANCE INDUSTRIES LTD. Constitution - the people. The use of a series of words in a Constitutional setting clearly implies that they are being used precisely, so that overlapping meanings are to be set aside and the purer and the core meanings be delineated. The phrase "be held" when viewed along with the phrase "shall vest", which vesting was done by the people as a nation, can only mean that it was used as a. lock to conserve, to preserve and to keep in place. And the key to that lock is also there in the same Article of the Constitution: "purposes of the Union" which can only mean the integrity, unity and development of the c nation. [Paras 88, 89) [884-C-H; 885-A-C] 1.5. Within the context of international law, there has emerged a body of thought under the broad rubric of Human Rights, that the people as the true owners of natural wealth and resources, ought to exercise a D "permanent sovereignty" i.e., the power to make laws, over such resources to ensure national development and well being of the people. The responsible use of such natural resources for the well-being of the people of a nation has been seen as an important aspect of E maintenance of international peace and a part of their right to self determination. Further, these rights of the people as Nations have been secured by many struggles for self-determination over millennia. Those rights encompass the freedom of self-determination through a F democratic order within the boundaries of the nation- state and the imperative of such self-determination in inter-se and yet interdependent zones of co-existence between nation-states. [Para 90) [885-D-F] 1.6. The concept of equality, a necessary condition G for achievement of justice, is inherent in the concept of national development that we have adopted as a nation. India was never meant to be a mere land in which the desires and the actions of the rich and the mighty take precedence over the needs of the people. The ambit and H

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A sweep of our egalitarian ideal inheres within itself the necessity of inter-generational equity. Our Constitutional jurisprudence recognizes this and makes sustainable development and protection of the environment a pre- condition for the use of nature. The concept of people as B a nation does not include just the living; it includes those who are unborn and waiting to be instantiated. Conservation of resources, especially scarce ones, is both a matter of efficient use to alleviate the suffering of the living and also of ensuring that such use does not C lead to diminishment of the prospects of their use by future generations. The statutory matrix dealing with natural gas and other petroleum resources also clearly indicates the importance of such permanence of sovereignty. The Territorial Waters Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 0 1976, the Oilfields (Regulation & Development) Act, 1948 and the Petroleum and Natural Gas Rules, 1959, all emphasise the importance and duty of the Gol to conserve and develop mineral oils, including natural gas. E [Paras 94, 95) [887-D-H; 888-A] 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. F (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. 725 RELIANCE INDUSTRIES LTD. 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

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A 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: 0 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 F (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 . • G 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 H

RELIANCE NATURAL RESOURCES LTD. v. 727 RELIANCE INDUSTRIES LTD. 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. 2.¹. 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 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 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] 2.2. In the light of the public trust elements so 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 development - including the concepts of egalitarianism 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

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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 0 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 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'LTD. v. 729 RELIANCE INDUSTRIES LTD. 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 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 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] 3.3. In some previous PSC's the word volume had been used instead of value, but that has been specifically H

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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 0 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] F . 3.⁴. 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 H

RELIANCE NATURAL RESOURCES LTD. v. 731 RELIANCE INDUSTRIES LTD. at a "price." The words 'produced' and 'saved' are first used in the phrase "Petroleum Operations" defined in Art. 1.74 of the PSC, wherein it is stated that Petroleum Operations mean, as "the context may require, Exploration Operations, Development Operations or Production Operations or any combination of two or more of such operations, including construction, operation and maintenance of all necessary facilities ..... environmental protection, transportation, storage, sale or disposition of Petroleum to the Delivery Point.. .. And all other incidental operations or activities as may be 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 3.5. 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 F "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] P. Ramanatha Aiyar's "Advanced Law Lexicon" (3rd Ed. H

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A .. 2005) and Black's Law Dictionary, referred to. · 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 E 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] 4.2. In as much as title passes only upon sale at the Del,ivery Point, the true owner, the people of India acting F 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] G 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. 733 RELIANCE INDUSTRIES LTD. 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 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 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 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, 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

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RELIANCE NATURAL RESOURCES LTD. v. 735 RELIANCE INDUSTRIES LTD. for the Gol to know who would be the potential users, 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 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 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 covenants in the PSC. When the covenants evidently carry a plain meaning which could be gathered from what the instrument itself has said, such responses cannot be used to interpret the terms of a contract. The· answers, at the most, may reflect the opinion of an individual minister and they would have no bearing on the interpretations to be placed by the courts. At any rate, the courts are not bound by the answers so given to interpret the instruments. [~ara 124] [900-F-H; 901-A] H

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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 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 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 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 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] F [901-E-H; 902-A-B] 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 receives a fair share of the revenues. However, it may not

RELIANCE NATURAL RESOURCES LTD. v. 737 RELIANCE INDUSTRIES LTD. be possible to determine true arms length prices in all 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]

9. The Empowered Group of Ministers framed a utilization policy and also approved the price formula/ H

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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 0 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] 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. 739 RELIANCE INDUSTRIES LTD. 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 H

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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, 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 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

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] 11.2. The minutes of the meetings of the Board of RIL dealing with various issues concerning the 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 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 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 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. 743 RELIANCE INDUSTRIES LTD. 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 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]

744 SUPREME COURT REPORTS [201 OJ 5 S.C.R.

A 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 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 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 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 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. 745 RELIANCE INDUSTRIES LTD. 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]

11. 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. G

12. 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

746 SUPREME COURT REPORTS [2010] 5 S.C.R.

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 B 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 0 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- 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 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

RELIANCE NATURAL RESOURCES LTD. v. 747 RELIANCE INDUSTRIES LTD. 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 F 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] 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. 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. E 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 necessarily involve certain steps in obtaining 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] 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. 749 RELIANCE INDUSTRIES LTD. 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 the Scheme entails. That understanding would certainly not have comprehended the claims that RNRL is putting forward in these proceedings: (i) that the intent was to actually share the benefits of the production and exploration activities, including the benefit of internal use of natural gas; (ii) that because the same was not possible on account of statutory and contractual problems, the gas supply agreement was a way out; (iii) that the gas be supplied in accordance with the commercial terms regarding quantity, price and tenure in the MoU which were never revealed to them; (iv) that the burden of gas supply would involve the transgression of the boundaries of the PSC from which the value flows to RIL; and (v) that the burden would extend to RIL subsidizing RNRL if it were required to pay a much higher value to 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.

RELIANCE NATURAL RESOURCES LTD. v. 751 RELIANCE INDUSTRIES LTD. (1996) 6 sec 665 referred to Para 33 A (1966) 1 All. E.R. 193 referred to Para 33 (1984) 1. sec 515 relied on Para 50 (1997) 1 sec 388 referred to Para 85 B (2004) 4 sec 489 relied on Para 85 AIR 1992 SC 522 relied on Para 85 In the judgment of Sudershan Reddy, J: (2008) 305 ITR 75 referred to Para 55(1) c (1991) 1 sec 212 referred to Para 55(1) (1990) 3 sec 152 referred to Para 55(1) (1995) 5 sec 482 referred to Para 55(1)_ D 1995(2) SCR 2 referred to Para 55(1) 1967 (2) SCR 454 referred to Para 55(1) (2001) 13 sec 154 referred to Para 55(1) (2006) 13 sec 542 referred to Para 55(1) E

(2008) 13 sec 213 referred to Para 55(1) (2004) 2 sec 663 referred to Para 55(1) (1971) 1 sec 85 referred to Para 55(1) F (1966) 6 sec 665 referred to Para 55(2) (2008) 12 sec 541 referred to Para 55(2) (1997) 8 sec 683 referred to Para 55(2) G 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 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) B (1972) AC 153 (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 referred to Para 55(3) (1979) 3 sec 54 held· inapplicable Para 55(3) (1997) 1 sec 579 referred to Para 63 (2007) 1 sec 753 referred to Para 63 D (1979) 3 sec 489 referred to Para 69 AIR 1993 SC 1601 referred to Para 69 1984 (1) sec 515 referred to Para 69 y E 1912 (1) sec 23 referred to Para 69 2004 (4) sec 489 referred to Para 69 AIR 1943 FC 75 distinguished Para 124

F CIVIL APPELLATE JURISDICTION: Civil Appeal No(s). 4273 of 2010. 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. 753 RELIANCE INDUSTRIES LTD. Gopal Subramanium, SG, Mohan Parasaran, Vivek A 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 B 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 E Neekhra, Monica Sarma, Mahesh Prasad, Senthil Jagdeesan for the appearing parties.