July 21 (Bloomberg) -- Indian officials said a legal battle between the billionaire Ambani brothers over the supply of natural gas involves “national property” and vowed to ensure the resource is used in accordance with government policy.

The fuel “doesn’t belong to them, but to the people of India,” Oil Minister Murli Deora said by telephone today from New Delhi, a day after the Supreme Court adjourned hearings in the lawsuit to Sept. 1. Oil Secretary R.S. Pandey, the top bureaucrat in the ministry, said yesterday “the government will protect its property at all costs.”

Anil Ambani wants to enforce a 2005 agreement requiring Reliance Industries Ltd., controlled by brother Mukesh Ambani, to sell gas from a Bay of Bengal field to his Reliance Natural Resources Ltd. at 44 percent less than the state-set price. Anil’s lawyers have questioned the government’s decision to ask a bench headed by Chief Justice K.G. Balakrishnan to scrap the pact based on an accord under which the family empire was split.

“The government will have legislation and rules in place, they will have the final say,” said Chong Yoon Chou, Singapore- based investment director at Aberdeen Asset Management Asia Ltd., which has $30 billion of assets. “The conflict highlights the risks of family run businesses.”

The Supreme Court allowed Mukesh Ambani’s company on July 20 to continue selling gas from the field to power and fertilizer producers, lawyers for the government and Reliance Industries said. India’s most valuable company has surged 64 percent in Mumbai this year, outpacing the 56 percent gain in the benchmark Sensitive Index, as investors bet output from the country’s biggest gas field will boost earnings.

Shares Fall

Reliance Industries fell 0.7 percent to 2,018.65 rupees in Mumbai, declining for the first time in six days, while Reliance Natural dropped 1.1 percent to 79.95 rupees. The benchmark Sensitive Index retreated 0.9 percent.

The Bombay High Court ordered the two companies on June 15 to reach an agreement in a month, based on the terms of a memorandum of understanding signed in June 2005. The accord requires Reliance Industries to sell 28 million cubic meters of gas per day at $2.34 per million British thermal units for 17 years to Reliance Natural.

Reliance Industries has said gas from the D6 field in the Krishna Godavari basin can’t be sold at less than the $4.2 per million Btu set in 2007 by the government, which controls prices of the fuel. The government designated fertilizer and power producers as priority customers for the fuel.

Government Approval

“The family agreement is contrary to the contract signed by Reliance Industries with the government where they agree to abide by the government’s pricing and allocation policy,” Oil Secretary Pandey said by telephone in New Delhi. “All such contracts require the government’s approval.”

The accord distributes all future gas from the D6 field between the brothers, with Reliance Industries getting 60 percent of the fuel, Pandey said.

“The two brothers have gone and distributed among themselves a property which doesn’t belong to any of them,” he said. “That is why we have asked the court to scrap that part of the family agreement which relates to the gas.”

Reliance Natural and its affiliates lack the ability to use the gas because it would take them at least three years to build power plants and receive the fuel, Reliance Industries said in court documents filed July 17.

“The government has no role to play in the share of gas of Reliance Industries,” Mahesh Agarwal, counsel for Reliance Natural, said yesterday. “The government is only concerned about its share of the gas.” Reliance Industries needs to supply the gas to from its own share, Agarwal said.

Mukesh Ambani didn’t respond to an e-mail seeking comment.

‘Expressly Said’

“From day one, we have said this was an arrangement and you can’t take the memorandum of understating in bits and pieces,” Harish Salve, lawyer for Reliance Industries, said outside the Supreme Court yesterday. “The memorandum of understanding said it is subject to company approval, it is subject to government approval - expressly said so.”

The country’s natural resources “cannot be held hostage” to private players and families, the Press Trust of India cited Tapan Kumar Sen of the Communist Party of India (Marxist) as saying in the upper house of India’s parliament yesterday.

“The key thing is getting a fair price” for the gas, Aberdeen Asset’s Chong said in an interview today. “Cutting through the sound bites, the issue is what the pricing is. It has to be market-based and transparent.”

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net.

Last Updated: July 21, 2009 07:36 EDT