THIS STATEMENT IS DESTINED TO CREATE HISTORY IN CORPORATE GOVERNANCE...............
Every Investor,Corporate Manager or student........must learn.......
Where a Chairman of a company listed in India has the courage,Where the mind is without fear......
(very soon other Stakeholders and Chairman of RIL will also respond.......more Milestones in the History of Corporate Governance)
Reliance Anil Dhirubhai Ambani Group (R-Adag) chairman Anil Ambani
addressed the annual general meeting of Reliance Natural Resources
Limited (RNRL) in Mumbai today. RNRL is currently engaged in a bitter
court battle with elder brother Mukesh Ambani's Reliance Industries
Limited over the use of gas from the Krishna-Godavari basin. Following
is the chairman's speech:
My dear fellow Reliance Natural Resources shareowners,
A warm welcome to each one of you to the 9th Annual General Meeting of
our company. It has been a little over three years since we first came
together to write a new chapter in our company's growth and evolution.
In this time, our shareowner family has grown to over 26 lakh members,
adding over 6 lakh new members since the demerger in 2005. We are now
the second largest shareholder family in the country, after our group
company Reliance Power, which has a shareholder base of 37 lakh members,
by far the largest in India.
Performance Review
The company's accounts for the year ended March 31, 2009, along with the
directors' report, letter to shareowners, and management discussion and
analysis have been circulated to you.
With your permission, I would like to take them as read.
The gas supply contract with Reliance Industries Ltd (RIL) is our
company's primary asset and contributes most of its value, affecting the
very basis for its creation. Accordingly, I propose today to comment
extensively on recent developments in this matter, covering four main
areas:
1. RIL's dishonourable conduct in persistently refusing to honour the
gas supply contract.
2. The exorbitant profits RIL is seeking to make at the cost of the
power and fertiliser sectors in the country.
3. The apparently biased and partisan role of the petroleum ministry,
and
4. The reality of the gas demand-supply scenario in India and its
implications on long-term pricing.
The Founder's Dream
At the outset, I am happy to note that Reliance Industries Limited
(RIL), a company founded by my father, the late Shri Dhirubhai Ambani,
with which I was associated for nearly 25 years and which is still very
close to my heart, has started the production of natural gas from KG
basin recently - although seven years after discovery, and with huge
time and cost overruns.
Nonetheless, my heartiest congratulations to the RIL team for achieving
this marvellous feat, and realising one of Dhirubhai's life-long dreams.
This significant domestic gas production in India will broadbase our
energy basket and contribute to our long-term energy security.
Gas Supply From RIL
Last year, when we met at the AGM, I shared with you the history behind
the creation of RNRL.
To recap briefly, our company was created through a demerger of RIL and
was to be responsible for the supply and transportation of gas from the
various gas fields of RIL to our group companies for power and other
projects.
This arrangement was approved, by all of you, as shareholders of RIL.
To ensure that the benefits of the gas business were rightfully enjoyed
by the over two million shareholders of RIL, they were all allotted
shares - free-of-cost - in the new company, Reliance Natural Resources.
Despite the binding commercial agreement that exists between RIL and
RNRL for the supply of gas, it is unfortunate that RIL has tried every
trick in the book - and, apparently, several outside the book - to back
out of its solemn, legal, and contractual obligations.
Following the failure of our every attempt at talks and conciliation for
nearly 18 months, we had no option but to approach the Bombay High Court
to ensure that RIL fulfils its gas supply obligations to our company.
I am happy to report that the hon'ble Bombay High Court has delivered
three judgments in the past two years on this matter, and in each one of
them, our stand has been vindicated, and RIL's claims summarily
dismissed.
Most recently, the division bench of Bombay High Court in its judgment
of 15 June 2009 has categorically ruled that
1. The RNRL application is maintainable, meaning our claims against RIL
are totally justified.
2. The quantity of gas to be supplied by RIL to RNRL is 28 million cubic
metres (plus another 12 in case RIL does not supply gas to NTPC), and
shall be binding.
3. The sale price of gas shall be US $2.34 per mmbtu.
4. The tenure of gas supply shall be for the full 17 years.
5. Parties to enter into a bankable gas supply agreement within 30 days.
6. The corporate restructuring MoU between the two groups is upheld,
benefiting over 15 million shareholders.
I would specially like to mention here that the Bombay High Court gave
this verdict AFTER hearing the government of India for over six months
on the interpretation of its production-sharing contract (PSC) with RIL.
Clearly, the hon'ble high court's order is a body blow to RIL.
In the last five weeks, there has been a spate of motivated and
misleading reports, even official statements from certain quarters, not
to mention an unnecessary legal intervention by the petroleum ministry
in the hon'ble Supreme Court - to sow the seeds of confusion and take
away from the clear and comprehensive nature of the Bombay High Court
verdict.
Outraged by this vicious and false propaganda, several of you have
approached me to urgently clarify these issues at the AGM today and
dispel the lies, myths, and untruths being propagated by vested
interests.
Let me, therefore, directly deal with your questions, concerns, and
doubts on this very critical matter affecting the very foundation of
your company.
Question: The petroleum ministry says that the two brothers are fighting
over something that doesn't belong to them? That this is a private
battle over a sovereign national asset. That the KG basin gas belongs to
the government and people of India.
Answer: I am sorry to say that facts are deliberately being twisted to
suggest that the corporate agreement between RIL and RNRL amounts to a
private division of sovereign national assets.
This bogey of sovereign ownership is being raised with the sole purpose
of attempting to bail out RIL and help them renege on their contractual
commitments. The fact is, we are not claiming any rights to the
ownership of the KG basin gas fields. We are claiming gas only from
RIL's lawful share or its rightful entitlement of production of gas
under the PSC.
More importantly, our claim is entirely in line with the government's
own stand on the floor of Parliament, not once or twice, but on at least
15 different occasions in the past three years.
To quote just one instance, on April 22, 2008, in a specific reference
to the RIL-RNRL corporate dispute, the government told Parliament in a
written answer, and I quote: "As per the PSC, the contractor - that is,
RIL - is entitled to sell its participating share of gas in cost
petroleum and profit petroleum."
Simply put, if RIL is entitled to sell its share of gas, as provided for
in the PSC and as confirmed by the government in Parliament on so many
occasions, where does the question then arise of our corporate agreement
carving up national assets or property?
Clearly, this bogey is being raised by those seeking to help RIL at any
cost, for reasons that no one can fathom...
Q: Why has the petroleum ministry's role suddenly escalated in the
RIL-RNRL gas dispute?
A: I am as surprised by this escalation as all of you and most other
observers. Even as recently as 2 July 2009, two weeks after the Bombay
High Court had delivered its judgment, the government told Parliament in
a written answer that the court case between RIL and RNRL is, and I
quote: "a commercial matter between two companies".
The petroleum ministry has publicly sought to justify its escalated
intervention on the ground that it didn't know the terms of the RIL-RNRL
gas arrangement till recently when they were revealed during the course
of the Bombay High Court hearings. I'm afraid this stand is contrary to
facts on record.
The petroleum ministry has been in possession of all relevant details of
the RIL-RNRL gas supply agreement for at least three years, that is,
since 2006, if not earlier. In April 2006, RIL provided all details of
the gas supply arrangements to the petroleum ministry. This is a matter
of official record.
In June 2006, three years before the Bombay High Court delivered its
judgment, RNRL submitted full details of its gas supply aqreement with
RIL to the petroleum ministry. This again is a matter of official
record.
The Bombay High Court order of June 2007 outlined all terms of the gas
supply agreement, including the initial supply of committed quantities
of gas, and the sharing of option gas. Way back in September 2007, when
the empowered group of ministers (herein after referred to as cabinet
sub-group for convenience) met, it took note of the full details of the
gas supply agreement between RIL and RNRL. The Union minister for
petroleum was an integral part of the cabinet sub-group and represented
the petroleum ministry's point of view. The cabinet sub-group actually
went further, and recognising the rights of the parties, categorically
recorded that its decisions were "without prejudice to the NTPC vs RIL &
RNRL vs RIL cases which are sub-judice".
This has been reiterated, reinforced, and restated twice in the cabinet
sub-group meetings, in October 2008 and January 2009, as per the minutes
filed by the government in the Bombay High Court. In other words, the
cabinet sub-group has consistently and rightly stated that its decisions
would not affect the rights of RNRL and NTPC against RIL, and the
court's decisions would be binding.
Through this entire period, the petroleum ministry was a party to, and
concurred with, this decision, and did not make any attempt to question
the corporate restructuring agreement between RIL and RNRL. It is only
now, after the adverse verdict of the Bombay High Court against RIL,
that the petroleum ministry has suddenly decided to intervene in this
purely corporate dispute.
Apparently, the petroleum ministry has used its discretion and not even
thought it fit to take the approval, I am informed, of the cabinet.
This, remember, is a matter which involves two of India's largest
business houses, over 15 million shareholders, global implications for
the energy business, and three unambiguous judgments of the Bombay High
Court.
Yet, the petroleum ministry has unilaterally gone ahead and taken a
stand which runs contrary to that of the cabinet sub-group - apparently
without even consulting it - even though that group represented the
broader, collective wisdom of several other ministers, including, inter
alia, the ministers of finance, law, power, and fertilisers! At least on
the face of it, quite unusual and puzzling!
There are some other curious aspects of the manner in which this case is
apparently being handled. I have been informed that the ministry of law
and justice has issued written instructions to all ministries, by a
circular dated 3.11.2008, that in all sensitive matters, "written
submissions/affidavits should be filed in the Supreme Court only after
the same are vetted/approved by the department of legal affairs,
ministry of law and justice."
Based on all public comments of the petroleum ministry, it clearly
considers this to be a sensitive matter. Nonetheless, it has reportedly
chosen not to take the requisite approval of the ministry of law and
justice. Maybe, technically, it has the powers to go ahead on its own,
but given the several inter-ministerial deliberations that had already
taken place on the subject and the substantial issues involved, would it
not have been more appropriate and transparent to at least consult the
law ministry? Quite the contrary, it appears!
According to media reports, the petroleum ministry, in an unprecedented
step, reportedly wrote to the law ministry earlier this month, and
simply informed them that copies of SLPs/affidavits would be made
available by the advocates of the petroleum ministry, and the same
should be filed in the Supreme Court!
Not just that, the petroleum ministry further instructed the law
ministry that no counsel should be instructed to appear in the matter
without their prior approval, as the matter was "sensitive".
Also, according to further media reports today, the senior government
law official who represented the petroleum ministry before the Bombay
High Court informed it that:
- submissions should be confined to the grievances as an aggrieved party
arising out of the judgment of the Bombay High Court.
- the challenge to the MoU should only be in to the gas sale agreement
and not to other matters
- the final SLP was not shown to him! Clearly, his advice was not
followed!
Finally, it has been brought to my attention that one of the senior
advocates of the petroleum ministry, who I have no doubt is a most
accomplished person with the highest degree of legal expertise, is the
same person who sent a formal complaint to Sebi [the Securities and
Exchange Board of India] in October 2007 against the Reliance Power IPO
and me personally. It's a different matter that Sebi and the hon'ble
Supreme Court allowed the IPO to proceed, overruling all complaints.
Media reports further suggest that some officials in the petroleum
ministry had observed that the services of this learned senior advocate
should not be considered "due to inadequate understanding and
presentation of cases before the Hon'ble high court...", but this was
overruled and he still represents the petroleum ministry!
Maybe all just an accident? Or a coincidence?... I leave it to your
judgment!
It doesn't stop here... it actually gets better... sorry, worse!
Frankly, if the petroleum ministry is genuinely aggrieved - and if they
honestly believe that RIL has violated the terms of the PSC by allegedly
trying to divide national property - why don't they exercise their
powers and terminate the PSC, and take back the ownership of the gas
fields from RIL, when the provisions exist for them to do so?
Since the corporate agreements between RIL and RNRL have been known to
them for three years, what have they been waiting for? Why are they
belatedly rushing to the Supreme Court, challenging commercial contracts
between two corporate entities?
Q: Why is the petroleum ministry's stance different now than it was in
the Bombay High Court?
A: I wish I knew... Before the Bombay High Court verdict, the ministry
did not ask for cancellation or annulment of the MoU! In fact, during
the high court hearing, the petroleum ministry made certain submissions
regarding its views on gas supply, and its interpretation of the PSC,
which ran completely contrary to their earlier stated positions on the
issue.
However, when our counsel requested the court's permission to
cross-examine the ministry's officials, the latter quickly withdrew all
their affidavits... Again, on the face of it, appears quite unusual...
and puzzling!
Q: Could the petroleum ministry then be intervening because the high
court judgment affects the government's interests adversely?
A: Not at all. The fact is that the Bombay high court has delivered not
one but three judgments on the issue, each one of which, including the
most recent one delivered on June 15, fully protects the government's
interests and revenues. This is also completely consistent with our own
legal position.
What is being deliberately distorted is that, as per the PSC, there is a
clear distinction between the sale price of gas, which is to be fixed by
the contractor (RIL), and the price to be adopted for determining the
government's royalty and share of production, normally referred to as
valuation, which is approved by the government.
This is not our interpretation of some very complex legal clauses - this
is the view of the government itself, consistently affirmed on the floor
of Parliament! On 30 August 2007, the government told Parliament in a
written answer and I quote: "As per the PSC signed by the government
under the New Exploration Licensing Policy (NELP), the operators have
the freedom to market the gas in the domestic market on an arm's length
basis. The government does not fix price of gas. The role of the
government is to approve the valuation of gas for the purpose of
determining government take."
Again, the government told Parliament on 27 November 2007 that "[it]
does not fix the price of gas". The Bombay High Court, too, has upheld
this legal position, and said that as long as the government gets its
royalty and share of production on the basis of the government-approved
price for valuation, they have no concern with the sale price at which
the contractor [RIL] sells the gas.
The government's approved gas price is thus not a sale price - it is a
price the government has fixed for valuing its own share of profit
petroleum. To illustrate: the situation is similar to that of stamp duty
on property transactions. Just like stamp duty is based on the
government's reference rate and has no relationship to the actual sale
or purchase price, the government-approved price of gas is a reference
rate that is used to calculate the government's share of profit
petroleum, but does not become the sale price.
It is just like when you buy a flat at a price of Rs10 lakh, the
registrar of properties may value the flat at Rs20 lakh and charge stamp
duty on Rs20 lakh. But the registrar does not go on to say that you must
pay Rs20 lakh to the seller - and the registrar certainly does not go
and file a case in the Supreme Court to make you pay Rs20 lakh! But this
is exactly what the petroleum ministry's stand means!
It has contended before the Supreme Court that it will not only value
the gas, but also fix the gas sale price that RNRL must pay RIL, even
though in Parliament it has repeatedly said that "government does not
fix the price of gas!" For the record, I want to emphasize that
government does not stand to lose a single rupee, even if RIL sells at a
lower than the approved valuation price to any party.
And here is the most mystifying part, something very few people are
aware of. Going by the petroleum ministry's determined opposition to the
Bombay High Court's judgment, it will be fair to assume that this is
their way of protecting the financial interests of the government.
Appears far from it... very far indeed!
As per the terms of the PSC, if RIL gets a higher sale price from us
based on the price the petroleum ministry wants to fix for the first few
years, 99% of all revenues and profits will go to RIL, and only a measly
1% will accrue to the government! Of the initial revenue of Rs50,000
crore, RIL gets almost all, i.e. Rs49,500 crore vs the government's
Rs500 crore. Makes you wonder why the petroleum ministry is pushing so
hard for higher gas prices, when 99% gains will go to RIL!
The irony is that even RIL's own international partner in the KG D-6,
Niko Resources, has written to the government that as per the PSC, the
petroleum ministry has no powers to fix the sale price! Other global
petroleum industry majors, including BP and Shell, have made a similar
formal submission to the government, arguing that any attempt to fix the
price would violate the market freedom provided under the PSC. RIL had
itself opposed this position earlier, but now, for obvious reasons, is
finding great virtue in toeing the petroleum ministry's line!
Q: If all this is true, then why is the petroleum ministry behaving in
this partisan manner?
A: What people say is that RIL is apparently firing from the shoulders
of the petroleum ministry to renege on its contractual commitments to
NTPC and RNRL. It is worth emphasizing that we are not the sole victims
of RIL's machinations. There is also government-owned NTPC, India's
largest power utility and a navaratna. People say there is a history to
the RIL-RNRL dispute - the corporate restructuring, and so on. But so
far as the RIL-NTPC dispute is concerned, obviously there is no ego, no
emotions, no family, and no corporate restructuring - it is plain and
simple corporate greed.
This is a unique case in the history of independent India where the
actions of one arm of the government, that is, the ministry of
petroleum, is ostensibly harming the interests of another, ministry of
power's jewel-in-the-crown NTPC - all for the sake of a monopolistic gas
producer, RIL.
NTPC has been fighting RIL for supply of gas from KG-D6 fields.
Initially, RIL had willingly and voluntarily quoted to supply gas to
NTPC at US $2.34 per unit, in a global competitive bid, and the dispute
was only as regards certain terms and conditions of the agreement.
Now, based on the petroleum ministry's revised stand, RIL has told the
courts that it cannot supply gas at the earlier contracted price of US
$2.34 even to NTPC! Like any other unbiased observer of this unfolding
crisis of credibility, I am deeply dismayed by this apparently partisan
and biased approach of the petroleum ministry in favour of RIL, which is
hurting not just RNRL, but also the government-owned NTPC.
NTPC's case against RIL has been going on for nearly three years in the
Bombay High Court, and if RIL's current delaying tactics are allowed to
persist, it will continue for much longer.
Q: Has the petroleum ministry always behaved like this?
A: Definitely not. It is evident that the apparently biased stance
commenced in 2006, coinciding with changes in the ministry. I am not
trying to cast any aspersions on the integrity or motives of individuals
here - I am sure they have good reasons for their stance. I am sure all
private companies in India wish that if they made commercial decisions
they wished to get out of, they too had a saviour to help bail them out
- as is the case for RIL!
Q: Will this intervention by the petroleum ministry have any long-term
implications for the business environment in India?
A: The petroleum ministry's stance is, in effect, that it will solely
decide:
- who should sell gas
- to whom,
- at what price
- and in what quantity,
- and when
- without any heed to commercial considerations or contractual
provisions!
In complete reversal to the entire direction of economic reforms, being
implemented by our respected prime minister, Dr Manmohan Singh, the
petroleum ministry is regrettably pursuing a different path, seeking
perhaps a return to the command-control elements of the dismantled
'licence-permit raj'!
Through its intervention, the ministry is aiming to rewrite the PSC
after nearly 10 years, and also seeking to cancel a contract between
third-party corporate entities! What, then, is the sanctity of a
contract, which is the fundamental cornerstone of any law-abiding,
market-driven economy? And will this not set a precedent, allowing any
ministry to alter any contracts in future at will?
Clearly, the petroleum ministry's unfortunate intervention in a
corporate commercial dispute in this manner, if permitted to continue,
will erode investor confidence, and thwart the government's efforts to
attract investments into India. This will also, naturally, have adverse
policy implications for private investments in all natural resources,
which are subject to similar considerations.
Q: What about RIL? Why is it not honouring its commitments?
A: I am deeply shocked and saddened by RIL's conduct in this matter, and
its blatant refusal to honour a bona fide commercial agreement. Let's
remind ourselves that RIL is no ordinary company. It is India's largest
private-sector company - a proud creation of India's greatest
entrepreneur, my late father, Shri Dhirubhai Ambani. What it does, the
signals it sends out, have relevance not just for its own business
partners but for India at large. And what RIL has been communicating in
the last few years is that it has no regard for its own solemn word, no
time for values, no respect for the sanctity of contracts. And, most of
all, no morality in its headlong pursuit of corporate greed.
The most important word for Shri Dhirubhai Ambani was TRUST and that
word has, unfortunately, gone missing.
RIL has shown no inclination, desire, or urgency to comply with the
judgments of the Bombay High Court, even though none of them has been
stayed by a higher court. Indeed, the actions of RIL have resulted in
existing customers with stranded assets filing a spate of unnecessary
petitions in the Supreme Court, even though we have made it clear that
there will be no disruption of gas supply to any existing or
priority-sector user if gas is supplied to RNRL in the interim as prayed
for by us in the Supreme Court.
Q: But why should RIL supply gas to RNRL at a preferential price lower
than the price of US $4.20 per mmbtu based on a private family
settlement, when others are paying that higher price?
A: There are no preferential or low prices. The price of US $2.34 was
not decided by two brothers on the dinner table. Nor is it part of some
private family arrangement. The price of US $2.34 was approved by RIL's
board of directors nearly five years ago and has been duly recorded in
the commercial agreements signed by RIL as a properly constituted legal
corporate entity, with all relevant authorisations. All these facts are
recorded in the recent order of the Bombay High Court.
The proposed gas supply arrangements were also part of the publicly
disclosed and widely circulated demerger scheme:
- approved by RIL's board,
- approved by over 2 million shareholders of RIL,
- approved by the Bombay High Court,
- after receiving the central government's no-objection certificate.
In other words, everybody, including the petroleum ministry, had an
opportunity to raise objections against the de-merger scheme, but they
didn't do so.
Secondly, ours is not some arbitrary price that came from nowhere. This
price was discovered in an international competitive bid floated by the
government-owned NTPC in 2004, in which RIL voluntarily and
unequivocally agreed to supply gas at US $2.34; a price that was
authorised by the RIL board.
RNRL's gas supply agreement with RIL, finalised at the same time as the
RIL-NTPC agreement, was based on this competitive arm's length price,
discovered through a full-fledged competitive global bid.
Unfortunately, the later price discovery of US $4.20 by RIL (for
valuation purposes) is completely flawed. The formula was never approved
by the petroleum ministry prior to the orchestrated tender by RIL where
participants were invited to bid on a nominated basis. The formula as
constructed is not rational, and does not pass on any real benefit to
the consumer, even if the crude price was to drop from US $60 or US $30!
Moreover, the price has been decided for only five years, and it is
unlikely that any new investments in greenfield power projects would
materialise on the basis of a five-year contract and, more importantly,
on a very high gas price.
NTPC, the largest and most experienced power utility in India, with all
its financial strengths, has not gone ahead with the construction of the
2600MW Kawas and Gandhar expansion projects as it does not have assured
gas supply contract and is finding it unviable to accept gas at a
delivered price of nearly US $7 per mmbtu (including transportation
costs).
Any price for valuation determined for a short-term commitment of five
years based on needs of plants sitting idle, and desperate for gas at
any price, cannot have any relevance for long-term, fixed price, 17-year
gas supply contracts on take-or-pay basis, for setting up greenfield
power and fertiliser projects involving investments of tens of thousands
of crores.
Q: But isn't US $4.2 the right price for domestic gas, given the
scarcity of gas in India?
A: This entire concept of scarcity of gas in India is actually a myth -
in the long run. The gas production in the country is set to double to
over 200 million cubic metres of gas per day in the near future, based
on further production from RIL's KG-D6 fields alone. In addition, there
will be production from gas reserves already found by various other
players like GSPC and ONGC. Besides, RIL has so far explored only 4% of
its total fields in KG-D6. The balance 96% area is still to be explored,
and given past finds, it is reasonable to expect similar huge
discoveries of reserves in the future.
In a few years, India will become a gas-surplus nation, provided
contractors are subject to an independent process of assessment and
verification, which prevents the hoarding, under-reporting or
sub-optimal production of gas. A gas price of US $4.2 is exorbitant and
can in no way be justified.
One must bear in mind that gas prices in the international market have
crashed by as much as 80% in the last few months. Yet, that seems to
have made no difference to the petroleum ministry's push for even higher
prices in India, much to the detriment of power and fertiliser
consumers.
The situation seems even more bizarre if one looks at other markets in
the world. In the Middle East, gas prices are currently ruling at US
$1.5, or just under one-fourth of the delivered price in India. India
now has among the highest short-term gas prices in the world, nearly 30%
higher than even in the UK and the US, where short-term prices are
currently hovering around US $3.5.
In our view, it would be against public interest to price gas in India
for any user above US $1.50. Natural gas should, in fact, be priced
substantially lower than US $2 for all power and fertiliser customers.
Of course, it is strange that in a democratic country like India, we
have to pay for a domestic resource like gas in dollars when the end
users of this resource, the millions of power and fertiliser consumers
in this country, pay for it in rupees.
The simple fact is that RIL has a short-term monopoly, and to perpetuate
this monopoly, and earn disproportionate profits at the cost of the
people, RIL is spreading misinformation in the public domain to ensure a
higher price for its gas.
It is a huge scandal that at the price of US $4.20, RIL wants to make
super-normal profits of over Rs50,000 crore, which will ultimately be
paid for by hundreds of millions of end consumers in the power and
fertiliser sector. People wonder if the petroleum ministry realises that
its efforts to make this the uniform price for all users will benefit
only one monopolistic supplier, RIL, at the expense of the whole
country!
As per analyst reports, the entire KG basin has been declared
commercial, when only 4% of it is actually being exploited, thus
profiting RIL for many, many years to come.
Q: What will be the impact of a gas price of US $4.2 for the country?
A: The burden of the higher gas prices will eventually be borne by
hundreds of millions of power and fertiliser consumers. The higher gas
price demanded by RIL increases the cost of power for consumers by as
much as Re1 per unit.
The story does not end there. The real price of gas is not US $4.20, but
close to US $7 per mmbtu, because the delivered price to bulk consumers
would include a huge additional component of transportation costs. At
these delivered prices, while some limited stranded power capacities may
function, I'm afraid it will not be possible to achieve the prime
minister's vision of 'power for all by 2012' - and all this, for the
sake of enriching one corporate entity, RIL.
I may add that there is a strong case to revisit the issue of
transportation costs for KG-D6 gas, probably the highest in the world,
by the PNGRB, the pipeline regulator. Presently [sic], these are pegged
at a prohibitive US $1.25, or 30% of the base gas price! Further, with
new tax breaks recently announced, the entire cost of setting up the gas
pipeline network has been allowed to be written off in the very first
year - a special and unique benefit not given to any other
capital-intensive sector.
For end users in both power and fertilisers, who ultimately pay for the
pipeline network, it is only fair that the benefits of these tax breaks
be passed on, and gas transportation costs be brought down to near zero.
I hope the regulators in gas and power sectors such as PNGRB, CERC, and
SERC, will examine this aspect more carefully.
Ironically, these transportation costs do not even go to RIL and its
millions of shareowners, but to a company called Reliance Gas
Transportation and Infrastructure Limited (RGTIL). In 2005, when I was
the vice-chairman and managing director of RIL, RGTIL was a 100%
subsidiary of RIL. But soon after I resigned, it ceased to be a
subsidiary; having been sold to the promoters of RIL for a princely sum
of Rs5 lakh and turned into a privately held company.
As many of you are shareholders of RIL as well, just like me, we should
all note that this company is no longer owned by RIL, but by RIL's
promoters.
Q: Won't RIL suffer huge losses at a low gas price of US $2.34?
A: The production cost of KG basin gas is only Rs43, or 89 cents, as
submitted by RIL to the petroleum ministry. Therefore, at a price of US
$2.34 applicable to NTPC and our company, RIL makes a profit of over
100% on its cost of production, which translates into over Rs30,000
crore just from NTPC and us over the lifetime of our contracts.
Accordingly, there is no question of RIL suffering a loss - it will
still make good profits at US $2.34 as confirmed by RIL's counsel in the
Bombay High Court. The problem is it wants to make super-normal profits
- talk of greed vs need!
I would also like to take this opportunity to comment on the capital
expenditure claimed to be incurred by RIL on the KG-D6 fields. Based on
the way the PSC is structured, all of us who buy gas from RIL are
effectively paying for the entire capital expenditure. This is because
as per the PSC, RIL is entitled to first recover its entire capital
expenditure from the revenues from sale of gas, before even the
government gets any meaningful share. The more RIL claims to have spent
on capital expenditure:
- the more we have to pay for gas,
- the less the government gets as its share from the revenues,
- and the more delayed is the timing when the government gets its
revenues.
Clearly, this mechanism embedded in the PSC requires complete
transparency and independent validation of the capital expenditure
claims of RIL - because all of us, a billion Indians, are paying for it!
It may be noted that each and every expenditure of Rs150 crore or more
made by any arm of the government goes to the cabinet committee of
economic affairs for approval. RIL's capital expenditure of nearly
Rs45,000 crore, as confirmed in Parliament by the petroleum minister
just yesterday, is nearly 33% of India's total defence budget. Yet, such
mega expenditure was cleared by a management committee of four,
comprising one junior official each from the petroleum ministry and
director-general of hydrocarbons, and two representatives of the
contractor [RIL].
The budgeted expenditure of RIL for peak production of 40 mmscmd in 2004
was only Rs12,000 crore, which should not have exceeded Rs20,000 crore
when the production was doubled to 80 mmscmd. However, it is shocking
that the capital expenditure has actually gone up by Rs25,000 crore to a
staggering Rs45,000 crore when the output became 80 mmscmd.
Expert analysis shows that if this was gold-plating of costs, the
government could have lost upwards of Rs30,000 crore. When we raised
this issue with the ministry, it appointed a so-called independent
expert to examine the matter. In his testimony, he said, and I quote:
"It has not been possible to study perhaps a few of important documents
which now appear relevant to the exercise. The most important is the
production-sharing contract between government and the operator."
In other words, by his own admission, the expert didn't even read the
terms of the PSC before putting his stamp of approval on RIL's capital
expenditure. I don't know what would be the right term to describe this
elegant audit arrangement - co-option, co-operation, collaboration, or
just collusion... I hope some of our esteemed public accountability
bodies like [the] comptroller and auditor-general (CAG) and Central
Vigilance Commission (CVC) will examine all relevant facts and take
appropriate action against the guilty persons, if indeed they find that
huge losses have been caused to the public exchequer.
Q: What has been the fallout of RIL's conduct on gas-based power in
India?
A: RIL's refusal to honour its binding contractual commitments has
delayed power projects of national importance of 12000MW by five years.
Committed investments to the tune of over Rs50,000 crore have been held
to ransom by RIL. As a result, major power cuts, especially in northern
India, have become commonplace, causing grave hardship to hundreds of
millions of consumers.
Contrary to the myths and rumours that are being deliberately spread by
RIL, we are not seeking to take away the gas for any ulterior,
unidentified, or selfish purpose. We intend to use all the gas for the
generation of clean, green, and affordable power, a priority that has
been duly accepted and endorsed by the government.
If the gas supply contract had been honoured, we would have by now
brought on stream up to 8,000MW Dadri project, overcoming the huge
deficit of power which has afflicted Delhi and large parts of northern
India in the last few years. Let me also add that in January 2009, gas
linkage to our Dadri and other power projects was approved by the
cabinet. Therefore, RIL is solely responsible for the delays in setting
up of these greenfield power projects, including Dadri.
Q: Isn't all this ultimately the fallout of the family dispute?
A: Let me state that the court cases are not a personal fight. There is
no ego... only pain, hurt and emotion... a desire for fairness and
justice. The court cases were essential to enforce the gas supply
agreements and thereby protect and enhance value for over 80 lakh
shareholders of our group and crores of power consumers in the country.
This is in line with the philosophy of our founder chairman Dhirubhai
Ambani, who insisted that we must work for the welfare of our
shareholders. Indeed, we would have acted in the same manner if it were
any other supplier of gas who was denying us our binding gas supply
arrangements.
Let me also remind you that RIL's commitment to supply gas for our power
projects at Dadri and elsewhere dates back to as early as January 2004 -
more than five years back, and much before the reorganisation in 2005.
This was announced in RIL's own media release issued at the time.
In October 2004, a joint board meeting of RIL and Reliance Energy was
held, wherein the directors of RIL reiterated their commitment to the
supply of gas from KG Basin to the Dadri project. So, this is entirely a
corporate dispute - and not at all a personal one.
Q: Wouldn't it have been better if the two companies had resolved this
dispute out of court?
A: We have repeatedly approached RIL in good faith, to sit down together
and amicably arrive at a mutually acceptable solution in the larger
public interest of a rapid implementation of our power projects. But RIL
is only interested in dragging and delaying issues - and does not want a
settlement at any cost.
To give just one example, I offered to personally meet at a time and
place of the Bombay High Court's direction, at an hour's notice, and sit
across the table with my respected elder brother to amicably resolve all
issues. Unfortunately, RIL informed the court that it was not convenient
for him to participate in any such discussions.
Last month, we addressed several letters to RIL to meet and arrive at a
workable agreement as per the high court judgment. RIL refused to
cooperate and instead sent us a letter on July 1, declining to
participate in any such discussions.
Current Status
Our company was formed solely for the supply of gas from RIL to our
group companies for power and other projects. Hence, the gas supply
contracts are critical for the future of RNRL.
Unfortunately, RNRL will become a shell company if the gas supply
contract is not honoured, as has also been observed by the Bombay High
Court in their judgment. Accordingly, we are determined to take all
legal steps for the implementation of this agreement.
The case against RIL in this matter is now before the hon'ble Supreme
Court. We are taking all necessary steps to have the matter finally
decided in the most accelerated time frame possible.
I have full faith in the judiciary of the country and I am confident
that we will, with the support and prayers of our 26 lakh shareowners
and the infinite grace of god, succeed in our endeavour to have the gas
supply agreements with RIL fully implemented. The truth shall prevail.
Before I conclude, I want to thank, on behalf of our over 26 lakh
shareowners, the Bombay High Court for protecting their rights and
giving a clear, comprehensive, and categorical verdict on a corporate
dispute of great national importance.
The corporate restructuring of the Reliance Group, blessed by my
respected mother, Kokilaben, was aimed at enhancing value for millions
of our shareholders and give [sic] concrete shape to our founder
Dhirubhai Ambani's 'well-head to wall-socket' strategy for the Reliance
Group. Over the past five years, I have made every possible effort to
resolve the outstanding issues with RIL so that we can all focus on
realising our founder's dream. But, unfortunately, without any success.
On its part, RIL has repeatedly shown that it will, sadly, stop at
nothing to deny us and our millions of stakeholders what is legitimately
theirs.
As you might be aware, I have recently written to prime minister
Manmohan Singh, on this subject. Dr Singh is globally respected for his
sense of fairness, transparency, and, above all, honesty. I am confident
that he will support the cause of truth and justice, and ensure
neutrality of the government in a purely commercial dispute between two
corporate entities.
Thank you, ladies and gentlemen, for your time, patience, and attention
and overwhelming support to the cause of truth and justice.
End
Credits : Analysts and media
