TMI Blog2010 (5) TMI 732X X X X Extracts X X X X X X X X Extracts X X X X ..... ary for this Court to go into the interpretation of the provisions of the PSC? Whether the approval of the Government is required to the price at which gas is sold by the contractor under the PSC? Whether the Government has the right to regulate the distribution of gas produced which it has exercised by putting in place the Gas Utilization Policy under which sectoral and consumer-wise priorities (to the quantities specified) have been identified and notified to RIL? Whether the Contractor has a physical share in the gas produced and saved which it can deal with at its own volition? Whether the “Suitable Arrangement” for supply of gas to Dadri Power Plant of REL can only be on the same terms as are applicable to other 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? Held that:- Appeal allowed. Both the learned Single Judge and the Division Bench committed a serious error in exercising jurisdiction in the manner they did under Section 392 of the Companies Act, 1956, for such interference has resulted in the provisions of a document (MoU) which was not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ors. vs. Union of India Ors. - (2004) 4 SCC 489 (CB). 5) Being aggrieved by the judgment and order of the Division Bench of the High Court of Bombay dated 15.06.2009 in Appeal No. 1 of 2008 in Company Application No. 1122 of 2006 and in Company Petition No. 731 of 2005, Reliance Natural Resources Ltd. (in short RNRL ) has filed S.L.P.(C) Nos. 14997 15033 of 2009. Questioning the same common order of the Division Bench of the High Court, Reliance Industries Limited (in short RIL ) has filed S.L.P. (C) Nos. 15063-15064 of 2009. Since the Union of India intervened at the stage when the Division Bench heard Appeal Nos. 844 of 2007 and 1 of 2008, it also filed S.L.P.(C) No. 18929 of 2009. One Vishweshwar Madhavarao Raste also filed SLP(C)....CC Nos.16126-16127 of 2009. Since all the appeals arising out of the above special leave petitions emanated from the common order dated 15.06.2009 passed by the Division Bench and the issues raised in all these appeals are one and the same, all the appeals were heard together and are being disposed of by this common judgment. 6) Brief facts: The case of RNRL: (a) In 1973, late Dhirubhai Ambani set up the RIL consisting of Oil, g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed away. Sometime thereafter, differences started between Mukesh Ambani and Anil Ambani over the management and control of the group companies. Both the brothers, at the relevant time, were looking after the affairs of RIL in all respects including the group companies. (g) The provisions of the PSC were known to the respective Board of Directors as well as to both the brothers. Mukesh Ambani was the Managing Director and Anil Ambani was the Joint Managing Director of the RIL. (h) In October, 2002, the Consortium (NIKO RIL) announced discovery of significant result of KG-D6 Block. Sometime in the year 2003, the National Thermal Power Corporation Limited (in short NTPC ) floated a global tender for supply of gas to its power projects. The Gas Sale and Purchase Agreement was annexed with the tender document. NTPC invited international competitive bids for supply of natural gas to its power plants located in the State of Gujarat to meet its fuel requirements. RIL succeeded in its bid to sell, transport and deliver 132 TBtu (means one trillion BTU (British Thermal Unit) or 1000000 MMBTU). NTPC, by letter dated 16.06.2004, confirmed RIL s deal. (i) In June, 2004, RIL entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id for off-shore oil and gas fields; strategic investment in RIL which has engaged in power projects, in order to use part of gas discovered for the generation of power; appropriate gas supply arrangement will be entered into between RIL and Global Fuel Management Services pursuant to which gas will be supplied to RIL; refined gas based energy undertaking; after the record date the Board of the resulting companies shall be re-constituted and shall thereafter be controlled and managed by Anil Ambani. A suitable arrangement would be entered into in relation to supply of gas for power projects of Reliance Patalganga Power Limited and REL with the gas based energy resulting companies. (n) The Scheme sanctioned by the Company Judge provided for de-merger of four Undertakings of Reliance Industries Limited (RIL) and transfer of these Undertakings on a Going concern basis to four resulting Companies. They are: (i) The Coal Based Energy Undertakings/Reliance Energy Ventures Limited. (ii) Gas Based Energy Undertaking/Global Fuel Management Services Limited now known as Reliance Natural Resources Limited (RNRL). (iii) Financial Services Undertaking/Reliance Capital Ventures Limited. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he terms and conditions as mentioned in the GSPA signed by RIL on 12.12.2005 and forwarded to the NTPC. It was further informed that they agree to carry out the changes to the proforma GSPA annexed to the GSMA so that it reflects the same terms as contained in GSPA between NTPC and RIL as and when any changes are carried out to NTPC GSPA. (r) On 28.02.2006, RNRL, by its letter to RIL, informed and elaborated various deviations in the GSMA from the agreed terms which were necessary for de-merging the business. A suitable draft agreement in compliance with the Scheme was also sent with the letter. On 12.04.2006, RIL made an application to the Ministry of Petroleum and Natural Gas (MoPNG) for approval of the gas price at which the sale of 28 MMSCMD of gas was agreed with the RNRL under the GSMA. (s) On 09.05.2006, RNRL, by a letter, requested the MoPNG to accord approval to the application dated 12.04.2006 made by the RIL. On 26.07.2006, the MoPNG communicated to the RIL its refusal to approve the price of gas agreed between the RNRL and the RIL under the GSMA. On 31.07.2006, RIL forwarded a letter to the RNRL, a copy of letter dated 26.07.2006 received from the MoPNG rejecting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts intervention to ensure that the Scheme is implemented effectively. 8) In addition to the above particulars, RNRL placed the following additional materials in support of their stand: a) The Board of Directors of RIL were appreciative of the resolution of the issues between Shri Mukesh Ambani and Shri Anil Ambani and in their meeting held on June 18, 2005 noted the settlement and amicable resolution of the dispute providing for reorganization of the Reliance Group including the businesses and interests of RIL and adopted a resolution thanking the efforts made by Smt. Kokilaben Dhirubhai Ambani in working towards the settlement. b) The agreement arrived at between Shri Mukesh Ambani, Chairman and Managing Director of RIL and Shri Anil Ambani relating to the reorganization of the RIL Group envisaged the supply of gas from RIL s current and future gas fields for various projects of Reliance-Anil Dhirubhai Group. The said agreement contains the following clauses:- (a) Quantum of Supply and Source of Supply Supply of 28 MMSCMD gas by RIL to Anil Dhirubhai Ambani Group (ADAG). This supply is subject to supply of 12 MMSCMD to NTPC. In the event that NTPC contract does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , through suitable arrangements. d) The Scheme also explains: (i) Gas Based Energy Resulting Company (ii) Gas Based Energy Undertaking e) The Scheme provided for suitable arrangements whereby the RNRL would receive gas from RIL and supply the same, as RIL would otherwise have done, for the power projects of REL. f) In the year 2003, NTPC had floated a global tender for supply of gas to its power projects to be located at Kawas and Gandhar in the State of Gujarat. RIL, who emerged as the successful bidder, had at the time of submission of bids unconditionally accepted all the terms and conditions mentioned in the draft GSPA. In accordance with the agreed position/settlement, the gas was to be supplied by RIL to the RNRL at the price and terms no less favourable than those of NTPC and the gas supply agreement between RIL and the RNRL would be as per the said NTPC contract terms. RIL, by letter dated 14.02.2006, signed by one K. Sethuraman, Authorised Signatory of RIL, communicated that he was directed to confirm that RIL would agree to carry out amending changes to the proforma of GSPA annexed to the Gas Supply Master Agreement (GSMA) so that it reflects t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the heads of so-called Agreement are a part of the Scheme as proposed by the Board of Directors of RIL and approved by the creditors and general body of shareholders. These allegations have no place in an application made for implementation of the Scheme as sanctioned by the High Court. The averments made therein are completely extraneous and irrelevant. The issues, if at all, as between Shri Mukesh Ambani and Shri Anil Ambani were personal to the Ambani family and the Board of RIL was not aware of the details of the settlement between Shri Mukesh Ambani and Shri Anil Ambani. d) The Vice Chairman and Joint Managing Director of RIL, at the relevant time, Shri Anil Ambani was or in any event, should be deemed to be fully aware of the nature of the rights of RIL in relation to exploration and production of gas from various gas-fields as also the provisions of the Production Sharing Contract (PSC). Significantly, the Production Sharing Contract for Block KG-D6 was executed way back in the year 2000. Being Board managed company, the business and affairs of RIL are under control and supervision of the Board of Directors and in fact the Minutes of the Board meeting clearly show that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view the several factors including the freedom and right of the contractor/RIL and the limited and restricted scope of interference in such permissible commercial aspects of the contractor, unless, it is in breach of any public policy and public interest. (8) The supply of gas contract/agreement needs to be clear and bankable documents for all the concerned parties. Finally, the Company Judge directed the parties to re- negotiate for a suitable arrangement . 11) As discussed earlier, aggrieved by the said order/directions of the Company Judge, RNRL has filed Appeal No. 1 of 2008, RIL has also filed Appeal No. 844 of 2007 before the Division Bench. During the course of hearing, considering the public/national importance, the Division Bench permitted the Union of India to intervene and put forth their stand. 12) The Division Bench framed the following issues for consideration : (1) Whether the Company Court has jurisdiction to entertain the Application filed by RNRL under the Companies Act, 1956? (2) What is a suitable arrangement between the two Companies in the matter of supply of gas for the power projects of the Resulting Companies and its affiliates? 13) Ans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to Private Sector Investment during the mid 1990s when private investment was sought on competition basis and certain blocks were awarded to Private Sector companies under a Production Sharing Contract (better known as the pre-NELP Production Sharing Contracts). This was done to increase private investment in this sector since the exploration and production of oil and gas is associated with considerable risk and no investment would have been attracted if the APM regime continued. However, the Contractors who signed the PSC were required to sell all the gas produced and saved to the Gas Authority of India Limited, a PSU, and did not have marketing freedom as regards natural gas. The pre-NELP regime was replaced by the NELP regime under which the PSC relevant to the present case was entered into between a Joint Venture composed of RIL and NIKO Resources Limited and the Government of India. In the NELP- 1 PSC, marketing freedom has been given to the contractor to a limited extent subject to the overall regulation of the Government. 17) Constitutional and other statutory Provisions: Article 297. Things of value within territorial waters or continental shelf and reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces of the community that best sub-serves the common good. 22) This Court in numerous decisions has laid down that in the award of tenders and the distribution of national property and State largesse, the State is bound to follow the dictate of Article 14. 23) In Ramana Dayaram Shetty vs. International Airport Authority of India Ors, (1979) 3 SCC 489, this Court has pointed out that : ........The power or discretion of the Government in the matter of grant of largess including award of jobs, contracts, quotas, licences etc., must be confined and structured by rational, relevant and non-discriminatory standard or norm and if the Government departs from such standard or norm in any particular case or cases, the action of the Government would be liable to be struck down, unless it can be shown by the Government that the departure was not arbitrary, but was based on some valid principle which in itself was not irrational, unreasonable or discriminatory 24) In Food Corporation of India vs. M/s Kamdhenu Cattle Feed Industries, (1993) 1 SCC 71, this Court observed as follows: In contractual sphere as in all other State actions, the State and all its instrumentalities have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if sanctioned by the Tribunal be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company: Provided that no order sanctioning any compromise or arrangement shall be made by the Tribunal unless the Tribunal is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Tribunal, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 351, and the like. (3) An order made by the Tribunal under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar. (4) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members or creditors of the company or otherwise, and the effect on those interests of the compromise or arrangement if, and in so far as, it is different from the effect on the like interests of other persons; and (b) in every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid. (2) Where the compromise or arrangement affects the rights of debenture-holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company s directors. (3) Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall, on making an application in the manner indicated by the notice, be furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the compromise or arrangement, are to be allotted or appropriated by that company to or for any person; (iii) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; (iv) the dissolution, without winding up, of any transferor company; (v) the provision to be made for any persons who, within such time and in such manner as the Court directs dissent from the compromise or arrangement; and (vi) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out: Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies; shall be sanctioned by the Tribunal unless the Court has received a report from the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest: Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the MoU are required to be incorporated in the GSMA as held by the Division Bench? e) Whether the provisions in the GSMA requiring Government approval for supply of gas to RNRL is unreasonable and that its inclusion renders the GSMA as not a suitable arrangement as contended by RNRL? f) Having insisted upon a Gas Sale and Purchase Agreement (GSPA) in conformity with the NTPC draft GSPA dated 12th May, 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 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 exercised by putting in place the Gas Utilization Policy under which sectoral and consumer-wise priorities (to the quantities specified) have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, 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 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 pointed out that this becomes clear beyond doubt from a reading of sub section 3 of Section 392. He also pointed out that Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 limits. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53 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:- 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 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 of a person who is not one of those recognised by Section 391 of the Act, could be accepted by the Company Court while approving a 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. 54. It was argued on behalf of the respondents that under Section 392 of the Act, the court has the power to make mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. Instead of the Company reviving the spinning unit as recommended by the State Bank of India Capital Markets Limited, as adopted in the General Meeting, now the Company will have nothing to do with the mill lands and 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. 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 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 on the pretext that it is a modification necessary for the proper working of the compromise or arrangement. We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Act. 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 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 counsel further contented that Section 392 shows the width of the power and the ultimate 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 Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Company Judge, 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 for sanctioning of any Scheme including of arrangement, demerger, merger and amalgamation. Therefore, the application filed by RNRL under Section 392 is maintainable. Nevertheless, as observed earlier, the power of the Court does not extend to re-writing the Scheme in any manner. (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 Bench of the High Court) which are as under: STRICTLY CONFIDENTIAL MEMORANDUM OF UNDERSTANDING This Memorandum of Understanding (this MoU ) is made at Mumbai this___ day of June, 2005 amongst Kokilaben D. Ambani ( Kokilaben ), Mukesh D. Ambani ( Mukesh ) and Anil D. Ambani ( Anil ) (each of Kokilaben, Mukesh and Anil hereinafter referred to individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 successionis 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 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 revok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided 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 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 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 to be viewed a little differently from ordinary contracts and their internal mechanism for working out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MoU and be treated as guidance to the term suitable arrangement. He also pointed out that a family arrangement or the MoU has not been referred to at any stage in the Scheme or in any representation made to the Stock Exchange and the same is contrary to the RNRL s own pleading and their case. Mr. Harish Salve also relied on various exerts from some of the letters/e-mails from Exhibit F filed by RNRL. Some of the letters/e-mail dated 30.07.2005 from Mr. Harish Shah (RIL) to Mr. Venkat Rao (REL); e-mail dated 06.10.2005 from Mr. Cyril Shroff to Mr. Sandeep Tandon/RIL; e-mail dated 29.11.2005 from Mr. Cyril Shroff to Mr. Anil Ambani; e- mail dated 14.12.2005 from RIL to Mr. J.P. Chalasani and e- mail dated 27.12.2005 from Mr. Sandeep 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-mails remain unchallenged. 30) In the light of the stand taken by both sides, this Court 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the demerger was to be worked out. 32) On the other hand, learned senior counsel appearing for the RNRL demonstrated the existence, effect, sanctity and the binding nature of MoU. It is their definite case that the existence of MoU was specifically pleaded in para 6.6 of the Company Petition. Learned Company Judge found that the MoU existed and that the terms of MoU had to be implemented. Inasmuch as the relevant part of MoU concerning the gas business have already been placed before the Division Bench in appeal with the consent of the parties and the relevant terms relating to price, tenure, volume etc. are admitted between the parties, it is only the interpretation thereof which is to be 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 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 da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 37) Thirdly, it must be pointed out that apart from the MoU, suitable arrangement must be understood in the context of 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. (C) GSMA and GSPA: whether they qualify as suitable arrangement: 38) 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acity 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 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. 39) It was pointed out by the learned senior counsel for the 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 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 interest of RNRL or resulting companies as it was by the Board of Directors of the RIL, the trustee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 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 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% to Mukesh Ambani Group and 40% to Anil Ambani Group. Subject to the above, after the MMSCD to REL, the next order of priority would be of RIL for its captive consumption for Mukesh Ambani Group Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also correspondence with 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 source of gas from RIL, which has the largest find of gas, was absolutely essential for the growth plans of the Anil Ambani Group and in order to enable Anil to carry REL to even greater heights. Kokilaben has, therefore, specially stressed and impressed upon Mukesh and Mukesh shall personally ensure that at the time of finalization of the binding gas supply agreement the terms provide the required conform and stability in these agreements, even if that means some departure 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 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 Group. (xi) Swapping of gas is permitted. (xii) (a) In relation to applicable governmental and statutory approvals, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing 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 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 Contractor has freedom to sell gas at arms length price 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 Bench has finally held that suitable arrangement should be entered into by the parties on the basis of the MOU. 43) 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 aspect relates to the role of the Government, the proper interpretation of PSC relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable 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 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. 47) Keeping the said object in mind, Clause 19 must be interpreted by taking into account 1) the interest of RNRL as reflected by the MoU; 2) the interest of the shareholders of RIL and RNRL; 3) the obligations of RIL under PSC; 4) the national policy of gas including the decisions of EGOM and Gas Utilization Policy; and 5) broader national and public interest. (D) PRODUCTION SHARING CONTRACT (PSC): 48) Some of the salient features of the PSC are as follows: i) Clause 6 of the Pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of this, along with the contemplation of a Government s 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 identifying the priority sectors, and allocating the requisite quantities in accordance with the needs of the said sectors and subjecting marketing freedom to the order of priority and guidelines framed is very much in accordance with law. Consequently, Article 21.1 and Article 21.3 should be read in 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. 52) To put it clear, both in terms of the Gas Utilization Policy and the Production Sharing Contract, Government in the capacity as an Executive of the Union can regulate and distribute the manner of sale of Natural Gas through allotments and allocation which woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cannot be 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-I which guide the pricing of KG D-6 gas, are as follows: Article 21.6.1 - The Contractor shall endeavour to sell a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. 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; c) Thirdly, having linkages with traded liquid fuels, and d) Fourthly, Government will have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cided on the utilization of a further volume of 19.826 (+0.875) 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. 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 Government or its nominee, it must be sold on the basis of competitive arm s length sales in the region for similar sales under similar conditions . Importantly, Article 21.6.3 states that the basis on which such prices are to be determined shall be approved by the Government prior to the sale. In the present case, the formula submitted by RIL was looked into by EGOM and examined by the Committee of Secretaries and PM s Economic Advisory Council. Due to this the price was determined to be $ 4.20, on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 position of RNRL as argued before us is that the GSMA is not suitable for them because it was not a bankable contract and that the MoU is the suitable arrangement. The question remains whether the GSMA is unsuitable due to it not being a bankable contract or it reducing RNRL to a shell company. BANKABLE CONTRACT: 67) The question of bankability has been argued in detail by RIL. Mr. Salve, learned senior counsel pointed out that GSMA cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 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 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. 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 binding contract. In its letter dated 18th December, 2006 after filing of the petition RNRL sought Government s approval for 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. 73) While RNRL had all alon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 contractor (RIL NIKO) entered into a Production Sharing Contract (PSC). In 2002, RIL NIKO announced discovery of significant result from KG-D6 block. 79) In 2003, NTPC floated a global tender for supply of gas 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 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 and the companies decided to move ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 supply agreement would be a general guidance for the same and shall as far as possible be the basis for such contracts and the terms of such contracts will be no less favorable than those of NTPC contract. The NTPC contract clearly provides 17 years as the period for which RIL will supply gas. With regard to the price at which the gas has to be supplied to REL for all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stribution of natural gas amongst the States - all these factors lead to the inescapable conclusion that natural gas in raw and liquefied form is petroleum product and part of mineral oil resource, which needs to be regulated by the Union. With relation to the Public Trust Doctrine, this court in M.C. Mehta v. Kamal Nath (1997) 1 SCC 388 held : 17. The Public Trust Doctrine primarily rests on the principle that certain resources like air, sea, waters and the forests have such a great importance to the people as a whole that it would be wholly unjustified to make them a subject of private ownership. The said resources being a gift of nature. They should be made freely available to everyone irrespective of the status in life. The doctrine enjoins upon the Government to protect the resources for the enjoyment of the general public rather than to permit then- use for private ownership or commercial purposes. 27. Our legal system-based on English Common Law - includes the public trust doctrine as part of its jurisprudence. The State is the trustee of all natural resources which are by nature meant for public use and enjoyment. Public at large is beneficiary of the sea- shore, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. 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 court. In other words, the court is to determine whether the Government has the power to determine the valuation and pricing of the gas. This determination by the court is not affected by the EGOM 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, EGOM s decision regarding the price would be applicable. The same goes for the general gas ut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... family arrangement or understanding between the two brothers, Mukesh and Anil Ambani, and their mother. Contents of the MoU were not made public, and even in the present proceedings, they were revealed in parts. Clearly, the MoU does not fall under the corporate domain - it was neither approved by the shareholders, nor was it attached to the scheme. Therefore, technically, the MoU is not legally binding. Nevertheless, cognizance can be taken of the fact that the MoU formed the backdrop of the Scheme, and therefore, contents of the Scheme have to be interpreted in the light of the MoU. C. Considerations to determine suitable arrangement under Clause 19 of the Scheme. Suitable arrangement under clause 19 of the Scheme must not be merely suitable for RIL. It has a broader meaning. Such an arrangement must be suitable for the interests of the shareholders of RNRL as reflected by the MoU, and RIL; the obligation of RIL under the PSC; the national policy on gas including the decisions of EGOM and the Gas Utilization Policy; and the broader national and public interest. D. Proper Interpretation of the PSC The objective of the PSC inter alia is to regulate the supply and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licy and national interests; 3) The parties should take into account the MoU, even though it is not legally binding, it is a commitment which reflects the good interests of both the parties; d) The parties must restrict their negotiations within the conditions of the Government policy, as reflected inter alia by the Gas Utilization Policy and EGOM decisions. 93) With the above directions/observations, all the appeals and I.A. No.1 are disposed of. No order as to costs. B. SUDERSHAN REDDY, J. I.A. No. 1 for permission to file Special Leave Petition is allowed. 2. We grant special leave and proceed to dispose of all the appeals. PART I PROLOGUE Jus publicum privatorum pactis mutari non potest. Public law cannot be changed by private pacts. Digest of Justinian Political democracy cannot last unless there is at its base social democracy.... On the social plane, we have in India a society based on the principle of graded inequality, which means elevation of some and degradation of others. On the economic plane, we have a society in which there are some who have immense wealth as against many who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State would have been compromised. Those with knowledge of history, and an inclination to learn from, it would necessarily be concerned about the situation today and potential consequences in the future. For them the words of Dr. Ambedkar would appear to be prescient and wise. 4. The wisdom of the ages, garnered through eons of humanity s collective struggles to find for all a life of dignity and fraternity - a dignity that arises from and is informed by liberty, equality, and justice in all walks of life and a fraternity that seeks to promote such dignity for all is the fire in which the Constitution of India has been forged. The very structure and text of the Constitution, when viewed through the lens of history and the working of the instrument itself, clearly demonstrates that it crystallizes collective human wisdom in its triadic ethical foundations. Those foundations are: (i) the Preamble that soars in eloquence in its articulation of collective human aspirations as national goals and sets out the raison d etre for the nation itself; (ii) the Fundamental Rights, that provide various necessary freedoms for the individuals and social groups, and places upon the State ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally, credit must also go to the socio-political and economic policies initiated and implemented, of course with varying degree of success and failure, for sustaining the hope that the promises enshrined in the Constitution are at least being sought to be achieved. However, a much larger measure of credit ought to go to the people: those people who turn up in ever larger numbers to the voting booths and continue to retain trust in the basic principles of democracy, notwithstanding their abysmal lot in life. Yet, when the State attempts to alleviate just a part of the burden of their continued dehumanized condition, such attempts are decried as populist by the elite of this country. 7. So, willy-nilly, we come back to the question asked by Dr. Ambedkar: how long will our people bear the contradictions of endemic and gross inequalities? An aspiring and youthful population can be a great boost to the economy and the society. It would be tautological to state that the GDP would grow rapidly with a larger proportion of the people in the productive phases of their lives. But, the same youth unemployed or underemployed, malnourished and without the capacity or hope to lead or achieve a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 08 and the Descent Into Depression , p. xi. Harvard University Press (2009)] 10. History has repeatedly shown that a culture of uncontained greed along with uncontrolled markets leads to disasters. Human rationality, with respect to pursuit of lucre, is essentially short run. So long as there appear to be possibilities of making profits, especially windfall profits, the fears that the competitors would reap them will drive businesses into taking greater and greater risks; in fact, even by self-enforcement of blindness to the potential for market collapse. To say that it was a failure of regulation is trite. Markets failed because regulation had practically ceased to exist. Finally veering around to the view that regulation of markets is absolutely essential, after spending a lifetime arguing for the opposite, and noting that the capacity for self-regulation was highly over-rated, Judge Posner in his own inimitable manner says: If you re worried that lions are eating too many zebras, you don t say to the lions, You re eating too many zebras . You have to build a fence around the lions. They re not going to build it. [ Richard A. Posner, ibid] 11. Historically, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on earnings from export of natural resources, similar effects can also arise from activities within the domestic economy. Take the case of India itself. We cannot by any stretch of imagination claim that we are a resource poor country. Yet, as we cast a glance across the face of our land, the greater incidence of social unrest, and movements for greater self determination, seem to occur by and large in states and regions that have plenty of natural wealth and paradoxically suffer from low levels of human development. We hasten to add that we are 4 The word political is being used in a technical sense to denote the state and all of its institutions, rather than merely political parties or to denounce the normative desirability of democratic political processes. 5 Joseph E. Stiglitz, Making Natural Resources into a Blessing rather than a Curse, in Covering Oil Ed. Svetlana Tsalik and Anya Schiffrin, Open Society Institute (2005), p. 13-14 not suggesting that absence of resources would lead to a better situation. Rather, it is to point out that the problems arise because exploitation of those resources occurs without appropriate supervision by the State as to the rates of exploitat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Freeman and American Democracy.] 16. We are not saying that markets have no role to play in a developing economy or that private initiative be suppressed and that all markets are essentially and only tools for expropriation and continuance of social injustices. We are stating that our Constitution posits that markets can be inimical to social justice, especially when left unregulated. Laissez faire market is a myth and it is, as Prof. Cass Sunstein points out: ....a grotesque misdescription of what free markets actually require and entail. Free markets depend for their existence on law...... moreover, the law that underlies free markets is coercive in the sense that in addition to facilitating individual transactions, it stops people from doing many things they would like to do. This point is not by any means a critique of free markets. But it suggests that markets should be understood as a legal construct, to be evaluated on the basis of whether they promote human interests, rather than as a part of nature and the natural order..... markets are a tool, to be used when they promote human purposes, and to be abandoned when they fail to do so... Achievement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members of the managements of corporations, who are also promoters and powerful shareholders, to the Board of Directors and other shareholders. One of the principal claims of RNRL in this case is that a private pact between the family members of the Ambani family can bind the Board and the Company, in the context of reorganization of the company without the shareholders having any knowledge of the extent of value that is actually likely to be demerged, even if such likely value runs into many thousands of crores of rupees and possibly hundred fold more than the assets and liabilities that were actually shown as being demerged in the Scheme document placed before the shareholders. 20. For a long time now, it has been well recognized that the modern industrial and post-industrial corporations control such a large extent of economic and social spheres that their activities necessarily have a wide and pervasive impact on the lives of most of the people of the country. We recognize that, in many normal instances, when issues of public interest are not apparent on the face of the record, then a Company Petition is normally, and rightly, treated as a matter of corporate law. However, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very of a very large reservoir of natural gas in KG-D6. In the same year Shri. Dhirubhai Ambani, the founder of RIL, passed away and subsequently the management of RIL was led by Mukesh D. Ambani, the elder son, as the Chairman and Managing Director and Anil D. Ambani, the younger son, as the Vice-Chairman and Joint Managing Director. On May 21, 2003, RIL submitted its conclusions to GoI that the reservoir discovered was a commercial discovery, which was subsequently certified to be so by GoI on 10.01.2004. 26. In May 2004, RIL submitted to the Management Committee of the PSC an Initial Development Plan, inter-alia, describing the nature of the discovery, the potential extent of natural gas that could be extracted, the kind of infrastructure and expenditure necessary for the same, and the potential market for natural gas in India. It was stated that natural gas produced from KG-D6 could be used by entities operating in the power and fertilizer sectors located in Andhra Pradesh, Maharashtra, Karnataka, Gujarat and Uttar Pradesh. It was stated that such users could use up to 82 MMSCMD of natural gas. It was also stated that NTPC s demand could be as much as 17 MMSCMD. The productio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e later stages of proceedings before the Division Bench. It is an admitted fact that it has been executed by and between the mother and her two sons only. 30. The MoU provided that - with disputes between the brothers, the other matters of family assets, and interests in various businesses being settled - the best way forward would be by way of a scheme of reorganization in which the energy producing, financial services and the telecommunications divisions were to be demerged to the ADA Group for ownership and control. The remaining divisions were to be with the MDA Group, including petroleum exploration and production division. The MoU specifically provided that the approvals of statutory and regulatory bodies, the shareholders and the boards of Directors of various companies would be conditions precedent for operationalising the reorganization. It was also specifically stated that personnel of both MDA Group and ADA Group would participate in the process of preparation of the Scheme so that their mutual interests could be protected. It was also agreed that the same lawyer who drafted the MoU would also draft the Scheme. 31. In addition, the MoU also had a section titled Gas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stating potential conflict of interest issues. Other Directors continued and after expressing their thanks to KDA, it was recorded that some Directors felt that any reorganization be undertaken only if it is in the best interests of all the shareholders. To this effect it was resolved that a Corporate Governance and Stakeholders Interface Committee comprising independent Directors examine in depth all the issues relevant for reorganization and suggest a proposal to the Board, including any scheme. It was also resolved that the said committee of independent Directors also be assisted by professionals, such as chartered accountants, solicitors, merchant bankers etc., including the lawyer who had drafted the MoU. 34. Based upon such authorization the CG Group proceeded to perform its assigned duties, assisted by various professionals, and with the active participation of personnel of both ADA and MDA groups. On August 3, 2005 Term Sheets were prepared and executed by representatives of the two groups and it was provided therein that the Scheme would be based on the terms agreed. With regard to the principal disclosures to be made in the scheme, it was decided that one of them would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved near unanimously by the shareholders and the stakeholders. Subsequently, the High Court sanctioned the Scheme on December 09, 2005. The MoU and the terms in it relating to gas supply do not find any mention in any of the petitions as well as the sanctioned Scheme. 37. Beginning on June 30, 2005 representatives of both the groups started negotiating the terms of gas supply agreements. Voluminous correspondence (Exh. F) ensued, mostly in the form of emails. Neither prior to the filing of the Scheme nor thereafter could the two groups arrive at any agreement. It is clear from the correspondence, that even until end of February, 2006 there was no controversy that was raised regarding the requirement of governmental approvals. The draft NTPC-GSPAs of May, 2005 containing the requirement of governmental approvals had been handed over to the ADA Group and it was agreed by an ADA Representative that it would form the basis for negotiation of gas supply agreements. 38. On January 12, 2006 a meeting of the Board of Directors of RNRL was called for, in which, a Gas Supply Master Agreement and a model Gas Sale and Purchase Agreement, approved by the Board of RIL, were placed for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t prices. 42. On August 1, 2006 the MoPNG constituted a Committee to Formulate Transparent Guidelines for Approving Gas Price Formula/Basis for giving Government Approval under the PSC for the same. On August 17, 2006, the said Pricing Committee issued letters to various stakeholders, seeking their comments and thereupon submitted its report in November 2006. 43. On November 8, 2006, RNRL filed Company Application under Section 392 of the Companies Act, 1956 seeking directions from the High Court to order RIL to change the gas supply agreements in a certain specific manner. According to RNRL, the gas supply agreements were not bankable in international financial markets, did not demerge the business of supply of gas to gas based energy producing companies within the ADA Group and thereby the very purpose for which RNRL had been set up was negated. Further, RNRL also claimed that unless the said changes were made, the Scheme would be unworkable and hence the reliefs as prayed for. RIL countered that the Company Application of 2006 was not maintainable, as the clauses that were being sought to be changed were not unconscionable, and the jurisdiction under Section 392 was only t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46. While the EGOM meetings were being held the litigation between RIL and NTPC, and RIL and RNRL were in various stages before the High Court. It appears that while exercising its sovereign right to frame policy of national importance, EGOM was also sensitive to the issue of decisions to be made by the concerned courts, and hence noted that the decisions of EGOM would be without prejudice to the rights of the litigants as decided by the Courts. 47. A final order and judgment was passed, on 15.10.2007, by the Learned Company Judge. The judgment held: the Application under Section 392 to be maintainable, that the Company Court was not competent to dictate the specific changes sought, that the GSMA was in breach of the Scheme, that the MoU was binding on both parties, and that suitable arrangements in Clause 19 of the Scheme had to be read in light of the MoU and that it was necessary for the Scheme. The Learned Company Judge also held that such gas supply contracts would be subject to Government s approval, pursuant to NELP and PSC and it was further held that Government should normally approve such contracts unless clearly in breach of public policy and public interest. The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench, being aggrieved by certain findings, has also preferred an appeal against the Judgment and Order of the Division Bench. After initially raising objections, the Learned Senior Counsel appearing for RNRL, Shri. Ram Jethmalani withdrew his objections to leave being granted. Further, in as much as on the face of the record it would appear that the PSC, to which the UoI is a party, has been interpreted without the GoI having had an opportunity to be properly impleaded and present its case and the potentially serious public interest implications that arise therefrom, leave has been granted to the UoI. 52. Now we shall proceed to summarise the contentions of the parties made during the oral hearings spanning 27 days and in the many thousands of pages of written documents. A number of authorities were also cited by each of the counsel in support of their arguments. We make it clear that we shall advert only to those submissions and citations which are necessary for disposal of these appeals. PART III SUMMARY OF THE SUBMISSIONS OF THE PARTIES: 53. Though the first party to file a special leave petition in these proceedings was RIL, and it is Shri Harish Salve, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had made prior to the demerger and even prior to the MoU and hence ought to honour them. 3. Tenure: The tenure should be a firm 17 years, as that was the term that had been promised to NTPC and that the provision regarding the same should be as stated in the draft agreements with NTPC. 4. Identity of Buyer : In as much as the gas supply agreements mandate that it nominate an affiliate from within the ADA Group that is engaged in gas based energy production as a buyer, and the gas is directly supplied to it and payments made to RIL are also from that quarter, the very purpose for which RNRL has been set up, to supply gas to gas based energy producing companies and thus promoting the setting up of such companies, would be negated. It is contended by RNRL that a fair reading of the Scheme would reveal the same. 5. Definition of an Affiliate: According to RNRL the definition of an affiliate should not require 51% ownership, but rather the definition as contained in either the PSC or the NTPC draft agreements. It is argued that by restricting its nominees to only those companies in which RNRL owns at least 51%, the freedom of RNRL to set up gas based e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose. Alternately, it is also argued by Shri. Jethmalani and Shri. Mukul Rohtagi that, even if one were to assume that the title does not pass through to the Contractor and that the GoI did have such rights, when the binding commitments were made by RIL to RNRL, there was no utilization policy in place, consequently RIL was free to find its own buyers under the marketing freedom promised by NELP, the only policy in place. Moreover, it is argued, the GoI knew about supply of natural gas to RNRL in as much as it was specifically mentioned in the IDP approved by the MC of the PSC. Arguing that the State has to act justly, fairly and reasonably even in contractual field, they have relied upon Kumari Shrilekha Vidyarthi v State of U.P., (1991) 1 SCC 212, Mahabir Auto Stores v Indian Oil Corpn., (1990) 3 SCC 752, LIC of India v Consumer Education Research Center (1995) 5 SCC 482. Further, they also argue that EGOM decisions cannot be held to be applicable in a manner that would affect its pre-existing contractual rights with RIL as executive action cannot interfere with contractual rights. To this effect they rely upon Rai Sahab Ram Jawaya Kapur Ors. v State of Punjab, 1995(2) SCR 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liappa Textiles Ltd. Ors. AIR 2004 SC 86 It was argued that the terms of gas supply, which are in the nature of day to day agreements entered into by the Management and hence need not have been placed before the shareholders for approval and that the powers of a Director to enter into contracts are very wide and reliance is placed on LIC v. Escorts Ltd (1989) 1 SCC 264 and Mohta Alloy Steel Works v Mohta Finance Leasing Co. Ltd. 1997) 89 Comp. Cases 227 3. Maintainability: It was also argued by the Learned Senior Counsel for RNRL that the power of the Company Court is of the widest amplitude and that in fact it is the duty of the court to ensure that the Scheme is fully implemented and the only limitation on the powers of the court is that it cannot change the character, purpose or basic structure of the Scheme. He relied on S.K. Gupta v K.P. Jain (1979) 3 SCC 54 CONTENTIONS OF RIL: 6. RIL s position with regard to the Six Protested Points was argued by Shri. Harish Salve as follows: The basic contention of RIL is that under the PSC the GoI has the right to approve the price formula/basis on which sales can be effectuated, pursuant to Art. 21.6 et. seq. Additionally, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the definition of affiliate should be wider than what was provided in the GSMA. It was submitted that the GSMA and GSPA fully comply with the requirements of Clause 19 of the Scheme, which requires that arrangements be entered into with RNRL for supply of gas to the power plants of REL and RPPL. Under the GSMA, RNRL would have the right to nominate affiliates to whom gas is required to be supplied under different GSPAs. The GSPA s are to be entered into with companies who are engaged in generation of electricity like the REL. RIL also further contends that the Scheme does not contemplate RNRL purchasing the gas and selling the same to its affiliates at a profit. RIL says that the buyers under the Scheme were to be companies which actually own and operate power plants and moreover under the PSC the title can only pass to the end consumer at the delivery point. It was stated that the scheme envisaged that RNRL take delivery of gas at the delivery point on behalf of the buyers and arrange for its transportation to the ultimate consumption point and for this purpose charge a marketing margin which must be nominal and the transportation charges incurred. The submission was that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y act as an agent of UoI. 59. According to Shri. Salve, what was approved by the shareholders and formed the basis for sanction of the Scheme, has in fact been propounded by the Board. The minutes of the Board meetings and the discussions recorded clearly show that the Board sought the opinion of the CG Committee and outside professionals in deciding whether to go with the reorganization or not, and also the nature of the Scheme that was to be put together. It is clear from the record that the Board acted independently and collectively. What it did not include in the Scheme therefore cannot now be said to be a part of the Scheme itself. With respect to gas supply agreements, the Board had clearly recognized that they were not permissible without governmental approvals, and in fact the personnel of ADA Group knew this and so did the lawyer who put the scheme together, drafted the MoU and was advising ADA. 60. Shri. Salve argued that the MoU was a confidential document from the private domain of the promoters and was executed in the context of settlement of family disputes. In as much as the MoU was never placed before the Board or the shareholders, it cannot be deemed to have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with what the Court feels is a better one. Shri. Nariman relied upon Miheer H. Mafatlal v Mafatlal Industries. (1997) 1 SCC 579, Consequently, under Section 392 the Court cannot impose its own wisdom, and change the basic fabric of the Scheme itself. Reliance was placed on S.K. Gupta (supra). Further, Shri Nariman also argued that in search of modification, it is impermissible to substitute a portion of the Scheme with a new Scheme. Reliance was placed on Meghal Homes (P) Ltd. V Shree Niwas Girni K.K. Samiti Ors. (2007) 7 SCC 753. According to RIL there is nothing unconscionable in the six clauses that have been protested and hence also the application by RNRL was not maintainable. 64. Scope of Clause 19 of the Scheme: Shri. Rohinton Nariman argues that what was provided for in Clause 19 with respect to the gas supply was a suitable arrangement, which means an uncrystallized arrangement to be negotiated. This, according to Shri Nariman is to be contrasted with the crystallized agreements and rights to use Reliance brand logo etc. which are also found in Clause 19 and this difference must be interpreted to be intentional. Further, according to Shri. Nariman the suitable arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dely accepted one in international law and UN General Assembly Resolution 1803 of 1962 specifically recognizes the same. Further, it was also argued that, in fact, forms of PSC developed as a result of such a resolution. Under the new contractual systems in the petroleum industry, as opposed to the historical concessions given by Persia for instance, the ownership of the resource vests and continues to vest with the sovereign until it is disposed off. It was pointed that Article 297 of the Constitution declares that minerals and other resources underlying the ocean vest in the Union of India. Learned Solicitor General specifically stated in his oral arguments that the PSC was placed on the floor of the Parliament. 68. It was argued that the EGOM decisions, regarding the utilization of natural gas and the price formula/basis, have never been challenged independently and that the present litigation is an attempt, in a seeming internecine war, to waylay GoI policies in a Company Petition. Learned Additional Solicitor General Shri. Mohan Parasaran points to Articles 77(3) and 73 of the Constitution and argues that the powers of EGOM are not merely traceable to the PSC but also to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oI to be able to monitor and frame policy for utilization of natural gas. It was emphatically stated by him, and also by Shri. Mohan Parasaran, that any marketing freedom under the PSC can be only pursuant to a gas utilization policy put in place by the GoI. 71. Shri Mohan Parasaran analysed Articles 27.1, 27.2, in conjunction with Article 21.1 and posited that title to PSC can pass to an end user only upon sale, and such sales have to be in accordance with a utilization policy. With respect to what is shared between the contractor and the GoI, he argues that it is revenue. To this effect he also drew our attention to the fact that the PSC considered by this Court in CIT v Enron Oil Gas India Ltd. (supra) - is different from the PSC in hand, and hence that case is not applicable. 72. Shri. Mohan Parasaran interpreted Article 21.6 to mean that arms length prices and the price formula therein as being applicable with respect to all gas produced and sold from KG-D6. PART IV WHOSE GAS IS IT ANYWAY? WHETHER A CONTRACTOR BECOMES THE OWNER OF THE GAS? 73. Shorn of all the details and lengthy submissions and contentions we shall now proceed to consider the relevant and subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of life issues [Handbook of Natural Gas Technology and Business, ed. Parag Diwan and Ashutosh Karnatak, Pentagon Energy Press (2009)] 75. The size, scale, scope and nature of a market for natural gas is a function of the total supplies, the level of demand and relative abilities to pay by different user segments, the length and density of network of pipelines, the number of producers, distributors and retailers etc. One of the critical features of a properly developed market for natural gas would be the network of large capacity pipelines that can carry it to different regions, and then a further local network to distribute it to end users [bid]. Further, where that large capacity pipeline goes to, determines which regions get natural gas. In a large country, if many regions are left without access, then inter-regional conflicts could develop, especially if competition for primary energy sources intensifies. 76. All of these factors play a role in classifying a market as developed or undeveloped. The market for natural gas in United States is considered to be the most developed, with historically large supplies being available, hundreds of producers, many lakhs of miles of pip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emerging with respect to ensuring: (4) energy security of the nation; (5) energy defense links; and (6) inter-generational equities. Under conditions of scarcity, these latter factors may indicate a greater need for emphasis on conservation as opposed to current consumption. It would appear that markets, with their emphasis on current consumption and short run profits may lead to faster depletion, and consequently necessitate far greater and indeed a primary role for the State in coordination and making choices between different objectives and value premises. While markets and private initiatives have an important role in garnering financial resources, developing and bringing new technologies to practical use, expanding the infrastructure, and increasing supplies by identification of and extraction from new sources, if unmonitored and completely unregulated markets are also capable of causing great inequities, in access, overpricing and sometimes even under pricing (if externalities, such as environmental costs, are not taken into account) the resources. 78. It would be a gross understatement to say that India s identified reserves and availability of natural gas for domestic con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not agree], India will increasingly have to compete for primary sources of energy and this may lead to geo- political instability on a global scale and even within national boundaries. Identification of our own domestic sources, determination of whether they can be extracted from and augmentation of such sources with new forms of energy production, and balancing of needs between current consumption and future consumption, reserves for defense purposes etc., are all absolutely essential tasks which have to be performed by the GoI [Integrated Energy Report, supra note 44].. 80. The network of pipelines for transport of natural gas is very small in length in India, of a few thousand kilometers only, and the density is also very low [See Basic Statistics on Indian Petroleum Natural Gas, 2008-2009, MoPNG GoI]. Except for a few states, and that too a few small regions in those states, access to natural gas in the rest of the country is non-existent. It is not a wonder that at least one Chief Minister wrote to the GoI in the 49 Adam R. Brandt: Testing Hubbert (2006); Aleklett, Hook, Jakobsson, Lardelli, Snowden Soderberger: The Peak of the Oil Age, Energy Policy Vol. 38 (2010). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production can take place and without rights in management of petroleum operations; and (9) joint off take agreements between oil companies and downstream divisions amongst them that controlled production, at an international level, keeping posted prices low so that even if sovereigns tried to take over the industry, they could be beaten down with production from elsewhere. [Ernest E. Smith John Dzienkowski, supra note 52] 82. In response to such great mischiefs, different types of arrangements have emerged between sovereign nations and oil producing companies. The philosophical and operational differences are with respect to: (1) the lengths of time over which exploration could take place and the requirement that after the initial period, if requisite exploration is not undertaken or does not result in a commercially exploitable discovery, the return of the contract area; (2) nature, extent and mode of participation in management of the petroleum operations; (3) participation in price setting and price modulation functions, through both administered price mechanisms and also through varying the quantity available in the market; (4) setting up of a financial system between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, who was cited by Learned Solicitor General, Gopal Subramaniam: contractual arrangements are divided into service contracts and production contracts. The difference between them depends on whether or not the contractor receives compensation in cash or in kind (crude). This is a rather modest distinction and, as a result, systems on both branches are commonly referred to as PSC s or sometimes production sharing agreements (PSA s) 85. One authentic source has been the United Nations. In a document titled Alternative Arrangements for Petroleum Development: A Guide for Government Policy-makers and Negotiators [UN Document No. ST/CTC/43, Sales No. E.82.II.A.22 ] published by the United Nations Centre on Transnational Corporations it has been stated: almost all forms of agreements between Governments of host countries and foreign oil companies increasingly reflect the Government s objectives of greater participation, greater control over operations and a greater share. Ibid page 5, para 15 Sharing of net revenue generated by petroleum exploitation has been a constant source of conflict between Governments and oil companies..... A certain proportion of the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies a deliberate, and not an incidental, act by a body at the various constitutional moments that have informed our Constitution. That body is the people as a nation. It is now a well established principle of jurisprudence that the true owners of natural wealth and resources are the people as a nation. U.N. General Assembly Resolution 1803 (XVII) of December 1962 states that the right of the people and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and the well-being of the people of the State concerned. (emphasis supplied) Consequently, we have to hold that it is the people of India, the true owners, who have vested, the inclusive set of potential resources in a particular class of geographic zones, in the Union, and that it is an act of trust and of faith, with a specific set of instructions. 89. Those instructions are inscribed, nay genetically encoded and hardwired, in the commands to be held for the purposes of the Union. The core and pure purport of the word hold is to conserve, to preserve and to keep in place and it only secondarily means use or disposal . The fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development. 92. Article 38 of the Constitution, a Directive Principle of State Policy, states that: (1) State shall strive to promote the welfare of the people by securing and promoting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of the national life. And further it is stated that the State shall, in particular, strive to minimize the inequalities in income and endeavour to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations. Thus, we can see that Article 38, though not enforceable in any court, but nevertheless fundamental in governance, codifies a part what the Preamble sets forth as the goal of the nation i.e. national development as both a process and a situation in which conditions of complete justice prevail. These conditions are essential for maintenance of social order in which our people can live with dignity and fraternity. National Development has been conceived as welfare of the people; a concept of welfare that subsumes within itself the benefits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring that such use does not lead to diminishment of the prospects of their use by future generations. 95. The statutory matrix dealing with natural gas and other petroleum resources also clearly indicates the importance of such permanence of sovereignty. The Territorial Waters Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976, the Oilfields (Regulation Development) Act, 1948 and the Petroleum and Natural Gas Rules, 1959, all emphasise the importance and duty of the GoI to conserve and develop mineral oils, including natural gas. 96. As we have noted above, Article 297 of the Constitution is a special provision which leads us to conclude that the powers granted to the Union to hold the resources for purposes of the Union casts special obligations over and above what are normally affixed with respect of all other resources that the Union may be permitted to act upon pursuant to Article 298. We hold that under Article 297 of the Constitution, the Union of India can indeed enter into contracts for the identification, development and extraction of resources in the geographic zones specified therein. However, such activities can only be premised on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions in a contract or a statute. It is a matter of Constitutional necessity. We hold that with respect to the natural resources extracted and exploited from the geographic zones specified in Article 297 the Union may not: (1) transfer title of those resources after their extraction unless the Union receives just and proper compensation for the same; (2) allow a situation to develop wherein the various users in different sectors could potentially be deprived of access to such resources; (3) allow the extraction of such resources without a clear policy statement of conservation, which takes into account total domestic availability, the requisite balancing of current needs with those of future generations, and also India s security requirements; (4) allow the extraction and distribution without periodic evaluation of the current distribution and making an assessment of how greater equity can be achieved, as between sectors and also between regions; (5) allow a contractor or any other agency to extract and distribute the resources without the explicit permission of the Union of India, which permission can be granted only pursuant to a rationally framed utilization policy; and (6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word Petroleum has been used in the specific PSC under consideration. The word Petroleum, referring to crude oil or natural gas as the case may be, is used in two senses in different parts of the PSC: as a physical product and also in terms of the monetized value. However, when the word Petroleum has been used in conjunction with the words Cost and Profit, the definitions in this PSC clearly indicate that reference is to the monetized value of the physical product i.e., the units of the physical quantity multiplied by the sale price at which the physical quantity is sold at. Article 1.28 of the PSC defines Cost Petroleum to mean the portion of total value of the Crude Oil, Condensate and Natural Gas produced and saved from the Contract Area which the Contractor is entitled to take in a particular period, for the recovery of Contract Costs as provided in Article 15 . Article 1.77 of the PSC defines Profit Petroleum to mean the total value of Crude Oil, Condensate and Natural Gas produced and saved from the Contract Area in a particular period, as reduced by Cost Petroleum and calculated as provided in Article 16. Reading Articles 2.2, 8, 15 and 16 of the PSC together, it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. .... Number of units traded (as opposed to turnover, which is the value of the units traded, although the terms are sometimes interchanged). (International Accounting) Whereas, Value is said to be : The expression VALUE in relation to any goods shall be deemed to be the wholesale cash price for which such goods of the like kind and quality are sold or are capable of being sold for delivery at the place of manufacture and at the time of their removal therefrom...... Also, according to Black s Law Dictionary, Value is said to be: 1. The significance, desirability or utility of something. (as a noun). 2. The monetary worth or price of something; the amount of goods, services or money that something will command in an exchange. 2. The significance, desirability, or utility of something. 3. Sufficient contractual consideration. (Black, 7th Edn. 1999) 107. In as much as the words volume and value have different connotations and meanings, though occasionally they may have some overlap, the fact that one was replaced by the other implies that the meaning ascribable in the context of this PSC should eliminate the overlap. Consequently it can only be understood tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein) were defined in terms of volume and not value. The observation of this Court in that decision that in Production Sharing Contracts what is shared is physical oil was based on that specific PSC. We have verified that contract also which was placed before us and we do find the difference as submitted by Shri Mohan Parasaran. 110. Under the PSC does the title get transferred to Contractor on account of it expending monies on exploration, development and production? According to the Learned Senior Counsel for RNRL, in as much as Article 27.2 of the PSC specifies that title to Petroleum to which the Contractor is entitled under this Contract and title to Petroleum sold by the Companies shall pass to the relevant buyer party at the Delivery Point..... it indicates that the title automatically passes to the Contractor on account of the Contractor having expended monies for exploration, development and production activities. This is only a partial reading of the PSC. Article 27.1 states that the Government is the sole owner of Petroleum underlying the Contract Area and shall remain the sole owner of Petroleum produced pursuant to the provisions of this Contract except as regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in place, RIL had the right to commit to sell natural gas at its sole discretion. They argue that in this case RIL chose to commit to RNRL, via the MoU and the Scheme. Therefore, according to RNRL s counsel, the GoI should not have any right to interfere in this contractual commitment. 114. We disagree. The sale at the Delivery Point takes place when the people of India are still the owners of the natural gas and consequently they have the responsibility of ensuring that they exercise their permanent sovereignty, through their elected government, in order to achieve a broad set of goals that constitute national development. While revenue generation is one part of those objectives, that cannot be the only objective of India. Timely utilization, by users spread across many sectors and across regions as the network of pipelines spreads and conservation are all necessary objectives to be kept in mind. The fundamental rationale of the PSC is the overall interests of India and the obligation of the Contractor is to always be mindful of the rights and interests of India. 115. Article 21.1 of the PSC makes it very clear that the sales of Natural Gas have to be in accordance with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rport the approval by the MC of the PSC of the Initial Development Plan? RNRL also contends that because the Initial Development Plan was approved by the MC of the PSC, and that plan had specifically stated that natural gas produced from KG- D6 would be used in their prospective power plant at Dadri, that the GoI knew about the allocation for Dadri and therefore should be presumed to have agreed to the same. That argument is attractive but does not bear the scrutiny. First and foremost, the IDP was only a proposal as to who could be the potential users. Secondly, the proposal also specified that there could be other users, especially those who have already started units that needed natural gas and were stranded. The MoU and the extent of natural gas that RNRL is demanding, completely denies the rights of those users to a fair access. 120. Over and above that, under the PSC the right to effectuate a utilization policy only vests with the GoI. Indeed, it cannot be any other way. The MC of the PSC is not the GoI to be able to effectuate decisions which would have the ramifications of policy, especially over a scarce resource with the kind of implications across the constitutional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... private parties get rights to exploit natural resources provide otherwise and impose restrictions that are being flouted. This happens many a times, and for obvious reasons. That cannot become the basis for evisceration of policy making rights of the GoI. And in this case, it involves a scarce resource in such massive quantity, that is almost 50% of what had been available throughout the country for use by all the other users in the previous decade, that silence by officials of GoI cannot and ought not to be given any weight at all. 123. It was also argued by the learned senior counsel for RNRL that various utterances by senior officials and replies by some Ministers in the Parliament indicate that the Government knew that the PSC provided the kinds of rights to RIL that RNRL claims in order to sustain its demands. The short answer to that, in the context of this case is: it does not matter. At best, they may suggest that the Ministers concerned may need better advisors from the permanent machinery. 124. The courts cannot be solely guided by the replies given by Ministers in the Parliament, in response to queries by Members, to appreciate and interpret the covenants in the PSC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Secondly, NTPC did not get the option to get quantities of natural gas that were promised to some one else, in the event that contract failed. Nor did NTPC get the right to receive 40% of all future gas supplies that were likely to be produced from any gas fields of RIL. Nor was the price for NTPC fixed in the confines of a Board room. Moreover, when the MoU was executed, a few years later the prices of natural gas all over the world had risen considerably. If an international tender were floated at that point of time, it would defy logic for RIL to bid at such a low price level. 127. The terms of Article 21.6 et. seq. are clear. The first one is a command that all the natural gas produced from KG-D6 is to be sold at arms length sales price , per Article 21.6.1. There is a reason for such a requirement. Historically, oil companies and sovereigns have bickered over the posted prices and joint off take agreements through which the real value realized is hidden from the sovereign. The requirements of arms length prices and arms length sales are to ensure that the sovereign receives a fair share of the revenues. However, it may not be possible to determine true arms length prices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ependent challenge questioning the validity of EGOM decisions. The collateral attack leveled against EGOM decision cannot be entertained notwithstanding the serious allegations of mala fides made against some Ministries during the course of hearing of this matter. The Government did not surrender its rights under PSC to fix the price by way of approval. Nor do the decisions of EGOM run counter to any of the covenants of PSC. The contention that no policy decision could have been taken by the Government retrospectively effecting the contractual rights needs no further consideration for the simple reason that the decision of EGOM does not run counter to the contract. The decisions cited in this regard are not required to be gone into. PART V WHOSE COMPANY IS IT ANYWAY? 131. We would have thought that the answer to this question was settled in the early stages of evolution of corporate form of organization. However, where an atmosphere of privilege and of secrecy is allowed to be all pervasive, trust and capacity for fiduciary action would consequently decline and this question would have to be asked again. Whether it be social life or the hurly burly of action in economic s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion that the State in India could abrogate its responsibilities to frame policies for utilization and pricing in the context of production and distribution of an extremely scarce and a vital natural resource and that in the context of such policies supply of gas between RIL and RNRL could not have been interrupted or abrogated. Consequently, if Clause 19 of the Scheme were to be read as the imposition of the burden upon RIL to supply natural gas, irrespective of governmental policies with respect to utilization and pricing of natural gas, then it would have to be struck down as a nullity. 135. Clause 19 of the Scheme makes a very important distinction between agreements - which are more concrete - and arrangements - which are amorphous and not certain. The Scheme implicitly contemplated a situation in which the arrangements for supply of gas may not occur or function to the full extent as desired. Governmental approvals and governmental policies are set in the context of national welfare and constitutional imperatives, and they cannot be said to be within the control of any particular person or company. Does that mean then that the Scheme with respect to the Gas Based Energy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, distributing and dealing in electricity and all forms of energy and power generated by any source, whether nuclear, steam, hydro, or tidal, water, wind, solar, hydrocarbon fuel, natural gas or any other form kind or description. Consequently we fail to see how RNRL can claim that it was set up only to obtain natural gas from RIL and then to trade with it within the ADA Group, or that anyone who reads the Scheme can understand it in that manner. 138. The arguments made by RNRL that it has not been able to set up the mega gas based power plant at Dadri because it did not get bankable agreements from RIL are unpersuasive. First and foremost, it would seem extremely unlikely that bankers do not understand that there are always supply risks associated with natural gas in a country like India, whether that be on account of GoI s policies or otherwise. It is also observed that others have started gas based energy generation plants and they have faced equally serious uncertainties, if not more. Furthermore, we have not been given one single document that shows denial of financing on account of lack of definitive natural gas supplies. Additionally, we were also informed that signi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of presumptions that flow from Sections 193, 194 and 195 of the Companies Act, 1956 that they are an accurate record of the proceedings. The collective decision making, at a conjoint sitting allows for exchange of ideas. The idea of the Board working as a collective is also about the process of sharing of views and arriving at collective decisions to protect and enhance the interests of all the shareholders. And in the very first meeting, albeit on the same day that the MoU was announced, the various Directors of RIL after thanking KDA, quite effectively severed any umbilical cord that the eventual Scheme might have had with the MoU, when they asserted that any reorganization can only be premised on protection of the value of all the shareholders. There is not even a whisper of protection of a broader class of shareholders in the MoU. This is not some mere technicality; but a fundamental philosophical and attitudinal approach with regard to arrival at the decision to reorganize the businesses. The duty to protect the interests of the shareholders is cast upon the Board, and the Board has to act in a fiduciary capacity vis-a-vis the shareholders. This duty has been a part of br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ittee with the help of professionals framed an outline of a Scheme, executed by representatives of both the MDA and the ADA Group and on that count too, it would have to be held that the Scheme was something more and fundamentally different from the MoU. 144. Clinchingly, with respect to the most contentious aspect - governmental approvals - which RNRL claims were not necessary, the minutes reveal that the Board actually commanded that it be made sure that any gas supply agreements, including terms of price, tenure etc., be subject to such approvals. Moreover, if MoU is considered, it actually runs counter to the entire claim of RNRL that it formed the basis of the Scheme regarding gas supply also in as much as the Board approved a Scheme in which the only provision with respect to gas supply was for a plan to set some uncrystallised suitable arrangements in place. If the Board had agreed to the commercial terms of agreement, as contained in the gas supply section of the MoU, then it would have been mandatory upon them to reveal the same to the shareholders of RIL, because of the sheer scale of monetary value of the gas supply contracts. RNRL itself claims that the potential mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport the contentions of RNRL with respect to governmental approvals? The provisions of Paragraph xii (a) and (b) of the Gas Supply section of the MoU, makes it abundantly clear that the two brothers who executed the MoU understood that the gas allocation set forth in it would require governmental approvals. The said paragraphs state as follows: 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 and obtain 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. (emphasis supplied) 147. In the course of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements were listed in a tabular form, in item 16 the protest was that with respect to governmental agreements it was not provided that the MDA Group would act in utmost good faith and make best endeavours . Many more of such acts of omission and commission which would demonstrate unequivocally that RNRL and ADA Group always knew that governmental approvals were necessary could be adduced. We do not consider it to be necessary to go into all those details. We conclude that ADA Group and subsequently RNRL was always aware that under the PSC the GoI had a right to frame policy and approve price formula/basis applicable to the sale of all gas produced from KG- D6. DOCTRINE OF IDENTIFICATION: 148. Shri. Jethmalani went to some lengths in arguing that the Doctrine of Identification has immediate and crucial relevance in this case. As explained by him, there are certain individuals, who are the controlling mind of the Company and that once they have agreed to something, it should be deemed that the Company also agreed to the same, including the Board. Reliance was placed upon the decisions referred to in the summary of submissions. In the instant matter his argument was that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed and it was recorded that he concurs with the view of Board members that the same are necessary, implies that ADA was aware of the same. 150. Over and above all of that, the matter turns upon Governmental approvals. How can anyone be held liable and then that liability be extended to the company, on a matter such as securing governmental approvals and that too with matters that involve major policy decisions? What exactly are RNRL, its board, ADA Group and ADA asking that MDA and RIL should have done? For the view we have taken in the matter it may not be necessary to refer any of the decisions upon which both the parties relied upon in support of their submissions. MAINTAINABILITY: 151. The learned Senior Counsel for RNRL have contended that the powers of the Court, under Section 392 of the Companies Act, are of the of the widest amplitude, much wider than the powers under Section 391, because they can extend even to suo moto ordering the winding up of the Company. Consequently, they argue that the courts must exercise such powers to fully implement the Scheme to effectuate the scheme one way or the other. They relied upon S.K. Gupta (supra). 152. Shri. Nariman argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to mean the gas supply provisions of the MoU. We hold that those conclusions were erroneous. We disagree with the propositions of Learned Counsel for RNRL that the ratio in S.K. Gupta (supra) would support such a result. 154. The ratio of S.K. Gupta (supra) is that under Section 392 the Courts have the duty of continuous supervision to make the Scheme workable by removing the hitches, obstacles or impediments as necessary to ensure the proper functioning of the Scheme. Further, while the Court does state that the powers of the court are of the widest amplitude, including the power to modify a provision of the scheme, it also does hold that the same can only be exercised so as to ensue the proper working of the Scheme and further, that such powers may not be exercised in a manner that would alter the basic fabric of the scheme. The removal of obstacles, impediments or hitches cannot be held to mean wholesale changes in the scheme itself and go beyond the confines of what the shareholders, the stakeholders and the courts that sanctioned the scheme would have understood the provisions of the scheme to mean. 155. It is true that in paragraph 26 of the said decision it was stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Company was to engage in the business of supply of many different kinds of fuels, in which supply of natural gas to its affiliate companies is one; and (2) that the Gas based Energy Resulting Company will engage in the business of promoting energy generation business, from using any and all fuels, including natural gas, both from RIL and also from other sources. Nowhere did the Scheme state that the only fuel that the Gas based Energy Resulting Company would deal with would be natural gas from RIL. To change that meaning would be to begin the process of tearing apart the basic fabric of the Scheme. 158. Basic fabric of a scheme also implicates the essentiality of common interests between the class of members who have voted together, thinking that they all have the same level of information and the same understanding of the entire class of members as to what the Scheme entails. That understanding would certainly not have comprehended the claims that RNRL is putting forward in these proceedings: (i) that the intent was to actually share the benefits of the production and exploration activities, including the benefit of internal use of natural gas; (ii) that because the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it only pertains to the situation at the time of sanction of the scheme and that the ratio of Megal Homes (supra) cannot be relied upon as S.K. Gupta (supra) a three judge decision, suggests otherwise. In light of the discussion above we do not see how, in the context of this case, the ratio of S.K. Gupta (supra) is different from that of Meghal Homes (supra): they both speak of the same thing, that the basic fabric of the scheme cannot be changed. Which aspect of that basic fabric the courts may deal with could vary, but certainly the processes that protect the shareholders, their rights to know what is being transferred and the sanctity of the class of members who have voted together cannot be derogated from. 161. In the instant case by importing the gas supply section into the Scheme, in the guise of interpreting it, the phrase suitable arrangements was transformed into suitable arrangements as agreed upon by the promoters in the gas supply section of the MoU . Such a modification necessarily tears apart the basic fabric and cannot be permitted. 162. For the view that we have taken it is not necessary to go into the protested points regarding the Identity of the Buyer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... policy/suitable legislation with regard to energy security of India and supply of natural gas under production sharing contracts. 165. What remains for us is to place our appreciation on record of the invaluable assistance rendered by Sarvashri Ram Jethmalani, Harish N. Salve, Mukul Rohatgi, R.F. Nariman and Ravi Shankar Prasad, all learned senior counsel appearing on behalf of the parties. We also acknowledge a very dispassionate assistance rendered by learned Solicitor General and his team of Additional Solicitors General. ANNEXURE GLOSSARY OF TERMS : ADA : Anil D. Ambani APM : Administered Price Mechanism BCF : Billion Cubic Feet BCM : Billion Cubic Meters CG : Corporate Governance CNG : Compressed Natural Gas DGH : Directorate General of Hydrocarbons EGOM : Empowered Group of Ministers GoI : Government of India GSMA : Gas Sales Master Agreement GSPA : Gas Sale Purchase Agreement GUP : Gas Utilization Policy IDP : Initial Development Plan KDA : Smt. Kokilaben Dhirubhai Ambani KG-DWN-98/3 : KG-D6 LNG : Liquefied Natural Gas MC : Management Committee MDA : Mukesh D. Ambani mmBtu : Million British Thermal Units 267 MMSCMD : Million Stan ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
