India May Penalize Reliance Industries

The government is contemplating penal action against Reliance Industries (RIL) for committing 28 million standard cubic meters of gas per day (mmscmd) from its KG basin block to Reliance Natural Resources (RNRL) at a price of $2.34 per million British thermal units (mmBtu) as part of the Ambani family settlement without the permission of the government. Watch

"RIL is merely a contractor for the KG basin block (D-6) and not the owner. Two promoters (read Mukesh Ambani and Anil Ambani) can't divide a national property between themselves without the government's approval. The matter is being examined," a senior official in the know told ET, requesting anonymity.

The government's intention of penalising RIL was first broken by ET NOW, this newspaper's business channel, on Tuesday evening.

The proposed penalty could come as a blessing in rather thin disguise for RIL, which would like to negate any contractual obligation on its part to supply gas to RNRL at a price of $2.34 per mmBtu, significantly lower than the government-set price of $4.20 per mmBtu at which RIL is selling gas to other users.

An RNRL executive claimed that such a move against RIL would in fact help the company in its dispute with RNRL. According to this person, the government had approved the proposal to sell gas to RNRL at the lower price as "part of its approval of the scheme of demerger."

When asked for comments, a senior RNRL said: "These aspects (price, term and quantity) are adequately and clearly covered in the judgement of the Bombay High Court." The High Court ruling clearly overrides any executive order. The only option for RIL is to approach the Supreme Cout if it disagrees with the order.

RIL's putative violation of the production-sharing contract (PSC), appears to have evoked some strong emotions, with some in the government of the view that the property (RIL's KG-D6 block) should be nationalised. However, it appears that those in favour of a more lenient course of action eventually prevailed.

"The government is competent to do so as the contractor has violated the PSC, but that would be too harsh and avoidable. But action could be taken against the contractor for dividing the national property, that does not belong to it," another official close to the development said on condition of anonymity.

Commenting on the issue, a Cabinet minister ruled out any move to nationalise the property. "RIL has made huge investment in the block. Any such move will be hurt investor sentiment," he said requesting anonymity.

When asked about the possible penal action, one of the officials quoted above said the government was consulting legal opinion. "It is too early to say about the natural of the penalty, but it could be as per the provisions of the production-sharing contract," he said.

If the government was indeed to impose a penalty it might cause some surprise as the details of the Ambani family settlement have been in the public domain since 2005. A consortium of RIL and NIKO had signed the PSC for D-6 block in 2000 and the gas was discovered in 2002.

Even as the government contemplates its future course of action, the war of letters between RIL and RNRL continued on Tuesday. RIL on Tuesday informed RNRL saying that it cannot sign any agreement without the government's approval. The letter was in response to a number of letters sent by RNRL asking RIL for a meeting to sign the gas deal as per the directive of the Bombay High Court on June 15.

The Bombay HC had ordered RIL to reach a 'suitable arrangement' with RNRL in a month's time in lines with the family agreement reached between the warring Ambani brothers on June 18, 2005.

"We have been advised that as there is lack of clarity on this aspect in the judgement, our position remains. We cannot sign any agreement without the approval of the government on price, quantity and tenure," said the RIL letter to RNRL. ET could not independently verify the contents of the RIL letter. Most independent observers feel that it is very likely that RIL would approach the Supreme Court against the Bombay HC ruling.

RNRL source confirmed receiving RIL's letter late Tuesday evening and said they would respond accordingly. When asked for comments, these sources said: "These aspects (price, term and quantity) are adequately and clearly covered in the judgement of the Bombay High Court." RNRL is believed to send a reply to RIL's letter on Wednesday.

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