RELIANCE NATURAL RESOURCES LTD. v. RELIANCE INDUSTRIES LTD.

83Copy pinpoint83. Scholars and experts divide the modern agreements between sovereign nations and oil companies into specific types of agreements. However, as experts point out, there is often a considerable overlap. As Prof. Ernest E. Smith and John S. Dzienkowski point out:

" .... there are four basic arrangem<ilnts between host countries and multinational oil companies .... (1) the concession; (2)·the production sharing agreement; (3) the participation agreement, and (4) the service contract. Although each of these four arrangements can be used to accomplish the same purpose, they are conceptually different from each other. They provide for different levels of control by the company, different compensation arrangements, and different levels of state oil company involvement. It is important to note, however, that some existing agreements have borr9wed clauses and concepts from two or more of the types of arrangements. H

882 SUPREME COURT REPORTS [2010J 5 S.C.R.

A Thus precise categorization of a particular country's arrangements is not always possible. "56

84Copy pinpoint84. The principal themes in production sharing contracts would appear to be that the sovereignty over the petroleum 8 produced continues to be with the nation, and the contractor bears varying levels of and forms of risk with respect to exploration activities and what is allowed to be recovered as costs (called Contract Costs) and to what extent in each year (called Cost Petroleum). According to Daniel Johnston; who C 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 D 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)"

85Copy pinpoint85. One authentic source has been the United Nations. In E a document titled "Alternative Arrangements for Petroleum Development: A Guide for Government Policy-makers and Negotiators" 57 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." 58

"Sharing of net revenue generated by petroleum exploitation has been a constant source of conflict between Governments and oil companies ..... A certain

56. Ernest E. Smith & John Dzienkowski, supra note 52.

57. UN Document No. ST/CTC/43, Sales No. E.82.11.A.22.

H 58. Ibid page 5, para 15.

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 883

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

proportion of the gross revenue must be set aside to repay capital costs of exploitation and field development to meet current operating costs .... The remainder of sales revenue is then available to provide a return to the oil company and . to provide income to the State. The Government, in its role as sovereign and, in most cases, as owner of the petroleum resource, expects to retain the bulk of such rent and to restrict profits of oil companies to that which is required to attract the companies investment" 59

"Even more variety appears in the provisions that determine how net revenue is shared if production is undertaken. lnspite of the variety, most payments can be classified in one of two types: payments based on profitability and payments based on production."60

The present PSC is required to be interpreted and understood with this background in mind.

86Copy pinpoint86. We now turn to an analysis of the constitutional ~nd statutory matrix in which the question "whose gas is it anyway?" needs to be addressed. E

87Copy pinpoint87. The natural gas, under dispute in these proceedings, is being mined from deep beneath the sea bed, off the eastern shore of India. Thus, it is a resource that falls squarely within the purview of Article 297 of the Constitution of India and is explicitly noted so in the PSC. Article 297 of the Constitution F declares that "All lands, minerals and other things of value underlying the ocean within the territorial waters or the continental shelf or the exclusive economic zone shall vest in the Union, to be held for the purposes of the Union". This Article of the Constitution is unique as it is the only such G provision in the Constitution that addresses a particular inclusive set of potential resources in a particular class of

59. Ibid page 14, para 48.

60. Ibid page 16 para 57. H

884 SUPREME COURT REPORTS [201 O] 5 S.C.R.

A geographic zones. It goes on to say that the limits of those geographic zones "shall be such as may be specified, from time to time, by or under any law made by Parliament." We need to appreciate the purport and meaning of Article 297 of our Constitution as increasingly these resources in the B geographic zones specified by it are going to be tapped, because of technological developments enhancing the capacities· of the nation.

88Copy pinpoint88. While the word "vest" could normally partake of at least C a portion of the full bundle of rights associated with ownership, the phrase "shall vest" as used in Article 297 of the Constitution implies 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 we/I-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.

89Copy pinpoint89. 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 G "hold" is to conserve, to preserve and to keep in place and it only secondarily means 'use' or 'disposal'. The fact that the phrase "be held" is used in Article 297 of the Constitution, whereas in Article 298 of the Constitution, in its immediate neighborhood, the word "hold" is used in conjunction with H abilities to "acquire" and "dispose" is significant and a clear

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 885

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

indication of the intent of the supreme drafter of the Constitution A - the people. The use of a series of words in a Constitutional setting clearly implies that they are being used precisely, so that overlapping meanings are to be set aside and the purer and the core meanings be delineated. The phrase "be held" when viewed along with the phrase "shall vest", which vesting was B done by the people as a nation, can only mean that it was used as a lock to conserve, to preserve and to keep in place. And the key to that lock is also there in the same Article of the Constitution: "purposes of the Union" which can only mean the integrity, unity and development of the nation. c

90Copy pinpoint90. Within the context of international law, there has emerged a body of thought under the broad rubric of Human Rights, that the people as the true owners of natural wealth and resources, ought to exercise a "permanent sovereignty" .i.e., the power to make laws, over such resources to ensure national D development and well being of the people. The responsible use of such natural resources for the well-being of the people of a nation has been seen as an important aspect of maintenance · of international peace and a part of their right fo "self determination"61 . Further, these rights of the people as Nations E have been secured by many struggles for self-determination over millennia. Those rights encompass the freedom of self- determination through a democratic order within the boundaries of the nation-state and the imperative of such self-determination in inter-se and yet interdependent zones of co-existence between nation-states.

91Copy pinpoint91. In Association of Natural Gas (supra), a Constitution Bench speaking through Balakrishnan, J.( as he then was) said:

".... The people of the entire country has a stake in the natural gas and its benefit has to be shared by the whole

61. See UN General Assembly Resolution 523 (vi) of January, 1952, 626 (vii) of December, 1952, 1314 (xii) of December, 1958. 1515 (xv) of December, 1960-all specifically_ referred in Resolution 1803 on Permanent Sovereignty. H

886 SUPREME COURT REPORTS '[2010] 5 S.C.R.

A country. There should be just and reasonable use of natural gas for national development."

92Copy pinpoint92. Article 38 of the Constitution, a Directive Principle of State Policy, states that: "(1) State shall strive to promote the 8 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 rtarticular, 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 develop·ment 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 of the conditions of justice.

93Copy pinpoint93. The structure of our Constitution is not such that it. permits the reading of each of the Directive Principles of StaR! F Policy, that have been framed for the achfevement of conditions of social, economic and political ju'stice in- isolation. The structural lines of logic, of ethical imperatives of the State and the lessons of history flow from one to the other. In the quest for national development and unity of.the nation, it was felt that . G .}r.e "ownership and control of the material resources of the " commun.ity" if distributed in a manner that does not result in common .good, it would lead to derogation from the quest for national developmen·t and the unity of the nation. Consequently, Article.39(b) ·of the Constitu-tion should be construed in light of H Article 38 of the Constitution and be understood as placing an

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 887

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

affirmative obligation upon the State to ensure that distribution of material resources of the community does not result in heightening of inequalities amongst people and amongst regions. In line with the logic of the Constitutional matrix just enunciated, and in the sweep of the quest for national development and unity, is another provision. In as much as inequalities between people and regions of the nation are inimical to those goals, Article 39(c) posits that the "operation of the economic system" when left unattended and unregulated, leads to "concentration of wealth and means •)f production. to the common detriment" and commands the State to ensure that c the same does not occur.

94Copy pinpoint94. The concept of equality, a necessary condition for achievement of justice, is inherent in the concept of national a development that we have adopted as nation. India was never meant to be a mere land in which the desires and the actions D of the rich and the mighty take precedence over the needs of the people. The ambit and sweep of our egalitarian ideal inheres within itself the necessity of inter-generational equity. Our Constitutional jurisprudence recognizes this and makes sustainable development and protection of the environment a E pre-condition for the use of nature. The concept of people as a nation does not inc:ude just the living; it includes those who are unborn and waiting to be instantiated. Conservation of resources, especially scarce ones, is both a matter of efficient use to alleviate the suffering of the living and also of ensuring that such use does not lead to diminishment of the prospects of their use by future generations.

95Copy pinpoint95. 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 Go'

888 SUPREME· COURT REPORTS [2010] 5 S.C.R.

A to conserve and develop mineral oils, including natural gas.·

96Copy pinpoint96. 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 8 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 key therein to unlock those resources: for the purposes of the Union.

97Copy pinpoint97. Much of the jurisprudence regarding restrictions of powers of the State in using natural resources has arisen from the concept of "public trust." Prof. Joseph Sax has said:

"[t]he idea of a public trusteeship rests upon three related principles. First that certain interests ..... have such importance to the citizenry as a whole that it would be unwise to make them the subject of private ownership. Second that they partake so much of the bounty of nature, rather than of individual enterprise, that they should be made freely available to the entire citizenry, without regard to economic status. And finally, that it is a principal purpose of government to promote the interests of the general public rather than to redistribute public goods from public uses to restricted private benefits .... "62

98Copy pinpoint98. The concept of public trust actually finds its genesis with respect to the ocean and waters, and some have even traced this concept to the Ch'in Dynasty in China (249-207 BC)- and the Roman Justinian Institutes. This has been extended substantially, and the broader notion now is that the State really

62. Joseph L. Sax, Defending the Environment: A Strategy for Citizen Action H 1971.

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 889

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

is acting only in a fiduciary capacity. ''The message is simple: A the sovereign rights of the nation-states over certain environmental resources are not proprietary, but fiduciary." 63

99Copy pinpoint99. In light of the public trust elements so intrinsic to resources under the sea-bed, and the special nature of Article B 297, the implications of natural gas for India's energy security, and the imperatives of national development - including the concepts of egalitarianism and promotion of inter-regional parity, we hold that the Union of India cannot enter into a contract that permits extraction of resources in a manner that would abrogate its permanent sovereignty over such resources. It is not just a matter of mere textual 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) no end user may be G

63. Peter H. Sand Sovereignty Bounded: Public Trusteeship for Common Pool 0 Resources. Also see Turnipseed, Roady, Sagarin & Crowder: The Silver Anniversary of the United States 6xclusive Econcomic Zone-Twenty Five Years of.Ocean Use and Abuse, and the Possibility of a Blue Wtare Public Trust Doctrine, Energy Law Quarterly Vol. 36:1 (2009). H

890 SUPREME COURT REPORTS [2010) 5 S.C.R.

A given any guarantee for continued access and of use beyond a period to be specified by the Government.

100Copy pinpoint100. Any contract including a PSC which does not take into its ambit stated principles may itself become vulnerable and fall foul of Article 14 of the Constitution. 8

101Copy pinpoint101. Based on the above discussion, we now turn our attention to the specific PSC under consideration in this case. From a broad consideration of the provisions therein, as discussed below, we cannot on the face of it deem that the PSC C is in contravention of the Constitutional values enunciated above. The subsequent policy decisions of Gol in no manner derogate from covenants of the PSC.

102Copy pinpoint102. The PSC itself specifically recog.nizes that the 0 interests of India are of paramount importance. Recital 6 of the PSC states that the "Government desires that the petroleum resources ...... be discovered and exploited with utmost expedition in the overall interests of India and in accordance with Good International Petroleum Industry Practices". Further, E the PSC also places an affirmative obligation on the Contractor, in Article 8.3(k) to "be always mindful of the rights and interests of India iri the conduct of Petroleum Operations". Article 32.2 specifically states that nothing in the PSC shall "entitle the Contractor to exercise the rights, privileges and powers conferred upon it in a manner which will contravene the F laws of India." We fail to appreciate, given such a clear linKage between the PSC and the constitutional imperatives, Shri Jethmalani's argument that Gal's policy initiatives violate the terms of the PSC and sanctity of contracts.

103Copy pinpoint103. Does a Production Sharing Contract only mean a sharing of physical quantity of natural gas as contended by RNRL? What does this PSC provide?

As discussed earlier,itts clear that a wide variety of instruments have come to be called Production Sharing

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 891

INDUSTRIES LTD. (8. SUDERSHAN REDDY, J.]

Contracts and there is no specific concordance between that title and what is actually shared pursuant to a PSC. In light of that discussion and the general acceptance that revenues are also shared in the context of Production Sharing Contracts, the insistence of RNRL that only production i.e., physical volume of gas can be shared under any production sharing contract may have to be held to be unsustainable.

104Copy pinpoint104. One of the bigger sources of confusion has been the manner in which the 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 E 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 F reduced by Cost Petroleum and calculated as provided in Article 16." Reading Articles 2.2, 8, 15 and 16 of the PSC together, it would have to be concluded that under this PSC the contractor is only entitled to cost petroleum and share of Profit Petroleum in terms of realized value from sale of Petroleum i.e. G natural gas in this case, and not to a share in physical quantities of Petroleum.

105Copy pinpoint105. As pointed out by the Learned Additional Solicitor General, Shri. Mohan Parasaran, in some previous PSC's the H

892 SUPREME COURT REPORTS [2010] 5 S.C.R.

A word volume had been used instead of value, but that has been specifically changed. The change in the wording is of great significance. PSC's and such instruments are model contracts that are developed and written to reflect particular policy decisions and we have been informed by the counsel of Uol B that it was laid on the floor of the Parliament. This implies that the Government is of the view, that the entire range of activities being contemplated by the Policy and the PSC itself to be of such importance that they also be noticed and commented upon, and if necessary acted upon, by the Parliament as a C whole. Consequently, we are of the opinion and hold that such. Contracts be very carefully examined and interpreted so as to not disturb the most obvious meanings ascribable. The two words in question here are "volume" and "value," which need to be appreciated.

106Copy pinpoint106. The word "volume" when used in scientific contexts would normally mean physical dimensions on three coordinate axes; in business and industrial parlance it is also used to reflect the total quantity of some physical produce. The word "value", on the other hand, implicates the meaning of both E intrinsic capacity to provide some utility, and also the value derived in the context of exchange in the market place. The word "value" and the phrase "total value" when used in the context of commerce would normally only reflect the monetized sum that is derived by multiplying the number of units of a F physical product with the sale price. This distinction is clearly stated in P. Ramanatha Aiyar's "Advanced Law Lexicon" (3rd Ed. 2005) as follows:

"Volume: " ... Term often confused with turnover, although in some instances they may be used to mean the same G thing. Strictly, volume is the number of units traded, whereas turnover refers to the value of the units traded. On the commodities market, however, volume refers to the quantity of soft commodities traded, and turnover refers to the tonnage of metals traded over a particular period of H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 893

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.) time." .... Number of units traded (as opposed to turnover, A 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 8 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)" E

107Copy pinpoint107. 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 that the word "value" is being used, in the PSC, to mean the monetized value of the physical quantity that is a resultant of multiplying the quantity of Petroleum (crude oi'I or natural gas) produced, saved and sold in the market (as discussed below) at a "price." The words produced and saved are first used in the phrase "Petroleum Operations" defined in Art. 1. 74 of the PSC, wherein it is stated that Petroleum Operations mean, as "the context may require, ·Exploration Operations, Development Operations or Producti.on Operations or any combination of two or more of such operations, including H

894 SUPREME COURT REPORTS [2010] 5 S.C.R.

A construction, operation and maintenance of all necessary facilities ..... environmental protection, transportation, storage, sale or disposition of Petroleum to the Delivery Point .... And all other incidental operations or activities as may be necessary." Further Article 21.6.1 specifically states that the B Contractor" .... shall endeavour to sell all Natural Gas produced and saved ... " This indicates that the entire set of all Petroleum Operations are to end in a sale at the Delivery Point; so it has to be concluded that the phrase "produced and saved" in the PSC encompasses the activity of sale of natural gas. c Consequently, the phrases 'Total Value", "Cost Petroleum" and "Profit Petroleum" can only be interpreted as having been used to denote the monetary value realized after the sale of natural gas at the delivery point.

108Copy pinpoint108. The change in the wording clearly implies that under D the PSC by making the "value" of the natural gas produced, saved and sold as what is to be shared, the intention of the Government was to ensure that the "volume" i.e., the physical quantities remain outside the purview of what is to be shared between the Contractor and the Government. Consequently, E under this PSC, RIL has no rights whatsoever to take physical qua~tities/volume of natural gas as a part of Profit Petroleum or Cost Petroleum, in as much as the contractor's right to take anything under the PSC can only be from the total value i.e., total revenue received from sale of natural gas. F

109Copy pinpoint109. The decision in Commissioner of Income Tax, Dehradun (supra}, relied upon by the Learned Senior Counsels for RNRL is inapposite in the instant matter, for the reason that the PSC that was under consideration in that particular case, G Cost Petroleum (Article 1.24 therein) and Profit Petroleum (Art. 1.69 therein) 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 H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 895

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

submitted by Shri Mohan Parasaran. A

110Copy pinpoint110. 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 regards that part of Crude Oil, Condensate, or Gas the title whereof has passed to the Contractor or any other person in accordance with the provisions of this Contract." These clauses do not state that the title passes through the contractor as an offset. Offset E cannot be read into these clauses by implications. All Petroleum Operations are directed towards selling of Petroleum i.e. natural gas in this case at the Delivery Point as discussed earlier.

111Copy pinpoint111. The title pursuant to Article 27.1 of the PSC can pass from the sovereign owner, the people of India, at the Delivery Point upon a sale, and not as a matter of offset against any incurred expenditure by RIL. The rights of RIL under the PSC are to recover its costs first, from sale of Petroleum, and that too only up ·to a maximum of 90% of each year's total value realised from sale. In as much as the contractor under such a PSC takes the risk that exploration costs cannot be recovered unless petroleum is discovered in commercially exploitable form, this is a continuation of the risk. For instance, the reservoir could stop producing or its production could start to decline H

896 SUPREME COURT REPORTS [2010] 5 S.C.R.

A precipitously. If the total volume of natural gas that is produced . over the life of the reservoir is very little or not sufficient and the market prices are low, the Contractor would risk not recovering its investments. Sale of Petroleum, is an integral part of Petroleum Operations and hence selling of Petroleum B is an obligation of the Contractor. The question of an automatic offset of incurred expenditures to effectuate an automatic transfer of title is not contemplated in this PSC at all. The transfer of title can be only to entities within a class of buyers specified by a utilization policy as discussed below. c 112. It should be noted, that in as much as title passes only upon sale at the Delivery Point, the true owner, the people of India acting through the Union of India have a sovereign right, that is tempered by public law, in determining the manner in which that sale is effectuated. Public resources cannot be D distributed or disposed off in an arbitrary manner.

113Copy pinpoint113. Does the Gol have the right to frame a Utilisation Policy under this PSC?

RNRL has repeatedly argued that in as much as NELP E promised the freedom to market to the contractors and that is what is provided in Article 21.3 of the PSC, and no other utilization policy was put 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 F Scheme. Therefore, according to RNRL's counsel, the Gol should not have any right to interfere in this contractual commitment.

114Copy pinpoint114. 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

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 897

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

of India. Timely utilization, by users spread across many sectors and across regions a·s 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. B

115Copy pinpoint115. Article 21.1 of the PSC makes it very clear that the sales of Natural Gas have to be in accordance with a Government Utilisation Policy and to the Indian Domestic Market. c "Subject to Article 21.2, 64 the Indian domestic market shall have the first call on the utilization of Natural Gas discovered and produced from the Contract Area. Accordingly any proposal by the Contractor relating to Discovery and production of Natural Gas from the Contract o Area shall be made in the context of the Government's policy for the utilization of Natural Gas and shall take into account the objectives of the Government to devej,op its resources in the most efficient manner and to promote conservation measures. " E

116Copy pinpoint116. Article 21.1 clearly contemplates that the pool of eligible buyers of natural gas extends to the whole of Indian domestic market. It does not speak of RIL having a right to unilaterally decide who to sell to. Clearly, under the provisions of Article 21.1 in the PSC, the Board Room of RIL or its internal divisions do not constitute the Indian domestic market. That phrase contemplates the entire class of eligible buyers in India.

117Copy pinpoint117. Further, the said Article 21.1 proceeds to state that all proposals of the Contractor for production, which includes the activity of selling, shall take into account Government's

64. Article 21.2 gives the right to the Contractor to use a small part of the Natural Gas produced from the Contract Area for purposes of Petroleum Operations such as reinjection for pressure maintenance in Oil Fields, gas lifting and captive generation required for Petroleum Operations i.e., for technical H

898 SUPREME COURT REPORTS [201 OJ 5 S.C.R.

A utilization policy. We note that it does not say that the Contractor take into account a government utilization policy only if there is one. It mandates that the extraction and sale can only be in the context of a utilization policy. Without a utilization policy that satisfies the conditions of Article 297 of our Constitution, not even a cubic centimeter of that natural gas can be sold, let B alone the many millions of cubic metres of natural gas that RNRL claims vested in it as a matter of contractual right.

118Copy pinpoint118. Consequently, we hold that under the PSC, unless the Government actually sets out a policy regarding utilization of the c natural gas produced, it cannot be committed or sold to anyone. The freedom to market can only be exercised subject to the utilization policy of the Gol.

119Copy pinpoint119. Of what purport the approval by the MC of the PSC o 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-06 would be used in their prospective power plant at Dadri, that the Gol E 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 F 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.

120Copy pinpoint120. Over and above that, under the PSC the right to effectuate a utilization policy only vests with the Gol. Indeed, it cannot be any other way. The MC of the PSC is not the Gol 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 spectrum that H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 899

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

121Copy pinpoint121. The IDP itself was proposed way back in the year C 2004 and the production started only in 2009. The fact that there was no Government Utilisation Policy in place has a direct connection to that lengthy gap. Over such a time frame, many new developments, including the increase of supply of gas, newer sources, depletion of older sources, availability of gas from other sources etc., could have as well taken place. There would have been no way for the Gol to know who would be the potential users, what are the needs of the nation, inequities between regions, how the network of pipeline would develop - those and many other such factors play a role in determining the policy. In such circumstances, one cannot imagine how the Gol could have framed a Utilisation Policy with respect to inter- sectora I needs, the requirements arising from strategic considerations or some other necessary factor that would be needed to be taken into consideration so many years ahead of actual production.

122Copy pinpoint122. The Silence and the Noise of Various Government Officials:

The Learned Senior Counsel for RNRL also argued, very vehemently, that the Gol had remained silent for a very long time, and even though it knew that RIL was making commitments to its internal divisions, said and did nothing. From this, they attempted to draw the implication that the Gol H

900 SUPREME COURT REPORTS [2010] 5 S.C.R.

A had agreed to RIL making such commitments to its own internal divisions. They went even further. They claimed that in the atmosphere of such a silence, RIL and the gas based energy producing division within RIL could make and indeed have made such allocations and that such a silence implies that rights have vested in them. That is an unsustainable argument. It is not uncommon for government agents to remain silent, even though the instruments under which 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 Gol. 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, thatsilence by officials of Gol cannot and ought not to be given any weight at all. ·

123Copy pinpoint123. 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 E 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.

124Copy pinpoint124. 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. When the covenants evidently carry a plain meaning which could be gathered from what the instrument itself has said, such G responses cannot be used to interpret the terms of a contract. The answers, at the most, may reflect the opinion of an individual minister and they would have no bearing on the interpretations to be placed by the courts. At any rate, the courts are not bound by the answers so given to interpret the H

RELIANCE NATURAL HESOURCES LTD. v. RELIANCE 901

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] instruments. The decision in Emperor v Sibnath Banerjee & A Ors. 65 , relied upon by Shri Jethmalani is not an authority for the proposition that the courts are bound by such statements made in the House in response to queries by members. The decision merely holds that such answers were "-admissible under Sections 17, 18 and 20 of the Indian Evidence Act.". B

125Copy pinpoint125. Is the Price Formula/Basis For Valuation'to·determine government Share or For Sale of All Natural Gas?

It was argued on behalf of RNRL that the provisions of Article 21 ~titled "Valuation:· can be read to mean that the right of the Gol to approve" a "price formula/basis" is only to enable it to place a value· on .natural gas to be able to determine its own physical share of the natural gas, and that consequently, RIL was free to sell it at whatever price it may to sell it at, so long as the price is an "arms length price." RNRL also clajms that the price fixed with respect to commitments to supply natural gas at USO 2.34/mmBtu well head price should apply, because that was the only contemporaneous arms length price that was available for a determination of what price RNRL should be p~ng. E

126Copy pinpoint126. This is yet another strained interpretation that defies credulity. In a lengthy letter to Minister of Fertilisers and Chemicals written by a Senior executive of RNRL in June 2007, it was stated that a number of factors enter into price determination, including spot, length of supply, quantity, delivery F point, price floor, and that even end use must be taken into account. Obviously this set of factors is not all inclusive. In a seller's market i.e., where natural gas is in acute shortage, the options given to a buyer can have a huge bearing on the price. The parameters between NTPC terms and RNRL are of a G significantly different order. First, the onerous "take or pay" clause is a part of the NTPC contract but not the gas supply agreements with RNRL, as repeatedly pointed out by Shri

65. AIR 1943 FC 75. H

902 SUPREME COURT REPORTS [2010] 5 S.C.R.

A Salve. 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 B confines of~ 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. c 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- 06 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 in all situations, because a market may not have developed properly.

128Copy pinpoint128. A spot market for natural gas for instance, which is possible when a large quantity of natural gas is available in a F region, and distributed through a dense network of pipelines, would be the best source for determination of arms length sales prices because numerous transactions take place and records are kept of the prices. Where such arms length prices are not available or a sizable class of comparable transactions in the G recent past is also not available such as the one provided in Article 21.6.2 (c), other methods have been chosen, including formulas that link prices to basket of fuel oils or even to crude oil as provided for in Article 21.6.3. All three Articles i.e., 21.6.1, 21.6.3 and 21.6.2(c) have to be read together. Article 21.6.2 (b) provides for a situation in which natural gas is sold to H

· RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 903 INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

nominees of Gol, in which case the Gol would know the actual A price. RNRL is taking a clause that is provided to protect the Gol, in the event that Gol is unable to determine whether it can assure to itself that the Contractor has sold or is selling at the stated price and conflating it to a right of RIL. B

129Copy pinpoint129. With regard to refusal of Gol to approve the proposed sale price on parity with the NTPC bids, it is noted that RNRL has not separately challenged it. The rejection was precisely on the ground that it is not a competitive arms length price between two unrelated parties, and was justified. At any rate as there is no provision for sharing physical quantities, the C question of Government fixing the price for its share of gas does not arise.

EGOM Decisions: D

130Copy pinpoint130. The Empowered Group of Ministers framed a utilization policy and also approved the price formula/basis·· submitted by RIL. It was constituted pursuant to Business Rules framed under Article 77(3) and its decisions are treated as the decisions of the Cabinet itself. It is a policy decision of the E Government and has force of law since the field is not occupied by any legislation made by the Parliament. It is needless to state that under Article 73 of the Constitution the powers of the Union executive do extend to matters upon which the Parliament is competent to legislate and are not confined to matters over which the legislation has been passed already. There is no need to dilate further on this issue since there is no independent challenge questioning the validity of EGOM decisions. The collateral attack leveled against EGOM decision cannot be entertained notwithstanding the serious allegations of mala tides 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 H

904 SUPREME COURT REPORTS [2010] 5 S.C.R.

A 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. B PART V

WHOSE COMPANY IS IT ANYWAY?

131Copy pinpoint131. We would have thought that the answer to this c 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 0 life or the hurly burly of action in economic sphere, neither law nor force can sustain a path of growth and development, if the capacity to trust is consistently undercut by surreptitious activities.

132Copy pinpoint132. Be that as it may, we now turn to some of the issues E that come up for our consideration with respect to matters internal to RIL. They are not dispositive as to the main elements of these proceedings, in as much as both Shri. Harish Salve and Shri. Mukul Rohtagi had submitted that the issue of governmental approvals was the key to the entire dispute. We F have. already expressed our view about that set of questions. Nevertheless, certain aspects of law and questions remain, on account of the decisions of the courts below. We turn to those issues.

133Copy pinpoint133. Of What Purport the "Gas Supply Arrangements" in Clause 19 of the Scheme From the Perspective of Section 391?:

It has been a widely accepted principle that companies can only transfer such rights, powers, duties and property as are H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 905

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

capable of being lawfully transferred by a party to a scheme; A and this determination has to be made as if the Companies Act, 1956 itself did not exist. Way back in 1958, Sachs J., had enunciated that principle. Specifically he held, and it is worth quoting him in-extenso: B " ... It is not necessary in a scheme to exclude specifically from its operation things incapable of such transfer, as general words in the scheme and any order in furtherance thereof must be taken to operate in a manner not repugnant to the general law ...... If, however, on a proper construction of the terms of a scheme, some part of it happens, by inadvertence, expressly to order an act which, had there been no scheme, the parties could not, either in relation to the interests of third parties or otherwise, bind themselves to do, then that part ofthe scheme would, in my view, have to oe treated as a nullity in so far as it purports so to order. To my mind, this latter principle equally applies where a scheme expressly prohibits an act which the parties could not, under general law .... bind themselves to refrain from doing." 66 E . 134. In this case, no definitive agreement for gas supply was placed before the shareholders and indeed such an agreement was not even promised or stated to be possible. No sensible person, exercising judgment from within the sphere of "commercial wisdom", could have arrived at the conclusion 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

66. In the Estate of Skinner, (1958) I W.L.R. 1043. H

906 SUPREME COURT REPORTS [2010] 5 S.C.R.

·A to utilization and pricing of natural gas, then it would have to be struck down as a nullity.

135Copy pinpoint135. 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 B 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 Business, which is now RNRL, has become unworkable? We hold that it has not become unworkable, but only that one part of the Scheme, which was in any case in the nature of a contingent and a highly uncertain event, has not come to pass for now on account of events and powers beyond the capacity of those who proposed the Scheme. Given the acute scarcity of natural gas in India, and given the constitutional imperatives on the Gol, no shareholder who was not na"iVe E would, could or should have relied on the certitude of natural gas supply from RIL to RNRL. Clause 19 of the Scheme provides that "suitable arrangements" would have to be made with respect to gas supply as opposed to the more definitive "suitable agreements" w.ith regard to "right to use the Reliance F logo" in the same clause. The word arrangement as used in this context clearly only indicates a potential that may or may not be realized and that is the only way it could have been interpreted. The word 'arrangements' as used in Clause 19 contemplates a complex set of mechanisms and would involve G many broad aspects, with a multitude of smaller parts, that may or may not work, especially because of changed circumstances. Hence, the phrase "suitable arrangements" has to be treated as being amorphous, requiring flexibility, involving uncertainty and even the potential that the results sought may not be achieved or realized. H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 907

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

136Copy pinpoint136. RNRL has argued vehemently that it will become a A shell company if it does not get natural gas from RIL and trade with it, as it claims that was its main purpose and also claims that would be a fair construction of the purport of the Scheme. A Scheme must be understood and interpreted exactly in terms of how a shareholder and a stakeholder who voted for it and received shares after the demerger would have understood it.

137Copy pinpoint137. In the Explanatory Statement to the Scheme, while one of the purposes of RNRL as stated in its Memorandum of Association is said to be dealing in the business of supply of gas, it is only a part of the total business of buying, selling and distributing a wide spectrum of fuels, with Natural Gas being just one of them; moreover, when we turn to the second objective of the Memorandum of Association, it is clear that an equally important purpose of RNRL is to "carry on, manage, _ supervise and control the business of transmitting, manufacturing, supplying, generating, 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 any one who reads the Scheme can understand it in that manner.

138Copy pinpoint138. 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, G whether that be on account of Gal'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 H

908 SUPREME COURT REPORTS [2010] 5 S.C.R.

A of lack of definitive natural gas supplies. Additionally, we were also informed that significant amounts of monies have been raised, and accepted as a fact by RNRL's counsel, both here in India and abroad and yet admittedly not even a brick has been laid at Dadri for the power project for which natural gas s was first sought and RNRL claims its rights begin from.

139Copy pinpoint139. RNRL also filed an information document for the issuance of its GDR's at Luxembourg in which it specifically claimed that the risks that it would face include the fact that Governmental Approvals for gas supply arrangements with RIL C may not come through. These are business risks associated with scarcity of natural gas and the necessity of national policy. These risks are attendant upon every entity that wants to rapidly expand. We see no reason to conflate that general condition which affects everyone in the Indian economy, to an issue of workability of the Scheme itself.

140Copy pinpoint140. Can the MoU be binding on the company?:

It is absolutely clear that the MoU was executed in the private domain, with the help and aid of a lawyer and then marked confidential. Further, the individuals, from all indications have only executed it in their individual capacity and it was not purported to be in exercise of their positions in RIL or any other company of the Reliance Group. It is also very clear that the MoU itself recognizes that the reorganization that the promoters sought would have to be routed through the Board. The promoters also had the right to apply for a Scheme of Rearrangement under Section 391 of the Companies Act, 1956, in which case the mode of shareholder approvals and the classes formed would have been entirely different. As Shri. G Rohinton Nariman points out, the MoU is an agreement between three promoters, and the Scheme is between two million shareholders, all of the same equity class and hence the MoU cannot now be imported into the Scheme. Otherwise the promoters who under the Scheme were the same as any one H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 909

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

else would now become special, thereby negating the very concept of class of members with similar interests voting on a proposal for reorganization.

141Copy pinpoint141. The minutes of the meetings of the Board of RIL dealing with various issues concerning the reorganization do not reveal anywhere whether the Board as a collective body ever took note of and approved the MoU. This is not a mere technicality. There is a certain legal sanctity associated with it, in the first place, in the 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 E a whisper of. protection of a broader class of shareholders in the MoU. This is not some mere technicality; but a fund.amental 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 broader understanding of company law from the days of Settlement67 Companies that were the precursors of joint stock companies. What RNRL is demanding, by implications that follow the insertion of the gas supply section of the MoU in Clause 19 of the Scheme, is that the Board of RIL only acted at the behest of the promoters and were mere rubber stamps of the

67. See part 1. 103-1.104 of Palmer's Company Law, page 1011, 25th Edn. ~1.1. H

910 SUPREME COURT REPORTS [2010] 5 S.C.R.

A decisions of the promoters. Acceptance of such demands would destroy the fabric of company law itself and the foundations of trust, faith and honest dealing with the shareholders. The actions of the Board of RIL clearly indicate that it did not conceive its role in that manner. B

142Copy pinpoint142. It is quite obvious, from the MoU itself, that the promoters family had a number of personal issues to settle, amongst which the issue relating to businesses and ownership over them was but one. It is also equally obvious that what has been revealed is but a portion of the total document. If such a C document were to be filed as a proposal for arrangement, it would have to be thrown out at the very inception. The differences in details of the proposals for demerger as contained in the MoU, when contrasted with that of the Scheme, are staggering. Where no reasons for reorganization are adduced in the MoU, apart from a statement that having settled all the other family and other business related issues the best way forward would be a reorganization, it is the Scheme as framed and approved by the Board which provides the justifications. The Scheme specifies that each of the businesses carry different sets of risks and prospects, and that they could attract different sets of investors, that a focused management is needed to enhance the prospects of each business, etc. Finally, it-is the Board which recommended the Scheme to the shareholders saying that it would benefit them. F

143Copy pinpoint143. The fact that the Board asked that an analysis of the pros and cons of such a reorganization be undertaken by the CG Committee of Independent Directors, along with the command that they propose a scheme of reorganization if any, with the help of professionals to study the various businesses G and the implications with respect to statutory and legal issues, is prima facie evidence of independence and application of the mind. Further, from the record it can be gleaned that the CG Committee with the help of professionals framed an outline of a Scheme, executed by representatives of both the MDA and H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 911

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

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.

144Copy pinpoint144. 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 c 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 monetary value of such gas supply arrangements could run into many thousands of crores of rupees, and we fail to see how prospective agreements involving such huge value, in which commercial terms are claimed to have been settled, cannot be revealed to the shareholders in the context of a scheme of arrangement. No rationale or justification can support such a proposition. F

145Copy pinpoint145. The Companies (Amendment) Act, 1965, based on the recommendations of Daphtary-Sastri Committee specifically provided that the applicants for a scheme shall "disclose by affidavit all material facts". (See: Section 391 (2) of the Companies Act, 1956). In as much as the terms and conditions of gas supply, as specified in the MoU, were not G specifically informed to all the- shareholders and stakeholders, including in this case the Gol (as a party to the PSC), we simply fail to see how the MoU can be read into the Scheme itself. It doesn't matter whether one calls MoU the guiding light or a tool H

912 SUPREME COURT REPORTS [2010] 5 S.C.R.

A for interpretation or a foundation - the sheer fact that the terms of gas supply contained in the MoU were withheld from the shareholders implies that it cannot now be imported into the S-::heme. The argument that contracts are entered into all the time, and are treated as day to day affairs for the management and the Board, fails at the point of division of a company. Where, in regular times a shareholder or a stakeholder can demand and obtain information and have time to try and monitor such contracts and the actions of the management, the act of hiving off an undertaking is a much more crucial point, when the shareholders have to be even more careful about the transfer of value. The whole purpose of Section 293 which · prohibits the Board from hiving off an undertaking without shareholders approvals, is to prevent such transfers being effectuated on a permanent basis without the knowledge of the share.holders. The very essence of the requirement that all 0 material facts be disclosed would have been decimated. Consequently, we hold that the Scheme as propounded by the Board, placed before and approved by shareholders and stakeholders and sanctioned by the court is completely different from the MoU. The MoU may have been the starting point. The E end point is significantly, substantially and materially different from it and it cannot now be brought back in the guise of interpretation.

146Copy pinpoint146. Does the MoU support 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 H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 913

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

approvals, RIL will, if so r~quired by the Anil Ambani A 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 (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 C Group would also have a claim for damages." (emphasis supplied)

147Copy pinpoint147. In the course of the proceedings before us, Shri. Harish Salve repeatedly challenged that RNRL had singularly failed to explain this provision which so clearly demonstrates that ADA was aware that governmental approvals would be necessary for the kind of gas supply agreements that had been contemplated in the MoU. At first, we heard an argument by RNRL !hat the said paragraphs do not relate to gas supply as such, but general governmental and statutory approvals with respect to reorganization. When pointed out that general approvals were provided for separately in the section of the MoU dealing with "Manner of Business Segregation", we next heard the arguments from RNRL's counsel that these relate to laying of pipes and make other arrangements for transport of natural gas from Kakinada. Finally, in the written submissions given to us after the hearings ended, this is what the counsel for RNRL submitted on page 43 of their written submissions:

"8. GOVERNMENT/STATUTORY APPROVAL G CLAUSES IN THE MOU:

(i) Contrary to wtiat is falsely contended by RIL, MOU did not provide that the commercial terms of supply of gas H

914 SUPREME COURT REPORTS [2010] 5 S.C.R.

A would require GovernmenUstatutory approval.

(ii) MOU merely referred to applicable regulatory and other approvals as RIL would require to engage in and carry on the gas exploration and production business." B These defenses of RNRL absolutely hold no water. The entire gas supply section of the MoU deals primarily with the issue of quantum and by reference to NTPC terms, price and tenure, as has been repeatedly contended by RNRL itself. To now turn around and claim that the governmental approvals c mentioned in that section refer to RIL's business of oil production and exploration is untenable. This is further evidenced by at least two other factors. The first one relates to RNRL's total failure to rebut the inferences drawn by Shri Harish Salve from the fact that ADA Group and RNRL's executives had D accepted that NTPC draft agreements from May, 2005 were to be the basis for gas supply agreements and those draft NTPC agreements specifically provided for governmental approvals. The second factor, equally striking, is that in the letter dated February 28, 2006 in which RNRL strongly protested the E GSMA & GSPA, RNRL did not protest the terms that governmental approvals were required. In the annexure to the said letter, in which differences between the MoU and tht;i gas supply 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 ail those details. We conclude that ADA Group and subsequently RNRL was always aware that under the PSC the Gol had a right to frame policy and approve price formula/basis applicable to the sale of all gas produced from KG-D6.

RELIANCE NATl:JRAL RESOURCES LTD. v. RELIANCE 9·15 INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

DOCTRINE OF IDENTIFICATION: A

148Copy pinpoint148. 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, w~o 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, in as much as MDA had agreed to the gas supply agreements as provided for in the MoU, it should be deemed that the Board and the Company also agreed to the same. Consequently his argument is that th~ Mou is binding on RIL.

149Copy pinpoint149. We disagree. Doctrine of Identification as developed by the courts is typically applicable in criminal and tortious liability cases. Even assuming that it is applicable in matters such as this case, nothing really turns upon it in the factual matrix of this case. It is a fact that the Board in mid 2004 had vested a substantial portions of its powers on MDA but retained the powers that only it could exercise. The crucial fact is that E ADA had agreed that the agreements entered into with MDA as a part of the MoU be mediated through the Board in the form of a reorganization, and the Board thereafter acted independently. This is amply evidenced by the Board insisting that governmental approvals were necessary for gas supply agreements, wh"ich RNRL claims were not a part of the MoL.c If that be the case, for the sake of argument, then it only strengthens the finding that the Board acted inElependently and provided that "suitable arrangements" needed to be put in place with respect to gas supply. Moreover, it is absolutely clear that the personnel from both ADA and MDA Group participated in the discussions leading up to the Board resolution approving the Scheme as presented to the shareholders and the stakeholders. The same Scheme was also approved by over 99% of the shareholders, which would mean that ADA himself H

916 SUPREME COURT REPORTS (2010] 5 S.C.R.

A also approved the Scheme as presented. Further, given the finding above by us that ADA and ADA Group members knew that government approvals were necessary and these are a part of general business risks that the ADA Group undertook, we fail to see what is left to impute to any one. Further, ADA was B a member of the Ambani family and a powerful shareholder who would have obviously had deep connections in the Company's management. To claim that he did not know what was going on with respect to how the Scheme was ~oing to be framed and have the changes made in accordance to what he wanted, if acceptable to others, is simply unacceptable. Further, the active participation of the lawyer - who had framed the MoU and was advising ADA on gas based energy production business -in the relevant Board meetings in which gas supply agreements were 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.

150Copy pinpoint150. 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:

151Copy pinpoint151. 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 H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 9'17 INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] effectuate the scheme one way or the other. They relied upon A S.K. Gupta (supra).

152Copy pinpoint152. Shri. Nariman argued that Section 392 of the Companies Act, 1956 appears to have been enacted to bring the provisions of Section 391 on par with the provisions of 8 Section 394. To this effect he pointed out to the differences between Section 394, which he stated was a complete code because it included powers of supervision in the past-sanction scenario, and Section 391 which does not have similar provisions. Mr. Nariman, relying on the decision of this court in Miheer H. Mafatfa/ (supra) submitted that the company court's C jurisdiction is peripheral and supervisory and not appellate, and further that the power to enforce a compromise or an arrangement by way of modification does not extend to substantive modifications to the scheme itself as approved by the shareholders. The power of modifi~ation, pursuant to D Section 392, cannot be greater than the power to sanction the scheme. In this regard he also argued that the ratio of S.K. Gupta (supra) should be construed .to be that courts have the power to modify terms of the scheme to remove impediments and the like to make the scheme function properly so long as E the basic fabric of the scheme is not affected. According to Shri Nariman, the judgment of this Court in Meghal Homes (P) ltd. (supra) sets out the correct position in which it was stated in para 54 that: F "... Section 392 of the Act. .. only gives power to the Court to make such modifications in the compromise or arrangement as it may consider necessary for the proper. working of the compromise or arrangement. .. it cannot be understood as a power to make substantial modifications G in the scheme approved by the members in a meeting called in terms of Section 391 of the Act." 0

153Copy pinpoint153. However wide the powers of the courts may be, they cannot be so wide as to order supply of gas in contravention H

918 SUPREME COURT REPORTS [201 OJ 5 S.C.R.

A of government policies, the constitutional obligations th:lt the Gol must bear in mind when formulating such polir;c..; and in contravention of broader public interest. The Division Bench erred by holding that certain quantum of ilatural gas stood allocated to RNRL. The error is on account of both a B misinterpretation of the PSC and also public law. Apart from that, both the Learned Single Judge and the Division Bench below have erroneously held that the MoU's gas .supply section be read into the Scheme thereby effectively substituting the phrase "suitable arrangements" in Clause 19 to mean the gas c 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.

154Copy pinpoint154. The ratio of S.K. Gupta (supra) is that under Section D 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. I

155Copy pinpoint155. It is true that in paragraph 26 of the said decision it was stated that if "something can be omitted or something can be added to a scheme of compromise by the Court, on its own motion or on the application of a person interested in the affairs of the company" then there ought not to be any justification for restricting the meaning of the word of modification and whittle H

RELIANCE NATURAL RESOURCES i... TD. v. RELIANCE 919 INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

down the powers of the court. However, the next paragraph A holds the key to the judgment that the "basic fabric" of the scheme ought not to be changed. The limit on the powers of the Court to modify by way of even additions or omissions as contemplated is that the "basic fabric" of the Scheme cannot be changed; and according to the said decision, even before s a court could embark upon a mission of suggesting modifications it has to first determine what "modifications are necessary to make the compromise or arrangement workable." Any such determination first has to arrive at a conclusion that the Scheme has become unworkable in its entirety or in a c portion thereof. Arrangements, by their very nature are complex processes involving many elements that may or may not work. In fact in S.K. Gupta (supra) this court recognized that to be the very reason why the legislature in India has given such a power to the courts; and such power can be exercised onlyJo 0 order those minimal modifications that would bring the.. aspect that is not working into a functional zone, with the proviso that at any rate such a modification cannot lead to a change of the "basic fabric" of the Scheme.

156Copy pinpoint156. What does the expression "basic fabric" mean? E "Fabric" can imply both the end result, and also equally importantly, the processes, procedures and steps that were taken to weave the "fabric" of the Scheme. During the course of weaving of the "fabric", decisions could be taken to leave out certain aspects as unacceptable to the Board or the F shareholders and stakeholders or the Court. Further, those processes necessarily involve certain steps in obtaining shareholders permissions. Such processes are the very essence of the fabric and not just some technicalities that are to be consigned to history and ignored in making modifications. G Whatever changes are made can only be minor ones which would not tamper with the essence of the scheme.

157Copy pinpoint157. In this Scheme, the shareholders & stakeholders of RIL would have broadly understood from the Scheme two things: H

920 SUPREME COURT REPORTS [2010] 5 S.C.R.

A (1) that the Gas based Energy Resulting 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 B 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 c tearing apart the "basic fabric" of the Scheme.

158Copy pinpoint158. "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 proceeding~: (i) that the intent was to actually share the benefits <1f the production and exploration activities, including the benefit of internal use of natural gas; (ii) that because the same was not possible on account of statutory and contractual problems, the gas supply agreement was a way out; (iii) that the gas be supplied in accordance with the commercial terms regarding quantity, price and tenure in the MoU which were never revealed to them; (iv) that the burden of gas supply would involve the transgression of the boundaries of the PSC from which the value flows to RIL; and (v) that the burden would extend to RIL subsidizing RNRL if it were required to pay a much higher value to Gol than what it receives from RNRL. In contrast to the foregoing, all that the class of members who approved the scheme and the court which sanctioned it would have understood was that normal commercial agreements of supply, that would protect the interests of both parties and also including the clauses of governmental agreements, would be H

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 921

INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] put in place. Such a conclusion would also follow from the main tenet of the Scheme that the two groups were to function independently of each other.

159Copy pinpoint159. If the question regarding what would make the Scheme work had been framed properly by the courts below and they had appreciated the role of the courts better then this case would not have taken the twists and turns that it has. The first question would have been whether the Scheme itself has become unworkable? RNRL's arguments that the gas supply is integral to the whole Scheme are simply an unsustainable proposition. Gas supply is but a part of the Scheme as a whole. The fact remains that RIL can supply gas to RNRL provided appropriate governmental approvals, pursuant to constitutionally permissible utilization policies, are in place; and moreover, the commitment to supply gas in the Scheme was to established gas based energy generating power plants. That possibility still remains. We fail to see where even that aspect of the Scheme has failed to work. We were given to understand that in fact one of the gas based power generating power plants associated with RNRL and ADA Group is in fact being supplied natural gas, all in accordance with the utilization policies set in place by the Gol. If that be the case, then the conclusion that even this small part of the Scheme is not working is completely unwarranted and would not even merit a second look at.

160Copy pinpoint160. The Learned Counsel for RNRL objected to reliance of RIL on the ratio of Miheer H. Mafatla/ (supra), on the ground that it only pertains to the situation at the time of sanction of the scheme and that the ratio of Mega/ 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 H

922 SUPREME COURT REPORTS (2010] 5 S.C.R.

A 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.

161Copy pinpoint161. In the instant case by importing the gas supply B 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.

162Copy pinpoint162. For the view that we have taken it is not necessary to go into the protested points regarding the Identity of the Buyer, Definition of Affiliate and Limitation of Liability.

CONCLUSIONS: D

163Copy pinpoint163. In the result, we hold that:

(i) both the learned Single Judge and the Division Bench committed a serious error in exercising jurisdiction in the manner they did under Section E 392 of the Companies Act, 1956, for such interference has resulted in the provisions of a document (MoU) which was not before the shareholders supersede the Scheme of Arrangement. Such a document could not have been read into and incorporated in the Scheme propounded by the Board, approved by the shareholders and sanctioned by the Company Court;

(ii) the courts below having rightly directed the parties to negotiate, and further having rightly refused to grant the prayers in the Company Application, however, fell into error directing the MoU to be binding and the basis for further negotiations between the parties. MoU is a private pact H

RELIANCE NATtJ~l RESOURCES LTD. v. RELIANCE 923 . INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.] .

between the members of Ambani family which is_ A not binding on RIL;

(iii) the EGOM decisions, regarding the utilization of the natural gas and the price formula/basis etc. do not suffer from any legal or constitutional infirmities. B They shall apply to all supplies of natural gas under the PSC. The parties are bound by the governmental policy and approvals regarding price, quantity and tenure for supply of gas;

(iv) under the PSC in issue the Contractor (RIL) does not become the owner of natural gas, and there is nothing like specified physical quantities of natural gas to be shared by the Gol and the Contractor;

(v) we, accordingly, direct the parties to renegotiate as to the suitable arrangements for supply of gas de-hors the MoU. SuclJ renegotiations shall be within the framework of governmental policy and approvals regarding pr'iC:e, quantity and tenure .for supply of gas. The renegotiations shall c~mmence within eight weeks from today at the initia ive of RIL and shall be completed within a period of six weeks from the day of commencement of negotiations.

Accordingly, the judgments of the learned Single Judge and the Division Bench of the Bombay High Court are set aside and we dispose of all the appeals without any order as to costs. Intervention Applications do not require any adjudication. They are also accordingly disposed of.

164Copy pinpoint164. Before we part with the case, we consider it appropriate to observe and remind the Gol that it is high time it frames a comprehensive policy/suitable legislation with regard to energy security of India and supply of natural gas under production sharing contracts. H

924 SUPREME COURT REPORT-$ (2010] 5 S.C.R.

165Copy pinpoint165. 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 B dispassionate assistance rendered by learned Solicitor General and his team of Additional Solicitors General.

ANNEXURE

GLOSSARY OF TERMS c ADA Anil D. Ambani

APM Administered Price Mechanism

BCF Billion Cubic Feet D BCM Billion Cubic Meters

CG Corporate Governance

CNG Compressed Natural Gas E DGH Directorate General of Hydrocarbons

EGOM Empowered Group of Ministers

F Gol Government of India

GSMA Gas Sales & Master Agreement

GSPA ,Gas Sale & Purchase Agreement

G GUP G~s Utilization Policy ' IDP Initial Development Plan

KDA Smt. Kokilaben Dhirubhai Ambani

RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 925

INDUSTRIES LTD. [B. SUDERSHAtJ REDDY, J.] KG-DWN-98/3 : KG-06 A

LNG Liquefied Natural Gas

MC Management Committee

MDA Mukesh D. Ambani B

mm Btu Million British Thermal Units

MMSCMD Million Standard Cubic Meters Per Day

MoPNG Ministry of Petroleum and Natural Gas c ·Mou Memorandum of Understanding

NELP New Exploration Licensing Policy D NTPC National Thermal Power Corporation

P1 Reserves Proven Reserves

P2 Reserves Probable Reserves E P3 Reserves Possible Reserves

PNG Petroleum and Natural Gas

PSC Production Sharing Contract F PSU Public Sector Undertaking

REL Reliance Energy Limited

RIL Reliance Industries Limited G RNR,L Reliance Natural Resources Limited

RPPL Reliance Para1ganga 'Power Limite,d

Scheme Scheme of Arrangement H