The companies, part of the Anil Dhirubhai Ambani Group, and their top executives have also agreed to abide by conditions set out by Sebi, four persons with knowledge of the development told ET.

The move will remove a persistent source of uncertainty that has dogged the companies for years. “The move is positive for Reliance Infra because the company will be able to access the capital markets without this shadow of regulatory uncertainty.

The company could have litigated all the way to the Supreme Court but that could have dragged on for years and simply made no sense,” said one of the four people. RNRL is in the process of being merged into Reliance Power , another ADAG company. So the proposed settlement is not particularly consequential for it.

These conditions are mainly pledges to tighten internal processes and are not particularly onerous, the people said. They are a standard part of any consent agreement. The settlement, which will involve a total payment of close to Rs 50 crore by the two companies, is close to being concluded after the consent terms were accepted by a three-member internal Sebi committee headed by retired Mumbai High Court judge Hosbet Suresh.

The panel’s conclusions are likely to be endorsed by two whole-time members of the Sebi board, three of the four persons mentioned earlier said. The ruling of the two board members is final.

ADAG officials declined comment for the story. Reliance Infrastructure, which distributes electricity in the suburbs of Mumbai and in parts of Delhi , is one of the flagship companies of the Anil Ambani Group . It also owns close to 45% of Reliance Power, which is implementing 25,000 mw of projects.

If the final figure endorsed by the regulator is close to Rs 50 crore, it will be among the highest fees to be paid since it was introduced in 2007. These negotiated settlements are common in the US where the Securities & Exchange Commission, or SEC , approves a large number of consent orders every year.

In India , a firm or person facing a probe can submit an application seeking a consent order, without admission of guilt and without denial of liability. Sebi has the right to refuse to enter into consent proceedings if the violations are be particularly egregious.

If the regulator agrees, the entity facing the probe has to finalise the terms with Sebi officials. These terms then go through a two-stage vetting.

First, they have to be endorsed by a panel headed by a retired high court judge, currently Hosbet Suresh. The panel’s conclusion then has to be endorsed by two full-time members of the Sebi board. Full-time members are officials in charge of executive functions as distinct from part-time board members.

Complex Case

At the heart of this case is a show-cause notice issued on June 7, 2010, by Sebi to the two companies and their top executives.

The notice came in the wake of a probe by the regulator and government agencies into dealings of Pluri Emerging Companies, an obscure foreign portfolio investor, which purchased participatory notes with stocks such as RNRL and Reliance Infrastructure as the underlying.

Participatory notes are derivative instruments that allow offshore entities to trade in Indian stocks anonymously.

Pluri had bought the participatory notes from Hythe Securities, another FII , which in turn had bought them from Barclays Bank , a British bank.

At that point, the Enforcement Directorate was probing Pluri for a series of allegedly fraudulent transactions involving the siphoning off of funds from the accounts of two Anil Ambani-promoted firms in the London branch of UBS and the use of these funds to buy shares in India. The proceeds of foreign loans raised by the ADAG firms were parked in these accounts.

Shares in Reliance Power, valued at US $8.75 billion, closed up 3.3 per cent, while Reliance Natural shares, with a market capitalisation of US $2.3 billion, ended down 1.9 per cent on Friday amid rampant market talk about a deal.

The companies announced a potential deal after the close of trading. Reliance Natural lost a May ruling by Supreme Court in a long-running gas supply dispute with Reliance Industries, which is controlled by Anil’s elder brother, Mukesh Ambani, who is the world’s fourth-richest man.

The brothers split their late father Dhirubhai’s business empire five years ago after disagreeing over ownership. Following the Supreme Court verdict, the Ambani brothers took a step towards reconciliation, ending a pact that forbade them from competing with each other, opening up sectors such as power generation, telecom and financials to the elder sibling.

Late last month, Reliance Natural and Reliance Industries said they signed a revised gas supply agreement, but did not disclose details.

Reliance Natural had wanted Reliance Industries to honour a private deal between the brothers, struck when the Reliance empire was split, to supply it with 28 mmscmd of gas for 17 years at US $2.34, about half the government-set price. The apex court ordered the companies to renegotiate the agreement at the government-approved price.

The gas is critical for Anil Ambani’s power business, including projects being built by Reliance Power.

Reliance Power went public in early 2008 in a US $2.9 billion IPO — India’s biggest — but has never risen abouve its issue price.

Both brothers have been active dealmakers in recent months. Anil Ambani’s Reliance Communications, India’s No 2 cellphone operator, agreed in late June to merge its telecoms towers business with that of GTL Infrastructure and is also looking to sell a 26 per cent stake in itself.

Mukesh Ambani’s Reliance Industries, the country’s biggest listed company, made a dramatic return to telecoms by buying the only company to win nationwide broadband wireless spectrum in a recent government auction. – Reuters

When the most bitterly fought battle in Indian corporate history was set to rest by Supreme Court and given a clear directive to settle all disputes, everyone was keen to see what agreement the Ambani brothers arrive at.  Typically, on a lazy Sunday morning, Mukesh Ambani’s Reliance Industries issued a bland statement announcing the end of the non-compete agreement signed between him and younger brother Anil.

As news of the truce started to sink in, the next question that crossed everyone’s mind was who played the pivotal role in bringing in the warring brothers to the table? Was it Kokilaben, their mother, or did the first step come from the elder brother as has been reported widely.

But a majority of Mukesh’s close friends believe that petroleum minister Murli Deora, an old family friend, was instrumental in bringing about the truce. They don’t rule out the possibility of Anil losing political support after Amar Singh expulsion from the Samajwadi Party. And some are of the opinion that Nita Ambani, Mukesh’s wife may also have played a crucial role in the new agreement.

For the record this is a step towards reconciliation, and the RIL statement said as much: “RIL and Anil Ambani-led ADAG have approved and signed an agreement canceling all existing non-compete arrangements entered into between the two groups in January 2006 pursuant to the scheme of reorganisation of the Reliance Group and entered into a new simpler, non compete agreement with respect to only gas based power generation.

The above agreements have been approved by the board of directors of RIL and the respective ADAG. The cancellation of the existing non-compete agreement as above will provide enhanced operational and financial flexibility to both groups, and greater ability to participate in high growth sectors of the Indian economy, such as oil and gas, petrochemicals, telecommunications, power, and financial services. However, RIL has agreed not to enter into gas based power generation business for the period up to March 31, 2022.”

The prospect of the two brothers working together again, however loosely, had the corporate world sitting up and taking note. A source close to the family who has watched both brothers growing up felt that how the new opportunities that have opened up with new no-compete are harnessed by either group will be a reflection of the brothers’ individual temperaments and working styles. 

“While Mukesh’s moves are well thought-out and timed, Anil is much more impromptu in his decision making. It will not come as a surprise if RIL enters businesses that Anil has a strong presence in the medium term. Telecom for instance, was Mukesh’s baby from the very beginning,” said the source.

Makarand Gadgil

Also see Without prejudice & Fanning the flames

The three wise men of the supreme court, who have the task of settling the dispute between the Ambani brothers fighting over KG-D6 gas have to decide not only on the letter of the law and whether the contractual agreement (the MoU) between the two brothers should prevail, but also on where the best interests of the larger public lie. Public good in this case does not involve only the government’s revenues but also the interests of the state-owned power generator NTPC, and therefore, the millions who buy NTPC’s power.  

The three-judge supreme court bench headed by the chief justice of India, K G Balakrishnan, began hearings in the case last week and observed that both brothers are fighting like nations at war leaving the shareholders in the lurch. The court also suggested that the brothers explore the possibility of an out-of-court settlement or going in for arbitration. But it seems that the brothers want to fight it out in the court although Anil Ambani began making the right noises just before the apex court began hearing the case and offered an olive branch to his brother. Mukesh refused.    

After the supreme court asked RIL’s counsel to limit his arguments to why the family MoU should not prevail—on whose basis the Bombay high court had delivered its judgement—RIL seems to have changed its strategy and decided to blame the government for the whole mess.

RIL’s counsel Harish Salve said that RIL is still willing to sell the gas to Reliance Natural Resources Ltd (RNRL) at US US $2.34 per metric million British thermal unit (mmBtu), the price committed to NTPC after global tendering. “But what RNRL refuses to read was that RIL’s commitment was always with a caveat that the supply of gas to NTPC at US $2.34 per unit was subject to the government’s approval.”

If the apex court upholds the Bombay high court judgement in favour of RNRL and asks RIL to supply the gas at US $2.34 per mmBtu instead of the government-determined price of US $4.20 per mmBtu, then RIL will take a longer time to recover its costs. This will affect the government’s share in the gas because the government’s share is linked to RIL recovering its capital expenditure. RNRL has also alleged that the RIL’s increasing its capital expenditure by almost four-fold from US $2.47 billion to US $8.8 billion, and that the country’s upstream regulator, the director general of hydrocarbons, V K Sibal, approved this capital expenditure in return for favours.  

But if the apex court rules that the government has the right to decide the pricing and allocation of gas, then it will have an impact on NTPC’s case in the Bombay High Court where the power utility is fighting a separate battle with RIL for the supply of gas at US $2.34 per mmBtu. If NTPC is required to pay more for the gas, then the cost of its power generation will go up, and this will ultimately be passed on to consumers. While ruling in favour of RNRL, the Bombay High Court observed that since the 28 metric million standard cubic metre per day (mmscmd) which is to be supplied by RIL to RNRL at US $2.34 per mmBtu for 17 years is going to come from RIL’s share of the gas, there is no need for the government’s prior approval. However, RIL’s contention is that the agreement to supply the gas was signed by Mukesh Ambani in his personal capacity, and it can’t be binding on the company to honour this commitment. RIL’s directors even filed an affidavit to this effect in the court and claimed that the RIL board never gave its approval to the gas supply arrangement between the two brothers.  

RIL also claims that though the demerger of the original Reliance empire took place on the basis of the family MoU, this MoU never came out in public because it was a secret family document. RNRL counters RIL’s claim by saying that there was a series of correspondence between the two companies as well as the legal firms representing both the companies before the demerger agreement was actually signed, and hence the basis of the demerger, the MoU between the two brothers, is not a secret family document.

Hiroo Advani of the Mumbai-based solicitor firm Advani & Co, which represents many oil and gas sector companies, rubbishes RIL’s stand. “When the chairman and majority shareholder of the company enters into an agreement and makes a commitment about an asset which belongs to the company it is presumed that he is doing so on behalf of the company.” If Mukesh Ambani doesn’t have such authority then RIL should sue him for exceeding his jurisdiction and causing loss to the company, Advani added.  

He also said that the government has the right to veto the deal under the production sharing contract (PSC) if it thinks that there was some underhand deal involved in determining the price of a natural resource like gas, and that the principle of arms length was not followed while discovering the price. This principle was followed in the case of NTPC, and RIL’s bid for NTPC’s gas supply contract was the basis of the agreement between RIL and RNRL. Ashok Sreeniwas of the Pune-based think-tank, Prayas Energy Group, said that the issue is not in whose favour the court gives its verdict. “Rather, it is about how we are going to govern a sector as vital as the petroleum. Such a dispute would not have arisen had there been an effective regulatory mechanism in place to govern the sector. What we need is transparency in governing the sector, and this is what is currently lacking,” Sreeniwas observed.

Also see End game & Fanning the flames

The minutes of the meeting  of the Empowered Group  of Ministers (EGoM)  held on 12 September,  2007 that form part of the  government’s submission  clearly state that the decisions taken by  the EGoM will be “without prejudice” to  the NTPC vs RIL and RNRL vs RIL cases  which are separately subjudice.”  “The government’s submission clearly  strengthens Anil Ambani’s case and goes  against government’s stated position  that the agreement between RIL and  RNRL is a private arrangement,” said  Hiroo Advani of Mumbai-based law firm  Advani & Co. �
Meanwhile, in a new twist to the case,  RIL has written to the power secretary  complaining about NTPC’s “reluctance”  to conclude the gas sales and purchase  agreement (GSPA) for the 2.7 mmscmd  gas allocated to it for the Faridabad, Dadri  and Anta plants.       RIL’s PMS Prasad claimed that despite  RIL being ready to sign the GSPA which  includes clause, “without prejudice to  ongoing case between the RIL and NTPC at Bombay high court”, NTPC is not  ready to discuss the GSPA and it will cost  the company an additional Rs 15,000  crore should it decide to import LNG  instead of buying RIL’s KG basin gas.  Till date none of its submissions – in the  Bombay High Court in the RIL vs RNRL  and RIL vs NTPC – spell out the position  stated in the EGoM minutes. In fact,  using the EGoM’s decision to fix the price  of gas at US $ 4.2 mmBtu RIL amended  its plea in the Bombay High Court in  case against NTPC. Now NTPC wants to  challenge the decision allowing change  of plea.

In fact, petroleum minister Murli  Deora had said on the floor of Rajya  Sabha that the US $ 2.35 mmBtu price  quoted by RIL in the NTPC tender was  not approved by the government and  therefore not applicable. 

The government’s latest submission  quoting an earlier ministerial decision  “sounds like an afterthought. The law  cannot make a distinction between the  self-interest of a public sector commercial  unit and a private sector one,” said a  senior power ministry official. Added  Advani, “Both NTPC and RNRL are  listed companies, how can one distinguish  between the two just because in one  government owns a majority stake?”  Ashok Sreeniwas of Prayas (Energy  Group) said, “The correct stand for the  government would be to not stress on  NTPC’s PSU status but to emphasise  that NTPC had called for a global tender  and RIL had participated in it without  putting any conditions.

 Added Advani,“The correct stance for NTPC to protect  its interest would have been to be party  to the RIL vs RNRL case. But it looks as  though the government wants to avoid  NTPC joining issue in the Apex Court.  If the court decides to club both petitions  then the government’s case doesn’t have  a leg to stand on.” If the court were to  club the cases then the pricing of gas will  apply to both RNRL and NTPC.  As things stand, it seems as if the ADA  Group Rs 12 crore media blitzkrieg is  finally paying off in NTPC’s favour.