RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD.

(f) Having insisted upon a Gas Sale and Purchase Agreement (GSPA) in conformity with the NTPC draft GSPA dated 12th May, 2005 which contained 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 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. Whether the approval of the Government is H

782 SUPREME COURT REPORTS [201 O] 5 S.C.R.

A 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 which it has B 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?

iii. Whether the Contractor has a physical share in the c gas produced and saved which it can deal with at its own volition?

(i) In view of the Gas Utilization Policy and the Pricing Policy of the Government, whether the "Suitable D Arrangement" for supply of gas to Dadri Power Plant of REL can only be on the same terms as are applicable to other allottees of gas and that too to the extent of the quantity of gas that may be allocated by the Government as and when the Dadri Power Plant is ready to receive gas? E

28Copy pinpoint28. All these issues can be answered in the following broad headings:

(A) Maintainability of the company petition: F (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. 783 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] necessary for the proper working of the compromise or arrangement". On the other hand, Section 394 restricts this power essentially to "incidental, consequential and supplemental matters only". Mr. R.F. Nariman, learned senior counsel appearing for RIL concentrated his argument with reference to Sections 391 to 394 of the Companies Act. B According to him, Section 392 of the Act had no predecessors either in English Law or in the Companies Act of 1913. The reason why the Legislature appears to have felt the necessity of enacting Section 392 is to bring Section 391 on par with Section 394. Section 394 applies only to Companies which are c re-constructing and or amalgamating, involving the transfer of assets and liabilities to another Company. It is thus, applicable to a species of the genus of Company referred to under Section

391. Section 394, sub-section 1 specifically gives the Company Court the power not merely to sanction the 0 compromise or arrangement but also gives the Company Court the power, by a subsequent order, to make provisions for "such incidental, consequential and supplemental matters as are necessary to secure that the re-construction or amalgamation shall be fully and effectively carried out" [Section 394(1 )(vi)]. This power is absent in Section 391, so that companies falling within E Section 391, but not within Section 394, would not be amenable to the Company Court's jurisdiction to enforce a compromise or arrangement made under section 391 and to see that they are fully carried out. Hence, the power under Section 392 has to be understood in the above context, and is of the same quality as the power expressly given to the Company Court post-sanction under Section 394.

(ii) It is pointed out by Mr. Nariman that on the facts of the present case, Section 392 does not apply at all, for the reason, that the sanctioned scheme on record is a scheme to which both Sections 391 and 394 apply. That being the case, in order to fully and effectively carry out an arrangement which has been sanctioned under Sections 391 to 394, the Company Court enjoys jurisdiction under Sections 394(1 )(i) to (vi) itself. He H

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

A pointed out that this becomes clear beyond doubt from a reading of sub section 3 of Section 392. He also pointed out that Section 153-A of the 1913 Act is conspicuous by its absence in sub-section(3) of Section 392. According to him, this makes it clear that where a compromise or arrangement has been sanctioned under Section 153 A of the previous Act, the provisions of Section 392 of 1956 Act will not apply, making it clear that where a scheme is governed by the provisions of Section 394, Section 392 would have no application.

(iii) The learned Single Judge founded his power to give relief in the Company Application filed by RNRL in.Section 392 on the ground that the applicants cannot be rendered remediless. For this, Mr. Nariman pointed out that the Company Judge was not correct for the simple reason that the remedy lies in Section 394(1) sub-clause (vi) which gives ample power to the Company Court to fully and effectively carry out the scheme governed by the provisions of Section 394. He also pointed out that the marginal note can be looked at to indicate the drift of the Section.

E (iv) It is the claim of the RIL that the power to enforce the compromise or arrangement includes the power to make such modifications in the compromise or arrangement as the Court may consider necessary for the proper working of the compromise or arrangement. However, Mr. Nariman further pointed out that the power to make mopifications does not extend obviously to make substantial or substantive modifications to the scheme itself which has been passed by at least 75% of the shareholders in exercise of their right of Corporate Democracy. In the present case, the Scheme was passed by an overwhelming majority of more than 99% of the equity shareholders of RIL. He further pointed out that apart from the language cif Section 392 the power under Section 392 cannot possibly be a greater power than the power under Section 391 to sanction the original scheme. fn- Miheer H. Mafat/al vs. Mafat/a/ Industries Limited (1997) 1 SCC 579, H

RELIANCE NATURAL RESOURCES LTD. v. 785 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] this C~urt delineated the extent of power of the Company Court A under section 391 in para 29 thus:

"29. 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 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 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 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. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an. F umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limi~s. But subject to that how best the game is to be played is left to the players and not to the umpire. The supervisory jurisdiction. of the Company Court can also G be culled out from the provisions of Section 392 of the Act which reads as under....... .

... ... .Of course this section deals with post-sanction supeNision. But the said provision itself clearly earmarks H

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

A the field in which the sanction of the Court operates. It is obvious that the supervisor cannot ever be treated as the author or a policy-maker. Consequently the propriety and the merits of the compromise or arrangement have to be judged by the parties who as sui juris with their open eyes B and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court cannot, therefore, undertake the exercise of scrutinising the scheme placed for its sanction with a view to finding out c whether a better scheme could have been adopted by the parties. This exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the company who in their best commercial and economic interest by majority agree to give green signal to such 'a D compromise or arrangement. ...... "

(v) Again ~n S.K. Gupta & Anr. Vs. K.P. Jain & Anr. (1979) 3 SCC 54, this Court dealt with the creditors' scheme propounded under Section 391 to get a particular Company out I: of winding up. Observations made in paragraphs 13 and 15 of this judgment, if read out of context, would make it clear that this Court has extended the power under section 392 to make modifications which would include additions and omissions to the scheme: at will. This is not the correct purport of the observations in para 13 and 15. In fact, the judgment very clearly states that the limit on the Court's power is always to see that the modifications are done for the proper working of the scheme and not for any other purpose. A very important paragraph of the· judgment is para 27 where this Court ultimately observed "strictly speaking, omission of the original sponsor and substituting another one would not change the 'basic fabric' of the scheme". This judgment therefore, must be understood as construing Section 392 in a manner that would not permit the Company Court to so modify a scheme as to change its basic fabric.

RELIANCE NATURAL RESOURCES LTD. v. 787 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] (vi) Another judgment of this Court is in Meghal homes (P) A Ltd. vs. Shree Niwas Girni K. K. Samiti & Ors. (2007) 7 SCC . 753 which squarely raises the issue as to whether in the guise of modifying a scheme, the Company Court can substitute a portion of the original scheme. This Court said an emphatic no:- B "53. But before that, we think that another step has to be taken in this case. What has now been accepted by the Division Bench, is not the scheme as modified by the General Meeting as contemplated by Section 391 of the Act. At least two of the modifications having ramifications C are based on undertakings or statements made on behalf of LBPL and there appears to be difference of opinion on that modification even among the Somanis. There is also the question whether the proposals ofa person who is not one of those recognised by Section 391 of the Act, could be accepted by the Company Court while approving a D scheme. We are of the view that the scheme with the modifications as now proposed or accepted, has to go back to the General Meeting of the members of the Company, called in accordance with Section 391 of the Act and the requisite majority obtained. E

54. 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 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.

55. A modification in the arrangement that may be 8 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 c 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 .D arrangement as now modified or proposed to be modified.

56. 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 E 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 F 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. G

57. 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 H Limited, as adopted in the General Meeting, now the

RELIANCE NATURAL RESOURCES LTD. v. 789 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 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. This again is an obligation cast on the members of SCML and we are of the view that this cannot also be taken to be a modification which the court can bring about on its own under Section 392 of the Act D on the pretext that it is a modification necessary for the proper working of the compromise or arrangement. We have no hesitation in holding that in any event, the Division Bench of the High Court ought to have directed a reconvening of the meeting of the members of the Company in terms of Section 391 of the Act to consider the modifications and ensured that the approval thereof by the requisite majority existed."

(vii) Mr. Nariman has submitted that the Company Judge in the present case referred to S. K. Gupta's (supra) case and finally held that since Sections 391 to 394 are interconnected it would be able to grant relief asked for in a Company Application filed under Section 392. It is the claim of the Mr. Nariman that it is not only incorrect but it would not be possible in exercise of power under Sections 392 or 394 to modify the terms of clause 19 of the Scheme. Insofar as the Division Bench, according to him, goes into various clauses of the Scheme to say that the subsequent power of modification of the Scheme itself is contained in these Clauses, more particularly, clause 22. He contended that even if it is to be H

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

A applied, no modification can be made under it without the consent of the parties to the Scheme. According to him, if the conclusion of the Division Bench is accepted, the resultant order of the Division Bench is contrary to Clause 22 in that it would not be possible to read the MoU dated 18.06.2005 into B Clause 19 of the Scheme without the consent of the Shareholders and the Board of Directors of RIL. He insisted that the Division Bench of the High Court was bound by the judgment in Meghal Homes where the jurisdiction of the Company Court under Section 392 was clearly spelt out. c (viii) Learned senior counsel for RNRL submitted that RNRL seeks to enforce the terms of the Scheme of Arrangement as sanctioned by the Bombay High Court vide its order dated 09.12.2005. As per the said Scheme, RIL was required to execute a suitable arrangement for supply of gas to RNRL. . D However, RIL has wrongfully caused the execution of a document the effect of which would be that the business of supply of gas, as contemplated in the Scheme of Arrangement, would not be transferred to RNRL. He further argued that the timing and manner of the impugned agreement as well as E several clauses of the Scheme render the same virtually unworkable. In these circumstances, it is pointed out that RNRL has approached the Company Court seeking suitable reliefs under Section 392 of the Companies Act.

F (ix) In the earlier part, the judgment of this Court in S.K. Gupta (supra) has been discussed. It is the duty of the Court to ensure that the Scheme is fully implemented. Learned senior counsel for the RNRL pointed out that in this case it would imply that this Court must ensure that the gas based energy G undertaking is, in fact, transferred to RNRL as contemplated under the Scheme. For this purpose, the Court has the jurisdiction and power to direct modification of the GSMA which was required to be executed pursuant to clause 19 of the Scheme. Learned senior couns€1 further contented that Section 392 shows the width of the power and the ultimate H

RELIANCE NATURAL RESOURCES LTD. v. 791 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] consequence envisaged under the Companies Act for non implementation of the Scheme. The only limitation on the power of the Court is that it cannot change the basic structure or character or purpose of the Scheme. It was further pointed out that subject to this, the power is of widest amplitude and unlimited. On behalf of the RNRL it was pointed out that the decision of this Court in Meghal Homes (supra) is not applicable to the present case, firstly, this judgment accepts the principle that the Court has wide power under Section 392 though the same are circumscribed, secondly, the said judgment does not refer to Gupta's case which was a binding c decision of a three-Judge Bench. Further, in Meghal Homes (supra) the challenge was the power of the Court to sanction the Scheme and not power to direct modification to an already sanctioned Scheme.

(x) In the light of the stand taken by both parties, this Court D analyzed the relief sought for in the Company Application and the relevant materials placed before the Company Judge. Section 392 creates a duty to supervise the carrying out of the compromise or arrangement. This power and duty was created to enable the Court to take steps from time to time to remove all obstacles in the way of enforcement of a sanctioned scheme. While sanctioning, it shall anticipate some hitches and difficulties which it can remove by the order of the sanction itself but clause 1(b) makes it clear that this power can also be exercised after the scheme has once been sanctioned. So long as the basic nature of the arrangement remains the same the power of modification is unlimited, the only limit being that the modification should be necessary for the working arrangement.

(xi) In view of the above discussion, this Court holds that G Section 392 is applicable to the Company Application filed by RNRL. This is more so because the Company Court has originally sanctioned the scheme under both Sections 391 and

394. Further, the position derived from Gupta (supra) the power of the Court under Section 392 is wide enough to make any H

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

A changes necessary for the working of the Scheme. Therefore, Court does have jurisdiction over the present matter. However, it is made clear that the power of the Court does not ext:::nd to re-writing the Scheme in any manner.

(xii) Furthermore, in the Companies Act, there is no 8 provision except Section 391 to Section 394 which deal with the procedure and power of the Company Court to sanction 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 C contention as raised that the present application under Section 392 of the Companies Act is without jurisdiction. On the other hand, Section 391 to Section 394 has ample power and jurisdiction to supervise the scheme as sanctioned under the Companies Act. As rightly observed by the Company Judge, D the exigencies, facts and circumstances, play dominant role in passing appropriate order under 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 E for sanctioning of any Scheme including of arrangement, demerger, merger and amalgamation. Therefore, the application filed by RNRL under Section 392 is maintciinable. Nevertheless, as observed earlier, the power of the Court does not extend to re-writing the Scheme in any manner. F (B) Memorandum of Understanding (MoU)

(i) In order to understand the position of RNRL and RIL as well as "suitable arrangement" under the "Scheme", it is but proper to refer the contents of MoU (placed before the Division G Bench of the High Court) which are as under:

"STRICTLY CONFIDENTIAL

MEMORANDUM OF UNDERSTANDING

H This Memorandum of Understanding (this "MoU") is made

RELIANCE NATURAL RES,OURCES LTD. v. 793 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] at Mumbai this_ day of June, 2005 amongst Kokilaben A D. Ambani ("Kokilaben"), Mukesh D. Ambani ("Mukesh") and Anil D. Ambani ("Anil") (each of Kokilaben, Mukesh and Anil hereinafter referred to individually as a "Party" and collectively as the "Parties.") B WHEREAS

A. After the demise of Shri Dhirubhai H Ambani (late Dhirubhai) on July 6, 2002, Kokilaben is the head of the Ambani family and has complete moral authority over the family. Her four children, Mukesh, C Anil, Dipti and Nina have, by Deed of Release dated October 17-, 2002, releas, their entire interest in the estate of late Dhirubhai in her favour.

B. Mukesh and Anil have been managing the various businesses of the family comprised in the Reliance Group (the "Businesses"). Differences have arisen between them in this behalf, and having regard to recent events and with the intervention of Kokilaben, the Parties have now agreed that the best way forward would be to have a segregation of the ownership and Businesses into two groups, with one group owned, managed and controlled by Mukesh and the other owned, managed and controlled by Anil. Most of the key principles relating to the segregation of certain family assets including controlling interest in the Businesses and companies have been agreed to between the Parties.

c. Mukesh and Anil have also expressed their unconditional trust in Kokilaben and agreed that she shall play a final and decisive role in resolving any open issues in the process of settlement, and that they shall abide by all decisions made by her to facilitate early closure of the settlement. H

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

A D. The Parties are now desirous of formally recording their agreement in this behalf."

(ii) It has been the consistent position of RNRL that the MoU signed between Mukesh Ambani and Anil Ambani is binding, and therefore, the "suitable arrangement" under the 8 "scheme" should be nothing but the MOU itself. On the other hand, RIL has consistently argued that the MOU is not binding for them since it is merely a non-legal instrument between certain family members. Therefore, it was argued that it will not C bind the companies and the shareholders who have a completely different personality.

(iii) Mr. Ram Jethmalani, learned senior counsel appearing for the RNRL strongly relied on the following decisions of this Court with reference to the importance of family arrangement D (MoU) and its effect and value.

1. Kale & Ors. vs. Deputy Director of Consolidation & Ors., (1976) 3 SCC 119 (Paragraphs 9, 17, 19, & 42) which states as under: E "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

RELIANCE NATURAL RESOURCES LTD. v. 795 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] same on technical or trivial grounds. Where the courts find 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 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 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 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 F 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: G "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 H

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

A 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. ..... .

B 52. 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 c 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. He F is also empowered to give clarifications and decide any differences relating to the implementation of the Memorandum of Understanding. Such a family settlement which settles disputes within the family should not be lightly interfered with especially when the settlement has been already acted upon by some members of the family. In the G present case, from 1989 to 1995 the Memorandum of Understanding has been substantially aCted upon and hence the parties must be held to the settlement which is in the interest of the family and which avoids disputes between the members of the family. Such settlements have H

RELIANCE NATURAL RESOURCES LTD. v. 797 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] to be viewed a little differently from ordinary contracts and their internal mechanism for working out the settlement should not be lightly disturbed. The respondents may make appropriate submissions in this connection before the High Court. We are sure that they will be considered as and when the High Court is required to do so whether in interlocutory proceedings or at the final hearing."

(iv) However, Mr. Harish N. Salve, learned senior counsel for the RIL while drawing our attention to Section 36 of the Companies Act, 1956, submitted that the Memorandum and C Articles shall bind the company and its members. According to him, the Articles of Association are the regulations of a company which are binding on the company and its shareholders. He, therefore, pointed out that nothing outside the Articles can bind a shareholder vis-a-vis the company. In support of the above stand, he heavily relied on paragraph 9 D of the judgment of this Court in V.B. Rangaraj vs. V.B. Gopalkrishnan & Ors. , AIR 1992 SC 453 which reads as under:

"9 ...... the private agreement which is lied upon by the plaitniffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the Article. Firstly, it imposes a restriction on a living member to transfer the shares only to the existing members and secondly the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the member's right to transfer his shares which are contrary to the provisions of the Art.13. They are, therefore, not binding either on the shareholders or on the company ...... "

29Copy pinpoint29. 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 0 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.

30Copy pinpoint30. 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 producing a "suitable arrangement". Though copy of the MoU

RELIANCE NATURAL RESOURCES LTD. v. 799 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] was not part of the record before the Company Judge, by 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 B 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

31Copy pinpoint31. 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.

32Copy pinpoint32. On the other hand, learned senior counsel appearing H

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

A 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. B 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.

33Copy pinpoint33. 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 G 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. 801 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 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.

34Copy pinpoint34. 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.

35Copy pinpoint35. 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.

36Copy pinpoint36. 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 requirement that the GSMA must confirm completely with the Mou.

37Copy pinpoint37. 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

38Copy pinpoint38. 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 F (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. This business of supply of gas to REL for their power projects is an integrated and/or constitute the Gas Based Energy Undertaking of RIL. G The intention, therefore, throughout was even under the Scheme to reorganize and segregate the business and undertakings to provide focused management attention. In this background it was contended by learned senior counsel appearing for RNRL that it was necessary that RIL should have given full and proper opportunity to the RNRL before passing such resolution hurriedly H

RELIANCE NATURAL RESOURCES LTD. v. 803 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] on 11.01.2006 and before executing such GSMA and GSPA A in question. As per clause 19 as recorded the suitable arrangement should be suitable to both the parties in all respects. In this aspect, the decision as taken hurriedly on 11.01.2006, therefore, was one sided, specifically taking into consideration the background and/or events followed upto the B sanctioning of the Scheme. As noted, the control over the Board of the RNRL on 10.01.2006 was of RIL, as control over has not been handed over to Anil Ambani. On 26.01.2006, final copy of GSPA was made available by nominee of RIL to nominee of Ambani Group. The drafts of GSMA and GSPA were only c circulated on 10.01.2006 through mail. It is to be noted that shares of RNRL were allotted/transferred to Anil Ambani only on 27.01.2006 i.e. after the Board meeting held on the same day. The New Board was re-constituted in accordance with clause 17 of the Scheme on 07.02.2006. As per clause 6, RIL D continued to manage the resulting companies till the effective date in the capacity of trustees. Therefore, it is the claim of RNRL that the Board of the Meeting and the Resolution and/or execution of the said GSMA on 11.01.2006/12.01.2006 before the actual transfer of control of the resulting companies to Anil Ambani and before re-constitution of the Board as per clause E 17 of each resulting companies were against clauses 17 and 19 and the basic purpose of the Scheme in so far as the supply of gas is concerned.

39Copy pinpoint39. 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 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.

40Copy pinpoint40. The Division Bench has concluded that the allocation 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 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:

"II. GAS Supply E (i) 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. Such international consultancy firm shall not have any conflict of interest. The report

RELIANCE NATURAL RESOURCE~ LTD. v. 805 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] of such agency could consider the DGH letter as one of the inputs and its decision shall be final as to the quantity and nature of reserve (including matters such as P, P2, P3 reserves) and this would be the factual basis for the rest of the decisions. The Mukesh Ambani Group will now move expeditiously for facilitating such-verification and is to provide all information for this purpose.

(ii) On the assumption that only 12 MMSCD is the current P1 reserve and other reserves are in the stages of discovery, arrangements as to quantity of c "net gas" (RIL's entitlement of gas as reduced by the quantity of the gas required for operation and transportation ) are as follows:

(a) The first right would be to NTPC under its existing draft supply agreement to the extent of 12 MMSCD. This would be for delivery on the west coast. In the event that the NTPC contract does not materialize or its cancelled, the entitlement of NTPC to the said extent shall go to the Anil Ambani Group in addition to its entitlement of 28 MMSCD in (b) below.

(b) Thereafter, and subject to availability of adequate P1 reserves the next 28 MMSCD would go to REL. No sooner the P1 reserves (determined as per (i) F above), are identified (whether from KGD6 or elsewhere), this would be included in a binding gas supply agreement in favour of REL. This would be at prices no greater than NTPC prices.

(c) Thereafter and for the entire future of the balance G reserves (including new discoveries of gas from new explorations and/or bids as may be submitted from time to time), the quantity of gas would, at the option of the Anil Ambani Group (exercised from time to time), be split in the ratio of 60:40 with 60% H

806 SUPREME COURT REPORTS (2010) 5 S.C.R.

A to Mukesh Ambani Group and 40% to Anil Ambani Group. Subject to the above, after the 28 MMSCD tb REL, the next order of priority would be of RIL for its captive consumption for Mukesh Ambani Group Companies to th.e extent of a maximum of B 25 MMSCD. Such 25 MMSCD will be set off against 60% entitlement of tHe Mukesh Ambani Group. An expert appointed by ~CICI Bank Limited will provide guidance, within a period of 45 days from this MOU, on the appropriateness of the amount of 25 MMSCD or captive consumption, and c in the event that the amount consid~red necessary by such expert is materially less tha~ 25 MMSCD, Kokilaben will reconsider the issue. Thereafter, the next order of priority would be at Anil Ambani Group's option, go to Anil Ambani Group. All such gas shall be supplied at market rates.

By way of examples:

If the P1 reserves are identified at 60 MMSCD, the sequence would be NTPC-12, REL-28 and RIL (captive)-20.

In case the reserves are 100, the sequence would be NTPC-12, REL-28, R!L(captive)-25, Anil Ambani Group (second installment)-16.67 and in so far as the balance 18.33 is concerned, the same would be shared in the ratio of 60:40. This shall be an option but not an obligation.

(iii) For the first 28 MMSCD, the price and the commercial terms shall be the same as those applicable to NTPC.

(iv) REL shall have the option to set up its own pipeline from the gas field to its plant at its own cost. This

RELIANCE NATURAL RESOURCES LTD. v. 807 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] shall not make a difference to the price for the gas supplied by RIL to REL.

(v) REL shall have the option to take delivery of gas at Kakinada on the East Coast and may construct its own pipeline. However, REL would still have to pay the transportation cost for supply to the West Coast even if the facility is not used, but will have the right to deal with the capacity as it deems fit and to sell or assign the same to another party, on the West Coast or otherwise. c (vi) 50% of the commitment for supply of gas would be supplied in the financial year 2008-09 and the balance 50% in 2009-10.

(vii) As soon as the P1 reserves are identified, a D binding gas supply agreement, in accordance with international best practices, bankable in the international financial market would be finalized and entered into, not later than 45 days from the date of this MoU. As stated above, the NTPC supply E 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 shall be no less favourable than those of the NTPC contract Mukesh will provide the Production Sharing Contract and also correspondence with F NTPC and the latest version of the draft contract to the Anil Ambani Group. The gas supply working group to discuss details.

(viii) Kokilaben recognizes that a long terms, stable G .source of gas from RIL .. which has the largest find of gas, was absolutely essential for the growth plans of the Anil. Am bani Group and in order to enable Anil to carry REL to even greater heights. Kokilaben has, therefore, specially stressed and H

808 SUPREME COURT REPORTS [2010) 5 S.C.R.

A impressed Jpon Mukesh and Mukesh shall personally E .1sure that at the time of finaliza~ie,,n of the binding gas supply agreement the terms provide the required conform and stability in these agreements, even if that means some departure B from the NTPC standard.

(ix) The gas supply/option agreements would be between RIL and a 100% subsidiary of RIL, which would be demerge to the Anil Ambani Group as part of the Scheme of Arrangement. Such agreements c would not be with REL.

(x) The gas supplied to the Anil Ambani Group by the Mukesh Ambani Group shall not be used for trading, other than trading within the Anil Ambani D Group.

(xi) Swapping of gas is permitted.

(xii) (a) In relation to applicable governmental and· statutory approvals, without in any manner mitigating RIL's responsibility to jointly work towards obtaining such approvals, RIL will, if so required by the Anil Ambani Group, give an irrevocable Power of Attorney to the Anil Ambani Group/REL to apply for an obtain all such governmental and regulatory approvals as are necessary on its behalf.

(b) The definitive agreements will reflect that the Mukesh Ambani Group will act in utmost good faith and will make best endeavours to work for and obtain such approvals. If there is any action taken in bad faith for not obtaining/scuttling the obtaining of such approvals, Kokilaben reserves her ability to . intervene again and the Anil Ambani Group would also have a claim for damages." H

RELIANCE NATURAL RESOURCES LTD. v. 809 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] A perusal of above-mentioned clauses show that there is a A fixed quantum of gas which stands allocated to RNRL, i.e., 28MMSCD to REL and in the event NTPC contract does not materialize or is cancelled, the entitlement of NTPC to the said extent shall go to the RNRL in addition to its entitlement of 28 MMSCD in addition to this allocation from the cost and profit B gas which will be available for sharing with the Union of India by RIL. It is further seen that for entire future of the balance reserves the quantity of gas be shared in the ratio of 60:40, i.e., 60 % to Mukesh Ambani Group and 40% to Anil Ambani Group. c

41Copy pinpoint41. 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 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 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.

42Copy pinpoint42. 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.

43Copy pinpoint43. 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 F results in RNRL becoming a shell company and whether the GSMA is a bankable agreement.

44Copy pinpoint44. Insofar as the workability of GSMA, RNRL has fourfold objection$. They are: 1) that the "suitable arrangement" under G 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 H

RELIANCE NATURAL RESOURCES LTD. v. 811 i-\ELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 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. 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. D SUITABLE ARRANGEMENT:

45Copy pinpoint45. 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 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.

46Copy pinpoint46. 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 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.

A 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.

47Copy pinpoint47. Keeping the said object in mind, Clause 19 must be 8 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. c (0) PRODUCTION SHARING CONTRACT CPSC):

48Copy pinpoint48. 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. F (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. G (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, H

RELIANCE 'NATURAL RESOURCES LTD. v. 813 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 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.

49Copy pinpoint49. 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 reaches the delivery point and thus, RIL has no right to dispose of the same without the express approval of the Union of India.

50Copy pinpoint50. 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.

51Copy pinpoint51. 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.

'· Aidentifying 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 country.

53. 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 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 blocks which were given to these companies by the

RELIANCE NATURAL RESOURCES LTD. v. 815 RELIANCE INDUSTRIES LTD. [P. SATHASiVAM, J.] Government on nomination basis. Such gas was subjected to 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 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 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

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 B 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 c 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 D 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 E (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:_ H

RELIANCE NATURAL RESOURCES LTD. v. 817 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 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 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 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 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 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 58. 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; B (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. c

59. 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): D (in US$/mmbtu)

PMT (weighted) 5.51

Rawa 3.5 E Rawa Satellite 4.3

Lakshmi 4.75

Weighted average 5.28 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 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:

"Arms Length Sales" means sales made freely in the open market, in freely convertible currencies, between willing

RELIANCE NATURAL RESOURCES LTD. v. 819 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] and unrelated sellers and buyers and in which such buyers 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."

61. 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.

62. 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.

63. 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 64. 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 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 under the PSC.

65. 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.

66. It is also relevant to answer a fundamental question that H

RELIANCE NATURAL RESOURCES LTD. v. 821 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 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 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 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 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 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 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 . 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 B to a shell company.

BANKABLE CONTRACT:

67. 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.

E 68. 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 ·F 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. 823 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]

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

70. 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 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 and definite quantity. The submission that the GSMA is not a bankable agreement has to be seen in this context.

71. 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. G

72. 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 1 binding contract. In its letter dated 18th December, 2006 after filing of the petition RNRL sought Government's approval for H

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

73. 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.

74. 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

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

1. Price- price of US $ 2.34 wrongly subjected to F government approval

2. 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 G contract contains a clear period of 17 years.

3. 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. 825 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] 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.

76. 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: E

77. 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. F

78. 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.

79. 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.

80. 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 E 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 or interest.

81. \/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 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 82. Before the Division Bench, on behalf of the Union of

RELIANCE NATURAL RESOURCES LTD. v. 827 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] India, it was submitted that India has been facing a chronic 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.

83. 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 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 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 . asJhe 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 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 0 of Profit gas to which art. 21.6 Of the PSC applies.

84. It must be noted that the constitutional mandate is that the natural resources belong to the people of this country. The nature of the word "vest" must be seen in the context of the E Public Trust Doctrine (PTO). Even though this doctrine has been applied in cases dealing with environmental jurisprudence, it has its broader application.

85. Constitution Bench of this Court in Association of F Natural Gas v. Union of India (2004) 4 SCC 489, while quoting Re: Cauvery Water Dispute Tribunal AIR 1992 SC 522 held that:

45. In Re: Cauvery Water Dispute Tribunal (Supra) the right to flowing water of rivers was described as a right G 'publici juris', i.e. a right of public. So also the people of the entire country has a stake in the natural gas and its benefit has to be shared by the whole country. There should be just and reasonable use of natural gas for national development. If one State alone is allowed to H

RELIANCE NATURAL RESOURCES LTD. v. 829 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.] extract and use natural gas, then other States will be deprived of its equitable share. This position goes on to fortify the stand adopted by the Union and will be a pointer to the conclusion that "natural gas' is included in Entry 53 of List I. Thus, the legislative history and the definition of 'petroleum', 'petr.oleum products' and 'mineral oil resources' contained in various legislations and books and the national interest involved in the equitable distribution of natural gas amon_gst the States - all these factors lead to the inescapable conclusion that "natural gas" in raw and liquefied form is petroleum product and part of mineral oil c resource, which needs to be regulated by the Union.

With relation to the Public Trust Doctrine, this court in MC. Mehta v. Kamal Nath (1997) 1 SCC 388 held:

17. The Public Trust Doctrine primarily rests on the principle that certain resources like air, sea, waters and the forests have such a great importance to the people as a whole that it would be wholly unjustified to make them a subject of private ownership. The said resources being a gift of nature. They should be made freely available to everyone irrespective of the status in life. The doctrine enjoins upon the Government to protect the resources for the enjoyment of the general public rather than to permit then- use for private ownership or commercial purposes.

27. Our legal system-based on English Common Law - ·F includes the public trust doctrine as part of its jurisprudence. The State is the trustee of all natural resources which are by nature meant for public use and enjoyment. Public at large is beneficiary of the sea-shore, running waters, airs, forests and ecologically fragile lands. G The State as a trustee is under a legal duty to protect the natural resources. These resources meant for public use cannot be converted into private ownership.

This doctrine is part of Indian law and finds application in H·

830 SUPREME COURT REPORTS [2010) 5 S.C.R.

A the present case as well. It is thus the duty of the Government to provide complete protection to the natural resources as a trustee of the people at large.

86. RIL's right of distribution is based on the PSC, which itself is derived from the power of the Government under the 8 constitutional provisions. Thus the very basis of RI L's mandate is the constitutional concepts that have been discussed by now, including Article 297, Articles 14 and 39(b) and the Public Trust Doctrine. Therefore, it would be beyond the power of RIL to do something which even the Government is not allowed to do. The transactions between RIL and RNRL are subject to the over- riding role of the Government.

87. It is relevant to note that the Constitution envisages exploration, extraction and supply of gas to be within the domain of governmental functions. It is the duty of the Union to make sure that these resources are used for the benefit of the citizens of this country. Due to shortage of funds and technical know-how, the Government has privatized such activities through the mechanism provided under the PSC. It would have been ideal for the PSUs to handle such projects exclusively. It is commendable that private entrepreneurial efforts are available, but the nature of the profits gained from such activities can ideally belong to the State which is in a better position to distribute them for the best interests of the people. F Nevertheless, even if private parties are employed for such purposes, they must be accountable to the constitutional set- up.

88. The statutory scheme of control of natural resources is governed by a combined reading of the Oil Fields G (Regulation and Development) Act, 1948; the Petroleum and Natural Gas Rules, 1959; and Maritime Zones Act.

89. As pointed out earlier, the proper interpretation of PSC gives the power to the Government not only to determine the basis of valuation of.gas, but also its price. According to Article

RELIANCE NAfURAL RESOURCES LTD. v. 831 RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]

21 of PSC, before the contractor sells the gas, the price of such gas must be approved by the Government.

90. It has been argued by RNRL that the decision of the EGOM (Empowered Group of Ministers) does not apply to the rights of RNRL under the Scheme. This argument is based on the text of the decision which states that the pricing decided upon by EGOM is "without prejudice" to the rights of the parties in the two cases pending before the Bombay High Court, i.e. RIL v. NTPC and RIL v. RNRL. This is contested by both the Government and RIL. This position of RNRL is unsustainable. C As pointed out by RIL the right interpretation of "without prejudice" in the EGOM decision is that even though EGOM intended it resolution on pricing to apply to RNRL, it left the question of the rights of the parties accruing from the MoU, the Scheme or the interpretation of PSC to the cou'rt. In other words, the court is to determine whether the Government has the power D to determine the valuation and pricing of the gas. This determination by the court is not affected by the F.GOM decision, as it would depend solely on the interpretation of the provisions of the PSC itself. But once it is determined that the Government does have the power to determine the price of gas, E EGOM's decision regarding the price would be applicable. The same goes for the general gas utilization policy and the policy of the Government with regard to pricing. Therefore, once the PSC is read to give power to the Government to determine the price of gas, these policy statements will be applicable. F

91. From the above analysis, the following are the broad sustainable conclusions which can be derived from the position of the Union:

(1) The natural resources are vested with the G 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.

(2) Even though exploration, extraction and exploitation H

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

A 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 B players in this process. Natural resources must always be used in the interests of the country, and not private interests.

(3) The broader constitutional principles, the statutory scheme as well as the proper interpretation of the c PSC mandates the Government to determine the price of the gas before it is supplied by the contractor.

(4) The policy of the Government, including the Gas D Utilization Policy and the decision of EGOM would be applicable to the pricing in the present case.

(5) The Government cannot be divested of its supervisory powers to regulate the supply and distribution of gas. E

92. Summary of our conclusions:

A. Question of Maintainability of the Company Application F RNRL filed an application under the Companies Act arguing that GSMA put in place by RIL does not satisfy the Scheme of demerger. The Scheme under question was approved by the Company Court on the previous occasion under Sections 392 and 394. Therefore, contrary to RIL's G argument, Sections 392 and 394 are applicable.