BOMBAY HC RULING RIL SHOULD HONOUR 2005 FAMILY SETTLEMENT

RNRL TO GET GAS AT $2.34

RIL May Challenge Decision In Supreme Court

 THE Bombay High Court on Monday asked Reliance Industries (RIL) to sell gas at a sharply reduced price to an Anil Ambani group firm, causing some uncertainty in India's nascent natural gas industry, and delivering a sharp blow to the valuations of RIL, the country's biggest private sector firm by market value.
    In a move that is likely to have many significant and unintended consequences, the court asked Mukesh Ambani controlled RIL to sell gas at $2.34 per mmBtu to Reliance Natural Resources (RNRL), which is owned by the younger Ambani. This price is 44.2% lower than the $4.20 per mmBtu that RIL has agreed to charge power and fertiliser firms under recently-signed agreements, and which is based on a government-approved formula. RIL wanted the court to uphold the government-approved price, but the court sanctified the lower price of $2.34 per mmBtu, which is stipulated in an agreement signed between Mukesh and Anil Ambani at the time of their separation in 2005-06.
    The court's decision will cause financial losses to Reliance Industries, which will have to sell at least 35% of its natural gas production, assuming a production level of 80 mmscmd, at lower than the $4.20 rate set by the government. The RIL scrip tumbled 7.4% to Rs 2,180.45. Also, while RIL will earn less on 35% of the total gas produced, it would probably have to share revenues with the government assuming the higher rate of $4.20.
    Amitabh Chakraborty, president-equities, Religare Securities, estimates that the move will lower RIL's earnings per share to Rs 132 in 2009-10 from an estimated Rs 141. Revenues from the KG-D6 basin (RIL's main gas field) is projected to fall to Rs 6,100 crore from Rs 8,100 crore while earnings before interest, tax, depreciation and amortisation is likely to slip to Rs 3,100 crore from Rs 5,800 crore.
    RIL is believed to be readying itself to challenge the order before the Supreme Court. "We are still reading the court's order and will take appropriate action," RIL counsel Milind Sathe said. "The full text of the judgment of the Hon'ble High Court has been received by us, and is being reviewed. We will decide on the future course of action, based on legal advice," an RIL spokesperson said later in a statement.
    The judgement will also have a major impact on two other stakeholders, the government and the country's natural gas industry. The government's efforts to put in place a pricing structure for the industry have received some kind of a setback.
HIGH-STAKES ORDER Impact of Judgement On Different Stakeholders
For Reliance Industries
Significant hit on RIL's bottomline, as it would have to sell substantial portion of gas at $2.34 per mmBtu, a 44% drop from the $4.2 per mmBtu it charges its current customers. Simultaneously, it would have to pay the government a revenue share based on the notional price of $4.2 per mmBtu. RIL stock was down 7.48%. RIL likely to challenge the verdict in the Supreme Court
For Govt
Its profit share, based on gas being priced at $4.2 per mmBtu, remains unchanged till 2014. The government will revisit its profits share only for gas supplies beyond five years.
For RNRL & Reliance Power
Comes as a major victory as they get 28 mmscmd of gas cheap for 17 years. However, the gas cannot be traded and has to be used for power generation. Could send Reliance Power scouting for purchase of a large gas-fired power plant. Shares of RNRL were up by a whopping 24% and Reliance Power gained 4%. High Court's decision puts end users in a spot
IN2007, the government took steps to create a formula for fixing natural gas prices and a price of $4.2 per mmBtu was fixed by RIL. "We are waiting for a copy of the order," petroleum secretary RS Pandey said in Delhi. He declined to comment further.
    Executives of two major private sector power firms that ET spoke to were unwilling to comment. Arvind Mahajan, executive director of KPMG, said there would be uncertainty. "There is uncertainty looming over end users who have already started taking gas allocated by the government. However, we will have to see how the situation will evolve," he added. Other analysts, however, said there would not be any confusion as different producers of natural gas sell the product at different prices.
    Though the Supreme Court may yet get to have its say on the matter, Monday's developments marks a substantial gain for the ADA GROUP. "This is our victory," RNRL counsel Mahesh Jethmalani told ET. "It (the order) vindicates our stand on the issue," an Anil Ambani group spokesperson said. RNRL shares rose 24% in the day's trade to Rs 108.
    The group is believed to be looking at a number of options for utilising the gas as and when it is available. One possibility is to buy an existing idle gasbased power plant, the other is to get its 4,000 MW Shahpur project off block quickly. Located in Maharashtra, this project is designed to run on both gas and coal. One ADA executive said the group can get this project onstream in 24 months. Dadri, the group's flagship power project, to get onstream will take at least 35 months to be implemented. Land has been acquired and environmental clearance has been secured. But EPC contracts have not been awarded as yet.
    RNRL had filed a court case RIL in December 2006, accusing the company of not providing gas at $2.34 per mmBtu as provided in the 2005-06 agreement. RNRL also wanted the court to stop RIL from selling to third parties any of the gas. Its contention was that it should get 35% of the KGD6 gas production at $2.34 per mmBtu and that RIL should not sell it to anybody. RNRL is a natural resources and trading firm floated by the Anil Ambani group. It was to buy gas from RIL and sell it to Reliance Power, which is implementing the Dadri project.
    RIL responded by saying the price has been declared invalid by the government. RNRL will have to buy gas at the price fixed by the government, it added. The arguments continued for more than two years with little headway. Earlier this year, the court gave a reprieve to RIL, allowing it to execute final agreements with third-party buyers at the government approved price of $4.2 per mmBtu. But it reserved final judgement on sales to RNRL till yesterday. The verdict, which was delivered by the division bench comprising justice JN Patel and KK Tated in the morning, affirmed RNRL's right to buy 28 million cubic metres of gas per day at $2.34 per mmBtu for 17 years.
    In case the Ambani brothers fail to conclude the gas deal within the stipulated time, they can seek their mother's help, the court said. The judgement, a copy of which is with ET, says: "We dispose of these appeals with a direction to the parties that within one month from the date of pronouncement of this judgement and order, the parties should enter into a 'suitable arrangement', on the basis of quantity, tenure and price as specified and agreed between the parties under the MoU either by re-negotiating the terms and conditions of the agreement as to make it a bankable agreement, or revert back to Kokilaben who had reserved her ability to intervene again if the parties failed to act upon the MoU dated June 18, 2005, and the Anil Ambani Group may opt for a claim for damages." The court said the family MoU provides for a remedy in the event of non-fulfilment of any obligations by any party.
    The rivalry between the Ambani brothers broke up India's largest corporation, RIL, in 2005-06. The family feud began shortly after the death of RIL founder Dhirubhai Ambani in 2002.

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