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Backward Intervention

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The Supreme Court’s decision on the Ambani brothers’ gas fight represents a pyrrhic victory for Mukesh, a loss for Anil and a big win for politicians harking back to the Licence Raj.

Everyone noticed the politics of semiotics; the visual images, or even the lack of them, were unforgettable. On 7 May, when Anil Ambani, with a distinct teeka on his forehead, entered the court, he seemed confident and sure of himself. When he left, he looked a shattered man and some people even sympathised with him. His elder brother Mukesh was absent from court; maybe he didn’t wish to over-react the way he did thumping his fist in the air each time Sachin Tendulkar smashed a boundary during a recent IPL match played by his team, Mumbai Indians.

The politics of the judgment was clear. The Government won, Mukesh was richer by a few thousand crore, and Anil was a vanquished entrepreneur. But as everyone grew obsessed with these ‘clear’ signals that emanated from the Supreme Court (SC), the subtle signs went largely unnoticed, dismissed even by those who habitually read between the lines. In fact, the 2:1 majority order was a win-win only for Indian politicians; it was a win-lose for the Government and Mukesh, and lose-win for Anil.

For, in one stroke, the apex court gave over-riding powers to India’s policymakers, the men in khadi, to decide on every aspect related to the country’s natural resources. Thus, it turned back the privatisation wheel by 360º—back to the 1970s and 1980s—at least in the natural resources sector. Any government will find it tough to embark on that path again. Sure, Mukesh—and also the Government, after some years—can now hope to earn huge profits on gas drawn from the vast Krishna-Godavari Basin that his Reliance Industries Ltd (RIL) discovered and developed off Andhra Pradesh’s coast. Since the SC has said that RIL doesn’t have to supply vast quantities to Anil’s Reliance Natural Resources Ltd (RNRL) at a discount price of $2.34 per unit, it has to be sold at a higher price. But it has also left Mukesh’s backward integration plan in shambles. And, despite the defeat, left Anil with an alternate option to pursue his ‘power’ dreams.

But let’s start at the beginning—the genesis of the always-popular brother-versus-brother epic that was fought in the 21st century.

THE FRATERNAL FIGHT

Once Mukesh and Anil decided to split the Reliance group in June 2005, mediators (including their mother Kokilaben) had to grapple with an even distribution of the family’s jewels. Since Mukesh was unwilling to give up control of the cash cow, RIL, which comprised the bulk of the group’s revenues and profits, Anil had to be compensated some other way—by way of KG gas.

As per the agreement inked between the Ambani siblings, Mukesh offered to sell gas on a long-term basis to fuel Anil’s proposed power projects (including one in Dadri, Uttar Pradesh) at $2.34 per unit, the low price at which RIL had agreed to supply gas to the state-owned NTPC. Mukesh also promised to share 40 per cent of future gas discoveries with Anil, though not at the same price. It seemed a fair deal.

But then, the Government intervened. It stated that it owned all resources found under the earth/sea, including oil and gas, and thus could determine the price at which the KG Basin gas was sold. This was part of the Union’s original ‘production sharing’ deal with RIL, it claimed, as did Mukesh. Even the agreement between the Ambani brothers mentioned that the deal was subject to government approvals; and an Empowered Group of Ministers, headed by Finance Minister Pranab Mukherjee, fixed the price at $4.2 per unit.

Anil had no option but to go to court. After the Bombay High Court decided in Anil’s favour last year, Mukesh and the Government approached the apex court, which had to answer the following questions. Did the Mukesh-Anil deal supercede the RIL-Government contract? Thus, was Mukesh bound to supply gas to Anil at the lower $2.34? Importantly, what was the Government’s role as far as India’s resources were concerned?

The SC ruled in favour of the Government, and hence Mukesh. It upheld the Government’s case on the grounds that Union policymakers have the right to decide the price, quantity and tenure of supply, and also the sectors to which it is allotted. Any private agreement has to be interpreted within the ambit of Government policy. Indian politicians won. As Petroleum Minister Murli Deora said after the judgment, “The Government’s stand has been vindicated.”

THE IMPLICATIONS

For all practical purposes, the SC order may open doors very wide indeed for corporate lobbyists to influence policies. This could possibly spell more corruption and crony capitalism. It may even mean a full-stop to the ongoing reforms process, at least in core areas such as minerals, metals and energy. It’s back to the Licence-quota regime; by logic, investors are likely to shy away from these and related sectors. Only those who cosy up with politicians are likely to benefit.

The language of a portion of the judgment reads like a paragraph from the now nearly dead Communist Manifesto. ‘It is relevant to note that the Constitution envisages exploration, extraction and supply of gas to be within the domain of Government functions. It is the duty of the Union to make sure that these resources are used for the benefit of citizens of the country. Due to shortage of funds and technical know-how, the Government has privatised such activities… It would have been ideal for the PSUs to handle such projects exclusively. …the nature of the profits gained from such activities can ideally belong to the State which is in a better position to distribute them in the best interests of the people. Nevertheless, even if private parties are employed for such purposes, they must be accountable within the Constitutional set-up.’

So, what happens to NTPC, which is still engaged in a legal dispute with Mukesh on the $2.34 price? Will it also have to pay $4.2 now? In a bid to respect the SC’s observations, Additional Solicitor General Mohan Parasaran has publicly said that the higher price need not apply to NTPC, which is state owned, since the RIL-Government contract states that RIL can supply cheap gas to ‘Government nominees’.

Mukesh may not worry much about it. For the Government can insist on a higher gas price after a few years, even for NTPC, which gets 15 per cent of the total gas production. Importantly, the bulk of the gas will be sold at a higher price, resulting in bumper profits; over the next few years, RIL’s revenues and profits from the sale of gas may exceed the combined revenues and profits of all its other businesses (refining, petrochemicals, and yarns and fibres).

However, Mukesh also knows that he may now be unable to use the gas freely to fuel his captive power plants. This is critical because the family deal inked with Anil also stated that a portion of the gas production will be used by RIL to fuel its captive power plants. This would have been a bonanza for Mukesh in terms of self-sufficiency, cost control and backward integration.

On that last count, the court order’s implications may impact Mukesh’s overall business strategy quite grievously. For decades, RIL has thrived on backward integration (to become self-sufficient on inputs and lower costs), anchored by mega projects (to command near-monopoly power). If all oil and gas decisions are taken by politicians, a loss of control in the last backward link would make it harder to have low input costs feed their way forward all through the chain (from hydrocarbons to plastics and polyester).

Has Mukesh cut his nose to spite his younger brother? No doubt, Anil has suffered a huge blow. With no cheap gas, RNRL’s grand strategy to make a fortune buying gas at $2.34 and selling at $4.2 has come to naught. His other firms, Reliance Energy and Reliance Power, also seem to be left high and dry. His Dadri gas-fired plant now looks unlikely to take off, as do other gas-based plants, though his captive coal-fired plant plans are still smouldering in the pipeline.

THE SILVER LINING

The SC has not squashed the sanctity of the deal signed between the Ambani brothers. Only that Government policies and contracts take precedence, which means Anil can still get the gas from Mukesh; the SC has given him six weeks to renegotiate the deal to include a higher price, and seek government approvals for the quantity and tenure of supply. If Anil has to transform the legal setback into an opportunity, he has to quit sparring with his brother, sit across the table, and rework the agreement. Remember, he still has options, and his gas-fired power projects could yet take off—even if he has to hope, pray and convince the Government to give its green signal.

But will he be able to do it? Will a victorious Mukesh allow him to? The two brothers, especially Mukesh who is still smarting from the muck raked up by Anil during their war since November 2004, appear in no mood for a truce.

Although the gas dispute may be almost over, new battlegrounds could emerge in areas such as power (where Anil is present), airports (which interests Anil), city infrastructure projects (in some, they are rivals), and media (which Anil has used to his benefit in the past). Since revenge is a dish best served cold, perhaps they will both wait for their chances once the existing tempers have cooled. The Ambani-versus-Ambani saga is far from over. Keep your eyes peeled.

Alam Srinivas is the author of Storms in the Sea Wind: Ambani vs Ambani