Holding

The MoU is not binding on the corporate entities, and the 'suitable arrangement' under the Scheme must be determined in light of the Production Sharing Contract, government policies, and national interest, with the Government having the power to determine the price and valuation of natural gas.

Summary

Reliance Natural Resources Ltd. (RNRL) and Reliance Industries Ltd. (RIL) entered into a Scheme of Arrangement under the Companies Act, 1956, based on a family Memorandum of Understanding (MoU) between the Ambani brothers. RNRL sought enforcement of gas supply terms from RIL, alleging that the Gas Sales Master Agreement (GSMA) was not a suitable arrangement. The Union of India intervened, asserting its rights under the Production Sharing Contract (PSC) to regulate pricing and distribution of natural gas. The Supreme Court held that the MoU is not legally binding on the corporate entities but can be used as an external aid for interpreting the Scheme. The Court ruled that the 'suitable arrangement' under Clause 19 of the Scheme must consider the PSC, government policies, national interest, and shareholder interests. The Government has the power to determine the price and valuation of natural gas under the PSC. The Court directed RIL to renegotiate with RNRL within six weeks, finalize within eight weeks, and place the result before the Company Court, with negotiations to be within the framework of government policies.

Issues considered

Whether the Company Petition filed by RNRL under Section 392 of the Companies Act was maintainable?
Whether the challenge raised by RNRL to the GSMA, that it is not a 'suitable arrangement', was maintainable?
Whether the MoU entered into amongst the family members of the Promoter was binding upon the corporate entity RIL?
Whether the terms of the MoU are required to be incorporated in the GSMA as held by the Division Bench?
Whether the provisions in the GSMA requiring Government approval for supply of gas to RNRL is unreasonable and renders the GSMA not a 'suitable arrangement'?
Having insisted upon a GSPA in conformity with the NTPC draft GSPA which contained a stipulation for Government approval, whether it is open to RNRL to contend that Government approval is not required?
Whether it is necessary for this Court to go into the interpretation of the provisions of the PSC?
Whether the approval of the Government is required to the price at which gas is sold by the contractor under the PSC?
Whether the Government has the right to regulate the distribution of gas produced which it has exercised by putting in place the Gas Utilization Policy?
Whether the Contractor has a physical share in the gas produced and saved which it can deal with at its own volition?
In view of the Gas Utilization Policy and the Pricing Policy of the Government, whether the 'Suitable Arrangement' for supply of gas to Dadri Power Plant can only be on the same terms as are applicable to other allottees of gas?

Legislation cited

Companies Act, 1956s. 193, s. 194, s. 195, s. 293, s. 391, s. 392, s. 393, s. 394
Constitution of Indias. 14, s. 291, s. 297, s. 298, s. 39(b), s. 73, s. 77(3)
Oil Fields (Regulation & Development) Act, 1948
Petroleum and Natural Gas Rules, 1959
Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976

Subjects

Companies ActScheme of ArrangementMemorandum of UnderstandingProduction Sharing ContractNatural GasGovernment PolicyPublic Trust DoctrineShareholder RightsCorporate LawEnergy LawConstitutional Law

Judgment

[2010] 5 S.C.R. 704

A RELIANCE NATURAL RESOURCES LTD.
v.
RELIANCE INDUSTRIES LTD.
(Civil Appeal No. 4273 of 2010)
MAY 7, 2010
B
[K.G. Balakrishnan, CJI., B. Sudershan Reddy and
P. Sathasivam, JJ.]

Companies Act, 1956:
c Sections 193, 194, 195, 293, 391, 392, 393 and 394 -
Gas Sales & Master Agreement (GSMA) - Entered into by
Reliance Natural Resources Limited (RNRL) with Reliance
Industries (RIL) on the basis of Memorandum of
D Understanding (MoU) arrived at between Ambani brothers -
Scheme approved by Company Court - Hence Sections 392
and 394 applicable - Power of the Court under Sections 391
to 394 wide enough to make necessary changes in the
Scheme - How&er, the power does not extend to making any
substantial or substantive changes to the Scheme - The said
E MoU does not fall under the corporate domain - Neither
approved by the shareholders nor attached to the Scheme -:
Thus technically the MoU is not binding - Nevertheless the
MoU formed the backdrop of the Scheme - Hence contents
of the Scheme to be interpreted in the light of the MoU -
F Suitable arrangement under Clause 19 of the Scheme - Must
be suitable for the interests of shareholders of RNRL and RIL
as also the obligation of RIL under the Production Sharing
Contract (PSC) and the broader national and public interest
- Article 21 of the PSC must be interpreted to give the power
G to the Government to determine both the valuation and price
of Gas - Government owns the gas till it reaches its ultimate
consumer - PSC shall override any other contractual
obligation between the Contractor and any other party - Gas
Sales & Master Agreement (GSMA) and Gas Sale &
H 704
RELIANCE NATURAL RESOURCES LTD. v. 705
RELIANCE INDUSTRIES LTD.
Purchase Agreement (GSPA) entered into with RNRL should A
fix the price, quantity and tenure in accordance with PAC -
Empowered Group of Ministers (EGOM) has already set the
price of gas for the purpose of PSC - Parties must abide by
this and other conditions placed by the Government policy -
Interests of the shareholders must be balanced - This B
balance cannot be struck by the Court as the Court does not
have the power under Sections 391 to 394 to create new
conditions under the Scheme - RIL directed to initiate
renegotiation with RNRL within six weeks so that the interests
of the shareholders are safeguarded and finalise the same c
within eight weeks thereafter - Resultant decision should be
placed before the Company Court for necessary orders -
Constitution of India, 1950 -Article. 14, 39(b), 73, 77(3), 291,
298 - Oil field (Regulation & Development) Act, 1948 -
Territorial Waters Continental Shelf, Exclusive Economic 0
Zone and other Maritime Zones Act, 1976 - Petroleum and
Natural Gas Rules, 1959.
Constitution of India, 1950:
Directive Principles of State Policy - Article 39(b) -
Natural gas is a mate/'.ial resource-_.,,.,__ Natural resources are E
vested with the Government as a matter of trust in the name
of the people of India - It is the solemn duty of the State to
protect the national interest - Natural resources must always
be used in the interests of th-e country, and not private
interests - Articles 73, 77(3). F
Doctrines:
Public Trust Doctrine - Doctrine of Identification -
Applicability of.
The appeals have been filed against the judgment G
and order of the Division Bench of the High Court of
Bombay passed in Appeal in Company Application and
in Company Petition filed by Reliance Natural Resources
Ltd. (RNRL) and Reliance Industries Limited (RIL). The
Union of India has filed the SLP against the same H
706 SUPREME COURT REPORTS [2010] 5 S.C.R.

A common order passed by the Division Bench of the
Bombay High Court. The matter mainly relates to Gas
Utilisation Po-licy and the Pricing Policy of the
Government and the Memorandum of Understanding
(MOU) entered into amongst the family members of the
8 promoter and its effect on RIL, apart from certain ancillary
issues.
In view of the rival contentions, the following issues
arose for consideration:
(a) Wh~ther the Company Petition filed by RNRL
c und~r Section 392 of the Companies Act, was
maintainable?
(b) Even if the Company Petition was
maintainable,· whether the challenge raised by
D RNRL to the GSMA, that it is not a "suitable
arrangement" was maintainable particularly in
view ~f the fact that on merits, the Company
Judge had found, these objections to be
unsustainable?
E (c) Whether the MoU entered into amongst the
family members of the Promoter was binding
upon the corporate entity - RIL?
(d) Whether the terms of the MoU are required_ to
be incorporated in the GSMA as held by the
F Division Bench?
(e) Whether the provisions in the GSMA requiring
Government approval for supply of gas to
RNRL is unreasonable and that its inclusion
renders lhe GSMA as not a "suitable
G
arrangemeR-1:" as contended by RNRL?
{f) Having insisted upon a Gas Sale and
Purchase Agreement (GSPA) in conformity
with the NTPC draft GSPA dated 12th May,
H 2005 which· contained an unequivocal
"
RELIANCE NATURAL RESOURCES LTD. v. 707
RELIANCE INDUSTRIES LTD.
stipulation for Government approval for A
quantity, tenure and price, whether it is open
to RNRL to now contend that the Government
approval for supply of gas is not required and
further that the provision requiring
Government approvals should be deleted from B
the GSMA/GSPA?
(g) Whether it is necessary for this Court to go
into the interpretation of the provisions of the
PSC?
i. Whether the approval of the Government is
c
(h)
required to the price at which gas is sold by
the contractor under the PSC?
ii. Whether the Government has the right to
regulate the distribution of gas produced D
which it has exercised by putting in place the
Gas Utilization Policy under which sectoral
and consumer-wise priorities (to the quantities
specified) have been identified and notified to
RIL? E
iii. Whether the Contractor has a physical share
in the gas produced and saved which it can
deal with at its own volition?
(i) In view of the Gas Utilization Policy and the
F
Pricing Policy of the Government, whether the
"Suitable Arrangement" for supply of gas to
Dadri Power Plant of REL can only be on the
same terms as are applicable to other anottees
of gas and that too to the extent of the quantity
of gas that may be allocated by the G.
Government as and when the Dadri Power
Plant is ready to receive gas?
Disposing of the matters, the Court
H
708 SUPREME COURT REPORTS (2010] 5 S.C.R.

A HELD:
(Per - Sathasivam, J. for himself and K.G.
Balakrishnan, CJI):
(A) Maintainability of the company petition:
B 1.1. In the light of the stand taken by both parties, this
Court analyzed the relief sought for in the Company
Application and the relevant materials placed before the
Company Judge. Section 392 creates a duty to supervise
the carrying out of the compromise or arrangement. This
C power and duty was created to enable the Court to take
steps from time to time to remove all obstacles in the way
of enforcement of a sanctioned scheme. While
sanctioning, it shall anticipate some hitches and
difficulties which it can remove by the order of the
o sanction itself but clause 1(b) makes it clear that this
power can also be exercised after the scheme has once
been sanctioned. So lo11g as the basic nature of the
arrangement remains the same the power of modification
is unlimited, the only limit being that the modification
E should be necessary for the working arrangement. [Para
28(x)] [791-D-F]
1.2. Section 392 is applicable to the Company
Application filed by Reliance Natural Resources Ltd.
(RNRL). This is more so because the Company Court has
F originally sanctioned the scheme under both Sections
391 and 394. The power of the Court under Section 392
is wide enough to make any changes necessary for the
working of the Scheme. Therefore, Court does have
jurisdiction over the present matter. However, it is made
G clear that the power of the Court does not extend to re-
writing the Scheme in any manner. [Para 28(xi)] [791-G-
H; 792-A-B]
1.3. In the Companies Act, there is no provision
except Section 391 to Section 394 which deal with the
H procedure and power of the Company Court to sanction
RELIANCE NATURAL RESOURCES LTD. v. 709
RELIANCE INDUSTRIES LTD.
the Scheme which fall within the ambit of the A
requirements as contemplated under these sections. In
the absence of any other provisions except Section 392,
it is difficult to accept the contention that the present
application under Section 392 of the Companies Act is
without jurisdiction. On the other hand, Section 391 to B
Section 394 has ample power and jurisdiction to
supervise the scheme as sanctioned under the
Companies A!:t. As rightly observed by the Company
Judge, the exigencies, facts and circumstances, play
dominant role in passing appropriate order under c
Sections 391 to 394 after sanctioning of the Scheme. The
Company Court is not powerless and can never become
functus officio. Sections 391 to 394 are interconnected
and it can pass appropriate order for sanctioning of any
Scheme including of arrangement, demerger, merger and D
amalgamation. Therefore, the application filed by RNRL
under Section 392 is maintainable. [Para 28(xii)] [792-B•
E]
Association of Natural Gas & Ors. vs. Union of India &
Ors. (2004) 4 sec 489 (CB), relied on. E
Meghal homes (P) Ltd. vs. Shree Niwas Girni K.K. Samiti
& Ors. (2007) 7 SCC 753, held inapplicable.
State of Tamil Nadu vs. L. Abu Kavur Bai, (1984) 1 SCC
515; Safar Jung Sugar Mills Ltd. etc. vs. State of Mysore & F
Ors., (1972) 1 SCC 23; Tinsukhia Electric Supply Company
Ltd. vs. State of Assam & Ors., (1989) 3 SCC 709; Ramana
Dayaram Shetty vs. International Airport Authority of India &
Ors, (1979) 3 SCC 489; Food Corporation of India vs. Mis
Kamdhenu Cattle Feed Industries, (1993) 1 SCC 71; Miheer
H. Mafatlal vs. Mafatla/ Industries Limited (1997) 1 SCC 579 G
and S.K. Gupta & Anr. Vs. K.P. Jain & Anr. (1979) 3 SCC
54, referred to.
(B) Memorandum of Understanding (MoU)
2.1. It is clear that both parties acted upon the said H
710 SUPREME COURT REPORTS [2010] 5 S.C.R.

A family arrangement/Mou dated 18.06.2005. The letters
and e-mails, further confirmed that there is an
arrangement made and agreed between the Reliance
Industries Limited (RIL) and Anil Ambani Group (RNRL),
it is also clear and show that the discussion between the
B group of officials was intended to expedite the
implementation of the MoU by producing a "suitable
arrangement". Though copy of the MoU was not part of
the record before the Company Judge, by consent, the
relevant portion was placed before the Division Bench at
c the time of hearing of the appeal. It cannot be accepted
that neither RIL nor its Board Members were aware of the
contents of the Mou. In fact, the Company Judge has
pointed out that a specific reference was made in the
Company Application No. 1122 of 20'06 and there is no
specific denial by the RIL. The Press Release at the
0
instance of their mother Smt. Kokilaben Ambani (Exh.
"D") about the family arrangement/MOU cannot be over-
looked. It is clear that because of the efforts of Smt.
Kokilaben Ambani, the mother of Mukesh Ambani & Anil
Ambani, the family settlement has been arrived at and
E followed by the Scheme of De-merger. It is also clear from
the materials i.e. exchange of letters and e-mails and the
deliberations by the officials of both entities and their
Board of Directors as well as the sharehold.ers have
agreed for the Scheme. Further it was demonstrated that
F after execution of MoU, both the parties have been
entering into contracts and agreements as an
independent entity. Except the gas supply agreement all
other companies as found are working and running their
affairs smoothly. [Para 30] [798-G-H; 799-A-E]
G 2.2. The MoU is not technically binding between RIL
and RNRL It is not in dispute that MoU is between three
persons and the personality of the company must be
construed separate from these persons. In the light of the
conduct of Mukesh Ambani, Chairman of RIL, MoU was
definitely the instrument which was the basis of the
RELIANCE NATURAL RESOURCES LTD. v. 711
RELIANCE INDUSTRIES LTD.
scheme. Therefore, it can be used .as an external aid for A
the interpretation of "suitable agreement" under the
scheme. To put it clear, the MoU is one of the ways in
which the intention of the parties can be made clear with
regard to what was considered suitable. Nevertheless,
there is no specific requirement that the Gas Sales and B
Master Agreement (GSMA) must conform completely with
the MoU. [Paras 35, 36] [801-G-E]
2.3. Apart from the MoU, "suitable arrangement"
must be understood in the context of government
policies, Production Sharing Contract (PSC) between RIL C
and the Government, national interest and interest of the
shareholders. Therefore, ~his court is of the view that MoU
is one of the means of construing suitability of the
arrangement and not the sole means. [Para 37] -[801-H;
802-A-B] D
Kale & Ors. vs. Deputy Director of Consolidation & Ors.,
(1976) 3 SCC 119; K.K. Modi vs. K.N. Modi & Ors., (1998) 3
SCC 573; V.B. Rangaraj vs. V.B. Gopalkrishnan & Ors. AIR
1992 SC 453; Union of India vs. United India Insurance Co.
Ltd. (1997) 8 SCC 683; Assistant Commissioner, E
Assessment-II, Bangalore & Ors. vs. Mis Velliappa Textiles
Ltd. & Ors, AIR 2004 SC 86 and J.K. Industries Ltd. & Ors.
vs. Chief Inspector of Factories and Boilers & Ors. (1996) 6
sec 665, referred to.
F
R. vs. Mc Donnell, (1966) 1 All. E.R. 193, referred to.
(C) Gas Sales & Master Agreement (GSMA) and Gas
Sales & Purchase Agreement (GSPA) - whether they
qualify as suitable arrangement:
3.1. The determination of "suitable arrangement" G
must not only include the MoU but other considerations
also. Among various considerations, the prime aspect
relates to the role of the Government, the proper
interpretation of Production Sharing Contract (PSC)
relating to pricing and valuation, national interest relating H
712 SUPREME COURT REPORTS [2010] 5 S.C.R.

A to the interest of consumers and protection of natural
resources. At the same time, the other consideration
must relate to the interest of RNRL, i.e., whether the
GSMA results in RNRL becoming a shell company and
whether the GSMA is a bankable agreement. [Para 43]
B [810-D-F]
3.2. The GSMA was put into the place in pursuance
of Clause 19 of the scheme. Clause 19 of the scheme
provides that in order to effectuate the demerger or RIL,
a suitable agreement has to be formulated. In other
C words, the position of RNRL is that "suitable
arrangement" within the meaning of Clause 19 is
supposed to be the MoU. Such an arrangement must be
suitable for RNRL. According to RNRL, since GSMA is not
a replication of the conditions of the MoU and that it is
D not a bankable agreement it will reduce RNRL into a shell
company. GSMA violates the scheme and must be
replaced taking into account the various points of
protestation raised by them. On the other hand, it is the
claim of RIL that since the Mou is not a binding
E document, there is no requirement that the GSMA must
replicate the MoU. [Para 44] [810-H; 811-A-D]
SUITABLE ARRANGEMENT:
3.3. There is a need to construct a suitable
F arrangement under Clause 19. The broader construction
of suitable arrangement is that the arrangement must be
suitable not only for RIL and RNRL but also suitable with
respect to the government's interest under PSC, in
consonance with the decisions of Empowered Group of
Ministers (EGOM) or any other gas utilization policy as
G well as larger national interest. This is because gas is an
essential natural resource and is not owned by either RIL
or RNRL. The Government holds this natural resource as
a trust for the people of the country. Supply of gas is a
matter of national interest and in the present case, due
H to the very nature of the companies involved, there are
RELIANCE NATURAL RESOURCES LTD. v. 713
RELIANCE INDUSTRIES LTD.
huge number of shareholders and people who will be A
indirectly affected by the policies of the companies.
Therefore, the arrangement flowing from Clause 19 must
be suitable for interest of all the above-mentioned
persons. Keeping the said object in mind, Clause 19 must
be interpreted by taking into account 1) the interest of B
RNRL as reflected by the MoU; 2) the interest of the
shareholders of RIL and RNRL; 3) .the obligations of RIL
under PSC; 4) the national policy of gas including the
decisions of EGOM and Gas Utilization Policy; and 5)
broader national and public interest. [Paras 46, 47) [811- c
F-H; 812-A-B]
(D) PRODUCTION SHARING CONTRACT CPSC):
4.1. It is not permissible for RIL to enter into a
contract with RNRL to supply fixed quantity of gas as the D
gas continues to be the property of the government _till
the time it reaches the delivery point and thus, RIL has
no right to dispose of the same without the express
approval of the Union of India. [Para 49) [813-D]
4.2. The Executive of the Union of India enjoys its E
Constitutional powers under Article 73 and Article 77 (3)
in order to fulfill the objectives of the Directive Principles
of State Policy relating to distribution of Natural Gas. This
Natural Gas is a material resource under Article 39(b). In
view of this, along with the contemplation of a F
Government's Policy for the utilization of Natural Gas
under Article 21.1, the Executive decided that distribution
would include within its ambit acquisition, including
acquisition of private owned material resources. The
framing of the "Gas Utilization Policy" in identifying the G
priority sectors, and allocating the requisite quantities in
accordance with the needs of the said sectors and
subjecting marketing freedom to the order of priority and
guidelines framed is very much in accordance with law.
Consequently, Article 21.1 and Article 21.3 should be read
in consonance with the Gas Utilization Policy and the H
714 SUPREME COURT REPORTS [2010] 5 S.C.R.

A latter is neither inconsistent with the provisions of the
Constitution, nor the Oil Field Regulation Act, 1948,
Petroleum and Natural Gas Rules 1959 and the Articles
of the Production Sharing Contract. To put it clear, both
in terms of the Gas Utilization Policy and the Production
B Sharing Contract, Government in the capacity as an
Executive of the Union can regulate and distribute the
manner of sale of Natural Gas through allotments and
allocation which would sub-serve the best interest of the
country. [Paras 51 and 52] [813-F-H; 814-A-D]
C 4.3. The price determined by the Government is not
the subject matter of either the Company Application nor
is it an issue which arises out of the impugned judgment.
There is no duly constituted proceeding where any
challenge has been laid to Government Policy, price
D fixation, grant or refusal of approval. Further, without
such a proceeding in existence and without NTPC being
a party in the present proceedings, any issue touching
upon the validity of price fixation or price formula does
not arise. The price of $ 4.20/mmbtu is based on the
E formula approved by the Government under its powers
pursuant to the terms of the PSC. The policy of the
Government is not under challenge or adjudication before
the Court. [Paras 53 and 54] [814-C-F]
4.4. In the instant case, the price formula was
F approved by Government in September, 2007 when it was
expected that gas would be produced from the basin in
June, 2008. The utilization of 40 mmscmd of gas was
decided upon in the months of May, 2008 in terms of
sectors and units to which gas would be supplied. As the
G production stabilized and further volumes of gas were
known to become available, the government recently
decided on the utilization of a further volume of 19.826
(+0.875) mmscmd on firm basis + 30.00 mmscmd on
tailback basis in October, 2009. As emphasized earlier, it
H is up to the owner (the Government) to decide as to how
RELIANCE NATURAL RESOURCES LTD. v. 715
RELIANCE INDUSTRIES LTD.
to utilize the gas and at what price it can be sold and this A
has been done in accordance with Production Sharing
Contract (PSC) which has a statutory basis. The PSC
under Article 21.1 makes it clear that the Contractor is
bound by the Government's policy for utilization of
natural gas. [Para 62] [819-E-G] B
4.5. The position is that under Article 21.6.1 of the
PSC, the gas must be sold at an arm's length price.
Article 21.6.2 states that notwithstanding 21.6.1, if the gas
is sold not to the Government or its nominee, it must be
sold on the basis of "competitive arm's length sales in C
the region for similar sales under similar conditions".
Importantly, Article 21.6.3 states that the basis on which
such prices are to be determined shall be approved by
the Government prior to the sale. In the present case, the
formula submitted by RIL was looked into by EGOM and D
examined by the Committee of Secretaries and PM's
Economic Advisory Council. Due to this the price was
determined to be $ 4.20, on the basis of the formula, price
equivalent to 2.5 + (Crude Price-25)0.15. Another
important consideration to be kept in mind is that the PSC E
overrides any other contract which may be entered into
for the supply for gas. This principle flows from the
following a) the natural resource, gas, is held by the
Government and trust on behalf the people. Therefore, for
legal purposes, the Government owns the gas till it F
reaches its final consumer; b) the PSC is the basis on
which the contractor exercises his right over the supply
of gas. Since it is the very basis of such a right, the
contractor does not have the competent power to give
any rights which do not accrue to it under the PSC. [Paras G
63, 64] [819-H; 820-A-E]
4.6. One of the main purposes of the PSC is pricing
and distribution of gas. Though there is "freedom of
trade" within the PSC, but this freedom is exercised by
the contractor through a transparent bidding process H
716 SUPREME COURT REPORTS [20101.5 S.C.R.

A and non-interference of the Governmen• in the
administration of gas supply. As a matter of P<>it:Y also,
the Government must be free to determine the J81uation
formula as well as the price. Therefore, keepi111g these
considerations in mind, the Government's interpretation
B of the PSC is valid. Thus the Government has tu power
to determine valuation as well as price for the purpose
of the PSC. [Para 65) [820-F-G]
State of Tamil Nadu vs. L. Abu Kavur Bai, (198') 1 SCC
515, relied on.
c 4.7. The power of the Government under t.. PSC is
quite bread and includes the power to regulate fte price
and distribution of gas. Such a power .quir~s
determination of price of supply and not onlj for the
determination of the share of the Contractor but also for
D the Government. Thus keeping the objectives ofJhe P"SC
in mind, it would not be possible to restrict the1· wer of
the Government. The arrangement in purs nee of
Clause 19 of the Scheme must be suitabl or the
shareholders of RIL as well. The position of RU.:, that if
E gas is sold at $2.34 that is at a price lower thaii the one
decided by the Government, there will be a d+onnect
between the actual amount which the Contractor.ill earn
from the sale of gas and the amount which will ~deemed
to have been earned by the Contractor under Vte PSC.
F Due to this, the Contractor would be losing out ot its own
profits which RIL claims would be halved. It is flso the
grievance of RIL that the Court must take into Jccount
the fact that the PSC provides for the legitimate ;ghts of
the Contractor to earn certain profits. If these P•fits are
G reduced to such a degree, it would affect the i'*rest of
the shareholders of RIL. [Para 66(1)(2)) [821-C-G]
BANKABLE CONTRACT:
. 5.1. While RNRL had all along been contending that
H for want of bankable gas supply agreement it could not
RELIANCE NATURAL RESOURCES LTD. v. 717
RELIANCE INDUSTRIES LTD.
establish a power plant including Dadri. In fact, money A
has already been raised to the extent of $ 510 m for Dadri
Plant by way of External Commercial Borrowings. This
position was candidly accepted by RNRL. Reliance
Power Ltd., the company that is now promoting Dadri has
raised Rs.11000 crores from the public. The shortage of B
funds is an excuse - it is simply not true. Furthermore,
according to RIL, it is a fact that other gas based power
plants has been set up in the country without having any
long term supply of gas contrary to what is being alleged
by RNRL, and that the contention that <f SMA is not a c
bankable document is without any factual basis. [Paras
73, 74] [824-B-D]
5.2. In view of all the arguments and counter-
arguments regarding the unsustainability of the
arrangem~nt under the GSMA, it is not proper for the D
court under Sections 391-394 to make modifications of
this nature in the Scheme. These changes must be
arrived at by the parties themselves through negotiation.
Furthermore, such negotiations must be done within the
ambit of the Government policies, including the over- E
riding effect of the PSC (including the Development Plan
under Article 10.7), EGOM decisions and other related
national policies. [Para 76] [825-C-D]
(E) ROLE OF GOVERNMENT:
F
6.1. It must be noted that the constitutional mandate
is that the natural resources belong to the people of this
country. The nature of the word "vest'1 must be seen in
the context of the Public Trust Doctrine (PTO). Even
though this doctrine has been applied in cases dealing
with environmental jurisprudence, it has its broader G
application. This doctrine is part of Indian law and finds
application in the present case as well. It is thus the duty
of the Government to provide complete protection to the
natural resources as a trustee of the people at large.
[Paras 84, 85) [828-E; 829-H; 830-A] H
718 SUPREME COURT REPORTS [2010] 5 S.C.R.

A M. C. Mehta v. Kamal Nath (1997) 1 SCC 388, referred
to.
6.2. RIL's right of distribution is based on the PSC,
which itself is derived from the power of the Government
under the constitutional provisions. Thus the very basis
8 of RIL's mandate is the constitutional concepts, including
Article 297, Articles 14 and 39(b) and the Public trust
Doctrine. Therefore, it would be beyond the power of RIL
to do something which even the Government is not
allowed to do. The transactions between RIL and RNRL
C are subject to the over-riding role of the Government.
[Para 86] (830-B-C]
6.3. It is relevant to note that the Constitution
envisages exploration, extraction and supply of gas to be
D within the domain of governmental functions. It is the duty
of the Union to make sure that these resources are used
for the benefit of the citizens of this country. Due to
shortage of funds and technical know-how, the
Government has privatized such activities through fhe
mechanism provided under the PSC. It would have been
E ideal for the PSUs to handle such projects exclusively. It
is commendable that private entrepreneurial efforts are
available, but the nature of the profits gained from such
activities can ideally belong to the State which is in a
better position to distribute them for the best interests of
F the people. Nevertheless, even if private parties are
employed for such purposes, they must be accountable
to the constitutional set-up. [Para 87] (830-D-F]
Association of Natural Gas v. Union of India (2004) 4
G SCC 489 and Re: Cauvery Water Dispute Tribunal AIR 1992
SC 522, relied on.
7. The natural resources are vested with the
Government as a matter of trust in the name of the people
of India. Thus, it is the solemn duty of the State to protect
H the national interest. Even though exploration, extraction
RELIANCE NATURAL RESOURCES LTD. v. 719
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and exploitation of natural resources are within the A
domain of governmental function, the Government has
decided to privatize some of its functions. For this
reason, the constitutional restrictions on the government
would equally apply to the private players in this process.
Natural resources must always be used in the interests B
of the country, and not private interests. The broader
constitutional principles, the statutory scheme as well as
the proper interpretation of the PSC mandates the
Government to determine the price of the gas before it is
supplied by the contractor. The policy of the Government, C
including the Gas Utilization Policy and the decision of
EGOM would be applicable to the pricing in the present
case. The Government cannot be divested of its
supervisory powers to. regulate the supply and
distribution of gas. [Para 91] (831-G-H; 831-A-E]
D
8.1. Though the Contractor (RIL) has the marketing
freed')m to sell the product from the contract area to
other consumers, this freedom is not absolute. The price
at which the produce will be sold to the consumer would
be subject to government's approval. The tenure of such
contracts can't be such that it vitiates the development E
plan as approved by the government. Therefore, the
GSMA and the GSPA entered into with RNRL should fix
the price, quantity and tenure in :::ccordance with the PSC.
[Para 92(F)(a)] [835-E-F]
8.2. The EGOM has already set the price of gas for
F
the purpose of the PSC. The parties must abide by this,
and other conditions placed by the Government policy.
The GSMA/GSPA deeply affects the interests of the
shareholders of both the companies. These interests
must be balanced. This balance cannot be struck by the G
court as the court does not have the power under
Sections 391-394 to create new conditions under the
scheme. In view of the same, RIL is directed to initiate
renegotiation with RNRL within six weeks the terms of the
H
720 SUPREME COURT REPORTS [2010] 5 S.C.R.

A GSMA so that their interests are safeguarded and finalize
the same within eight weeks thereafter and the resultant
decision be placed before the Company Court for
necessary orders. [Para 92(F)(b)] [834-G-H; 835-A]
8.3. While renegotiating the terms of GSMA, the
B following must be kept in mind:
(1) The terms of the PSC shall have an over-riding
effect;
(2) The parties cannot violate the policy of the
Government in the form of the Gas Utilization
c Policy and national interests;
(3) The parties should take into account the MoU,
even though it is not legally binding, it is a
commitment which reflects the good interests
of both the parties; [Para 92(F)(c)] [835-B-D]
D
8.4. The parties must restrict their negotiations within
the conditions of the Government policy, as reflected inter
alia by the Gas Utilization Policy and EGOM decisions.
[Para 92(F)(d)] [835-D-E]
E Per (Sudershan Reddy, J.): (Sathasivam, J. and
Balakrishnan, CJI expressing dissent on (i) exercise of
jurisdiction u/s 352 of Companies Act. 1956 and (ii) nature
of the MoU and not taking it into account the
renegotiations):
F 1.1. There are no completely unregulated free
markets for natural gas anywhere in the world. By
framing an overarching analytical framework, it can be
observed that every jurisdiction grapples with three sets
of issues relating to ensuring: (1) adequate supplies to
G meet overall energy and industrial needs; (2) equitable
access across all sectors, especially those which have
implications for quality of life; and (3) equitable pricing,
even if market forces are allowed to play a much larger
role. Three more issues are emerging with respect to
ensuring: energy security of the nation; energy defense
H links; and inter-generational equities. Under conditions
RELIANCE NATURAL RESOURCES LTD. v. 721
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of scarcity, these latter factors may indicate a greater A
need for emphasis on conservation a.s opposed to
current consumption. It would appear that markets, with
their emphasis on current consumption and short run
profits may lead to faster depletion, and consequently
necessitate far greater and indeed a primary role for the B
State in coordination and making choices between
different objectives and value premises. While markets
and private initiatives have an important role in garnering
financial resources, developing and bringing new
technologies to practical use, expanding the c
infrastructure, and increasing supplies by identification
of and e:ltraction from new sources, if unmonitored and
completely unregulated markets are also capable of
causing great inequities, in access, overpricing and
sometimes even under pricing (if externalities, such as D
environmental costs, are not taken into account) the
resources. [Para 77] [877-A-E] ·
1.2. The principal themes in production sharing
contracts would appear to be that the sovereignty over
the petroleum produced continues to be with the nation, E
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).
[Para 84] [882-B-C] F
1.3. 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. G
Article 297 of the Constitution 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 H
722 SUPREME COURT REPORTS [2010] 5 S.C.R.

A Constitution is unique as it is the only such provision in
the Constitution that addresses a particular inclusive set
of potential resources in a particular class of geographic
zones. It goes on to say that the limits of those
geographic zones "shall be such as may be specified, from
s time to time, by or under any law made by Parliament." One
needs to appreciate the purport and meaning of Article
297 of our Constitution as increasingly these resources
in the geographic zones specified by it are going to be
tapped, because of technological developments
c enhancing the capacities of the nation. [Para 87] [883-E-
H; 884-A-B]
1.4. While the word "vest" could normally partake of
at least a portion of the full bundle of rights associated
with ownership, the phrase "shall vest" as used in Article
o 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
E wealth and resources" are the people as a nation. 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.
F 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 "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
G 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 abilities to
"acquire" and "dispose" is significant and a clear
indication of the intent of the supreme drafter of the
H
RELIANCE NATURAL RESOURCES LTD. v. 723
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Constitution - the people. The use of a series of words A
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 done by B
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 c
nation. [Paras 88, 89) [884-C-H; 885-A-C]
1.5. 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 D
"permanent sovereignty" i.e., the power to make laws,
over such resources to ensure national 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 E
maintenance of international peace and a part of their
right to self determination. Further, these rights of the
people as Nations have been secured by many struggles
for self-determination over millennia. Those rights
encompass the freedom of self-determination through a
F
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. [Para 90) [885-D-F]
1.6. The concept of equality, a necessary condition G
for achievement of justice, is inherent in the concept of
national development that we have adopted as a nation.
India was never meant to be a mere land in which the
desires and the actions of the rich and the mighty take
precedence over the needs of the people. The ambit and H
724 SUPREME COURT REPORTS [2010] 5 S.C.R.

A 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 pre-
condition for the use of nature. The concept of people as
B a nation does not include 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
C lead to diminishment of the prospects of their use by
future generations. 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,
0
1976, the Oilfields (Regulation & Development) Act, 1948
and the Petroleum and Natural Gas Rules, 1959, all
emphasise the importance and duty of the Gol to
conserve and develop mineral oils, including natural gas.
E [Paras 94, 95) [887-D-H; 888-A]
CIT v Enron Oil and Gas India Ltd. (2008) 305 ITR 75;
Kumari Shrilekha Vidyarthi v. State of UP. (1991) 1 SCC 212;
Mahabir Auto Stores v. Indian Oil Corpn., (1990) 3 SCC 752;
UC of India v Consumer Education & Research Center.
F (1995) 5 SCC 482; Rai Sahab Ram Jawaya Kapur & Ors. v.
State of Punjab, 1995(2) SCR 2; State of Madhya Pradesh
v. Thakur Bharat Singh, 1967 (2) SCR 454; Poonam Verma
v. DOA. (2007) 13 SCC 154; Union of India & Ors. v. Asian
Food Industries, (2006) 13 SCC 542; Kusumam Hotels (P)
Ltd. v. Kera/a SEB. (2008) 13 SCC 213; NTPC Ltd. v.
G Reshmi Constructions, Builders & Contractors. (2004) 2 SCC
663; Madhav Rao Jivaji Rao Scindia v Union of India (1971)
1 SCC 85; J.K. Industries Ltd. v. Chief Inspector of Factories
& Boilers (1966) 6 SCC 665; Indian Bank v .Godhara Nagrik
Coop. Credit Society Ltd. (2008) 12 SCC 541; Union of India
H
RELIANCE NATURAL RESOURCES LTD. v. 725
RELIANCE INDUSTRIES LTD.
v. United India Insurance Co. Ltd. (1997) 8 SCC 683; A
Assistant Commissioner, Assessment-II, Bangalore & Ors. v.
Mis. Velliappa Textiles Ltd. & Ors. AIR 2004 SC 86; L/C v.
Escorts Ltd (1989) 1 SCC 264; Mohta Alloy & Steel Works v
Mohta Finance & Leasing Co. Ltd. (1997) 89 Comp. Cases
227; S.K. Gupta v. K.P. Jain (1979) 3 SCC 54; Miheer H. B
Mafatlal v. Mafatlal Industries. (1997) 1 SCC 579; Meghal
Homes (P) Ltd. v. Shree Niwas Gimi K.K. Samiti & Ors. (2007)
7 SCC 753; R.D. Shetty v. International Airports Authority of
India (1979) 3 SCC 489; F.C.I. v. Kamdhenu Cattle Feed
Industries. AIR 1993 SC 1601; State of Tamil Nadu v. L. Abu c
Kavur Bai 1984 (1) SCC 515; Safar Jung Sugar Mills Ltd. v.
State of Mysore. 1972 (1) SCC 23 and Association of Natural
Gas & Ors. v. Union of India & Ors. 2004 (4) SCC 489,
referred to.
Lennards Carrying Co. v. Asiatic Petroleum Co. Ltd. D
2924-25 All ER 280; Bou/ting and Anr. v. Association of
Cinematography, Television and Allied Technicians (1963) 2
QB 606; R. v. McDonnell (1966) 1 All ER 193; Tesco Super
Markets v. Nattress (1971) UKHL 1; (1972) AC 153;
Meridian Global v. Securities Commission (1995) 3 All ER E
918 and H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham &
Sons (1956) 3 All ER 624, referred to.
Handbook of Natural Gas Technology and Business, ed.
Parag Diwan and Ashutosh Karnatak, Pentagon Energy Press
(2009); Integrated Energy Policy, Report of the Expert F
Committee, Planning Commission of India, Got (2006);
MoPNG Basic Statistics (2008-2009); MoPNG Basic
Statistics (2008-2009) citing BP Statistical Review of World
Energy, June 2008 & OPEC Annual Statistical Bulletin;
Integrated Energy Policy: Report of the Expert Committee, G
Planning Commission of India, GO/ (2006); The Peak of the
Oil Age, Energy Policy Vol. 38 (2010); Basic Statistics on
Indian Petroleum & Natural Gas, 2008-2009, MoPNG Gol,
referred to.
H
726 SUPREME COURT REPORTS [2010] 5 S.C.R.

A Joseph Stiglitz, Making Globalization Work: The Next
Steps to Global Justice, p. 8, Allen Lane (2006); Richard A.
Posner: "A Failure of Capitalism: The Crisis of '08 and the·
Desc~nt Into Depression': p. xi. Harvard University Press
(2009); Joseph E. Stiglitz, Making Natural Resources into a
B Blessing rather than a Curse, in "Covering Oil" Ed. Svetlana
Tsalik and Anya Schiffrin, Open. Society Institute (2005), p.
13-14; Terry Lynn Karl "Understanding the Resource Curse"
in Covering Oil (Open Society Initiative, 2005); Government
by Contract.: Outsourcing· And American Democracy, Ed.
c Jody Freeman and American Democracy; Cass Sunstein:
Free Markets and Social Justice (Oxford University Press,
1997); Robert J. Michaels, "Natural Gas Markets and
Regulation", in the Concise Encylcopedia of Economics, 2nd
Ed.; Stephen Breyer: Regulation and its Reform, Harvard
University Press (1982); Paul Stephen Dempsey:
0
Deregulation and Reregulation - Policy, Politics and
Economics in Handbook of Regulation and Administrative
Law ed. David H. Rosenbloom & Richard D. Schwartz, New
York (1994); Colin Scott: The Juridification of Relations in the
UK Utility Sector in Commercial Regulation & Judicial
E Review ed. Julia Black, Peter Muchlinski & Paul Walker, Hart
(1998); Cosmo Graham: Regulating Public Utilities - A
Constitutional Approach; UNCTAD: Competition in Energy
Markets TDIB/COM.21CLP/60 GE. 07-50741 (2007); Gas
Regulation: in 35 jurisdictions, Global Competition Review
F (2006); Energy lnformatioh Administration, Dept. of Energy,
U.S. Government; Adam R. Brandt: Testing Hubbert (2006);
Aleklett, Hook, Jakobsson, Lardefli, Snowden & Soderberger;
Ernest E. Smith & John Dzienkowski, "A Fifty Year
Perspective on World Petroleum Arrangements" 24 TEX . •
G INT'L L. J. 13 (1989); Oswald Whitman Knauth: The Policy
of United States Towards Industrial Monopoly, Bibliolife
(2010); The great mischiefs 3 to 6 led to nationalization of the
oil industry in Mexico, in 1938. They also led to the first
modern declaration that all natural resources belong to the
H
RELIANCE NATURAL RESOURCES LTD. v. 727
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people as a nation and to be used for national development A
and substantively informed the progress in international law,
Jed by former colonies, that the people in those lands are the
rightful owners and should benefits from the use of such
resources; "Alternative Arrangements for Petroleum
Development: A Guide for Government Policy-makers and B
Negotiators" UN Document No. ST/CTC/43, Sales No.
E.82.11.A.22 and UN General Assembly Resolution 523 (vi)
of January, 1952, 626 (vii) of December, 1952, 1314 (xiii)
of December, 1958, 1515 (xv) of December, 1960 - all
specifically referred in Resolution 1803 on Permanent c
Sovereignty, referred to.
2.1. Article 297 of the Constitution is a special
provision which leads to the conclusion that the powers
granted to the Union to hold the resources for purposes
of the Union casts special obligations over and above D
what are normally affixed with respect of all other
resources that the Union may be permitted to act upon
pursuant to Article 298. Under Article 297 of the
Constitution, the Union of India can indeed enter into
contracts for the identification, development and E
extraction of resources in the geograpt1ic zones specified
therein. However, such activities can only be premised
on the key therein to unlock those resources: for the
purposes of the Union. [Para 96) [888-B-C]
2.2. In the light of the public trust elements so F
intrinsic to resources under the sea-bed, and the special
nature of Article 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, the Union of India G
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. With respect to the H
728 SUPREME COURT REPORTS [2010] 5 S.C.R.

A 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
B 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
c 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
0
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 given any guarantee for continued access
E and of use beyond a period to be specified by the
Government. [Para 99) [889-B-G; 890-A]
Joseph L. Sax, Defending the Environment: A Strategy
for Citizen Action (1971) and Peter H. Sand Sovereignty
F Bounded: Public Trusteeship for Common Pool Resources;
Turnipseed, Roady, Sagarin & Crowder: The Silver
Anniversary of the United States Exclusive Economic Zone
- Twenty Five Years of Ocean Use and Abuse, and the
Possibility of a Blue Wtare Public Trust Doctrine., Energy
G Law Quarterly Vol. 36:1 (2009), referred to.
3.1. It is clear that a wide variety of instruments have
come to be called Production Sharing Contracts and
there is no specific concordance between that title and
what is actually shared pursuant to a PSC. In the light of
H
RELIANCE NATURAL RESOURCEs<J'LTD. v. 729
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that discussion and the general acceptance that A
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. [Para 103] [890-H; 891-A-B] B
3.2. 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 C
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 D
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 E
the 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 F
particular period, as 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 contr~ctor is only
entitled to cost petroleum and share of Profit Pe~roleum G
in terms of realized value from sale of Petroleum i.e.
natural gas in this case, and not to a share in physical
quantities of Petroleum. [Para 104] [891-C-G]
3.3. In some previous PSC's the word volume had
been used instead of value, but that has been specifically H
730 SUPREME COURT REPORTS [2010] 5 S.C.R.

A 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 laid on the floor of the
Parliament. This implies that the Government is of the
B 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 whole. Consequently, such Contracts
c should 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. The word "volume" when
used in scientific contexts would normally mean physical
dimensions on three coordinate axes; in business and
0
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 intrinsic
capacity to provide some utility, and also the value
derived in the context of exchange in the market place.
E 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 physical product with the sale price.
[Paras 105, 106] [891-H; 892-A-F]
F
. 3.4. 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
G 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
oil or natural gas) produced, saved and sold in the market
H
RELIANCE NATURAL RESOURCES LTD. v. 731
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at a "price." The words 'produced' and 'saved' are first A
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
Production Operations or any combination of two or B
more of such operations, including 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 c
necessary." Further Article 21.6.1 specifically states that
the 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 D
"produced and saved" in the PSC encompasses the
activity of sale of natural gas. 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 naturai gas
at the delivery point. [Para 107] [893-E-H; 894-A-C] E
3.5. The change in the wording clearly implies that
under 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 F
"volume" i.e., the physical quantities remain outside the
purview of what is to be shared between the Contractor
· and the Government. Consequently, under this PSC, RIL
has no rights whatsoever to take physical quantities/
volume of natural gas as a· part of Profit Petroleum or G
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.
[Para 108] [894-D-E]
P. Ramanatha Aiyar's "Advanced Law Lexicon" (3rd Ed. H
732 SUPREME COURT REPORTS (2010] 5 S.C.R.

A .. 2005) and Black's Law Dictionary, referred to.
· 4,1,_ The title pursuant to Article 27.1 of the PSC can
pass from the sovereign owner, the people of India, at the
. Deliv.ery· Point upon a sale, and not as a matter of offset
again!)t 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%
()f 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
C is discovered in commercially exploitable form, this is a
continuation of the risk. 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.
D Sale of Petroleum, is an integral part of Petroleum
Operations and hence selling. of Petroleum 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
E transfer of title can be only to entities within a class of
buyers specified by a utilization policy. [Para 111) [895-
F-H; 896-A-B]
4.2. In as much as title passes only upon sale at the
Del,ivery Point, the true owner, the people of India acting
F 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 distributed or disposed off in an arbitrary manner.
[Para 112) [896-C-D]
G 5.1. 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
H
·--
RELIANCE NATURAL RESOURCES LTD. v. 733
RELIANCE INDUSTRIES LTD.
broad set of goals that constitute national development. A
While revenue generation is one part of those objectives,
that cannot be the only objective of India. Timely
utilization, by users spread across many sectors and
acr~ss regions as the network of pipelines spreads and
conservation are all necessary objectives to be kept in B
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.
[Para 114) [896-G-H; 897-A-B]
5.2. Article 21.1 of the PSC makes it very clear that C
the sales of Natural Gas have to be in accordance with a
Government Utilisation Policy and to the Indian Domestic
Market. [Para 1,15) [897-B-C]
5.3. Article 21.1 clearly contemplates that the pool of D
eligible buyers of natural gas extends to the whole of
Indian domestic market. It doe~ 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, E
class of eligible buyers in India.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 utilization policy. It does
not say that the Contractor take into account a F
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 G
gas can be sold, let alone the many millions of cubic
metres of natural gas that RNRL claims vested in it as a
matter of contractual right. Consequently, it is held that
under the PSC, unless the Government actually sets out
a policy regarding utilization of the natural gas produced, H
734 SUPREME COURT REPORTS [2010] 5 S.C.R.

A it cannot be committed or sold to anyone. The freedom
to market can only be exercised subject to the utilization
policy of the Gol. [Paras 116, 117, 118] [897-E-G; 898-A-
C]
6.1. The Initial Development Plan (IDP) was only a
B proposal as to who could be the potential users. The
proposal also specified that there could be other 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
C denies the rights of those users to a fair access. Over
and above that, under the PSC the right to effectuate a
utilization policy only vests with the Got. Indeed, it cannot
be any other way. The MC of the PSC is not the Got to
be able to effectuate decisions which would have the
D ramifications of policy, especially over a scarce resource
with the kind of implications across the constitutional
spectrum. In the instant case, what RNRL had demanded,
as of the first time that it filed the Company Application
was for 28 MMSCMD (and in the event that NTPC contract
E did not go through then 40 MMSCMD) and the Option
V()lumes of 40% of all the gas to be ever produced by
RIL under any contract with the Got. The notion that two
nominees of the Got can effectuate policy decisions of
such a nature, in the context of their role as members of
F the Management Committee to effectuate the working of
a PSC, is simply untenable and impermissible. [Paras
119, 120] [899-D-H; 899-A-B]
6.2. The IDP itself was proposed way back in the year
2004 and the production started only in 2009. The fact that
G 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
H have as well taken place. There would have been no way
RELIANCE NATURAL RESOURCES LTD. v. 735
RELIANCE INDUSTRIES LTD.
for the Gol to know who would be the potential users, A
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 B
Utilisation Policy with respect to inter-sectoral 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. [Para 121] [899-C-F] c
7.1. 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 D
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 E
decade, that silence by officials of Gol cannot and ought
not to be given any weight at all. [Para 122] [900-B-D]
7.2. 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 F
covenants in the PSC. When the covenants evidently
carry a plain meaning which could be gathered from what
the instrument itself has said, such responses cannot be
used to interpret the terms of a contract. The· answers,
at the most, may reflect the opinion of an individual G
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 instruments. [~ara 124] [900-F-H; 901-A]
H
736 SUPREME COURT REPORTS [2010] 5 S.C.R.

A Emperor v. Sibnath Banerjee & Ors. AIR 1943 FC 75,
distinguished.
8.1. 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
B price determination, including spot, length of supply,
quantity, delivery point, price floor, and that even end use
must be tal<en 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
C have a huge bearing on the price. The parameters
between NTPC terms and RNRL are of a 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. Secondly, NTPC did not get the
D 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
E confines of a 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. [Para 126]
F [901-E-H; 902-A-B]
8.2. 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.
G 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
H receives a fair share of the revenues. However, it may not
RELIANCE NATURAL RESOURCES LTD. v. 737
RELIANCE INDUSTRIES LTD.
be possible to determine true arms length prices in all A
situations, because a market may not have developed
properly. [Para 127) [902-C-E]
8.3. A spot market for natural gas for instance, which
is possible when a large quantity of natural gas is
available in a region, and distributed through a dense 8
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 C
in the 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) D
have to be read together. Article 21.6.2 (b) provides for a
situation in which natural gas is sold to nominees of Gol, -
in which case the Got would know the actual price. RNRL
is taking a clause. that is provided to protect the Gal, in
the event that Gol is unable to determine whether it can E
assure to itself that the Contractor has sold or is selling
at the stated price and conflating it to a right of RIL. [Para
128] [902-F-H; 903-A]
8.4. With regard to refusal of Gol to approve the
proposed sale price on parity with the NTPC bids, it is · F
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 question of G
Government fixing the price for its share of gas does not
arise. [Para 129] [903-B-C]
9. The Empowered Group of Ministers framed a
utilization policy and also approved the price formula/
H
738 • SUPREME COURT REPOR1TS [2010] 5 S.C.R.

A 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 Government and has force
of law since the field is not occupied by any legislation
B 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 Rassed
c 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
0
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 taken by the Government
E 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.
(Para 130] (903-D-H; 904-A-B]
F 1.0.1. 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
G 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
·H
RELIANCE NATURAL RESOURCES LTD. v. 739
RELIANCE INDUSTRIES LTD.
interrupted or abrogated. Consequently, if Clause 19 of A
the Scheme were to be read as the imposition of the
burden upon RIL to supply natural gas, irrespective of
governmental policies with respect to utilization and
pricing of natural gas, then it would have to be struck
down as a nullity. [Para 134] [905-E-H; 906-A] B
10.2. 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 Scheme implicitly
contemplated a situation in which the arrangements for C
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. D
It does not mean that the Scheme with respect to the Gas
Based Energy Business, which is now RNRL, has
,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 E
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 nai've would, could or should have relied on
F
the certitude of natural gas supply from R.IL 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" with regard to "right to use the Reliance
logo" in the same clause. The word arrangement as used G
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 Cl~use 19 contemplates a complex set of mechanisms
H
740 SUPREME COURT REPORTS [2010] 5 S.C.R.

A and would involve 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
8 even the potential that the results sought may not be
achieved or realized. [Para 135] (906-B-H]
10.3. 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
C 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 -0ne of
them; moreover, on perusal of the second objective of the
Memorandum of Asseciation, it is clear that an equally
o 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,
E or tidal, water, wind, solar, hydrocarbon fuel, 11atural gas
or any other form kind or descr~ption." Consequently
one fails to see how RNRL can claim that it was set up
only to obtain natural gas from RIL and then to trade V'lith
it within the Anil D. Ambani (ADA) Group, or that any one
F who reads the Scheme can understand it in that manner.
[Para 137] [907 -C-E]
10.4. 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
G RIL are unpersuasive. First and foremost, it woula seem
extremely unlikely that bankers do not understand that
there are always supply risks associated with natural gas
in a country like India, whether that be on account of
Gol's policies or otherwise. It is also observed that others
H have started gas based energy generation plants and
RELIANCE NATURAL RESOURCES LTD. v. 741
RELIANCE INDUSTRIES LTD.
they have faced equally serious uncertainties, if not more. A
Furthermore, this Court has not been given one single
document that shows denial of financing on account of
lack of definitive natural gas supplies. Though significant
amounts of monies have been raised, both here in India
and abroad and yet admittedly not even a brick has been B
laid at Dadri for the power project for which natural gas
was first sought and RNRL claims its rights begin from.
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 c
that Governmental Approvals for gas supply
arrangements with RIL 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. 0
There is no reason to conflate that general condition
which affects everyone in the Indian economy, to an
issue of workability of the Scheme itself. [Paras 138, 139]
[907-F-H; 191~A-D]
In the Estate of Skinner, (1958) 1 W.L.R. 1043, referred E
to.
11.1. 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 F
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 G
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 mod-e o1
shareholder approvals and the .classes formed would
have been entirely different. The MoU is an agreement H
742 SUPREME COURT REPORTS [201 O] 5 S.C. R. ·

A 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 else would now become special,
B thereby negating the very concept of class of members
with similar interests voting on a proposal .for
reorganization. [Para 1401. [908-E-H; 909-A]
11.2. The minutes of the meetings of the Board of RIL
dealing with various issues concerning the
C 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
D 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
E 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
Smt. Kokilaben (KDA), quite effectively severed any
F 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 a whisper of protection
of a broader class of shareholders in the MoU. This is not
G some mere technicality; but a fundamental 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
H
..
RELIANCE NATURAL RESOURCES LTD. v. 743
RELIANCE INDUSTRIES LTD.
broader understanding of company law from the days of A
Settlement 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 8
promoters and were mere rubber stamps of the 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. C
[Para 141] [909-B-G; 910-A-B],
11.3. 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 .· D
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 document were to be filed
as a proposal for arrangement, it would have to be
thrown out at the very inception. The differences in E
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
F
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 G
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. [Para 142]
[911-B-F]
744 SUPREME COURT REPORTS [201 OJ 5 S.C.R.

A 11.4. The fact that the Board asked that an analysis
of the pros and cons of such a reorganization be
undertaken by the Corporate Governance (CG)
Committee of Independent Directors, along with the
command that they propose a scheme of reorganization
B if any, with the help of professionals to study the various
businesses and the implications with respect to statutory
and legal issues, is prima Jacie evidence of independence
and application of the iriind. Further, from the record it
can be gleaned that the CG Committee with the help of
C professionals framed an outline of a Scheme, executed
by representatives of both the Mukesh D. Ambai (MDA)
and the Anil D. Ambani (ADA) Group and on that count
too, it would have to be held that the Scheme was
something more and fundamentally different from the
D MoU. [Para 143) [910-F-H; 911-A]
11.5. 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 approved a Scheme in which the only provision
E 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
F 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 one fails to see how
prospective agreements involving such huge value, in
G 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. [Para 144)
[911-B-F]
H
RELIANCE NATURAL RESOURCES LTD. v. 745
RELIANCE INDUSTRIES LTD.
11.6. In as much as the terms and conditions of gas A
supply, as specified in the MoU, were not specifically
informed to all the shareholders and stakeholders,
includin~ in this case the Gol (as a party to the PSC), one
simply fail~ to see how the MoU can be read into the
Scheme itself. It doesn't matter whether one calls MoU B
the guiding light or a tool 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 Scheme. The argument that contracts are entered into c
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. [Para 145] [911-G-H; 912-A-B]
11. 7. The whole purpose of Sectio.n 293 of the
Companies Act which prohibits the Board from hiving off D
an undertaking without shareholders approvals, is to
prevent such transfers being effecuated on a permanent
basis without the knowledge of the shareholders. The
very essence of the requirement that all material facts be
disclosed would have been decimated. Consequently, E
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 end
point is significantly, substantially and materially different F
from it and it cannot now be brought back in the guise
of interpretation. [Para 145] [912-C-E]
Palmer's Company Law part 1.103, 1.104, page 1011,
25th Edn. Vol.1, referred to.
G
12. The entire gas supply section of the MoU deals
primarily with the isst.1e 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 mentioned in that H
746 SUPREME COURT REPORTS [2010] 5 S.C.R.

A section refer to RIL's business of oil production and
exploration is untenable. This is further evidenced t.y at
least two other factors. The first one relates to r{NRL's
total failure to rebut the inferences drpwn from the fact
that ADA Group and RNRL's executiv~s had accepted
B 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 dat~d February 28, 2006 in which RNRL strongly
c protested the 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 the 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
0
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
E adduced. It is not necessary to go into all those details.
The 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. [Para 147] [914-B-
F HJ
13.1. Doctrine of Identification as developed by the
courts is typically applicable in criminal and tortious
liability cases. Even assuming that it is applicable in
G 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 portion of its
powers on MDA but retained the powers that only it
could exercise. The crucial fact is that ADA had agreed
H that the agreements entered into with MDA as a part of
RELIANCE NATURAL RESOURCES LTD. v. 747
RELIANCE INDUSTRIES LTD.
the MoU be mediated through the Board in the form of a 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, which RNRL claims were not
a part of the MoU. If that be the case, for the sake of B
argument, then it only strengthens the finding that the
Board acted independently 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 c \
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 also approved the Scheme as D
presented. Further, given the finding 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, one fails to see what is
left to impute to any one. [Para 149] [915-D-H; 916-A-B]
E
13.2. ADA was 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 going to be framed and F
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 G
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. [Para 149] [916-
B-D]
H
748 SUPREME COURT REPORTS [2010) 5 S.C.R.

A 14.1. However wide the powers of the courts may be,
they cannot be so wide as to order supply of gas in
contravention of government policies, the constitutional
obligations that the Gol must bear in mind when
formulating such policies and in contravention of broader
B public interest. The Division Bench erred by holding that
certain quantum of naturar gas stood allocated to RNRL.
The error is on account of both a misinterpretatfon of the
PSC and also public law. Apart from that, both the Single
Judge and the Division Bench below have erroneously
c 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
supply provisions of the MoU. Those conclusions were
erroneous. [Para 153) [917-H; 918-A-C]
D S.K. Gupta & Anr. Vs. K.P. Jain & Anr. (1979) 3 SCC 54,
held inapplicable.
14.2. "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.
E During the course of weaving of the "fabric", decisions
could be taken to leave out certain aspects as
unacceptable to the Board or the shareholders and
stakeholders or the Court. Further, those processes
necessarily involve certain steps in obtaining
F 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. Whatever changes are made can only be
minor ones which would not tamper with the essence of
G the scheme. [Para 156) [919-E-G]
14.3. In this Scheme, the shareholders & stakeholders
of RIL would have broadly understood from the Scheme
two things: (1) that the Gas based Energy Resulting!
H Company was to engage in the business of supply of
RELIANCE NATURAL RESOURCES LTD. v. 749
RELIANCE INDUSTRIES LTD.
many different kinds of fuels, in which supply of natural A
gas to its affiliate compal)ies is one; and (2) that the Gas
based Energy Resulting Company will engage in the
business of promoting energy generation business, from
using any and all fuels, including natural gas, both from
RIL and also from other sources. Nowhere did the B
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 tearing apart the "basic fabric"
of the Scheme. [Para 157] [919~H; 920-A-C] c
14.4. "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 D
the Scheme entails. That understanding would certainly
not have comprehended the claims that RNRL is putting
forward in these proceedings: (i) that the intent was to
actually share the benefits of the production and
exploration activities, including the benefit of internal use E
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 F
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 G
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 H
750 SUPREME COURT REPORTS [2010] 5 S.C.R.
i
A interests of both parties and also including the clauses
of governmental agreements, would be 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. [Para 158] [920-C-H; 921-A]
B 14.5. In the instant case by importing the gas supply
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
C a modification necessarily tears apart the basic fabric and
cannot be permitted. [Para 161] [922-8-C]
Case Law Reference:
In the judgment of Sathasivam, J:
D
(2004) 4 sec 489 (CB) relied on Para 4
(1984) 1 sec 515 referred to Para 18
(1972) 1 sec 23 referred to Para 20
E (1989) 3 sec 109 referred to Para 21
..
(1979) 3 sec 489 referred to Para 23
(1993) 1 sec 11 referred to Para 24
(2001) 1 sec 753 held inapplicable Para 27(A)(vi)
F
(1997) 1 sec 579 . referred to Para 28(A)(iv)
(1979) 3 sec 54 referred to Para 28(A)(v)
....
(1976) 3 sec 119 referred to Para 28(8)(1)
G (1998) 3 sec 573 referred to Para 28(8)(2)
AIR 1992 SC 453 referred to Para 28(B)(iv)
(1997) 8 sec 683 referred to Para 33
AIR 2004 SC 86 referred to Para 33
-H

-
RELIANCE NATURAL RESOURCES LTD. v. 751
RELIANCE INDUSTRIES LTD.
(1996) 6 sec 665 referred to Para 33 A
(1966) 1 All. E.R. 193 referred to Para 33
(1984) 1. sec 515 relied on Para 50
(1997) 1 sec 388 referred to Para 85
B
(2004) 4 sec 489 relied on Para 85
AIR 1992 SC 522 relied on Para 85
In the judgment of Sudershan Reddy, J:
(2008) 305 ITR 75 referred to Para 55(1) c
(1991) 1 sec 212 referred to Para 55(1)
(1990) 3 sec 152 referred to Para 55(1)
(1995) 5 sec 482 referred to Para 55(1)_
D
1995(2) SCR 2 referred to Para 55(1)
1967 (2) SCR 454 referred to Para 55(1)
(2001) 13 sec 154 referred to Para 55(1)
(2006) 13 sec 542 referred to Para 55(1) E

(2008) 13 sec 213 referred to Para 55(1)
(2004) 2 sec 663 referred to Para 55(1)
(1971) 1 sec 85 referred to Para 55(1) F
(1966) 6 sec 665 referred to Para 55(2)
(2008) 12 sec 541 referred to Para 55(2)
(1997) 8 sec 683 referred to Para 55(2)
G
AIR 2004 SC 86 referred to Para 55(2)
(1989) 1 sec 264 referred to Para 55(2)
(1997) 89 Comp. referred to Para 55(2)
Cases 227 H
752 SUPREME COURT REPORTS [2010] 5 S.C.R.

A 2924-25 All ER 280 referred to Para 55(2)
(1963) 2 QB 606 referred to Para 55(2)
(1966) 1 ALLER 193 referred to Para 55(2)
(1971) UKHL 1; referred to Para 55(2)
B
(1972) AC 153
(1995) 3 ALL ER 918 referred to Para 55(2)
(1956) 3 ALL ER 624 referred to Para 55(2)
c (1979) 3 sec 54 referred to Para 55(3)
(1979) 3 sec 54 held· inapplicable Para 55(3)
(1997) 1 sec 579 referred to Para 63
(2007) 1 sec 753 referred to Para 63
D
(1979) 3 sec 489 referred to Para 69
AIR 1993 SC 1601 referred to Para 69
1984 (1) sec 515 referred to Para 69 y
E 1912 (1) sec 23 referred to Para 69
2004 (4) sec 489 referred to Para 69
AIR 1943 FC 75 distinguished Para 124

F CIVIL APPELLATE JURISDICTION: Civil Appeal No(s).
4273 of 2010.
From the Judgment & Order dated 15.06.2009 of the Hogh
Court of Judicate at Bombay in Appeal No. 844 of 2007 in
Company Application No. 1122 of 2006 in Company Petition
G No. 731 of 2005.
WITH
C.A. Nos. 4274, 4275-4276, 4277 of 2010 & I.A. No. 1 in
C.A. Nos. 4280-4281 of 2010.
H
RELIANCE NATURAL RESOURCES LTD. v. 753
RELIANCE INDUSTRIES LTD.
Gopal Subramanium, SG, Mohan Parasaran, Vivek A
Tankha, ASG, Ram Jethmalani, Mukul Rohatgi, Mahesh
<lehmalani, Harish N. Salve, Shyam Divan, U.U. Lalit, P.H.
Parekh, Dr. Milind Sathe, Rohington, F. Nariman, Dr. Abhishek
M. Singhvi, K. Lakshminarayana Rao, Ravi Shankar Prasad,
Ranjit Kumar, Mahesh Agarwal, Saurabh Kirpal, Manali B
Singhal, Rishi Agrawala, Rohma Hameed Radhika Gautam,
P.R. Mala, Saurabh Gupta, Diksha Rai (for E.C. Agrawala),
Suresh Gupte, F.P. Pooniwala Atul Dayal, Sameer Parekh,
Smita Bhargave, E.R. Kumar, Meenakshi Gover, Sumeet Lall,
Sumit Goel, Amit Bhandari, Kamal Deep Dayal, Shubhanshu c
Padhi, Shakun Sharma, Chetan Rai, Harsh Sahu, Rahul Chugh,
Raghav S, Rajat Nair, Aneesh Pattanaik, Sonali Basu Parekh
(for M/s. Parekh & Co.), Dr. Shailendra Sharma, D.L.
Chidananda, Gaurav Dhingra, Dayan Krishnan, Gautam
Narayan, Arvind K. Sharma, Dr. Harsh K. Pathak, Zoheb D
Hussaqin, Alok P. Kumar, C.S. Bhardwaj, Pravin Satale, Rajiv
Shankar Dvivedi, Sarojananda Jha, Dharmendra Kr. Sinha,
Pallavi Langar, Amrita Bhattachrya, Shelly Shaleja (for M/s.
Coac), Kavita Wadia, Kamal Budhiraja, Manu Seshadri, Ira
Asthana (for Dua Associates), Suryanaryana Singh, Pragati
E
Neekhra, Monica Sarma, Mahesh Prasad, Senthil Jagdeesan
for the appearing parties.
The Judgment of the Court was delivered by
P. SATHASIVAM, J.1. I have had the benefit of reading
the erudite judgment of my learned Brother, Hon. B. Sudershan F
Reddy, J. I am unable to share the view expressed by him on
some points and must respectfully dissent.
2. Though the facts and provisions of the relevant law have
been set out in the judgment prepared by B. Sudershan Reddy, G
J., keeping in view of the importance in the matter, I propose
to refer all the details and deliver a separate judgment in the
following terms:-
3. Leave granted.
H
754 SUPREME COURT REPORTS [2010] 5 S.C.R.

A 4. "The people of the entire country have a stake in natural
gas and its benefit has to be shared by the whole country."
Association of Natural Gas & Ors. vs. Union of India &
Ors. (2004) 4 sec 489 (CB).
B 5. Being aggrieved by the judgment and order of the
Division Bench of the High Court of Bombay dated 15.06.2009
in Appeal No. 1 of 2008 in Company Application No. 1122 of
2006 and in Company Petition No. 731 of 2005, Reliance
Natural Resources Ltd. (in short "RNRL") has filed S.L.P.(C)
c Nos. 14997 & 15033 of 2009. Questioning the same common
order of the Division Bench of the High Court, Reliance
Industries Limited (in short "RIL") has filed S.L.P. (C) Nos.
15063-15064 of 2009. Since the Union of India intervened at
the stage when the Division Bench heard Appeal Nos. 844 of
D 2007 and 1 of 2008, it also filed S.L.P.(C} No. 18929 of 2009.
One Vishweshwar Madhavarao Raste also filed SLP(C) .... CC
Nos.16126-16127 of 2009. Since all the appeals arising out
of the above special leave petitions emanated from the
common order dated 15.06.2009 passed by the Division Bench
and the issues raised in all these appeals are one and the
E same, all the appeals were heard together and are being
disposed of by this common judgment.
6. Brief facts:
The case of RNRL:
F
(a) In 1973, late Dhirubhai Ambani set up the RIL
consisting of Oil, gas, refining and exploration, textile, yarn,
polyster, petrochemicals and communication business with his
two sons Mukesh Ambani and Anil Ambani. In the year 1999,
G the Government of India announced a New Exploration and
Licensing Policy, 1999 (in short "NELP"). This policy provided
that various petroleum blocks could be awarded for exploration,
development and production of petroleum and gas to private·
entities.
H
RELIANCE NATURAL RESOURCES LTD .. v. 755
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
(b) It is the policy of the Government that Petroleum A
Resources which may exist in the territorial waters, the
continental shelf and the exclusive economic zone of India be
discovered and exploited with utmost expedition in the overall
interest of India and in accordance with good International
Petroleum Industry Practice. B ·

(c) In the same year, i.e. 1999, RIL has formed a
Consortium with NIKO. Their consortium was the successful
bidder for Block KG-D6 and was called the Contractor.

(d) On 24.03.2000, Reliance Platforms C
Communications.com Private Limited was incorporated which
was changed to Global Fuel Management Services Limited and
now called "Reliance Natural Resources Limited (RNRL).

(e) A Production Sharing Contract (in short "PSC") has D
been entered into between the Government of India and the
Contractor on 12.04.2000. The PSC, as recorded, is within the
contract area identified as Block KG DWN-98-3. KG-D6 is
situated offshore coasts of Andhra Pradesh in the Indian
Ocean. Such blocks are called as "Deep Water Exploration E
Blocks". The exploration in such areas require employment of
highly skilled and experienced technical personnel and an
extremely expensive and time-consuming exercise. As
recorded, all exploration expenses required to locate petroleum
resources have to be borne by the Contractor. Therefore, the
Contractor is bound to incur huge cost and resources for F
discovery of reserves in the area at their risk. The exploration
activities are still in progress, the first gas deal expected in
June, 2008. As per the PSC, all the expenses relating to the
exploration, development and production of cost incurred by the
Contractor can only be recovered from the petroleum/gas G
actually produced and sold by the Contractor. The Contractor
has freedom to sell the gas produced from the block subject
to the adjustment and the terms of profit sharing between the
Government and the RIL as set out in the PSC.
H
756 SUPREME COURT REPORTS [2010] 5 S.C.R.

A (f) On 06.07.2002, Mr. Dhirubhai Ambani passed away.
Sometime thereafter, differences started between Mukesh
Ambani and Anil Ambani over the management and control of
the group companies. Both the brothers, at the relevant time,
were looking after the affairs of RIL in all respects including the
B group companies.

(g) The provisions of the PSC were known to the
respective Board of Directors as well as to both the brothers.
Mukesh Ambani was the Managing Director and Anil Ambani
was the Joint Managing Director of the RIL.
c
(h) In October, 2002, the Consortium (NIKO & RIL)
announced discovery of significant result of KG-D6 Block.
Sometime in the year 2003, the National Thermal Power
Corporation Limited (in short "NTPC") floated a global tender
D for supply of gas to its power projects. The Gas Sale and
Purchase Agreement was annexed with the tender document.
NTPC invited international competitive bids for supply of natural
gas to its power plants located in the State of Gujarat to meet
its.fuel requirements. RIL succeeded in its bid to sell, transport
E and deliver 132 TBtu (means one trillion BTU (British Thermal
Unit) or 1000000 MMBTU). NTPC, by letter dated 16.06.2004,
confirmed RI L's deal. ·

(i) In June, 2004, RIL entered into a State Support
Agreement with the Government of U.P. to make necessary
F arrangements for land, water and other facilities for Dadri
Project.

0) In a Board Meeting of Reliance Energy Limited (in short
"REL") held on 20.10.2004, which was attended by Mukesh
G Ambani and other Directors of RIL, after reviewing the Dadri
Project it was recorded that gas from KG Basin would be
supplied for the power projects of REL. The Board of REL was
assured about the availability of gas, its timing, adequate quality
and requested quantity at a competitive price for the project.
H

,_
RELIANCE NATURAL RESOURCES LTD. v. 757
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
{k) On 18.06.2005, the media released a statement A
informing the general public that an amicable settlement is
arrived at in respect of all disputes between the Ambani
Brothers. It was stated that Mukesh Ambani will take over the
responsibility for RIL and IPCL and Anil Ambani will take over
the responsibility for Reliance lnfocomm Ltd., Reliance Energy B
Ltd._ and Reliance Capital Ltd. On the same day, Anil Ambani
resigned as Joint Managing Director of RIL.

(I) Both the brothers with the mediation of their mother Mrs.
Kokilaben Dhirubhai Ambani arrived at a Memorandum of · C
Understanding (MoU)/family arrangement dated 18.06.2005
and accordingly resolved their disputes amicably. Based upon
the said MoU, both the brothers and the officials of RIL and other
group companies, made various discussions, exchanged
correspondences, e-mails and held conferences and meetings
to implement the MoU and to resolve the disputes and to divide D
the various companies by a Scheme of Arrangement.

(m) On 11.08.2005, RNRL was acquired by RIL for the
purpose of de-merger. The name was changed to Global Fuel
Management Services. RIL (de-merged company) moved a E
petition in the Bombay High Court bearing No. 731/2005 dated
24.10.2005 to obtain a sanction of Scheme of Arrangement
(the Scheme) between RIL and four other companies viz., (i)
Reliance Energy Ventures Limited, (ii) Global Fuel Management
Services Limited, (iii) Reliance Capital Ventures Limited and F
(iv) Reliance Communication Ventures Limited. By order dated
09.12.2005, the Company Judge, Bombay High Court has
granted sanction to the Scheme and inter alia directed that the
shareholders of RIL would hold shares in each of the resulting
companies in the ratio of 1:1 in addition to the shares held in G
the parent company (RIL). The scheme provides that RIL
successfully bid for off-shore oil and gas fields; strategic
investment in RIL which has engaged in power projects, in order
to use part of gas discovered for the generation of power; ¥

appropriate gas supply arrangement will be entered into H
758 SUPREME COURT REPORTS [2010] 5 S.C.R.

A between RIL and Global Fuel Management Services pursuant
to which gas will be supplied to RIL; refined gas based energy
undertaking; after the record date the Board of the resulting_
companies shall be re-constituted and shall thereafter be
controlled and managed by Anil Ambani. A suitable
B arrangement would be entered into in relation to supply of gas
for power projects of Reliance Patalganga Power Limited and
REL with the gas based energy resulting companies.

(n) The Scheme sanctioned by the Company Judge
provided for de-merger of four Undertakings of Reliance
C Industries Limited (RIL) and transfer of these Undertakings on
a "Going concern" basis to four resulting Companies. They are:

(i) The Coal Based Energy Undertakings/Reliance Energy
Ventures Limited.
D
(ii) Gas Based Energy Undertaking/Global Fuel
Management Services Limited now known as "Reliance
Natural Resources Limited (RNRL).

(iii) Financial Services Undertaking/Reliance Capital
E Ventures Limited.

(iv) Telecommunication Undertakings/Reliance
Communication Ventures Limited.

F The De-merged company-Reliance Industries Limited (RIL)
is to retain all other businesses including Petrochemicals,
refining, oil and gas exploration and production, textile and
other business. The Scheme became effective from
21.12.2005.

G (o) A draft of GSMA (Gas Sale Master Agreement) and
GSPA (Gas Sale Purchase Agreement) were e-mailed by an
official of RIL to sole nominee of Anil Dhirubhai Ambani Group
on the Board of RIL on 11.01.2006, drafts of GSMA and GSPA
were approved by the Board of RIL at a time when the Board
H . of RNRL was under the control of Mukesh Ambani. The
•

RELIANCE NATURAL RESOURCES LTD. v. 759
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
nominee of Anil Dhirubhai Ambani Group had raised objections A
but the same were overruled. There was no sufficient time given
to RNRL to read the draft. No independent or legal advise could
be taken on behalf of RNRL. Basic clauses to the agreements
are the bone of contention of the present litigation. Both the
agreements alleged to have also been settled and executed B
on 12.01.2006. On the same day, a letter addressed by Mr. J.P.
Chalasani, the nominee of ADAG on the Board of RNRL to
other Directors on the Board of RNRL namely, Mr. Sandip
Tandon and Mr. L.V. Merchant who were the nominees of
Mukesh Ambani/RIL, stating therein that the proceeding in the c
Board Meeting held on 11.01.2006 to consider the agreement
with RIL in terms of the Scheme were illegal and void. By
another letter dated 13.01.2006, a request was made to take
the contents of letter dated 12.01.2006 with regard to the
agenda-item No.8 (gas supply agreement) and be made part
0
of the minutes of the Board Meeting.

(p) On 13.01.2006 by a letter addressed to Shri
Chalasani, the minutes of the Board of Directors held on
11.01.2006 were informed that it would be tabled at the meeting
of 13.01.2006. Some of the objections, as raised by Chalasani, E
were also recorded. On 26.01.2006, the GSPA copy was made
available to ADAG for the first time. On 27 .01.2006, the shares
of the RNRL to the shareholders of RIL were allotted.

(q) On 07.02.2006, the Board of the RNRL was re- F
constituted in order to hand over the management and control
of the resulting companies to Mr. Anil Ambani. On 14.02.2006,
a letter addressed by RIL to the RNRL stating that a proforma
gas sale and purchase agreement (GSPA) has been annexed
to the above GSMA. The proforma contains the terms and G
conditions as mentioned in the GSPA signed by RIL on
12.12.2005 and forwarded to the NTPC. It was further informed
.that they agree to carry out the changes to the proforma GSPA
annexed to the GSMA so that it reflects the same terms as
contained in GSPA between NTPC and RIL as and when any H
760 SUPREME COURT REPORTS [2010] 5 S.C.R.

A changes are carried out to NTPC GSPA.

(r) On 28.02.2006, RNRL, by its letter to RIL, informed and
elaborated various deviations in the GSMA from the agreed
terms which were necessary 'Jr de-merging the business. A
.8 suitable draft agreement in c~., ipliance with the Scheme was
also sent with the letter. On 12.04.2006, RIL made an
application to the Ministry of Petroleum and Natural Gas
.(MoPNG) for approval of the gas price at which the sale of 28
MMSCMD of gas was agreed with the RNRL under the GSMA.

C (s) On 09.05.2006, RNRL, by a letter. requested the
MoPNG to accord approval to the application dated 12.04.2006
made by the RIL. On 26.07.2006, the MoPNG communicated
to the RIL its refusal to approve the price of gas agreed
between the RNRL and the RIL under the GSMA. On
D 31.07.2006, RIL forwarded a letter to the RNRL, a copy of letter
dated 26.07.2006 received from the MoPNG rejecting the
proposed formula for determining the gas price as the basis
of valuation of gas under the PSC.

E (t) With these details, RNRL on 07.11.2006/08.11.2006,
filed a Company application No. 1122 of 2006 under Section
392 of the Companies Act, 1956 (hereinafter referred to as "the
Act") before the High Court of Bombay in which the following
prayers were made:

F "(a) Order and Direct RIL to take all necessary steps in
order to ensure actual supply of 28 MMSCMD or 40
MMSCMD of gas to RNRL on the NTPC Contract Terms
and as per the commercial aspect set out in Para 8.3
hereinabove.
G
(b) Order and Direct RIL to execute an amendment to the
Gas Supply Master Agreement dated January 12, 2006
and to the Form of Gas Sale and Purchase Agreement
attached in Schedule 3.2 thereto, to bring them in line with
the Gas Supply Master Agreement and Form of Gas Sale
H
RELIANCE NATURAL RESOURCES LTD. v. 761
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
and Purchase Agreement as se1 out in Ex. J to this A
Application.

(c) restrain RIL from creating any third p a r t y
interests or rights in respect of i) 28 MMSCMD of Gas to
be supplied to the Applicant; (ii) 12 MMSCMD to be 8
supplied to the Applicant on firm basis in case NTPC
Contract does not materialize; and/or entering into any
contract(s) and/or use or supply to any third party the said
· gas (28 MMSCMD or 40 MMSCMD, as the case may be)
· which is required to be supplied to the Applicant under the C
Scheme.

(d) pending the hearing and final disposal of the
application, direct RIL to supply the said 28 MMSCMD or
40 MMSCMD gas, as the case may be, to the applicant
on the same terms as per NTPC Contract. D

(e) ad-interim reliefs in terms of prayer (c) and (d) above.

(f) Such further orders be passed and/or directions be given
as this Hon'ble Court may deems fit and proper."
E
7. In the said application of RNRL, it was highlighted that
to make the Scheme as sanctioned by the High Court, effective
and workable, it is necessary to direct the amendments and
alterations to the GSMA dated 12.01.2006 and draft GSPA
annexed to the GSMA, as both do not result in effective transfer F
of the business sought to be demerged and are not in
compliance with the terms of the Scheme of Arrangement in
its letter and spirit. The GSMA and GSPA are also not in
compliance with the Mou which was the very reason of the
Scheme of Arrangement as filed by RIL. Therefore, ~NRL . G
prayed for Company Courts' intervention to ensure that the
Scheme is implemented effectively.

8. In addition to the above particulars, RNRL placed the
following additional materials in support of their stand:
H
762 SUPREME COURT REPORTS [2010) 5 S.C.R.

A (a) The Board of Directors of RIL were appreciative of the
resolution of the issues between Shri Mukesh Ambani and· Shri
Anil Ambani and in their meeting held on June 18, 2005 noted
the settlement and amicable resolution of the dispute providing
fC!lr reorganization of the Reliance Group including the
B D\!Sinesses and interests of RIL and adopted a resolution
thanking the efforts made· by Smt. Kokilaben Dhirubhai Ambani
in working towards the settlement.

(b) The agreement arrived at between Shri Mukesh
C Ambani, Chairman and Managing Director of RIL and Shri Anil
Ambani relating to the reorganization of the RIL Group
envisaged the supply of gas from RI L's current and future gas
fields for various projects of Reliance-Anil Dhirubhai Group. The
said agreement contains the following clauses:-

D (a) Quantum of Supply and·source of Supply

Supply of 28 MMSCMD gas by RIL to Anil
Dhirubhai Ambani Group (ADAG). This supply is
subject to supply of 12 MMSCMD to NTPC.
E In the event that NTPC contract does not
materialize or cancelled, the entitlement of NTPC
to the said extent should go to the ADA Group in
addition to its entitlement of 28 MMSCMD i.e. a
total of 40 MMSCMD.
F
ADA Group to have option to buy 40% of all
balance and future gas from the current or future
gas fields of MDA Group.

Supply to be from the proven P1 Reserves of RIL
G whether from the KGD-6 Basin or elsewhere.

(b) Supply period 17 (Seventeen) Years.

(c) ADA Group's Purchase Obligation.
H
RELIANCE NATURAL RESOURCES LTD. v. 763
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
On take or pay basis. A

(d) Price and Commercial Terms

The firm quantity of 28 MMSCMD/ 40 MMSCMD
at a price no greater than NTPC prices.
B
Option gas at the market rate

Other commercial terms-same as those of NTPC
contract.

Shall be in accordance with International Best C
Practices.

· Shall be bankable in International Financial
Markets.
D
(e) Other terms governing the Arrangement.

Reliance ADA Group shall have the option to take
delivery of gas at Kakinada on the East Coast and
may construct its own pipeline. However, REL
would still have to pay the transportation cost for E
supply to the West Coast even if the facility is not
used, but will have the right to deal with the capacity
as it deems fit and to sell or assign the same to
another party.
F
The gas supply/option agreements would be
between RIL and a 100% subsidiary of RIL, which
would be demerged to the Reliance-ADA Group
as part of the Scheme and not with REL.

In relation to applicable governmental and statutory G
approvals, without in any manner mitigating RIL's
responsibility, RIL and Reliance-ADA Group, give
an irrevocable Power of Attorney to the Reliance-
A DA Group to apply for and obtain all such
governmental and regulatory approvals as are H
764 SUPREME COURT REPORTS [2010) 5 S.C.R.

A necessary on its behalf.

(c) The understanding and agreemel"'ts relating to the
supply of gas as part of the reorganization of RIL are set out in
the Information Memorandum filed for ~he benefit of the
B shareholders and investors by RNRL with the Bombay Stock
Exchange and of the RNRL. Consequently, as part of the
reorganization of the business and undertakings of RIL, the
power business of RIL including the Gas Based Power
Business, described in the Scheme as the Gas Based Energy
Undertaking, was also to be demerged. The Gas Based
C Energy Undertaking of RIL to be demerged under the Scheme
consisted of the business of supply of gas for power projects
REL and of Reliance Patalganga Power Ltd., through suitable
arrangements.

D (d) The Scheme also explains:

(i) Gas Based Energy Resulting Company

(ii) Gas Based Energy Undertaking

E (e) The Scheme provided for suitable arrangements
whereby the RNRL would receive gas from RIL and supply the
same, as RIL would otherwise have done, for the power projects
of REL.

(f) In the year 2003, NTPC had floated a global tender for
F supply of gas to its power projects to be located at Kawas and
~andhar in the State of Gujarat. RIL, who emerged as the
successful bidder, had at the time of submission of bids
unconditionally accepted all the terms and conditions mentioned
in the draft GSPA. In accordance with the agreed position/
G settlement, the gas was to be supplied by RIL to the RNRL at
the price and terms no less favourable than those of NTPC and
the gas supply agreement between RIL and the RNRL would
be as per the said NTPC contract terms. RIL, by letter dated
14.02.2006, signed by one K. Sethuraman, Authorised
H
RELIANCE NATURAL RESOURCES LTD. v. 765
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
Signatory of RIL, communicated that he was directed to confirm A
that RIL would agree to carry out amending changes to the
proforma of GSPA annexed to the Gas Supply Master
Agreement (GSMA) so that it reflects the same terms as are
contained in the GSPA for 12 MMSCMD between NTPC and
RIL as and when changes are carried out to NTPC GSPA. B

(g) The Scheme also provided that post the demerger of
the Demerged Undertakings of RIL, Shri Anil Ambani would
obtain control and management of the businesses and
undertakings being demerged.
c
(h) Further, the agreement had to reflect an interest in gas
produced by all the gas fields of RIL so as to ensure that gas
upto the agreed quantity i.e. 28 MMSCMD or 40 MMSCMD,
as the case may be, would be made available to RNRL in
priority to any other sale or use by RIL except for the gas to be \D
used for RIL itself for operation and transportation and for the
gas to be supplied to NTPC. The interest of RNRL was thus to
extend to gas fields other than the KG-D6.

(i) The GSMA and the form of GSPA significantly depart E
from the Draft Agreement to the NTPC request for bids and
unconditionally accepted by RIL.

9. The case of RIL:-
(a) A Scheme for the demerger of a large company with F
majority of shares being held by the public and by institutions,
has to be in larger public interest as well as in the interest of
the company. It must necessarily safeguard the interest of large
body of shareholders of the Demerged Company as also the
shareholders of the Resulting Companies. Any settlement of the G
disputes stated to have taken place between or amongst the
promoters has, as a necessity, to abide by the final decision
of the Board of the Demerged Company and such adaptations
as may be necessary to protect and further the interests of the
large body of shareholders or public interest.
H
766 SUPREME COURT REPORTS [2010) 5 S.C.R.

A (b) Once the Scheme as was placed before and duly
approved by; the shareholders (99% shareholders approved
the Scheme) which suggests that the Scheme had the support
not merely of the General Body of shareholders but also the
members of the promoters' family-all anterior or underlying
B agreements become irrelevant. The senior-most member of the
family who resolved all the disputes has, at no point, contested
the Scheme as being inconsistent with any arrangement that
may have been arrived at. The present application is a thinly
disguised attempt to reopen the Scheme after it has been fully
c implemented in a manner that is completely inconsistent not only
with the demerger of the businesses but the provisions of
Section 392 of the Companies Act, 1956.

(c) That none of the heads of so-called Agreement are a
part of the Scheme as proposed by the Board of Directors of
D RIL and approved by the creditors and general body of
shareholders. These allegations have no place in an application
made for implementation of the Scheme as sanctioned by the
High Court. The averments made therein are completely
extraneous and irrelevant. The issues, if at all, as between Shri
E Mukesh Ambani and Shri Anil Ambani were personal to the
Ambani family and the Board of RIL was not aware of the
details of the settlement between Shri Mukesh Ambani and Shri
Anil Ambani.

F (d) The Vice Chairman and Joint Managing Director of
RIL, at the relevant time, Shri Anil Ambani was or in any event,
should be deemed to be fully aware of the nature of the rights
of RIL in relation to exploration and production of gas from
various gas-fields as also the provisions of the Production
G Sharing Contract (PSC). Significantly, the Production Sharing
Contract for Block KG-D6 was executed way back in the year
2000. Being Board managed company, the business and
affairs of RIL are under control and supervision of the Board of
Directors and in fact the Minutes of the Board meeting clearly
show that in all matters in which Shri Mukesh Ambani was or
H could be said to be an interested director, he had refrained from
RELIANCE NATURAL RESOURCES LTD. v. 767
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
participating in the deliberations and voting on the resolutions. A
The terms and conditions on which the gas was to be supplied
to the power plants of Reliance Patalganga Power Limited and
REL was to be at the discretion by the Board of Directors of
the Demerged Company who were not bound by any
"agreement" as between two groups of promoters. The Board B
of Directors of Demerged Company was obliged ·and in fact
had at all times kept the interests of the general body of
shareholders as being a paramount importance and had taken
such decisions as in the best judgment of the Board, accorded
to their duty as the Board with the shareholders interests being c
of utmost importance.

10. After considering the claim of both the parties viz.,
RNRL and RIL the "Company Judge has arrived at the following
conclusions":
0
"184. The conclusions are:

(1) The present company application under Section 392
of the Companies Act is maintainable.

(2) The Company Court, however, under Section 392 of E·
the Companies Act cannot direct or dictate to maintain or
amend or modify and/or insist for a particular clause or
clauses of such gas supply agreement or such other
commercial agreement/contract.
F
(3) The GSMA as formed and finalized in the Board of
Director's Meeting of RIL on 11.01.2007 and modified on
12.01.2007 is in breach of the Scheme.

(4) The MoU (Memorandum of Understanding/Family
Arrangement) and its content are binding to both parties G
RIL and RNRL and all the concerned, Mr. Mukesh Ambani
and his group of Companies and Mr. Anil Ambani and his
group of Companies have already acted upon at the pre
and post stages of the MoU and the pre and post stages
of the Scheme accordingly. H
768 SUPREME COURT REPORTS [2010] 5 S.C.R.

A. (5) The term "suitable arrangement" as referred in the
Scheme needs to read and interpret by taking into account
the terms of the MoU as well as the Scheme as referred
above. It is also necessary for the complete and full
working of the Scheme.
B
(6) The terms as mentioned in the MoU and GSMA need
to be suitable for both the parties subject to the
Government's policies and national, international practice
in supply of gas or such other products.

c (7) The contract of such nature is subject to the
Government's approval in view of NELP & PSC and such
related Government policies, but keeping in view the
several factors including the freedom and right of the
contractor/RIL and the limited and restricted scope of
D interference in such permissible commercial aspects of the
contractor, unless, it is in breach of any public policy and
· public interest.

(8) The supply of gas contracUagreement needs to be
clear and bankable documents for all the concerned
E
parties."

Finally, the Company Judge directed the parties to re-negotiate
for a "suitable arrangement".

F 11. As discussed earlier, aggrieved by the said order/
directions of the Company Judge, RNRL has filed Appeal No.
1 of 2008, RIL has also filed Appeal No. 844 of 2007 before
the Division Bench. During the course of hearing, considering
the public/national importance, the Division Bench permitted the
G Union of India to intervene and put forth their stand.

12. The Division Bench framed the following "issues for
consideration":

(1) Whether the Company Court has jurisdiction to entertain
H the Application filed by RNRL under the Companies Act, 1956?
•
RELIANCE NATURAL RESOURCES LTD. v. 769
RELIANCE tNDUSTRIES LTD. [P. SATHASIVAM, J.]
(2) What is a "suitable arrangement" between the two A
Companies in the matter of supply of gas for the power projects
of the Resulting Companies and its affiliates?

13. Answers by the Division Bench:

(a) The Division Bench has answered the first issue in the B
· affirmative. The reasoning of the Division Bench, however, is
different from that of the Single Judge. The Company Judge
had held that the Application was maintainable under Section
392 read with Section 394 of the Companies Act. The Division
Bench however found the Company Application to be C
maintainable on the basis of Clauses 17, 18, 20 to 24 of the
Scheme of Demerger itself.

(b) On the second issue, the Division Bench held as
follows: D

(i) The suitable arrangement was required to be made by
engrafting the MoU on the GSMA,

(ii) As far as the fixation of price is concerned, the
Government has the power to fix the price, but only for its "take" E
of the gas, and

(iii) Although the Government could lay down the Gas
Utilization Policy, such Utilization Policy would apply only to the
gas available for allocation after certain quantity of gas which
F
according to the Division Bench, "stood allocated" to RNRL as
per the MoU. The Gas Utilization Policy could apply only to the
balance quantities.

(iv) There was nothing in the PSC that prevented the
Contractor from selling gas at a price lower than the price G
approved by the Government and RIL could fulfill its obligation
of supply of gas at a price of US$ 2.34 per mmbtu.

14. Aggrieved by the above directions/conclusions RNRL,
RIL as well as U.0.1. have filed these appeals by way of special H
770 SUPREME COURT REPORTS [2010] 5 S.C.R.

A leave petition before this Court.

15. Heard Mis Ram Jethmalani and Mr. Mukul Rohatgi, Mr.
Ravi Shankar Prasad, learned senior counsel for RNRL, M/s
Harish N. Salve, and Mr. Rohington F. Nariman, learned senior
counsel for RIL and Mr. Gopal Subramanium, learned Solicitor
8
General, M/s Mohan Parasaran and Mr. Vivek Tankha,
Additional Solicitor General for the Union of India.

16. Historical background:

c Up to the early 90's, prior to the NELP and pre-NELP
years, natural gas was being produced only from the fields
operated by the Government companies, namely Oil & Natural
Gas Corporation (in short 'ONGC') and Oil India Limited (in
short 'OIL), out of blocks which were given to these companies
0 by the Government on nomination basis. Since these fields
were given on nomination basis and only to Government
Companies, the Government's power to regulate the Natural
Gas Sector was absolute.

Later, it was decided to open the sector to Private Sector
E Investment during the mid 1990s when private investment was_
sought on competition basis and certain blocks were awarded
to Private Sector companies under a Production Sharing
Contract (better known as the pre-NELP Production Sharing
Contracts). This was done to increase private investment in this
F sector since the exploration and production of oil and gas is
associated with considerable risk and no investment would
have been attracted if the APM regime continued. However, the
Contractors who signed the PSC were required to sell all the
gas produced and saved to the Gas Authority of India Limited,
G a PSU, and did not have marketing freedom as regards natural
gas.

The pre-NELP regime was replaced by the NELP regime
under which the PSC relevant to the present case was entered
H into between a Joint Venture composed of RIL and NIKO
RELIANCE NATURAL RESOURCES LTD. v. 771
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
Resources Limited and the Government of India. In the NELP- A
· 1 PSC, marketing freedom has been given to the contractor
to a limited extent subject to the overall regulation of the
Government.

17. Constitutional and other statutory Provisions: 8
"Article 297. Things of value within territorial waters or
continental shelf and resources of the exclusive
economic zone to vest in the Union- (1) All lands, minerals
and other things of value underlying the ocean within the
territorial waters, or the continental shelf, or the exclusive C
economic zone, of India shall vest in the Union and be held
for the purposes of the Union.

(2) All other resources of the exclusive economic zone of
India shall also vest in the Union and be held for the D
purposes of the Union.

(3) The limits of the territorial waters, the continental shelf,
the exclusive economic zone, and other maritime zones,
of India shall be such as may be specified, from time to
time, by or under any law made by Parliament." E

18. Article 39(b) of the Constitution envisages that the
State shall, in particular, direct its policy towards securing the
ownership and control of material resources of the community
as so distributed as best to sub-serve the common good. F

19. This Court, in the case of State of Tamil Nadu vs. L.
Abu Kavur Bai, (1984) 1 SCC 515 at 549 held that the
expression 'distribute' under Article 39(b) cannot but be given
full play as it fulfills the basic purpose of re-structuring the G
economic order. It embraces the entire material resources of
the community. Its goal is so to undertake distribution as best
to sub-serve the common good. It re-organizes by such
distribution the ownership and control. To distribute, would
mean, to allot, to divide into classes or into groups and
embraces arrangements, classification, placement, disposition, H
772 SUPREME COURT REPORTS [2010) 5 S.C.R.

A apportionment, the system of disbursing goods throughout the
community.

20. In Safar Jung Sugar Mills Ltd. etc. vs. State of Mysore
& Ors., (1972) 1 SCC 23 at page 36 paragraph 38, this Court
held as under:
8
"38 ............ Delimiting areas for transactions or pa11fes or
denotin'g price for transactions are all within the area of
individual freedom of contract with limited choice by reason
of ensuring the greatest good for the greatest number by
C achieving proper supply at standard or fair price to
eliminate the evils of hoarding and scarcity on the one
hand and availability on the other."

21. In Tinsukhia, Electric Supply Company Ltd. vs. State
D of Assam & Ors., (1989) 3 SCC 709, this Court affirmed the
views expressed in the above cases in the context of electricity
supply and also affirmed the Government's role in the securing
and distributing of the resources of the community that-best sub-
serves the common good.
E 22. This Court in numerous decisions has laid down that
in the award of tenders and the distribution of national property
and State largesse, the State is bound to follow the dictate of
Article 14.

F 23. In Ramana Dayaram Sheffy vs. International Airport
Authority of India & Ors, (1979) 3 SCC 489, this Court has
pointed out that :

" ........ The power or discretion of the Government in the
matter of grant of larg_ess including award of jobs,
G contracts, quotas, licences etc., must be confined and
structured by rational, relevant and non-discriminatory
standard or norm and if the Government departs from such
standard or norm in any particular case or cases, the action
of the Government would be liable to be struck do~n.
RELIANCE NATURAL RESOURCES LTD. v. 773
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
unless it can be shown by the Government that the A
departure was not arbitrary, but was based on some valid
principle which in itself was not irrational, unreasonable or
discriminatory "

24. In Food Corporation of India vs. Mis Kamdhenu Cattle 8
Feed Industries, (1993) 1 SCC 71, this Court observed as
follows:

"In contractual sphere as in all other State actions, the State
and all its instrumentalities have to conform to Article 14
of the Constitution of which non-arbitrariness is a C
significant facet. There is no unfettered discretion in public
law ; A public authority possesses powers only to use them
for public good. This imposes the duty to act fairly and to
adopt a procedure which is 'fairplay in action' .......... "
D
25. The Oil Fields (Regulation & Development) Act, 1948
and the Petroleum and Natural Gas Rules, 1959, make
provisions, inter alia, for the regulation of petroleum operation
and grant of licence and leases for exploration, development ,,
and production of petroleum in India. The Territorial Waters, E
Continental Shelf, Exclusive Economic Zone and Maritime
Zones Act, 1976 provides for the grant or a licence of Letter of
Authority by the Government to explore and exploit the
resources of the Continental Shelf and Exclusive Economic
Zone and any Petroleum operation.
F
26. Under the Companies Act, there are no provisions
except Sections 391 to 394 which deal with the procedure and
power of the Company Court to sanction the Scheme which falls
within the ambit of requirements as contemplated under these
sections. Since the Company Judge as well as the Division G
Bench of the High Court proceeded on the basis that it has
ample power and jurisdiction to supervise the Scheme as
sanctioned under Sections 391 to 394 of the Companies Act,
it is but proper to refer those sections which are as under:
H
774 SUPREME COURT REPORTS [2010] 5 S.C.R.

A "391. Power to compromise or make arrangements with
creditors and members

(1) Where a compromise or arrangement is proposed-

(a) between a company and its creditors or any class of
B them; or

(b) between a company and its members or any class of
them,

c the Tribunal may, on the application of the company or of
any creditor or member of the company or, in the case of
a company which is being wound up, of the liquidator, order
a meeting of the creditors or class of creditors, or of the
members or class of members, as the case may be to be
called, held and conducted in sµch manner as the Tribunal
D directs. ·

(2) If a majority in number representing three-fourths in
value of the creditors, or class of creditors, or members,
or class of members as the case may b~. present and
E voting either in person or, where proxies are allowed under
the rules made under section 643, by proxy, at the meeting,
agree to any compromise or arrangement, the compromise
or arrangement shall, if sanctioned by the Tribunal be
binding on all the creditors, all the creditors of the class,
F all the members, or all the members of the class, as the
case may be, and also on the company, or, in the case of
a company which is being wound up, on the liquidator and
contributories of the company:

Provided that no order sanctioning any compromise or
G arrangement shall be made by the Tribunal unless the
Tribunal is satisfied that the company or any other person
by whom an application has been made under sub-
section (1) has disclosed to the Tribunal, by affidavit or
otherwise, all material facts relating to the company, such
H
RELIANCE NATURAL RESOURCES LTD. v. 775
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
as the latest financial position of the company, the latest A
auditor's report on the accounts of the company, the
pendency of any investigation proceedings in relation to
the company under sections 235 to 351, and the like .
•
(3) An order made by the Tribunal under sub-section (2)
B
shall have no effect until a certified copy of the order has
been filed with the Re,gistrar.

(4) A copy of every such order shall be annexed to every
copy of the mernor-andum of the company issued after the
certifiecrcopy of the order has been filed as aforesaid, or C
in the case of a company not having a memorandum, to
every copy so issued of the instrument constituting or
defining the constitution of the company.

(5) If default is made in complying with sub-section (4), the D
company, and every officer of the company who is in
default, shall be punishable with fine which may extend to
one hundred rupees for each copy in respect of which
default is made.

(6) The Tribunal may, at any time after an application has E
been made to it under this section stay the commencement
or continuation of any suit or proceeding against the
company on such terms as the Tribunal thinks fit, until the
application is finally disposed of.

392. Power of Tribunal to enforce compromise and
arrangement : (1) Where the Tribunal makes an order
under section 391 sanctioning a compromise or an
arrangement in respect of a company, it-

(a) shall -have power to supervise the carrying out of the G
compromise or an arrangement; and

(b) may, at the time of making such order or at any time
thereafter, give such directions in regard to any matter or
make such modifications in the compromise or H
776 SUPREME COURT REPORTS [2010] 5 S.C.R.

A arrangement as it may consider necessary for the proper
working of the compromise or arrangement.

(2) If the Tribunal aforesaid is satisfied that a compromise
or an arrangement sanctioned under section 391 cannot
be worked satisfactorily with or without modifications, it
B
may, either on its own motion or on the application of any
person interested in the affairs of the company, make an
order winding up the company, and such an order shall be
deemed to be an order made under section 433 of this
Act.
c
(3) The provisions of this section shall, so far as may be,
also apply to a company in respect of vvhich an order has
been made before the commencement of the Companies
(Amendment) Act, 2001 sanctioning a compromise 'Or an
D · arrangement.

393. Information as to compromises or arrangements
with creditors and members - (1) Where a meeting of
creditors or any ~lass-0f creditors, or of members or any
class of members, is called under section 391,-
E
(a) with every notice calling the meeting which is
sent to a creditor or member, there shall be sent
also a statement setting forth the terms of the
compromise or arrangement and explaining its
F effect; and in particular, stating any material
interests of the directors, managiflg director or
manager of the company, whether in their capacity
as such or as members_ OJ creditors of the company
or otherwise, and the effect on those interests of the
G compromise or arrangement if, and in so far as, it
is different from the effect on the like interests of
other persons; and

(b) in every notice calling the meeting which is given
by advertisement, there shall be included either
H
RELIANCE NATURAL RESOURCES LTD. v. 777
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
such a statement as aforesaid or a notification of A
the place at which and the manner in which
creditors or members entitled to attend the meeting
may obtain copies of such a statement as
aforesaid.
B
(2) Where the compromise or arrangement affects the
rights of debenture-holders of the company, the said
statement shall give the like information and explanation
as respects the trustees of any deed for securing the issue
of the debentures as it is required to give as respects the C
company's directors.

(3) Where a notice given by advertisement includes a
notification that copies of a statement setting forth the
terms of the compromise or arrangement proposed and
explaining its effect can be obtained by creditors or D
members entitled to attend the meeting, every creditor or
member so entitled shall, on making an application in the
manner indicated by the notice, be furnished by the
company, free of charge, with a copy of the statement.
E
(4) Where default is made in complying 'with any of the
requirements of this section, the company, and every
officer of the company who is in default, shall be
punishable with fine which may extend to fifty thousand
rupees; and for the purpose of this sub~section any
liquidator of the company and any trustee of a deed for
F
securing the issue of debentures of Jhe company shall be
deemed to be an officer of the company:

Provided that a person shall not be punishable under this
sub-section if he shows that the default was due to the G
refusal of any other person, being a director, managing
director, manager or trustee for debenture holders, to
supply the necessary particulars as to his material
interests.
H
778 SUPREME COURT REPORTS [2010] 5 S.C.R.

A (5) Every director, managing director, or manager of the
company, and every trustee for debenture holders ot the
company, shall give notice to the company of such matters
relating to himself as may be necessary for the purposes
of this section; and if he fails to do so, he shall be
B punishable with fine which may extend to five thousand
rupees.

394. Provisions for facilitating reconstruction and
amalgamation of companies

C (1) Where an application is made fo the Tribunal under
section 391 for the sanctioning of a compromise or
arrangement proposed between a company and any such
persons as are mentioned in that section, and it is shown
to the Tribunal-
D
(a) that the compromise or arrangement has been
proposed for the purposes of, or in connection with, a
scheme for the reconstruction of any company or
companies, or the amalgamation of any two or more
companies; and
E
(b) that under the scheme the whole or any part of the
undertaking, property or liabilities of any company
concerned in the scheme (in this section referred to as a
"transferor company") is to be transferred to another
F company (in this section referred to as "the transferee
company");

the Tribunal may, either by the order sanctioning the
compromise or arrangement or by a subsequent order,
G make provision for all or any of the following matters:-

(i) the transfer to the transferee company of the whole
or any part of the undertaking, property or liabilities
. of any transferor company;

H (ii) the allotment or appropriation by the transferee
RELIANCE NATURAL RESOURCES LTD. v. 779
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
company of any shares, debentures policies, or A
other like interests in that company which, under the
compromise or arrangement, are to be allotted or
appropriated by that company to or for any person;

(iii) the continuation by or against the transferee
B
company of any legal proceedings pending by or
against any transferor company;

(iv) the dissolution, without winding up, of any transferor
company;
c
(v) the provision to be made for any persons who,
within such time and in such manner as the Court
directs dissent from the compromise or
arrangement; and

(vi) such incidental, consequential and supplemental D
matters as are necessary to secure that the
reconstruction or amalgamation shall be fully and
effectively carried out:

Provided that no compromise or arrangement proposed E
for the purposes of, or in connection with, a scheme for
the amalgamation of a company, which is being wound up,
with any other company or companies; shall be sanctioned
by the Tribunal unless the Court has received a report from
the Registrar that the affairs of the company have not been F
conducted in a manner prejudicial to the interests of its
members or to public interest:

Provided further that no order for the dissolution of any
transferor company under clause (iv) shall be made by the .
Tribunal unless the Official Liquidator has, on scrutiny of G
the books and papers of the company, made a report to
the Tribunal thaNhe affairs of the company have not been
conducted in a manner prejudicial to the interests of its
members or to public interest.
H
780 SUPREME COURT REPORTS [2010] 5 S.C.Ft

A · (2) Where an order under this section provides for the
transfer of any property or liabilities, then, by virtue of the
order; that property shall be transferred to and vest in and
those liabilities shall be transferred to and become the
liabilities of the transferee company and in the case of any:
8 property, if the order so directs, freed from any charge
Which is, by virtue of the compromise or arrangement, to
cease to have effect.

(3) Within thirty days after the making of an order under
this section, every company in relation to which the order
c is made shall cause a certified copy thereof to be filed with
the Registrar for registration.

If default is made in complying with this sub-section, the
company, and every officer of the company who is in
D default, shall be punishable with fine which may extend to
five hundred rupees.

(4) In this section~

(a) "property" includes property rights and powers of every
E description; and "liabilities" includes duties of every
description; and

(b) "Transferee company" does not include any company
other than a company within the meaning of this Act; but
F "transferor company" includes any body corporate, whether
a company within the meaning of this Act or not.

394A. Notice to be given to Central Government for
appl~aUons under secUons 391 and 394
The Tribunal shall give notice of every application made
G to it under section 391 or 394 to the Central Government,
and shall take into consideration the representations, if
any, made to it by that Government before passing any
order under any of these sections."

H 27. ISSUES ARISING IN THE PRESENT APPEALS:
RELIANCE NATURAL RESOURCES LTD. v. 781
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
·(a) Whether the Company Petition filed by RNRL u)1der A
Section 392 of the Companies Act, was
maintainable?

(b) Even if the Company Petition was maintainable,
whether the challenge raised by RNRL to the 8
GSMA, that it is not a "suitable arrangement" was
maintainable particularly in view of the fact that on
merits, the Company Judge had found, these
objections to be unsustainable?

(c) Whether the MoU entered into amongst the family C
members of the Promoter was binding upon the ..
corporate entity - RIL?

(d) Whether the terms of the MoU are required to be
incorporated in the GSMA as held by the Division D
Bench?

(e) Whether the provisions in the GSMA requiring
Government approval for supply of gas to RNRL is
unreasonable and that its inclusion renders the
GSMA as not a "suitab~ arrangement" as E
contended by RNRL?

(f) Having insisted upon a Gas Sale and Purchase
Agreement (GSPA) in conformity with the NTPC
draft GSPA dated 12th May, 2005 which contained F
an unequivocal stipulation for Government approval
for quantity, tenure and price, whether it is open to
RNRL to now contend that the Government approval
for supply of gas is not required and further that the
provision requiring Government approvals should G
be deleted from the GSMA/GSPA?

(g) Whether it is necessary for this Court to go into the
interpretation of the provisions of the PSC?

(h) i. Whether the approval of the Government is H
782 SUPREME COURT REPORTS [201 O] 5 S.C.R.

A required to the price at which gas is sold by the
contractor under the PSC?

ii. Whether the Government has the right to regulate
the distribution of gas produced which it has
B exercised by putting in place the Gas Utilization
Policy under which sectoral and consumer-wise
priorities (to the quantities specified) have been
identified and notified to RIL?

iii. Whether the Contractor has a physical share in the
c gas produced and saved which it can deal with at
its own volition?

(i) In view of the Gas Utilization Policy and the Pricing
Policy of the Government, whether the "Suitable
D Arrangement" for supply of gas to Dadri Power
Plant of REL can only be on the same terms as are
applicable to other allottees of gas and that too to
the extent of the quantity of gas that may be
allocated by the Government as and when the Dadri
Power Plant is ready to receive gas?
E
28. All these issues can be answered in the following broad
headings:

(A) Maintainability of the company petition:
F
(i) It has been argued before this Court that the original
company application was not maintainable as the Company
Judge (single Judge) did not have any jurisdiction. It has been
argued that the jurisdiction of the Court can only be found under
Section 394 of the Act and Section 392 is completely
G inapplicable. RIL has argued this because the wording of both
the provisions suggests that Section 392 provides much wider
. power to the Court with re~spect to making additions in the
Scheme. Section 392 (1)(b) states that the Court "may give such
directions in regard to any matter or making such modifications
H in the compromise or arrangement as it may consider
RELIANCE NATURAL RESOURCES LTD. v. 783
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
necessary for the proper working of the compromise or A
arrangement". On the other hand, Section 394 restricts this
power essentially to "incidental, consequential and
supplemental matters only". Mr. R.F. Nariman, learned senior
counsel appearing for RIL concentrated his argument with
reference to Sections 391 to 394 of the Companies Act. B
According to him, Section 392 of the Act had no predecessors
either in English Law or in the Companies Act of 1913. The
reason why the Legislature appears to have felt the necessity
of enacting Section 392 is to bring Section 391 on par with
Section 394. Section 394 applies only to Companies which are c
re-constructing and or amalgamating, involving the transfer of
assets and liabilities to another Company. It is thus, applicable
to a species of the genus of Company referred to under Section
391. Section 394, sub-section 1 specifically gives the
Company Court the power not merely to sanction the
0
compromise or arrangement but also gives the Company Court
the power, by a subsequent order, to make provisions for "such
incidental, consequential and supplemental matters as are
necessary to secure that the re-construction or amalgamation
shall be fully and effectively carried out" [Section 394(1 )(vi)]. This
power is absent in Section 391, so that companies falling within E
Section 391, but not within Section 394, would not be amenable
to the Company Court's jurisdiction to enforce a compromise
or arrangement made under section 391 and to see that they
are fully carried out. Hence, the power under Section 392 has
to be understood in the above context, and is of the same F
quality as the power expressly given to the Company Court
post-sanction under Section 394.

(ii) It is pointed out by Mr. Nariman that on the facts of the
present case, Section 392 does not apply at all, for the reason, G
that the sanctioned scheme on record is a scheme to which
both Sections 391 and 394 apply. That being the case, in order
to fully and effectively carry out an arrangement which has been
sanctioned under Sections 391 to 394, the Company Court
enjoys jurisdiction under Sections 394(1 )(i) to (vi) itself. He H
784 SUPREME COURT REPORTS [2010] 5 S.C.R.

A pointed out that this becomes clear beyond doubt from a
reading of sub section 3 of Section 392. He also pointed out
that Section 153-A of the 1913 Act is conspicuous by its
absence in sub-section(3) of Section 392. According to him,
this makes it clear that where a compromise or arrangement
B has been sanctioned under Section 153 A of the previous Act,
the provisions of Section 392 of 1956 Act will not apply, making
it clear that where a scheme is governed by the provisions of
Section 394, Section 392 would have no application.

(iii) The learned Single Judge founded his power to give
C relief in the Company Application filed by RNRL in.Section 392
on the ground that the applicants cannot be rendered
remediless. For this, Mr. Nariman pointed out that the Company
Judge was not correct for the simple reason that the remedy
lies in Section 394(1) sub-clause (vi) which gives ample power
D to the Company Court to fully and effectively carry out the
scheme governed by the provisions of Section 394. He also
pointed out that the marginal note can be looked at to indicate
the drift of the Section.

E (iv) It is the claim of the RIL that the power to enforce the
compromise or arrangement includes the power to make such
modifications in the compromise or arrangement as the Court
may consider necessary for the proper working of the
compromise or arrangement. However, Mr. Nariman further
F pointed out that the power to make mopifications does not
extend obviously to make substantial or substantive
modifications to the scheme itself which has been passed by
at least 75% of the shareholders in exercise of their right of
Corporate Democracy. In the present case, the Scheme was
G passed by an overwhelming majority of more than 99% of the
equity shareholders of RIL. He further pointed out that apart
from the language cif Section 392 the power under Section 392
cannot possibly be a greater power than the power under
Section 391 to sanction the original scheme. fn- Miheer H.
Mafat/al vs. Mafat/a/ Industries Limited (1997) 1 SCC 579,
H
RELIANCE NATURAL RESOURCES LTD. v. 785
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
this C~urt delineated the extent of power of the Company Court A
under section 391 in para 29 thus:

"29. However further question remains whet.her the Court
has jurisdiction like an appellate authority to minutely
scrutinise the scheme and to arrive at an independent B
conclusion whether the scheme should be permitted to go
through or not when the majority of the creditors or
members or their respective classes have approved the
scheme as required by Section 391 sub-section (2). On
this aspect the nature of compromise or arrangement C
between the company and the creditors and members has
to be kept in view. It is the commercial wisdom of the
parties to the scheme who have taken an informed
decision about the usefulness and propriety of the scheme
by supporting it by the requisite majority vote that has to
be kept in view by the Court. The Court certainly would not D
act as a court of appeal and sit in judgment over the
informed view of the parties concerned to the compromise
as the same would be in the realm of corporate and
commercial wisdom of the parties concerned. The Court
has neither the expertise nor the jurisdiction to delve deep E
into the commercial wisdom exercised by the creditors and
members of the company who have ratified the Scheme
by the requisite majority. Consequently the Company
Court's jurisdiction to that extent is peripheral and
supervisory and not appellate. The Court acts like an. F
umpire in a game of cricket who has to see that both the
teams play their game according to the rules and do not
overstep the limi~s. But subject to that how best the game
is to be played is left to the players and not to the umpire.
The supervisory jurisdiction. of the Company Court can also G
be culled out from the provisions of Section 392 of the Act
which reads as under....... .

... ... .Of course this section deals with post-sanction
supeNision. But the said provision itself clearly earmarks H
786 SUPREME COURT REPORTS [2010] 5 S.C.R.

A the field in which the sanction of the Court operates. It is
obvious that the supervisor cannot ever be treated as the
author or a policy-maker. Consequently the propriety and
the merits of the compromise or arrangement have to be
judged by the parties who as sui juris with their open eyes
B and fully informed about the pros and cons of the scheme
arrive at their own reasoned judgment and agree to be
bound by such compromise or arrangement. The Court
cannot, therefore, undertake the exercise of scrutinising the
scheme placed for its sanction with a view to finding out
c whether a better scheme could have been adopted by the
parties. This exercise remains only for the parties and is
in the realm of commercial democracy permeating the
activities of the concerned creditors and members of the
company who in their best commercial and economic
interest by majority agree to give green signal to such 'a
D
compromise or arrangement. ...... "

(v) Again ~n S.K. Gupta & Anr. Vs. K.P. Jain & Anr. (1979)
3 SCC 54, this Court dealt with the creditors' scheme
propounded under Section 391 to get a particular Company out
I: of winding up. Observations made in paragraphs 13 and 15 of
this judgment, if read out of context, would make it clear that
this Court has extended the power under section 392 to make
modifications which would include additions and omissions to
the scheme: at will. This is not the correct purport of the
F observations in para 13 and 15. In fact, the judgment very clearly
states that the limit on the Court's power is always to see that
the modifications are done for the proper working of the
scheme and not for any other purpose. A very important
paragraph of the· judgment is para 27 where this Court ultimately
G observed "strictly speaking, omission of the original sponsor
and substituting another one would not change the 'basic fabric'
of the scheme". This judgment therefore, must be understood
as construing Section 392 in a manner that would not permit
the Company Court to so modify a scheme as to change its
H basic fabric.
RELIANCE NATURAL RESOURCES LTD. v. 787
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
(vi) Another judgment of this Court is in Meghal homes (P) A
Ltd. vs. Shree Niwas Girni K. K. Samiti & Ors. (2007) 7 SCC
. 753 which squarely raises the issue as to whether in the guise
of modifying a scheme, the Company Court can substitute a
portion of the original scheme. This Court said an emphatic no:-
B
"53. But before that, we think that another step has to be
taken in this case. What has now been accepted by the
Division Bench, is not the scheme as modified by the
General Meeting as contemplated by Section 391 of the
Act. At least two of the modifications having ramifications C
are based on undertakings or statements made on behalf
of LBPL and there appears to be difference of opinion on
that modification even among the Somanis. There is also
the question whether the proposals ofa person who is not
one of those recognised by Section 391 of the Act, could
be accepted by the Company Court while approving a D
scheme. We are of the view that the scheme with the
modifications as now proposed or accepted, has to go
back to the General Meeting of the members of the
Company, called in accordance with Section 391 of the
Act and the requisite majority obtained. E

54. It was argued on behalf of the respondents that under
Section 392 of the Act, the court has the power to make
modifications in the compromise or arrangement as it may
consider necessary and this power would include the F
power to approve what has been put forward by LBPL who
has come forward to discharge the liabilities of the
Company on the rights in the properties of the Company
other than in the office building and in the godown, being
given to it for development and sale. As we read Section G
392 of the Act, it 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. This is only a power that
enables the court to provide for proper working of
H
788 SUPREME COURT REPORTS [2010] 5 S.C.R.

A compromise or arrangement, it cannot be understood as
a power to make substantial modifications in the scheme
approved by the members in a meeting called in terms of
Section 391 of the Act.

55. A modification in the arrangement that may be
8
considered necessary for the proper working of the
compromise or arrangement cannot be taken as the same
as a modification in the compromise or arrangement itself
and any such modification in the scheme or arrangement
or an essential term thereof must go back to the General
c Meeting in terms of Section 391 of the Act and a fresh
approval obtained therefor. The fact that no member or
creditor opposed it in court cannot be considered as a
substitute for following the requirements of Section 391 :>f
the Companies Act for approval of the compromise or
.D arrangement as now modified or proposed to be modified.

56. In Miheer H. Mafatlal v. Mafatlal Industries Ltd. this
Court had insisted that the procedural requirements of
Section 391 must be satisfied before the court can
E consider the acceptability of a scheme even in respect of
a company not in liquidation. Therefore, we are not in a
position to accept the argument on behalf of the
respondents that the scheme now as modified by the
decision of the Division Bench need not go back to the
F General Meeting of the members in terms of Section 391
of the Act. We must also remember that at least before
us there are serious objections to the modifications by one
of the Somanis who are the promoters of the Company in
liquidation and the sponsors of the arrangement and that
objection cannot be brushed aside.
G
57. We find that the modifications proposed alters the
position of the shareholders vis-a-vis the Company. Instead
of the Company reviving the spinning unit as
recommended by the State Bank of India Capital Markets
H Limited, as adopted in the General Meeting, now the
RELIANCE NATURAL RESOURCES LTD. v. 789
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
Company will have nothing to do with the mill lands and A
the whole of the mill lands will pass on to LBPL on LBPL
paying a value of Rs 97.50 crores to SCML and LBPL will
start an industry of its own in that property. This cannot be
considered to be a modification in the scheme necessary
for the proper working of the compromise or arrangement. B
This is a modification of the scheme itself. Same is the
position regarding the provision of replacing the resolution
passed that if any surplus amounts are available, SCML
would start a viable industry in any part of the State of
Maharashtra, by a commitment that SCML would establish c
an industry in any part of the State of Maharashtra on an
investment of Rs 20 crores. This again is an obligation cast
on the members of SCML and we are of the view that this
cannot also be taken to be a modification which the court
can bring about on its own under Section 392 of the Act D
on the pretext that it is a modification necessary for the
proper working of the compromise or arrangement. We
have no hesitation in holding that in any event, the Division
Bench of the High Court ought to have directed a
reconvening of the meeting of the members of the
Company in terms of Section 391 of the Act to consider E
the modifications and ensured that the approval thereof by
the requisite majority existed."

(vii) Mr. Nariman has submitted that the Company Judge
in the present case referred to S. K. Gupta's (supra) case and F
finally held that since Sections 391 to 394 are interconnected
it would be able to grant relief asked for in a Company
Application filed under Section 392. It is the claim of the Mr.
Nariman that it is not only incorrect but it would not be possible
in exercise of power under Sections 392 or 394 to modify the G
terms of clause 19 of the Scheme. Insofar as the Division
Bench, according to him, goes into various clauses of the
Scheme to say that the subsequent power of modification of
the Scheme itself is contained in these Clauses, more
particularly, clause 22. He contended that even if it is to be H
790 SUPREME COURT REPORTS [2010] 5 S.C.R.

A applied, no modification can be made under it without the
consent of the parties to the Scheme. According to him, if the
conclusion of the Division Bench is accepted, the resultant
order of the Division Bench is contrary to Clause 22 in that it
would not be possible to read the MoU dated 18.06.2005 into
B Clause 19 of the Scheme without the consent of the
Shareholders and the Board of Directors of RIL. He insisted
that the Division Bench of the High Court was bound by the
judgment in Meghal Homes where the jurisdiction of the
Company Court under Section 392 was clearly spelt out.
c (viii) Learned senior counsel for RNRL submitted that RNRL
seeks to enforce the terms of the Scheme of Arrangement as
sanctioned by the Bombay High Court vide its order dated
09.12.2005. As per the said Scheme, RIL was required to
execute a suitable arrangement for supply of gas to RNRL.
. D However, RIL has wrongfully caused the execution of a
document the effect of which would be that the business of
supply of gas, as contemplated in the Scheme of Arrangement,
would not be transferred to RNRL. He further argued that the
timing and manner of the impugned agreement as well as
E several clauses of the Scheme render the same virtually
unworkable. In these circumstances, it is pointed out that RNRL
has approached the Company Court seeking suitable reliefs
under Section 392 of the Companies Act.

F (ix) In the earlier part, the judgment of this Court in S.K.
Gupta (supra) has been discussed. It is the duty of the Court
to ensure that the Scheme is fully implemented. Learned senior
counsel for the RNRL pointed out that in this case it would imply
that this Court must ensure that the gas based energy
G undertaking is, in fact, transferred to RNRL as contemplated
under the Scheme. For this purpose, the Court has the
jurisdiction and power to direct modification of the GSMA
which was required to be executed pursuant to clause 19 of
the Scheme. Learned senior couns€1 further contented that
Section 392 shows the width of the power and the ultimate
H
RELIANCE NATURAL RESOURCES LTD. v. 791
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
consequence envisaged under the Companies Act for non A
implementation of the Scheme. The only limitation on the power
of the Court is that it cannot change the basic structure or
character or purpose of the Scheme. It was further pointed out
that subject to this, the power is of widest amplitude and
unlimited. On behalf of the RNRL it was pointed out that the B
decision of this Court in Meghal Homes (supra) is not
applicable to the present case, firstly, this judgment accepts the
principle that the Court has wide power under Section 392
though the same are circumscribed, secondly, the said
judgment does not refer to Gupta's case which was a binding c
decision of a three-Judge Bench. Further, in Meghal Homes
(supra) the challenge was the power of the Court to sanction
the Scheme and not power to direct modification to an already
sanctioned Scheme.

(x) In the light of the stand taken by both parties, this Court D
analyzed the relief sought for in the Company Application and
the relevant materials placed before the Company Judge.
Section 392 creates a duty to supervise the carrying out of the
compromise or arrangement. This power and duty was created
to enable the Court to take steps from time to time to remove E
all obstacles in the way of enforcement of a sanctioned scheme.
While sanctioning, it shall anticipate some hitches and
difficulties which it can remove by the order of the sanction itself
but clause 1(b) makes it clear that this power can also be
exercised after the scheme has once been sanctioned. So long F
as the basic nature of the arrangement remains the same the
power of modification is unlimited, the only limit being that the
modification should be necessary for the working arrangement.

(xi) In view of the above discussion, this Court holds that G
Section 392 is applicable to the Company Application filed by
RNRL. This is more so because the Company Court has
originally sanctioned the scheme under both Sections 391 and
394. Further, the position derived from Gupta (supra) the power
of the Court under Section 392 is wide enough to make any
H
792 SUPREME COURT REPORTS [2010] 5 S.C.R.

A changes necessary for the working of the Scheme. Therefore,
Court does have jurisdiction over the present matter. However,
it is made clear that the power of the Court does not ext:::nd to
re-writing the Scheme in any manner.

(xii) Furthermore, in the Companies Act, there is no
8
provision except Section 391 to Section 394 which deal with
the procedure and power of the Company Court to sanction the
Scheme which fall within the ambit of the requirements as
contemplated under these sections. In the absence of any other
provisions except Section 392, it is difficult to accept the
C contention as raised that the present application under Section
392 of the Companies Act is without jurisdiction. On the other
hand, Section 391 to Section 394 has ample power and
jurisdiction to supervise the scheme as sanctioned under the
Companies Act. As rightly observed by the Company Judge,
D the exigencies, facts and circumstances, play dominant role in
passing appropriate order under Sections 391 to 394 after
sanctioning of the Scheme. The Company Court is not
powerless and can never become functus officio. Sections 391
to 394 are interconnected and it can pass appropriate order
E for sanctioning of any Scheme including of arrangement,
demerger, merger and amalgamation. Therefore, the
application filed by RNRL under Section 392 is maintciinable.
Nevertheless, as observed earlier, the power of the Court does
not extend to re-writing the Scheme in any manner.
F
(B) Memorandum of Understanding (MoU)

(i) In order to understand the position of RNRL and RIL as
well as "suitable arrangement" under the "Scheme", it is but
proper to refer the contents of MoU (placed before the Division
G Bench of the High Court) which are as under:

"STRICTLY CONFIDENTIAL

MEMORANDUM OF UNDERSTANDING

H This Memorandum of Understanding (this "MoU") is made
RELIANCE NATURAL RES,OURCES LTD. v. 793
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
at Mumbai this_ day of June, 2005 amongst Kokilaben A
D. Ambani ("Kokilaben"), Mukesh D. Ambani ("Mukesh")
and Anil D. Ambani ("Anil") (each of Kokilaben, Mukesh
and Anil hereinafter referred to individually as a "Party" and
collectively as the "Parties.")
B
WHEREAS

A. After the demise of Shri Dhirubhai H Ambani (late
Dhirubhai) on July 6, 2002, Kokilaben is the head
of the Ambani family and has complete moral
authority over the family. Her four children, Mukesh, C
Anil, Dipti and Nina have, by Deed of Release
dated October 17-, 2002, releas, their entire
interest in the estate of late Dhirubhai in her favour.

B. Mukesh and Anil have been managing the various D
businesses of the family comprised in the Reliance
Group (the "Businesses"). Differences have arisen
between them in this behalf, and having regard to
recent events and with the intervention of
Kokilaben, the Parties have now agreed that the
E
best way forward would be to have a segregation
of the ownership and Businesses into two groups,
with one group owned, managed and controlled by
Mukesh and the other owned, managed and
controlled by Anil. Most of the key principles relating
to the segregation of certain family assets including
F
controlling interest in the Businesses and
companies have been agreed to between the
Parties.

c. Mukesh and Anil have also expressed their G
unconditional trust in Kokilaben and agreed that she
shall play a final and decisive role in resolving any
open issues in the process of settlement, and that
they shall abide by all decisions made by her to
facilitate early closure of the settlement. H
. 794 SUPREME COURT REPORTS [201 OJ 5 S.C.R.

A D. The Parties are now desirous of formally recording
their agreement in this behalf."

(ii) It has been the consistent position of RNRL that the
MoU signed between Mukesh Ambani and Anil Ambani is
binding, and therefore, the "suitable arrangement" under the
8
"scheme" should be nothing but the MOU itself. On the other
hand, RIL has consistently argued that the MOU is not binding
for them since it is merely a non-legal instrument between
certain family members. Therefore, it was argued that it will not
C bind the companies and the shareholders who have a
completely different personality.

(iii) Mr. Ram Jethmalani, learned senior counsel appearing
for the RNRL strongly relied on the following decisions of this
Court with reference to the importance of family arrangement
D (MoU) and its effect and value.

1. Kale & Ors. vs. Deputy Director of Consolidation &
Ors., (1976) 3 SCC 119 (Paragraphs 9, 17, 19, & 42) which
states as under:
E "9 ............ A family arrangement by which the property is
equitably divided between the various contenders so as
to achieve an equal distribution of wealth instead of
concentrating the same in the hands of a few is
undoubtedly a milestone in the administration of social
F justice. That is why the term "family" has to be understood
in a wider sense so as to include within its fold not only
close relations or legal heirs but even those persons who
may have some sort of antecedent title, a semblance of a
claim or even if they have a spes succession is so that
G future disputes are sealed for ever and the family instead
of fighting claims inter se and wasting time, money and
energy on such fruitless or futile litigation is able to devote
its attention to more constructive work in the larger interest
· of the country. The courts have, therefore, leaned in favour
H of upholding a family arrangement instead of disturbing the
RELIANCE NATURAL RESOURCES LTD. v. 795
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
same on technical or trivial grounds. Where the courts find A
that the family arrangement suffers from a legal lacuna or
a formal defect the rule of estoppel is pressed into service
and is applied to shut out plea of the person who being a
party to family arrangement seeks to unsettle a settled
dispute and claims to revoke the family arrangement under B
which he has himself enjoyed some material benefits ....... .

17. In Krishna Bihari/al v. Gulabchand, 1971 1 ·SCC
837, it was pointed out that the word "family" had a very
wide connotation and could not be confined only to a group
of persons who were recognised by law as having a right C
of succession or claiming to have a share.

19. Thus it would appear from a review of the
decisions analysed above that the courts have taken a very
liberal and broad view of the validity of the family D
settlement and have always tried to uphold it and maintain
it. The central idea in the approach made by the courts is
that if by consent of parties a matter has been settled, it
should not be allowed to be reopened by the parties to the
agreement on frivolous or untenable grounds. E

42 .......... As observed by this Court in T. V.R. Subbu
Chetty's Family Charities case, that if a person having full
knowledge of his right as a possible reversioner enters
into a transaction which settles his claim as well as the
claim of the opponents at the relevant time, he cannot be F
permitted to go back on that agreement when reversion
actually falls open."

2. K.K. Modi vs. K.N. Modi & Ors., (1998) 3 SCC 573
(Paragraphs 33 & 52) which states as under: G
"33. In the present case, the Memorandum of
Understanding records the settlement of various disputes
as between Group A and Group B in terms of the
Memorandum of Understanding. It essentially records a
H
796 SUPREME COURT REPORTS [2010] 5 S.C.R.

A settlement arrived at regarding disputes and differences
between the two groups which belong to the same family.
In terms of the settlement, the shares and assets of various
companies are required to be valued in the manner
specified in the agreement. ..... .
B 52. Group A contends that there is no merit in the challenge
to the decision of the Chairman of IFCI which has been
made binding under the Memorandum of Understanding.
The entire Memorandum of Understanding including clause
9 has to be looked upon as a family settlement between
c various members of the Modi family. Under the
memorandum of Understanding, all pending disputes in
respect of the rights of various members of the Modi family
forming part of either Group A or Group B have been finally
settled and adjusted. Where it has become necessary to
D split any of the existing companies, this has also been
provided for in the Memorandum of Understanding. It is a
complete settlement, providing how assets are to be
valued, how they are to be divided, how a scheme for
dividing some of the specified companies has to be
E prepared and who has to do this work. In order to obviate
any dispute, the parties have agreed that the entire
working out of this agreement will be subject to such
directions as the Chairman, IFCI may give pertaining to the
implementation of the Memorandum of Understanding. He
F is also empowered to give clarifications and decide any
differences relating to the implementation of the
Memorandum of Understanding. Such a family settlement
which settles disputes within the family should not be lightly
interfered with especially when the settlement has been
already acted upon by some members of the family. In the
G
present case, from 1989 to 1995 the Memorandum of
Understanding has been substantially aCted upon and
hence the parties must be held to the settlement which is
in the interest of the family and which avoids disputes
between the members of the family. Such settlements have
H
RELIANCE NATURAL RESOURCES LTD. v. 797
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
to be viewed a little differently from ordinary contracts and A
their internal mechanism for working out the settlement
should not be lightly disturbed. The respondents may make
appropriate submissions in this connection before the High
Court. We are sure that they will be considered as and
when the High Court is required to do so whether in B
interlocutory proceedings or at the final hearing."

(iv) However, Mr. Harish N. Salve, learned senior counsel
for the RIL while drawing our attention to Section 36 of the
Companies Act, 1956, submitted that the Memorandum and C
Articles shall bind the company and its members. According
to him, the Articles of Association are the regulations of a
company which are binding on the company and its
shareholders. He, therefore, pointed out that nothing outside the
Articles can bind a shareholder vis-a-vis the company. In
support of the above stand, he heavily relied on paragraph 9 D
of the judgment of this Court in V.B. Rangaraj vs. V.B.
Gopalkrishnan & Ors. , AIR 1992 SC 453 which reads as
under:

"9 ...... the private agreement which is lied upon by the E
plaitniffs whereunder there is a restriction on a living
member to transfer his shareholding only to the branch of
family to which he belongs in terms imposes two
restrictions which are not stipulated in the Article. Firstly,
it imposes a restriction on a living member to transfer the F
shares only to the existing members and secondly the
transfer has to be only to a member belonging to the same
branch of family. The agreement obviously, therefore,
imposes additional restrictions on the member's right to
transfer his shares which are contrary to the provisions of G
the Art.13. They are, therefore, not binding either on the
shareholders or on the company ...... "

29. It is seen from the above decision that the agreement
between the two groups of shareholders which impose certain
restrictions on the transferability of the shares held by them was H
798 SUPREME COURT REPORTS [2010) 5 S.C.R.

A not binding either on the company or its shareholders because
the restrictions so imposed by the agreement were contrary to
the provisions of the Articles, sale of shares held by one of the
two groups in breach of the agreement could not, therefore, be
held to be valid. He also pointed out that the agreement
B between the shareholders is not binding on the company unless
the company adopts it and it is incorporated in the Articles of
Association. Based on the above principles, he pointed out that
the de-merger Scheme was based on the .MoU and be treated
as guidance to the term suitable arrangement. He also pointed
c out that a family arrangement or the MoU has not been referred
to at any stage in the Scheme or in any representation made
to the Stock Exchange and the same is contrary to the RNRL's
own. pleading and their case. Mr. Harish Salve also relied on
various exerts from some of the letters/e-mails from Exhibit "F"
filed by RNRL. Some of the letters/e-mail dated 30.07.2005
0
from Mr. Harish Shah (RIL) to Mr. Venkat Rao (REL); e-mail
dated 06.10.2005 from Mr. Cyril Shroff to Mr. Sandeep Tandon/
RIL; e-mail dated 29.11.2005 from Mr. Cyril Shroff to Mr. Anil
Ambani; e-mail dated 14.12.2005 from RIL to Mr. J.P.
Chalasani and e-mail dated 27 .12.2005 from Mr. Sandeep
E Tandon (RIL) to Mr. Venkat Ponanda etc. but not disputed the
contents of the letters or correspondences and e-mails referred
therein. The existence of letters/correspondence and e'lmails
remain unchallenged.

F 30. In the light of the stand taken by both ~ides, this Col\rt
analysed the contents of MoU and the subsequent arrangement-'
after_ exchange of various letters/e-mails as well as·
deliberations among the officials of both the entities. It is clear
that both parties acted upon the said family arrangement/Mou
G dated 18.06.2005. The above referred letters and e-mails,
further confirmed that there is an arrangement made and
agreed between the RIL and ADAG (RNRL), it is also clear and
show that the discussion between the group of officials was
intended to expedite the implementation of the MoU by
H producing a "suitable arrangement". Though copy of the MoU
RELIANCE NATURAL RESOURCES LTD. v. 799
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
was not part of the record before the Company Judge, by A
consent, the above extracted portion was placed before the
Division Bench at the time of hearing of the appeal. It cannot
be accepted that neither RIL nor its Board Members were
aware of the contents of the MOU. In fact, the Company Judge
has pointed out that a specific reference was made in the B
Company Application No. 1122 of 2006 and there is no specific
denial by the RIL. The Press Release at the instance of their
mother Smt. Kokilaben Ambani (Exh. "D") about the family
arrangement/MOU cannot be over-looked. It is clear that
because of the efforts of Smt. Kokilaben Ambani, the mother c
of Mukesh Ambani & Anil Ambani, the family settlement has
been arrived at and followed by the Scheme of De-merger. It
is also clear from the materials i.e. exchange of letters and e-
mails and the deliberations by the officials of both entities and
their Board of Directors as well as the shareholders have D
agreed for the Scheme. Further it was demonstrated that after
execution of MOU, both the parties have been entering into
contracts and agreements as an independent entity. As pointed
out that except the gas supply agreement all other companies
as found are working and running their affairs smoothly.
E
31. Before the Division Bench, it was submitted by RIL that
the MoU amongst the promoters does not bind the corporate
entity RIL. It was not open to RNRL to produce the documents
at the stage of appeal which were not placed before the learned
Single Judge. The MoU was clearly in the private domain and F
was never placed in the corporate domain even though such
course of action was suggested by Mr. Cyril Shroff, the Solicitor
appointed to draw the Scheme of Demerger. It was also the
stand of the RIL that MoU was never placed before its Board
of Directors and contents thereof were not known to the Board. G
The correspondence contained in Exhibit F of the Company
Application, at best, goes to show that MoU was the broad
structure on which the demerger was to be worked out.

32. On the other hand, learned senior counsel appearing
H
800 SUPREME COURT REPORTS [2010] 5 S.C.R.

A for the RNRL demonstrated the existence, effect, sanctity and
the binding nature of MoU. It is their definite case that the
existence of MoU was specifically pleaded in para 6.6 of the
Company Petition. Learned Company Judge found that the
MoU existed and that the terms of MoU had to be implemented.
B Inasmuch as the relevant part of MoU concerning the gas
business have already been placed before the Division Bench
in appeal with the consent of the parties and the relevant terms
relating to price, tenure, volume etc. are admitted between the
parties, it is only the interpretation thereof which is to be
c considered. Further, the MoU itself seeks to divide the business
into two groups i.e. Anil Ambani Group and Mukesh Ambani
Group wherein both individuals would control and supervise
various businesses through various corporate entities. The
implementation of the Mou resulted in the scheme under
D Section 391 of the Act before the Company Court. Apart from
this, it was pointed out that the Board of RIL made a public
announcement on 18.06.2005 i.e. soon after the execution of
MoU on the same day publicly acknowledging, with gratitude
to their mother, Smt. Kokilaben that a settlement of disputes
has been reached between the members of the family. Further,
E Exhibit F reflects the knowledge of the terms of MoU with the
senior officials of both sides wherein efforts were being made
to work out mutually negotiated GSMA/GSPA which would be
in line with MoU.

F 33. Apart from the above factual details, Mr. Ram
Jethmalani, learned senior counsel appearing for RNRL
explained the Doctrine of Identification and submitted the family
arrangement was arrived at and signed by Smt. Kokilaben
Ambani, Shri Mukesh Ambani and Shri Anil Ambani. Among
G the three, Shri Mukesh Ambani was and is the Chairman and
Managing Director of RIL. As per the Doctrine of Identification,
a company is identified with such of its key personnel through
whom it works. Mr. Jethmalani further pointed out that his
actions are deemed to be action of the company itself, hence,
H RIL b deemed to be aware of and bound by the actions of the
RELIANCE NATURAL RESOURCES LTD. v. 801
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
Managing Director. In support of the principle "Doctrine of A
Identification", he relied on decisions of this Court, namely,
Union of India vs. United India Insurance Co. Ltd., (1997) 8
SCC 683 at page 695, Assistant Commissioner, Assessment-
//, Bangalore & Ors. vs. Mis Velliappa Textiles Ltd. & Ors, AIR
2004 SC 86 para 16, R. vs. Mc Donnell, (1966) 1 All. E.R. 8
193 at page 196 & 202, J.K. Industries Ltd. & Ors. vs. Chief
Inspector of Factories and Boilers & Ors. (1996) 6 SCC 665
paragraphs 44 & 45.

34. In the light of the stand taken by RIL and RNRL, the
contents of various clauses in MoU particularly with regard to C
distribution of gas and also the conclusion arrived by the
Company Judge and the Division Bench of the High Court have
been carefully verified.

35. Firstly, the MoU is not technically binding between RIL D
and RNRL. It is not in dispute that MoU is between three
persons and the personality of the company must be construed
separate from these persons. The principle emphasized by Mr.
Jethmalani i.e. Doctrine of Identification may be applicable only
in respect of small undertakings but in the case of RIL and E
RNRL, the companies have more than three million
shareholders, in such a situation, one cannot make the
companies' personality the same as that of persons involved.

36. Secondly, in the light of the conduct of Mukesh Ambani,
Chairman of RIL, MoU was definitely the instrument which was
F
the basis of the scheme. Therefore, it can be used as an
external aid for the interpretation of "suitable agreement" under
the scheme. To put it clear, the MoU is one of the ways in which
the intention of the parties can be made clear with regard to
what was considered suitable. Nevertheless, there is no specific G
requirement that the GSMA must confirm completely with the
Mou.

37. Thirdly, it must be pointed out that apart from the MoU,
"suitable arrangement" must be understood in the context of H .
'

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

A government policies, production sharing contract (PSC)
betWeen RIL and the Government, national interest and interest
of the shareholders. Therefore, in our view MoU is one of the
means of construing suitability of the arrangement and not the
sole means.
B
ffiL
38. Subsequent to the formation of the Scheme, the Board
of Directors of RIL framed the GSMA and GSPA. As per the
Scheme clause VIII and sub-clause (xvii), the Board of Directors
C of each of the resulting companies to be re-constituted in such
manner as is agreed betWeen each resulting companies and
Anil Ambani and thereupon each of the resulting companies
shall be controlled and managed by Anil Ambani. The
demerged company constituting the remaining Undertakings
D shall continue to be controlled and managed by Mukesh D.
Ambani. As per the preamble of the Scheme and even
otherwise the RIL being contractor in pursuance to the PSC,
remained under the control of Mukesh D. Ambani having object
to commence the production and sale of gas and further as
E REL has announced setting up of Gas Based Power
Generation of India. RIL proposed to use part of its gas
discovered for the generation of power for which purpose an
appropriate gas supply arrangement agreed to be entered into
between RIL and Global Fuel Management Services Limited
F (now RNRL) pursuant to which gas agreed to be supplied to
REL for their power projects including Reliance Patalganga
Power Limited, for the generation of power. This business of
supply of gas to REL for their power projects is an integrated
and/or constitute the Gas Based Energy Undertaking of RIL.
G The intention, therefore, throughout was even under the Scheme
to reorganize and segregate the business and undertakings to
provide focused management attention. In this background it
was contended by learned senior counsel appearing for RNRL
that it was necessary that RIL should have given full and proper
opportunity to the RNRL before passing such resolution hurriedly
H
RELIANCE NATURAL RESOURCES LTD. v. 803
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
on 11.01.2006 and before executing such GSMA and GSPA A
in question. As per clause 19 as recorded the suitable
arrangement should be suitable to both the parties in all
respects. In this aspect, the decision as taken hurriedly on
11.01.2006, therefore, was one sided, specifically taking into
consideration the background and/or events followed upto the B
sanctioning of the Scheme. As noted, the control over the Board
of the RNRL on 10.01.2006 was of RIL, as control over has not
been handed over to Anil Ambani. On 26.01.2006, final copy
of GSPA was made available by nominee of RIL to nominee
of Ambani Group. The drafts of GSMA and GSPA were only c
circulated on 10.01.2006 through mail. It is to be noted that
shares of RNRL were allotted/transferred to Anil Ambani only
on 27.01.2006 i.e. after the Board meeting held on the same
day. The New Board was re-constituted in accordance with
clause 17 of the Scheme on 07.02.2006. As per clause 6, RIL D
continued to manage the resulting companies till the effective
date in the capacity of trustees. Therefore, it is the claim of
RNRL that the Board of the Meeting and the Resolution and/or
execution of the said GSMA on 11.01.2006/12.01.2006 before
the actual transfer of control of the resulting companies to Anil
Ambani and before re-constitution of the Board as per clause E
17 of each resulting companies were against clauses 17 and
19 and the basic purpose of the Scheme in so far as the supply
of gas is concerned.

39. It was pointed out by the learned senior counsel for the F
RNRL that pending the decisions and discussion on various
aspects of gas supply agreement hurriedly in spite of objection
by them, the Board on 12.01.2006 took a decision by majority
and approved the GSMA and GSPA. It was contended by
RNRL that such decision cannot be said to be bona fide. The G
Resolution dated 12.01.2006 without new Board of Directors
of resulting companies is not as per the agreed terms of the
Scheme. It was also their claim that the decision as taken
hurriedly on 12.01.2006 raises various doubts and it is one
sided and it safeguards only the interest of RIL and not in the H
804 SUPREME COURT REPORTS [2010] 5 S.C.R.

A interest of RNRL or resulting companies as it was by the Board
of Directors of the RIL, the trustee company after the Scheme,
but before the nomination or formation of Board of Directors
of RNRL. It was argued that the procedure as followed to adopt
or resolve or execute the GSMA was unfair and unjust. In those
B circumstances, it was projected before the Company Judge as
well as the Division Bench that whether the parties have
committed any breach of clauses of the Scheme which is
creating hurdle.

40. The Division Bench has concluded that the allocation
C of gas to RNRL for its resulting companies, i.e., supply of gas
for power project of Reliance Patalganga Power Limited and
REL with the Gas Based Energy Resulting Company, a suitable
arrangement which is required tci be made by incorporating the
same in the GSMA and GSPA according to the MoU reached
D between the parties on 18.06.2005. It is useful to extract the
relevant portion of the MoU relating to gas supply which reads
as under:

"II. GAS Supply
E
(i) An expert international firm will be appointed to
evaluate the nature and extent of gas reserves
• particularly at KGD6 and all other gas fields from
which RIL produces gas from which gas could be
supplied to Reliance Energy Limited ("REL"), for all
F its projects (including without limitation its proposed
Dadri Power Project). The expert shall be
appointed by ICICI Bank Limited in consultation with
both groups (who must agree within 72 hours
hereof) and if they are unable to agree, an
G international energy consultancy firm, as may be
nominated by the energy/E&P department.of ICICI
Bank Limited will nominate an international expert
who will carry out this survey and provide an
independent report. Such international consultancy
H firm shall not have any conflict of interest. The report
RELIANCE NATURAL RESOURCE~ LTD. v. 805
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
of such agency could consider the DGH letter as A
one of the inputs and its decision shall be final as
to the quantity and nature of reserve (including
matters such as P, P2, P3 reserves) and this would
be the factual basis for the rest of the decisions. The
Mukesh Ambani Group will now move expeditiously B
for facilitating such-verification and is to provide all
information for this purpose.

(ii) On the assumption that only 12 MMSCD is the
current P1 reserve and other reserves are in the
stages of discovery, arrangements as to quantity of
c
"net gas" (RIL's entitlement of gas as reduced by
the quantity of the gas required for operation and
transportation ) are as follows:

(a) The first right would be to NTPC under its existing D
draft supply agreement to the extent of 12 MMSCD.
This would be for delivery on the west coast. In the
event that the NTPC contract does not materialize
or its cancelled, the entitlement of NTPC to the said
extent shall go to the Anil Ambani Group in addition E
to its entitlement of 28 MMSCD in (b) below.

(b) Thereafter, and subject to availability of adequate
P1 reserves the next 28 MMSCD would go to REL.
No sooner the P1 reserves (determined as per (i)
F
above), are identified (whether from KGD6 or
elsewhere), this would be included in a binding gas
supply agreement in favour of REL. This would be
at prices no greater than NTPC prices.

(c) Thereafter and for the entire future of the balance G
reserves (including new discoveries of gas from
new explorations and/or bids as may be submitted
from time to time), the quantity of gas would, at the
option of the Anil Ambani Group (exercised from
time to time), be split in the ratio of 60:40 with 60% H
806 SUPREME COURT REPORTS (2010) 5 S.C.R.

A to Mukesh Ambani Group and 40% to Anil Ambani
Group. Subject to the above, after the 28 MMSCD
tb REL, the next order of priority would be of RIL
for its captive consumption for Mukesh Ambani
Group Companies to th.e extent of a maximum of
B 25 MMSCD. Such 25 MMSCD will be set off
against 60% entitlement of tHe Mukesh Ambani
Group. An expert appointed by ~CICI Bank Limited
will provide guidance, within a period of 45 days
from this MOU, on the appropriateness of the
amount of 25 MMSCD or captive consumption, and
c in the event that the amount consid~red necessary
by such expert is materially less tha~ 25 MMSCD,
Kokilaben will reconsider the issue. Thereafter, the
next order of priority would be at Anil Ambani
Group's option, go to Anil Ambani Group. All such
D gas shall be supplied at market rates.

By way of examples:

If the P1 reserves are identified at 60 MMSCD, the
E sequence would be NTPC-12, REL-28 and RIL
(captive)-20.

In case the reserves are 100, the sequence would
be NTPC-12, REL-28, R!L(captive)-25, Anil
Ambani Group (second installment)-16.67 and in so
F far as the balance 18.33 is concerned, the same
would be shared in the ratio of 60:40. This shall be
an option but not an obligation.

(iii) For the first 28 MMSCD, the price and the
G commercial terms shall be the same as those
applicable to NTPC.

(iv) REL shall have the option to set up its own pipeline
from the gas field to its plant at its own cost. This

H
RELIANCE NATURAL RESOURCES LTD. v. 807
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
shall not make a difference to the price for the gas A
supplied by RIL to REL.

(v) REL shall have the option to take delivery of gas
at Kakinada on the East Coast and may construct
its own pipeline. However, REL would still have to
B
pay the transportation cost for supply to the West
Coast even if the facility is not used, but will have
the right to deal with the capacity as it deems fit and
to sell or assign the same to another party, on the
West Coast or otherwise.
c
(vi) 50% of the commitment for supply of gas would be
supplied in the financial year 2008-09 and the
balance 50% in 2009-10.

(vii) As soon as the P1 reserves are identified, a D
binding gas supply agreement, in accordance with
international best practices, bankable in the
international financial market would be finalized and
entered into, not later than 45 days from the date
of this MoU. As stated above, the NTPC supply
E
agreement would be a general guidance for the ·
same and shall as far as possible be the basis for
such contracts, and the terms of such contracts
shall be no less favourable than those of the NTPC
contract Mukesh will provide the Production
Sharing Contract and also correspondence with F
NTPC and the latest version of the draft contract to
the Anil Ambani Group. The gas supply working
group to discuss details.

(viii) Kokilaben recognizes that a long terms, stable G
.source of gas from RIL .. which has the largest find
of gas, was absolutely essential for the growth
plans of the Anil. Am bani Group and in order to
enable Anil to carry REL to even greater heights.
Kokilaben has, therefore, specially stressed and H
808 SUPREME COURT REPORTS [2010) 5 S.C.R.

A impressed Jpon Mukesh and Mukesh shall
personally E .1sure that at the time of finaliza~ie,,n of
the binding gas supply agreement the terms
provide the required conform and stability in these
agreements, even if that means some departure
B from the NTPC standard.

(ix) The gas supply/option agreements would be
between RIL and a 100% subsidiary of RIL, which
would be demerge to the Anil Ambani Group as part
of the Scheme of Arrangement. Such agreements
c would not be with REL.

(x) The gas supplied to the Anil Ambani Group by the
Mukesh Ambani Group shall not be used for
trading, other than trading within the Anil Ambani
D Group.

(xi) Swapping of gas is permitted.

(xii) (a) In relation to applicable governmental and·
statutory approvals, without in any manner
E mitigating RIL's responsibility to jointly work
towards obtaining such approvals, RIL will, if so
required by the Anil Ambani Group, give an
irrevocable Power of Attorney to the Anil Ambani
Group/REL to apply for an obtain all such
F governmental and regulatory approvals as are
necessary on its behalf.

(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
G
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 Group would
also have a claim for damages."
H
RELIANCE NATURAL RESOURCES LTD. v. 809
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
A perusal of above-mentioned clauses show that there is a A
fixed quantum of gas which stands allocated to RNRL, i.e.,
28MMSCD to REL and in the event NTPC contract does not
materialize or is cancelled, the entitlement of NTPC to the said
extent shall go to the RNRL in addition to its entitlement of 28
MMSCD in addition to this allocation from the cost and profit B
gas which will be available for sharing with the Union of India
by RIL. It is further seen that for entire future of the balance
reserves the quantity of gas be shared in the ratio of 60:40, i.e.,
60 % to Mukesh Ambani Group and 40% to Anil Ambani
Group. c
41. On going through the materials placed by RNRL, RIL,
the Company Judge and the Division Bench reached the·
following conclusions:

(a) GSMA/GSPA was hurriedly framed which reflects D
mala fides on the part of RIL.

(b) There·is no fraud on the part of RIL in terms of
Section 17 of the Contract Act as alleged by RNRL.

(c) The dispute in the present case is about conditions E
of supply (rate, quantity, tenure etc.) and the non-
compliance of the GSMA with MoU.

(d) GSMA/GSPA is not "suitable arrangement" as they
are not true to the MoU. F

(e) The Court, under Section 392, does not have the
power to add clauses and/or amend clauses.

(f) The parties must negotiate the contents of "suitable
arrangement" in the Scheme, since the Court is not G
an expert in such things.

42. On the very same issue, after analyzing all tile
materials, the Division Bench agreed with the Company Judge
that MoU was binding on the parties by giving different reasons. H
810 SUPREME COURT REPORTS [2010] 5 S.C.R.

A On this conclusion, the Division Bench ruled that all the aspects
of GSMA relating to supply of gas, tenure, pricing etc. must then
be the same as provided under the MOU. The Division Bench
also held that there is no absolute freedom to market the,gas
as argued by RNRL. Under Articles 21.6.2(b} and (c) of the
B PSC, the Government shall regulate the sale on the basis of a
formula. But at the same time, the Division Bench held that there
is nothing in the PSC to restrict the sale of gas by the contractor
at a price lesser than that approved by the Government. In those
circumstances, the Division Bench has concluded that the
c Contractor has freedom to sell gas at arms length pr;r;e to the
benefits of the parties to the PSC out of their share of profit
gas to which Article 21.6 of the PSC applies. The Division
Be.nch has finally held that "suitable arrangement" should be
entered into by the parties on the basis of the MOU.
D 43. On consideration of the above analysis, it is quite
reasonable that the test must be formulated to determine what
"suitable arrangement" means. The determination of "suitable
arrangement" must not only include the MoU but other
considerations also. Among various considerations, the prime
E aspect relates to the role of the Government, the proper
interpretation of PSC relating to pricing and valuation, national
interest relating to the interest of consumers and protection of
natural resources. At the same time, the other consideration
must relate to the interest of RNRL, i.e., whether the GSMA
F results in RNRL becoming a shell company and whether the
GSMA is a bankable agreement.

44. Insofar as the workability of GSMA, RNRL has fourfold
objection$. They are: 1) that the "suitable arrangement" under
G the scheme is nothing but the MoU; 2) that the GSMA is not a
bankable agreement; 3) malafide on the part of RIL to bring in
an illegal gas agreement; 4) Pursuant to the stand of the RIL
and its response, RNRL has raised six points of protestation.
The GSMA was put into the place in pursuance of Clause 19
of the scheme. Clause 19 of the scheme provides that in order
H
RELIANCE NATURAL RESOURCES LTD. v. 811
i-\ELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
to effectuate the demerger or RIL, a suitable agreement has A
to be formulated. In other words, the position of RNRL is that
"suitable arrangement" within the meaning of Clause 19 is
supposed to be the MoU. Such an arrangement must be suitable ,
for RNRL. According to RNRL, since GSMA is not a replication
of the conditions of the MoU and that it is not a bankable B
agreement it will reduce RNRL into a shell company. GSM.\
violates the scheme and must be replaced taking into account
the various points of protestation raised by them. On the other
hand, it is the claim of RIL that since the MoU is not a binding
document, there is no requirement that the GSMA must
replicate the MoU. Further, they questioned the stand of RNRL
that the GSMA is not suitable for RNRL. Further, they put-forth
their case that the GSMA is in consonance with the obligations
of RIL to the Government under the BSE and the requirements
flowing from the decisions of EGOM.
D
SUITABLE ARRANGEMENT:

45. Suitable Arrangement under Clause 19 of the scheme
must not be merely suitable for RIL alone. In other words, it has
a broader meaning. Such an arrangerr.ent must be suitable for E
the interest of shareholders of RNRL as reflected by MoU and
RIL, the obligations of RIL under the PSC, the National Policy
of gas including the decisions of EGOM and Gas Utilization
Policy (GUP) and the broader national and public interest.

46. There is a need to construct a suitable arrangement F
under Clause 19. Th.e broader construction of suitable
arrangement is that the arrangement must be suitable not only
for RIL and RNRL but also suitable with respect to the
government's interest under PSC, in consonance with the
decisions of EGOM or any other gas utilization policy as well G
as larger national interest. This is because gas is an essential
natural resource and is not owned by either RIL or RNRL. The
Government holds this natural resource as a trust for the people
of the country. Supply of gas is a matter of national interest and
in the present case, due to the very nature of the companies H
812 SUPREME COURT REPORTS [2010] 5 S.C.R.

A involved, there are huge number of shareholders and people
who will be indirectly affected by the policies of the companies.
Therefore, the arrangement flowing from Clause 19 must be
suitable for interest of all the above-mentioned persons.

47. Keeping the said object in mind, Clause 19 must be
8
interpreted by taking into account 1) the interest of RNRL as
reflected by the MoU; 2) the interest of the shareholders of RIL
and RNRL; 3) the obligations of RIL under PSC; 4) the national
policy of gas including the decisions of EGOM and Gas
Utilization Policy; and 5) broader national and public interest.
c
(0) PRODUCTION SHARING CONTRACT CPSC):

48. Some of the salient features of the PSC are as follows:

(i) Clause 6 of the Preamble makes it clear that
D discovery and exploitation will be in the over all
interest of India.

(ii) Article 8.3(k) makes the contractor is to be mindful
of the rights and interest of the people of India in
E the conduct of petroleum operations.

(iii) Article 10. 7(c) (iii) the contractor is duty bourid to ·
ensure that the production area does not suffer any
excessive rate of decline of production or an
excessive loss of reservoir pressure.
F
(iv) Article 32.2 makes it clear that the contractor is not
entitled to exercise the rights, privileges and duties
within the contract in a manner which contravenes
the laws of India.
G
(v) Article 21 (1) mandates that the discovery and
.production of riatur(i!I gas shall be in the context of
government's policy for the utilization of natural gas.
The above clauses in the form of articles make it
clear that PSC is subject to the Constitution of India,
H
RELIANCE 'NATURAL RESOURCES LTD. v. 813
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
the Oil Fields Act, 1948, the Petroleum and Natural A
Gas Rules, 1959, the Territorial Waters, the
Continental Shelf and Exclusive Economic Zone
and other Maritime Zones Act, 1976 and also the
gas utilization policy.
B
(vi) Article 27(1) deals with title to petroleum under the
contract areas as well as natural gas produced and
saved from the contract area vests with the
Government unless such title has passed in terms
of PSC. As per Clause (2), title remains with the C
Government till the time the natural gas reaches the
delivery point as defined in the PSC.

49. Therefore, it is not permissible for RIL to enter into a
contract with RNRL to supply fixed quantity of gas as the gas
continues to be the property of the government till the time it D
reaches the delivery point and thus, RIL has no right to dispose
of the same without the express approval of the Union of India.

50. This Court in State of Tamil Nadu vs. L. Abu Kavur
Bai, (1984) 1 sec 515 at 549 held "to distribute would mean E
to allot, to divide into classes or into groups and embraces
arrangements, classification, placement, disposition,
apportionment and the system of disbursing goods through out
the community.

51. In the light of the above, the Executive of the Union of F
India enjoys its Constitutional powers under Article 73 and
Article 77 (3) in order to fulfill the objectives of the Directive
Principles of State Policy relating to distribution of Natural Gas.
This Natural Gas is a material resource under Article 39(b). in
view of this, along with the contemplation of a Government's G
Policy for the utilization of Natural Gas under Article 21.1 and
the decision of this Court referred to above, the Executive
decided that distribution would include within its ambit
acquisition, including acquisition of private owned material
resources. The framing of the "Gas Utilization Policy" in H
814 SUPREME COURT REPORTS [2010] 5 S.C.R.

'· Aidentifying the priority sectors, and allocating the requisite
quantities in accordance with the needs of the said sectors and
subjecting marketing freedom to the order of priority and
guidelines framed is very much in accordance with law.
Consequently, Article 21.1 and Article 21-.3-shoutd oe read In
B consonance with the 'Gas Utilization Policy and the latter is
neither inconsistent with the provisions of the Constitution, nor
the Oil Field Regulation Act, 1948, Petroleum and Natural Gas
Rules 1959 and the Articles of the Production Sharing Contract
referred to above.
c 52. To put it clear, both in terms of the Gas Utilization Policy
and the Production Sharing Cohtract, Government in the
capacity as an Executive of the Union can regulate and
distribute the manner of sale of Natura1 Gas through allotments
and allocation which would sub-serve the best interest of the
D country.

53. At the outset, it is to be noted that the price determined
by the Government is not the subject matter of either the
Company Application nor 1s it an issue which arises out of the
E impugned judgment. There is no duly constituted proceeding
where any challenge has been laid to Government Policy, price
fixation, grant or refusal of approval. Further, without such a
proceeding in existence and without NTPC being a party in the
present proceedings, any issue touching upon the validity of
F price fixation or price formula does not arise.

54. The price of $ 4.20/mmbtu is based on the formula
approved by the Government under its powers pursuant to the
terms of the PSC. The policy of the Government is not under
challenge or adjudication before the Court.
G
55. Mr. Gopal Subramanium, learned Solicitor General
explained that up to early 1990s, prior to NELP and pre-NELP
years, gas was being produced only from the fields operated
by the Government companies, viz., ONGC and OIL, out of
H blocks which were given to these companies by the
RELIANCE NATURAL RESOURCES LTD. v. 815
RELIANCE INDUSTRIES LTD. [P. SATHASiVAM, J.]
Government on nomination basis. Such gas was subjected to A
administered price regime. This was because, firstly, the fields
were given on nomination basis and not on competition basis
and secondly, to the Government companies which are subject
to directions of the Government. Government, at that time, was
guided primarily by the needs of the consumers who naturally B
liked to get the gas as cheap as possible. Therefore, the basis
for Administered Price Mechanism (APM) pricing was cost-
plus. Cost of production plus marginal profits as may be
determined by Government was the sale price. Fields were
given to Government-owned companies on nomination basis c
till early 1990s. There was, however, the problem of augmenting
the production. Exploration and Production was at the core of
energy security and hence it was decided to open the fields to
Private Sector investment. During mid-1990s, known as pre-
NELP years, private investment was sought on competition D
basis and certain blocks were awarded to them under a
Production Sharing Contract. The pricing formula was
specifically mentioned in such contracts. This was a major
departure from a cost-plus or APM regime. It was thought that
without this, private investment will not take place. Pre-NELP E
regime was further improved to NELP regime. Sourcing of
investment, technology and efficient operations from
companies within ·the country and from outside on a level
playing field with domestic public sector companies was the
main feature of the NELP regime and, therefore, the 'arm's
length' price, which is another name for market price, was F
introduced in the PSCs of NELP. Exploration and production
of oil and gas is associated with considerable risk and no
investment would have come if product prices were subjected
to cost-plus or administered price regime. So, the NELP
pricing regime provides for arm's length price which is another G
name for market price. But since the gas market is not fully
developed unlike markets for crude oil, it is stipulated in the
PSC that there will be a formula or basis for the determination
of the prices Which shall be approved by the Government prior
to sale and for granting this approval, Government can not be H
816 SUPREME COURT REPORTS [2010] 5 S.C.R.

A arbitrary but shall take into account the prevailing policy, if any,
on pricing of natural gas, including any linkages with traded
liquid fuels. The relevant PSC provisions in NELP-1 which guide
the pricing of KG 0-6 gas, are as follows:

"Article 21.6.1 - The Contractor shall endeavour to sell
B
all Natural Gas produced and saved from the Contract
Area at arms-length prices to the benefits of Parties to the
Contract.

Article 21.6.2 - Notwithstanding the provision of Article
c 21.6.1, Natural Gas produced from the Contract Area shall
be valued for the purposes of this Contract as follows:

(a) Gas which is used as per Article 21.2 or flared with
the approval of the Government or re-injected or
D sold to the Government pursuant to Article 21.4.5
shall be ascribed a zero value;

(b) Gas which is sold to the Government or any other
Government nominee shall be valued at the prices
actually obtained; and
E
(c) Gas which is sold or disposed of otherwise than in
accordance with paragraph (a) or (b) shall be
valued on the basis of competitive arms length
sales in the region for similar sales under similar
F conditions.

Article 21.6.3 - The formula or basis on which the prices
shall be determined pursuant to Articles 21.6.2 (b) or (c)
shall be approved by the Government prior to the sale
of Natural Gas to the consumers/buyers. For granting this
G approval Government shall take into account the
prevailing policy, if any, on pricing of Natural Gas
including any linkages with traded liquid fuels, and it may
delegate or assign this function to a regulatory authority
as and when such an authority is in existence:_
H
RELIANCE NATURAL RESOURCES LTD. v. 817
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
It is further pointed out that in accordance with this approach, A
Government asked the Contractor to submit a formula on arm's
length basis. EGOM was constituted by the Government of India
in August, 2007 which looked into the pricing and utilization of
gas in terms of the Governmen't's rights and obligations under
the PSC. RIL submitted a formula based on Arm's Length B
principle, having obtained quotations from users of gas. The
proposal of RIL was examined by Committee of Secretaries
(COS) and later by PM's Economic Advisory Council. EGOM,
assisted by their views, approved a newly suggested formula
with certain modifications, on 12/09/2007. The price formula c
approved by the EGOM which is to be applicable uniformly to
all sectors is as follows:

Price (in US$ per mmbtu) =2.5 + (Crude Price 0.15 - 25)
56. It is further pointed out that the said exercise was D
undertaken by the government on an independent application
of mind and government differed from the Contractor and the
contractor relented leading to a lower price being fixed at $4.2
instead of $4.32 claimed by the contractor. This formula is valid
for 5 years as per the EGOM decision. According to the E
formula, the price may vary between US $ 4.2 to US $ 2.5/
mmbtu during a period of 5 years. With crude prices of US $
60/barrel or more, the price will be US $ 4.2/mmbtu; for US $
25/barrel, it will be US $ 2.5/mmbtu. The formula, thus, imposes
a ceiling on gas price at US $ 4.2/mmbtu. EGOM also decided F
on gas utilization policy in May 2008 whereby the priority sector
and consumers were decided.

57. It is also brought to the notice of this Court that EGOM
consisted of the Chairman (External Affairs Minister), who was
a' very senior Minister in the Council of Ministers, Ministers of G
the consuming sectors (such as Fertilizer and Power), the
Minister from producing Sector (i.e., Petroleum & Natural Gas),
and the Ministers in charge of Ministry of Finance, Law and
Corporate Affairs, besides Planning Commission.
H
818 SUPREME COURT REPORTS [2010] 5 S.C.R.

A 58. The pricing formula/basis as per the PSC has to be:

(a) Firstly on arm's length basis,

(b) Secondly, to the benefit of the contractor as well as
the Government;
B
(c) Thirdly, having linkages with traded liquid fuels, and

(d) Fourthly, Government will have to perform
Regulator's fcmclion till one is appointed for the
purpose.
c
59. The following table will indicate ttie pricing prevalent
in India in respect of gases from other fields (excluding, of
course, the gas from the Government companies' fields, which
are at administered prices):
D
(in US$/mmbtu)

PMT (weighted) 5.51

Rawa 3.5
E
Rawa Satellite 4.3

Lakshmi 4.75

Weighted average 5.28
F
60) The fixation of price arose before the EGOM only in
August, 2007 when the price formula was considered. As
shown above, all prices prevailing in India and abroad indicated
a price which was in the region of $ 4.2. The Contractor had
G asked the Government to approve it for RNRL in 2006, but the
Government rejected it as it was a related party transaction.
'Arms length sales' has been defined in Article 1.8 of the PSC
as follows:

"Arms Length Sales" means sales made freely in the open
H market, in freely convertible currencies, between willing
RELIANCE NATURAL RESOURCES LTD. v. 819
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
and unrelated sellers and buyers and in which such buyers A
an sellers have no contractual or other relationship directly
or indirectly, or any common or joint interest as is.
reasonably likely to influence selling prices and shall, inter
alia, exclude sales (whether direct or indirect, through
brokers or otherwise) involving Affiliates, sales between B
Companies which are Parties to this Contract, sales
between governments and government-owned entities,
counter trades, restricted or distress sales, sales involving
barter arrangements and generally any transactions
motivated in whole or in part by considerations other than c
normal commercial practices."

61. Mr. Gopal Subramanium reiterated that the
submissions made pertaining to the PSC are without prejudice
to the stand of the Government vis-a-vis NTPC and also without
prejudice to the submission that this Court is not called upon D
in the present proceedings to interpret the PSC.

62. In the case on hand, Price formula was approved by
Government in September, 2007 when it was expected that gas
would be produced from the basin in June, 2008. The utilization E
of_40 mmscmd of gas was decided upon in the months of May,
2008 in terms of sectors and units to which gas would be
supplied. As the production stabalized and further volumes of
gas were known to become available, the government recently
decided on the utilization of a further volume of 19.826 (+0.875) F
mmscmd on firm basis + 30.00 mmscmd on fallback basis in
October, 2009. As emphasized earlier, it is up to the owner (the
Government) to decide as to how to utilize the gas and at what
price it can be sold and this has been done in accordance with
Production Sharing Contract (PSC) which has a statutory basis. G
The PSC under Article 21.1 makes it clear that the Contractor
is bound by the Government's policy for utilization of natural gas.

63. The position is that under Article 21.6.1 of the PSC,
the gas must be sold at an arm's length price. Article 21.6.2
states that notwithstanding 21.6.1, if the gas is sold not to the H
820 SUPREME COURT REPORTS [2010) 5 S.C.R.

A Government or its nominee, it must be sold on the basis of
"competitive arm's length sales in the region for similar sales
under similarconditions", Importantly, Article 21.6.3 states that
the basis on which such prices are to be determined shall be
approved by the Government prior to the sale. In the present
B case, the formula submitted by RIL was looked into by EGOM
and examined by the Committee of Secretaries and PM's
Economic Advisory Council. Due to this the price was
determined to be $ 4.20, on the basis of the formula, price
, equivalentto 2.5 +(Crude Price-2l))0.15.
c 64. Another important consideration to be kept in mind is
that the PSC overrides any other contract which may be
entered into for the supply for gas. This prineiple flows from the
following a) the natural. resource, gas, is held by the ·
Government and trust on behalf the people. Therefore, for legal
D purposes, the Government owns the gas till it reaches its final
consumer; b) the PSC is the basis on which the contractor
exercises his right over the supply of gas. Since ~t is the very
basis of such a right, the contractor does not have the
competent power to give any rights which do not accrue to it
E under the PSC.

65. One of the main purposes of the PSC is pricing and
distribution of gas. Though there is ''freedom of trade". within
the PSC, but this freedom is exercised by the contractor through
F a transparent bidding· process and non-interference of the
Government in the administration of gas supply. As a matter
of policy also, the Government must be free to determine the
valuation formula as well as the price. Therefore, keeping these
considerations in mind, the Government's interpretation of the
G PSC as has been lucidly demonstrated by the learned Solicitor
General is valid. Thus the Government has the power to
determine valuation as well as price for the purpose of the
PSC.

66. It is also relevant to answer a fundamental question that
H
RELIANCE NATURAL RESOURCES LTD. v. 821
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
is whether the power of the Government under the PSC to A
. q~termine the valuation as well as pricing is the selling price
or is it the price only for the determination of the share of the
Government or is it the price at which RIL must sell the gas to
RNRL. The Division Bench of the High Court has held that even
if the price is to be determined by the Government, there is no B
reason why RIL cannot sell the gas to RNRL at a lower price
than that. This position is unsustainable for two reasons:

(1) The power of the Government under the PSC is
quite broad and includes the power to regulate the C
price and distribution of gas. Such a power
requires determination of price of supply and ..not
only for the determination of the share of the
Contractor but also for the Government. Thus
keeping the objectives of the PSC in mind, it would
not be possible to restrict the power of the D
Government.

(2) The arrangement in pursuance of Clause 19 of the
Scheme must be suitable for the shareholders-of
RIL as well. The position of RIL is that if gas is sold E
at $2.34 that is at a price lower than the one
decided by the Government, there will be a
disconnect between the actual amount which the
Contractor will earn from the sale of gas and the
amount which will be deemed to have been earned F
by the Contractor under the PSC. Due to this, the
Contractor would be losing out on its own profits
which RIL claims would be halved. It is also the
grievance of RIL that the Court must take into
account the fact that the PSC provides for the G
legitimate rights of the Contractor to earn certain
profits. If these profits are reduced to such a
degree, it would affect the interest of the
shareholders of RIL.

(3) On the other hand, the posjtion of RNRL as argued H
822 SUPREME COURT REPORTS [2010] 5 S.C.R.

A . before us is that the GSMA is not suitable for them
because it was not a bankable contract and that the
MoU is the suitable arrangement. The question
remains whether the GSMA is unsuitable due to it
not being a bankable contract or it reducing RNRL
B to a shell company.

BANKABLE CONTRACT:

67. The question of bankability has been argued in detail
by RIL. Mr. Salve, learned senior counsel pointed out that GSMA
C cannot be considered a non-bankable contract. On behalf of
RIL, it was pointed out that the question of bankability has to
be seen in the context of the Power Project that would be and
or should be promoted by the RNRL. There is no evidence
whatsoever to show that financing of any power project ~as
D declined because gas supply arrangement was considered to
be non-bankable. It bears emphasis that under the GSMA in
respect of specific power projects, a GSPA qua that project
would be entered into.

E 68. Normally, a banker financing a non-recourse project
(i.e_ a situation where the finance for the project can only be
recovered from the project and not from the assets of the owner
df the project beyond those of the project itself) would insist on
full security not only from the physical assets but also from
revenue streams (normally the sale price of electricity would be
·F required to be put in escrow) a• well as firm supply contract of
scarce resources like coal supply or gas supply or other such
valuable resources supply contract. The banker could assign
this resource to some other liquid buyer and thereby recover
its debt. Similarly, if the banker is unable. to recover its debt
G because of the default by raw-material supplier (on which the
project is based), the banker could directly recover the
liquidated damages, in repayment of its debts from such raw
material supplier. These are general features of "banker
contracts".
H
RELIANCE NATURAL RESOURCES LTD. v. 823
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
69. RNRL's case is that the project being promoted require A
bankable contracts because they were "non recourse projects"
i.e. these projects would be self sustainable project which were
by themselves to be commercially and economically feasible
not requiring any support or guarantee from the parent i.e. no
recourse to parent company in case of default. There is no such B
understanding either in the MoU or in the Scheme.

70. RIL facilitates for production of gas and REL's Dadri
power plant was to be completed in the same time frame. When
RIL has put its equity and also borrowed money and completed
the project, RNRL is not even in initial stage of construction of C
its power project. Obviously to secure finance for a project
RNRL would inter alia have to establish that gas was available
for that project on suitable terms. For that purpose, RIL had
proposed in the GSMA that it would enter into a specific gas
supply contract that would have a definite tenure, definite price D
and definite quantity. The submission that the GSMA is not a
bankable agreement has to be seen in this context.

71. It was pointed out by RIL that whether or not the contract
is bankable is not a question of law but a question of fact. There E
are two ways to determine this, namely -

(a) by way of fact evidence showing that banks/
financial institutions/Funding agencies had rejected
the project on account of unsuitability of certain
clause of GSMA; or F

(b) ·expert evidence suggesting that on the basis of
such GSMA it could not be possible for RNRL to
raise funds for the gas based power project.
G
72. It was further pointed out that RNRL has acted in
furtherance of GSMA. It applied for grant of permission to lay·
pipelines on an assertion that the GSMA is a suitable and valid
1
binding contract. In its letter dated 18th December, 2006 after
filing of the petition RNRL sought Government's approval for H
824 SUPREME COURT REPORTS [2010] 5 S.C.R.

A laying pipeline. RNRL has acted under the price approval
clause of the GSMA by seeking approval of the price of US $
2.34. RNRL had also moved the Government for seeking
approval of the price of US $ 2.34 by their letter dated 17th July,
2007.
B
73. While RNRL had all along been contending that for want
of bankable gas supply agreement it could not establish a
power plant including Dadri. In fact, money has already been
raised$ 510 m for Dadri Plant by way of External Commercial
Borrowings. This position was candidly accepted by RNRL.
C Reliance Power Ltd., the company that is now promoting Dadri
has raised Rs.11000 crores from the public. The shortage of
funds is an excuse - it is simply not true.

74. Furthermore, according to RIL, it is a fact that other gas
D based power plants has been set up in the country without
having any long term supply of gas contrary to what is being
alleged by RNRL. It is, therefore, submitted that the contention
that GSMA is not a bankable document is without any factual
basis.
E
75. RNRL has enumerated the following main elements
which have, according to them, resulted in the agreement being
not bankable :-

1. Price- price of US $ 2.34 wrongly subjected to
F government approval

2. Term- as per the formula (clause 3b) given in the
GSMA, the term of supply comes to be just 1 to 4
years instead of 17 years. Whereas the NTPC
G contract contains a clear period of 17 years.

3. Quantity- as per the formula in clause 3.1 (c) of the
GSMA, RNRL would receive only 6 MMSCMD of
gas instead of 28 even if the total production is 38.

H 4. Capping of liability- clause 14.3 (i) of the GSMA
RELIANCE NATURAL RESOURCES LTD. v. 825
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
limits the liability of the seller i.e. RIL to maximum A
of 6 months only.

5. By quoting clause 13.8 and 13.9 of the GSMA
submitted that as a result of these clauses if the
government does not accept the price which is the 8
basis for determination of the government's share
in Profit petroleum under the PSC, the GSMA then
will stand annulled.

76. In view of all these arguments and counter-arguments
regarding the unsustainability of the arrangement under the C
GSMA, we hold that it is not proper for the court under Sections
391-394 to make modifications of this nature in the Scheme.
These changes must be arrived at by the parties themselves
through negotiation. Furthermore, we hold that such
negotiations must be done within the ambit of the Government D
policies, including the over-riding effect of the PSC (including
the Development Plan under Article 10.7), EGOM decisions
and other related national policies.

(E) ROLE OF GOVERNMENT:
E
77. Though in the earlier part, we have adverted to certain
aspects about the government's role since the above issue is
relevant for disposal of the dispute between the two entities, it
would be beneficial to once again narrate certain facts and
decide the issue. F

78. In 1999, NELP announced to award petroleum blocks
for exploration, development, production of petroleum and
natural gas. RIL with NIKO were the successful bidders for block
KG-D6. Pursuant to the same, the government and the G
contractor (RIL & NIKO) entered into a Production Sharing
Contract (PSC). In 2002, RIL & NIKO announced discovery of
significant result from KG-06 b.lock.

79. In 2003, NTPC floated a, global tender for supply of gas
H
826 SUPREME COURT REPORTS [2010] 5 S.C.R.

A to their power projects. RIL succeeded in its bid to sell, transport
and deliver 132 Trillion British thermal unit (TBtu) or 1000000
MMBTU. NTPC confirmed the same on 16th June 2004. In a
board meeting of Reliance Energy Limited (REL) held in 2004
which was attended by Mukesh Ambani and other members
B of RIL recorded that gas from KG basin would be supplied for
the power projects of REL. In 2005, MoU was arrived at by both
the parties and Anil Ambani resigned as a Joint Managing
Director of RIL. Thereafter, a scheme of arrangement was
moved C!nd the companies decided to move Bombay High
c Court for sanction of the scheme of demerger. The High Court
approved the scheme. The scheme provided that an
appropriate gas supply arrangement will be entered into
between RIL and RNRL.

80. The learned Company Judge in his order has
D concluded that the GSMA is not in terms of the scheme. MoU
is binding on both partiE)s. The terms as mentioned in MoU and
GSMA need to be suitable for both the parties subject to
government policies and national and international practice in
supply of gas or such other products. The Company Judge
E further said that such a contract is subject to government's
approval in view of NELP & PSC, but keeping in view the
several factors including freedom and right to the contractor/
RIL and the limited and restricted scope of interference in such
commercial aspects, unless, it is breach of any public policy
F or interest.

81. \/Vhen the matter was taken up before the Division
Bench, the Division Bench had permitted the Union of India to
join as intervener in the appeals for the limited purpose of
G assisting the court in the matter relating to Production Sharing
Contract between the union and the RIL with particular emphasis
to Article 21 of the contract as the Division Bench was of the
view that the pricing and distribution of gas has far reaching
consequences.

H 82. Before the Division Bench, on behalf of the Union of
RELIANCE NATURAL RESOURCES LTD. v. 827
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
India, it was submitted that India has been facing a chronic A
shortage of natural gas due to demand and paucity of supply ..
Under NELP, the government has given contractors the
freedom to market gas as well as oil in India in accordance with
the terms and conditions provided in the PSCs. This freedom
is not absolute and certain restrictions have been imposed B
upon viz; the prices at which the sale takes place have to be
arms-length prices and are subject to approval by the
government. The gas can only be sold in accordance with the
government approved price formula and the approved gas
utilization policy. The stand of the government was that the c
Government of India continues to be the owner of the gas till
the delivery point. It was further pointed out that by private
negotiations no party can decide as to how natural resources
which are national assets vesting in the Government of India
are to be dealt with and that the price which has been arrived
D
at is binding on the contractor and no party can raise a
challenge regarding the same in a company petition.

83. The Division Bench, by the impugned order, has
concluded the terms as mentioned in the MoU and GSMA need
to be modified suitably for both the parties subject to the E
government's policies and national, international practice in
supply of gas and such other products. The contract of such
nature is subject to government's approval in view of NELP and
PSC and such related government policies, but keeping in view
the several factors including the freedom and the right of the F
contractor/RIL and the limited and restricted scope of
interference in such permissible commercial aspects of the
contractor, unless, it is in breach of any public policy and public
interest. As regards the tenure of the gas supply, the Division
Bench observed that the MoU clearly carves out that the NTPC G
supply agreement would be a general guidance for the same
and shall as far as possible be the basis for such contracts and
the terms of such contracts will be no less favorable than those
of NTPC contract. The NTPC contract clearly provides 17 years
. asJhe period for which RIL will supply gas. With regard to the H
828 SUPREME COURT REPORTS [2010] 5 S.C.R.

A price at which the gas has to be supplied to REL for all its
projects including its affiliates would be subject to and under
the terms of production Sharing contract which REL has entered
with the ministry of petroleum and NIKO resources limited on
12th April, 2000. In terms of article 21.6.3 the contractor shall
B be at the liberty to market the gas but then the same will have
to be regulated on the basis of formula on which the price shall
be determined pursuant to articles 21.6.2 (b) and (c) to be
approved by the government prior to the sale of natural gas to
the consumer/buyer. The Division Bench has made it clear that
C there is no specific provision under the production sharing
contract to prevent the contractor to sell the gas at lesser price
than what is fixed by the government for valuation of gas to the
extent of its share and further observed that that the contractor
has freedom to sell gas at arm's length prices to the benefit of
the parties to the production sharing contract out of their share
0
of Profit gas to which art. 21.6 Of the PSC applies.

84. It must be noted that the constitutional mandate is that
the natural resources belong to the people of this country. The
nature of the word "vest" must be seen in the context of the
E Public Trust Doctrine (PTO). Even though this doctrine has been
applied in cases dealing with environmental jurisprudence, it
has its broader application.

85. Constitution Bench of this Court in Association of
F Natural Gas v. Union of India (2004) 4 SCC 489, while quoting
Re: Cauvery Water Dispute Tribunal AIR 1992 SC 522 held
that:

45. In Re: Cauvery Water Dispute Tribunal (Supra) the
right to flowing water of rivers was described as a right
G 'publici juris', i.e. a right of public. So also the people of
the entire country has a stake in the natural gas and its
benefit has to be shared by the whole country. There
should be just and reasonable use of natural gas for
national development. If one State alone is allowed to
H
RELIANCE NATURAL RESOURCES LTD. v. 829
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extract and use natural gas, then other States will be A
deprived of its equitable share. This position goes on to
fortify the stand adopted by the Union and will be a pointer
to the conclusion that "natural gas' is included in Entry 53
of List I. Thus, the legislative history and the definition of
'petroleum', 'petr.oleum products' and 'mineral oil B
resources' contained in various legislations and books and
the national interest involved in the equitable distribution
of natural gas amon_gst the States - all these factors lead
to the inescapable conclusion that "natural gas" in raw and
liquefied form is petroleum product and part of mineral oil c
resource, which needs to be regulated by the Union.

With relation to the Public Trust Doctrine, this court in MC.
Mehta v. Kamal Nath (1997) 1 SCC 388 held:

17. The Public Trust Doctrine primarily rests on the D
principle that certain resources like air, sea, waters and
the forests have such a great importance to the people as
a whole that it would be wholly unjustified to make them a
subject of private ownership. The said resources being a
gift of nature. They should be made freely available to E
everyone irrespective of the status in life. The doctrine
enjoins upon the Government to protect the resources for
the enjoyment of the general public rather than to permit
then- use for private ownership or commercial purposes.

27. Our legal system-based on English Common Law - ·F
includes the public trust doctrine as part of its
jurisprudence. The State is the trustee of all natural
resources which are by nature meant for public use and
enjoyment. Public at large is beneficiary of the sea-shore,
running waters, airs, forests and ecologically fragile lands. G
The State as a trustee is under a legal duty to protect the
natural resources. These resources meant for public use
cannot be converted into private ownership.

This doctrine is part of Indian law and finds application in H·
830 SUPREME COURT REPORTS [2010) 5 S.C.R.

A the present case as well. It is thus the duty of the Government
to provide complete protection to the natural resources as a
trustee of the people at large.

86. RIL's right of distribution is based on the PSC, which
itself is derived from the power of the Government under the
8
constitutional provisions. Thus the very basis of RI L's mandate
is the constitutional concepts that have been discussed by now,
including Article 297, Articles 14 and 39(b) and the Public Trust
Doctrine. Therefore, it would be beyond the power of RIL to do
C something which even the Government is not allowed to do. The
transactions between RIL and RNRL are subject to the over-
riding role of the Government.

87. It is relevant to note that the Constitution envisages
exploration, extraction and supply of gas to be within the
D domain of governmental functions. It is the duty of the Union to
make sure that these resources are used for the benefit of the
citizens of this country. Due to shortage of funds and technical
know-how, the Government has privatized such activities
through the mechanism provided under the PSC. It would have
E been ideal for the PSUs to handle such projects exclusively. It
is commendable that private entrepreneurial efforts are
available, but the nature of the profits gained from such
activities can ideally belong to the State which is in a better
position to distribute them for the best interests of the people.
F Nevertheless, even if private parties are employed for such
purposes, they must be accountable to the constitutional set-
up.

88. The statutory scheme of control of natural resources
is governed by a combined reading of the Oil Fields
G (Regulation and Development) Act, 1948; the Petroleum and
Natural Gas Rules, 1959; and Maritime Zones Act.

89. As pointed out earlier, the proper interpretation of PSC
gives the power to the Government not only to determine the
H basis of valuation of.gas, but also its price. According to Article
RELIANCE NAfURAL RESOURCES LTD. v. 831
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]

21 of PSC, before the contractor sells the gas, the price of A
such gas must be approved by the Government.

90. It has been argued by RNRL that the decision of the
EGOM (Empowered Group of Ministers) does not apply to the
rights of RNRL under the Scheme. This argument is based on
B
the text of the decision which states that the pricing decided
upon by EGOM is "without prejudice" to the rights of the parties
in the two cases pending before the Bombay High Court, i.e.
RIL v. NTPC and RIL v. RNRL. This is contested by both the
Government and RIL. This position of RNRL is unsustainable. C
As pointed out by RIL the right interpretation of "without
prejudice" in the EGOM decision is that even though EGOM
intended it resolution on pricing to apply to RNRL, it left the
question of the rights of the parties accruing from the MoU, the
Scheme or the interpretation of PSC to the cou'rt. In other words,
the court is to determine whether the Government has the power D
to determine the valuation and pricing of the gas. This
determination by the court is not affected by the F.GOM
decision, as it would depend solely on the interpretation of the
provisions of the PSC itself. But once it is determined that the
Government does have the power to determine the price of gas, E
EGOM's decision regarding the price would be applicable. The
same goes for the general gas utilization policy and the policy
of the Government with regard to pricing. Therefore, once the
PSC is read to give power to the Government to determine the
price of gas, these policy statements will be applicable. F

91. From the above analysis, the following are the broad
sustainable conclusions which can be derived from the position
of the Union:

(1) The natural resources are vested with the G
Government as a matter of trust in the name of the
people of India. Thus, it is the solemn duty of the
State to protect the national interest.

(2) Even though exploration, extraction and exploitation H
832 SUPREME COURT REPORTS [2010] 5 S.C.R.

A of natural resources are within the domain of
governmental function, the Government has
decided to privatize some of its functions. For this
reason, the constitutional restrictions on the
government would equally apply to the private
B players in this process. Natural resources must
always be used in the interests of the country, and
not private interests.

(3) The broader constitutional principles, the statutory
scheme as well as the proper interpretation of the
c PSC mandates the Government to determine the
price of the gas before it is supplied by the
contractor.

(4) The policy of the Government, including the Gas
D Utilization Policy and the decision of EGOM would
be applicable to the pricing in the present case.

(5) The Government cannot be divested of its
supervisory powers to regulate the supply and
distribution of gas.
E
92. Summary of our conclusions:

A. Question of Maintainability of the Company
Application
F
RNRL filed an application under the Companies Act
arguing that GSMA put in place by RIL does not satisfy the
Scheme of demerger. The Scheme under question was
approved by the Company Court on the previous occasion
under Sections 392 and 394. Therefore, contrary to RIL's
G argument, Sections 392 and 394 are applicable.

Further, the power of the court under Sections 391 to 394
of the Companies Act is wide enough to make necessary
changes for working of the Scheme. This power is specific to
H the facts and circumstances of the case at hand. Nevertheless, · ·
RELIANCE NATURAL RESOURCES LTD. v. 833
RELIANCE INDUSTRIES LTD. [P. SATHASIVAM, J.]
this power does not extend to making anv substantial or A
substantive changes to the Scheme.

Therefore, the Company Court enjoys jurisdiction to
entertain the application under Sections 392 and 394 of the
Companies Act. B

B. Binding Nature of the Memorandum of Understanding

The. MoU was signed as a private family arrangement or
understanding between the two brothers, Mukesh and Anil
Ambani, and their mother. Contents of the MoU were not made c
public, and even in the present proceedings, they were revealed
in parts. Clearly, the MoU does not fall under the corporate
domain - it was neither approved by the shareholders, nor was
it attached to the scheme. Therefore, technically, the MoU is
not legally binding. D

Nevertheless, cognizance can be taken of the fact that the
MoU formed the backdrop of the Scheme, and therefore,
contents of the Scheme have to be interpreted in the light of
the MoU.
E
C. Considerations to determine "suitable arrangement"
under Clause 19 of the Scheme.

"Suitable arrangement" under clause 19 of the Scheme
must not be merely suitable for RIL. It has a broader meaning.
F
Such an arrangement must be suitable for the interests of the
shareh~lders of RNRL as reflected by the MoU, and RIL; the
obligation of RIL under the PSC; the national policy on gas
including the decisions of EGOM and the Gas Utilization Policy;
and the broader national and public interest.
G
D. Proper Interpretation of the PSC

The objective of the PSC inter alia is to regulate the supply
and distribution of gas. Keeping this objective in mind, Article
21 of the PSC must be interpreted to give the power to the H
834 SUPREME COURT REPORTS [201 O] 5 S.C.R.

A Government to determine both the valuation and price of gas.
It is not feasible to restrict the power of the Government in such
matters of national importance, especially when the governing
contract, the PSC, also provides for it.

B E. Role of the Government

In a constitutional democracy like ours, the national assets
belong to the people. The Government holds such natural
resources in trust. Legally, therefore, the Government owns such
assets for the purposes of developing them in the interests of
C the people. In the present case, the Government owns the gas
till it reaches its ultimate consumer.

A mechanism is provided under the PSC between the
Government and the Contractor (RIL, in the present case). The
D PSC shall over·ride any other contractual obligation between
the Contractor and any other party.

F. Relief
(a) Though the Contractor (RIL) has the marketing freedom
E to sell the product from the contract area to other consumers,
this freedom is not absolute. The price at which the produce
will be sold to the consumer would be subject to government's
approval. The tenure of such contracts can't be such that it
vitiates the development plan as approved by the government.
F fhefefore 1 the GSMA and the GSPA entered into with RNRL
should fix the price, quantity and tenure in accordance with the
·PSC.
(b} The EGOM has already set the price of gas for the
purpose of the PSC. The parties must abide by this, and other
G eondltlons placed by the Government policy. The GSMA/GSPA
deeply affects the interests of the shareholders of both the
companies. These interests must be balanced. This balance
cannot b~ struck by the court as the court does not have the
power under Sections 391-394 to create new conditions under
H the scheme. In view of the same, RIL is directed to initiate
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 835
INDUSTRIES LTD.
renegotiation with RNRL within six weeks the terms of the A
GSMA so that their interests are safeguarded and finalize the
same within eight weeks thereafter and the resultant decision
be placed before the Company Court for necessary orders.

(c) While renegotiating the terms of GSMA, the following 8
must be kept in mind:

(1) The terms of the PSC shall have an over-riding
effect;

(2) The parties cannot violate the policy of the C . ,..
Government in the form of the Gas Utilization Policy
and national interests;
...
(3) The parties should take into account the MoU, even
though it is not legally binding, it is a commitment
which reflects the good interests .of both the parties; D

(d) The parties must restrict their negotiations within the
conditions of the Government policy, as refle'cted inter alia by
the Gas Utilization Policy and EGOM decisions.
E
93. With the above directions/observations, all the appeals
and I.A. No.1 are disposed of. No order as to costs.

B. SUDERSHAN REDDY, J. 1. I.A. No. 1 for permission
to file Special Leave Petition is allowed.
F
2. We grant special leave and proceed to dispose of all
the appeals.

PART I

PROLOGUE G

"Jus publicum privatorum pactis mutari non potest."

Public law cannot be changed by private pacts.

- Digest of Justinian H
836 SUPREME COURT REPORTS [2010] 5 S.C.R.

A "Political democracy cannot last unless there is at its base
social democracy .... On the social plane, we have in India
a society based on the principle of graded inequality,
which means elevation of some and degradation of others.
On the economic plane, we have a society in which there
B are some who have immense wealth as against many who
live in abject poverty .... How long shall we continue to live
this life of contradictions? How long shall we continue to
deny equality in our social and economic life? If we
continue to deny it for long, we will do so only by putting
c our political democracy in peril. We must remove this
contradiction at the earliest possible moment or else those
who suffer from inequality will blow up the structure of
political democracy which this Assembly has so laboriously
built up".
D 3. Those who know the Constitutional history of India
recognize the above to be the wise words of Dr. Ambedkar,
one of our founding fathers. Those who are concerned about
the welfare of our people, and the future of our nation, his
second warning will always be a matter of intense intellectual
E disquiet: "Indeed if,• may say so, if things go wrong under the
new Constitution, the reason will not be that we had a bad
Constitution. What we will have to say is that Man was vile." It
is never enough to have a written constitution. We need people
who, in the course of working the Constitution, to borrow a
F memorable phrase from Granville Austin, will exhibit qualities
of great integrity and a deeply felt ethical urgency to ameliorate
the social and economic conditions in which our people live and
suffer. That obligation arises from the very politico-constitutional
ideals and structures upon which the State has been formed
G and the future of the nation premised. In disputes such as the
one before this Court, the lens of the Constitution has to be used
to examine the implications with respect to achievements of
such ideals and the strength of our institutions. The power that
is vested in the State, and exercised by its agents, is the power
H of all the people and not just of those with great wealth and
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 837
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status. The vesting of such powers is an act of faith and of trust, ~ A
two qualities that are to be earned, sustained and nurtured.
Continuance of such faith and trust undoubtedly depends, in the
least, on the belief that people have that such powers are being
exercised to further the Constitutional goals. To the extent that
the people begin to believe that their faith and trust were B
misplaced, and that their collective powers are being improperly
used for the benefit of the few, as opposed to being used for
public welfare and interests, one may reasonably conclude that
at least the effective functioning of the State would have been
compromised. Those with knowledge of history, and an c
inclination to learn from, it would necessarily be concerned
about the situation today and potential consequences in the
future. For them the. words of Dr. Ambedkar would appear to
be prescient and wise.

4. The wisdom of the ages, garnered through eons of D
· humanity's collective struggles to find for all a life of dignity and .
fraternity - a dignity that arises from and is informed by liberty,
equality, and justice in all walks of life and a fraternity that seeks
to promote such dignity for all is the fire in which the Constitution
of India has been forged. The very structure and text of the E
1 Constitution, when viewed through the lens of history and the

working of the instrument itself, clearly demonstrates that it
crystallizes collective human wisdom in its triadic ethical
foundations. Those foundations are: (i) the Preamble that soars
in eloquence in _its articulation of collective human aspirations F
as national goals and sets out the raison d'etre for the nation
itself; (ii) the Fundamental Rights, that provide various
necessary freedoms for the individuals and ~ocial groups, and
places upon the State certain affirmative obligations to
eliminate those institutional and socio-economic conditions G
limiting such freedoms, so that all can strive towards lhe
achievement of the goals set forth in the Preamble; and (3) the
Directive Principles of State Policy, fundamental to governance
and necessary for the achievement of all round socio-economic
H
838 SUPREME COURT REPORTS [2010] 5 S.C.R.

A development so that the goals of the Preamble can be secured,
and the effective exercise of the Fundamental Rights by all can
be ensured.

5. It was recognized early in our struggle for freedom that,
as India awakens politically an explosive situation could develop
8
if the contradictions were not resolved soon. Thus, it was felt
thatthe State ought to play a key role in ensuring that all the
people are assured, a life informed by liberty, equality, justice
and fraternity, so that their dignity, as individuals and as social
C beings, can be secured. To this effect, the State has been given
the powers to place -reasonable restrictions even on the
Fundamental Rights of the individuals for the achievement of
broader c:iood for all, tlle powers to enact socio-economic
legislation to effectuate re-distribution of wealth and ensure
equitable access to. material resources and to frame policies
D that ameliorate the·· harsh consequences of the civil and the
market spheres of ·social actiOfl that people participate in.
Where such power is vested in trust by the people, it implies,
as a necessary corollary, a trust·that such powers will be fully
used to further the Constitutional goals within the four corners
E of Constitutional permissibility. Availability of such powers to
use, in a practical sense, implies that those powers have not 1
been abjured or derogated .from.

· · 6. The dawn of independence evoked much hope; and
F also much anxiety, especially amongst scholars and observers
from the West, about the feasibility of the experiment of India
as a Constitutional democracy. Yet, in our seventh decade of
freedom and the sixtieth year of constituting ourse~es as a
Sovereign, Socialist, Secular, Democratic Republic, it is
G apparent that we have survived, and indeed by and large
flourished as a political democracy. In part, this was surely on
account of the great moral integrity and wisdom that our
founding fathers and early political leadership brought to the
table, and the efforts they put in towards building the institutions

H
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 839
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

of our democracy. Additionally, credit must also go to the socio- A
political and economic policies initiated and implemented, of
course with varying degree of success and failure, for
sustaining the hope that the promises enshrined in the
Constitution are at least being sought to be achieved. However,
a much larger measure of credit ought to go to the people: those s
people who turn up in ever larger numbers to the voting booths
and continue to retain trust in the basic principles of democracy,
notwithstanding their abysmal lot in life. Yet, When the State
attempts to alleviate just a part of the burden of their continued
dehumanized condition, such attempts are decried as populist c
by the elite of this country.

7. So, willy-nilly, we come back to the question asked by
Dr. Ambedkar: how long will our people bear the contradictions
of endemic and gross inequalities? An aspiring and youthful
population can be a great boost to the economy and the· D
society. It would be tautological to state that the GDP would
grow rapidly with a larger proportion of the people in the
productive phases of their lives. But, the same youth
unemployed or underemployed, malnourished and without the
capacity or hope to lead or achieve a dignified life, can be the E
most dangerous of all forces.

8. A small portion of our population, over the past two
decades, has been chanting incessantly for increased
privatization of the material resources of the community, and F
some of them even doubt whether the goals of equality and
social justice are capable of being addressed directly. They
argue that economic growth will eventually trickle doll'fn and lift
everyone up. For those at the bottom of the economic and
social pyramid, it appears that the Nation has forsaken those G
goals as unattainable at best and unworthy at worst. The neo-
liberal agenda has increasingly eviscerated the State of stature.
and power, bringing vast benefits to the few, modest benefits
for some, while leaving everybody else, the majority, behjnd.

H
840 SUPREME COURT REPORTS [2010] 5 S.C.R.

A "... these global imbalances are morally unacceptable and
politically unsustainable." 1 (emphasis added).

9. We have heard a lot about free markets and freedom
to market. We must confess that we were perplexed by the
extent to which it was pressed that contractual arrangements
8
between private parties with the State and amongst themselves
could displace the obligations of the State to ttie people
themselves. Judge Richard Posner, one of the doyens of the
free market ideology and responsible for building the intellectual.
foundations of the neo-liberal segments of the law and·
C economics jurisprudence, had this to say about the recent
global financial crisis and it is worth quoting him in-extenso:

"Some conservatives believe that the depression is the
. result of unwise government policies. I believe it is a
D market failure. The government's myopia, passivity, and
blunders played a critical role in allowing the recession to
balloon into a depression, and so have several fortuitous
factors. But without any government regulation of the
financial industry, the economy would still, in all likelihood,
E be in a depression. We are learning from it that we need
a more active and intelligent government to keep our moael
of capitalist economy from running off the rails. The
movement to deregulate the financial industry went too far
by exaggerating the resilience-the self-healing powers--
F of laissez-faire capitalism". 2

10. History has repeatedly shown that a culture of
uncontained greed along with uncontrolled markets leads to
disasters. Human rationality, with respect to pursuit of lucre, is
essentially short run. So long as there appear to be possibilities
G of making profits, especially windfall profits, the fears that the

1. Quoted in Joseph Stiglitiz, Making Globalization Work: The Next Steps to
Global Justice, p.8, Allen Lane (2006)
2. Richard A. Posner: "A Failure of Capitalism: The Crisis of 08 and the
H Descent Into Depression'', p. xi Harvard University Press (2009).
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 841
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

competitors would reap them will drive busir.esses into taking A
greater and greater risks; in fact, even by self-enforcement of
blindness to the potential for market collapse. To say that it was
a failure of regulation is trite. Markets failed because regulation
had practically ceased to exist. Finally veering around to the
view that regulation of markets is absolutely essential, after B
spending a lifetime arguing for the opposite, and noting that the
capacity for self-regulation was highly over-rated, Judge Posner
in his own inimitable manner says:

"If you're worried that lions are eating too many zebras, you
don't say to the lions, 'You're eating too many zebras'. You
c
have to build a fence around the lions. They're not going
to build it." 3

11. Historically, and all across the globe, predatory forms
of capitalism seem to o(ganize themselves, first and foremost, D
around the extractive industries that seek to exploit the vast, but
exhaustible, natural resources. Water, forests, minerals and oil
- they are all being privatized; and not yet satisfied, the voices
that speak for predatory capitalism seek more, ignorin_g the
lessons from history and current experiences. One of the E
lessons of history is that, barring a few, most of the countrie's\·
endowed with vast and easily exploitable natural resources·
have fared far worse than t~ose with smaller endowments, on
almost every social and economic indicia. As Joseph Stiglitz
points out: F
"[T]here is a curious phenomenon ..... 'resource curse.' It
appears, that on average-, resource rich countries have
performed worse than those with smaller endowments -
quite the opposite Qf what might have been
expected ........... [B]ut ev~n when countries as a whole have G
done fairly well, resource rich countries are often marked
by large inequality: rich countries with poor people ........
[T]wo-thirds of the people" in an oil rich country that is also

3. Richard A. Posner, ibid. H
842 SUPREME COURT REPORTS [2010] 5 S.C.R. -

A a member of a global oil producing countries group "live
in poverty as the fruits of the country's oil bounty go to a
minority ...... These puzzles cry out for an· explanation, one
that will allow countries to do something to undo the
resource curse ..... We understand in particular that much
B of the problem is political in nature ....... [W]hen compared
to countries dependant on the export of agricultural
commodities, mineral and oil exporting countries suffer
from unusually high poverty, poor health care, widespread
malnutrition, high rates of child mortality, low life expectancy,
c and poor educational performance - all of which are
surprising findings given the revenue streams of resource-
rich countries." 5

12. We draw attention to this problem, because, even
though it is often associated with those countries that depend
D mostly on earnings from export of natural resources, similar
effects can also arise from activities within the domestic
economy. Take the case of India itself. We cannot by any stretch
of imagination claim that we are a resource poor country. Yet,
as we cast a glance across the face of our land, the greater
E incidence of social unrest, and movements for greater self
determination, seem to occur by and large in states and regions
that have plenty of natural wealth and paradoxically suffer from
low levels of human development. We hasten to add that we
are not suggesting that absence of resources would lead to a
F better situation. Rather, it is to point out that the problems arise
because exploitation of those resources occurs without
appropriate supervision by the State as to the rates of
exploitation, equitable distribution of the wealth it generates,
collusions between the extractive industry and some agents of
G
4. The word political is being used in a technical sense to denote the state
and all of its institutions, rather than merely political parties or to denounce
the normative desirability of democratic political processes.
5. Joseph E. Stiglitz. Making Natural Resources into a Blessing rather than a
Curse, in "Covering Oil" Ed. Svetlana Tsalik and Anya Schiffrin, Open Society
--H Institute (2005), p. 13-14.
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 843
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

the State and the consequent evisceration of the moral authority A
of the institutions of the State.

13. The crux of the problem is, as P[Of. Terry Lynn Karl
says:

".... utilizing petroleum wealth effectively is not easy ..... . B
Because the institutional setting is generally incapable of
dealing with economic manifestations of resource curse,
it ends up transforming them in a vicious development cycle
or "staple trap." 6
c
14. One would have expected, that with the resources being
owned by the people as a nation, it would be the State public
institutions that would actually operate the extraction industry.
For a few decades that was the case, and it was beset by
problems of administrative apathy and even pilferage. Over the 0
past two decades vast tracts of Nation's resources have again
begun to be licensed for exploitation by private parties. Be that
as it may, it must be emphasized that the on going process
cannot dispense with the role to be played by the State. Strong
State institutions are even more necessary when we are
E
dealing with Nation's resources and we allow contractors to
exploit them.

15. The law is for the benefit of the people. Even where it
does not work in its full measure all the time, the public nature
of law is still capable of exerting moral authority and bringing F
comfort to the people. But, when law is pushed into unseen
categories, effectively hidden from public gaze, it raises
suspicion - especially when it purports to deal with the
collective resources of the people. When the threshold of public
scrutiny is crossed, it raises vital issues regarding our continued G
fealty to democratic values, constitutionalism, accountability,
transparency and the rule of law. Jody Freeman and Martha
Minnow write:
6. Terry Lynn Karl "Understanding the Resource Curse" in Covering Oil (Open
Society Initiative 2005). H
844 SUPREME COURT REPORTS [2010] 5 S.C.R.

A "[T]he primary concern, voiced in recent years by critics in
public policy circles and in academia, is that the ubiquity
of governance by private contractors strikingly outstrips our
legal and political capacities of oversight meant to ensure
that the contractors' execution of those governmental
B functions complies with democratic norms." 7 ·

16. We are not saying that markets have no role to play in
a developing economy or that private initiative be suppressed
and that all markets are essentially and only tools for
expropriation and continuance of social injustices. We are
C stating that our Constitution posits that markets can be inimical
to social justice, especially when left unregulated. Laissez faire
market is a myth and it is, as Prof. Cass Sunstein points out:

" .... a grotesque misdescription of what free markets
D actually require and entail. Free markets depend for their
existence on law ...... moreover, the law that underlies free
markets is coercive in the sense that in addition to facilitating
individual transactions, it stops people from doing many things
they would like to do. This point is not by any means a critique
E of free markets. But it suggests that markets should be
understood as a legal construct, to be evaluated on the basis
cif whether they promote human interests, rather than as a part
of nature and the natural order. .... markets are a tool, to be
used when they promote human purposes, and to be
F abandoned when they fail to do so ... Achievement of social
justice is a higher value than the protection of free markets;
markets are mere instruments to be evaluated by their effects."8

17. The Constitution of India postulates that monopolies,
·created by an inequitable distribution of resources and their
G concentration in the hands of the few, are inimical to democracy

7.• Government by Contract: Outsourcing And American Democracy, Ed. Jody
Freeman and American Democracy.
8. Cass Sunstein: Free Markets and Social Justice (Oxford University Press,
1997)
H
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 845
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

and the values of equality and justice in all .spheres of social A
action. They were the lessons of history. While large economic
organizations might be necessary to accomplish certain kinds
. of tasks, it is imperative that the State always be. watchful that
they do not take over the essential functions of the State,
especially of policy formulation. In its dealings with such entities, B
the State should always be mindful that it does not convey that
its public law duties could be bought or abrogated in any
manner.

18. One may ask why in a Company Petition such a
discussion of constitutional values has had to come about. Such c
is the nature of the dispute itself. The Comparw Petition, and
the Scheme of Arrangement that it arises from, ostensibly, are
to be dealt under Sections 391 through 394 of the Companies
Act; but, involve at their foundations, a claim by Reliance
Natural Resources Limited that it is entitled to receive, on D
account of a private pact between members of the Ambani
family, vast quantities of natural gas, amounting to a significant
portion of what would be available for the entire country, at a
low price and for a long time, de-hors any policy made by the
Government of India. It claims that the Gol has a right to enter E
mto and has actually entered into a contract that allows,
Reliance Industry Limited to produce and decide how to use a
precious and a scarce natural resource belonging to the people
of this nation without any governmental supervision. Further,
RNRL also claims, that its vested interest in such vast quantities F
of natural gas is such, that subsequently framed governmental
policy cannot have a bearing on such an entitlement irrespective
of public interest implications.

19. Apart from the above, this particular case also
implicates aspects of accountability of members· of the G
managements of corporations, who are also promoters and
powerful shareholders, to the Board of Directors and other
shareholders. One of the principal claims of RNRL in this case
is that a private pact between the family members of the
H
846 SUPREME COURT REPORTS [2010] 5 S.C.R.

A Ambani family can bind the Board and the Company, in the
context of reorganization of the company without the
shareholders having any knowledge of the extent of value that
is actually likely to be demerged, even if such likely value runs
into many thousands of crores of rupees and possibly hundred
B fold more than the assets and liabilities that were actually shown
as being demerged in the Scheme document placed befo~e
the shareholders.

20. For a long time now, it has been well recognized that
the modern industrial and post-industrial corporations control
C such a large extent of economic and social spheres that their
activities necessarily have a wide and pervasive impact on the
lives of most of the people of the country. We recognize that,
in many normal instances, when issues of PL1blic interest are
not apparent on the face of the record, then a Company Petition
D is normally, and rightly, treated as a matter of corporate law.
However, when the conflict involves the right to use vast swaths
of a national natural resource that is owned by the people,
public law is necessarily implicated to a small or a large extent.
Further, when publicly listed companies, with many millions of
E shareholders of ordinary people, do not reveal the full extent of
value that is to be transferred, it would obviously implicate the
broader principles of corporate law.

21. That is why we began this section with an epigraph,
F "Jus pub/icum privatorum pactis mutari non potest" from the
Digest of Justinian. Natural Gas belongs to the people of India,
and vests in the Union of India, to be held for the purposes of
the Union. The Constitution of India commands the Government
to frame policy to prevent the distribution of such resources in
G a manner that may be inimical to national development.
Ultimately, the residual owners of a company are its
shareholders, and they have a right to know what is happening
to the company and its assets, including assets by way of
contractual rights, so that they can take an informed decision
about a proposal that is put up for their consideration. For the
~ H
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 847
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]
past three hundred years of evolution of corporate law, the A
principal theme has been the protection of those who give their·
wealth and resour~es in trust to a company. Managements and
Board of Directors of companies have a fiduciary responsibility
to the shareholders, and neither the processes nor the
substantive objectives of protection of the shareholders can be 8
derogated from.

22. A number of acronyms have been used in this
judgment. A glossary is annexed herewith for referral.

23. It is with the above observations we shall now proceed C
to consider the facts and the issues that arise for our
consideration.

PART II

THE FACTUAL MATRIX D
24. In April 2000, a consortium of companies, Reliance
Industries Limited and NIKO, together forming the Contractor,
entered into a Production Sharing Contract with the Union of
India to explore for and produce Petroleum, which includes both E
crude oil ~nd natural gas as applicable, in a block KG-DWN-
98/3, located off the eastern sea shore of Andhra Pradesh. This ·
block has been referred to as KG-D6 by the parties and we
shall adopt that nomenclature; however, the judgment and
decision shall be understood as being applicable to the entire F
KGcDWN-98/3 block.

25. In 2002, RIL announced the discovery of a very large
reservoir of natural gas in KG-D6. In the same year Shri.
Dhirubhai Ambani, the founder of RIL, passed away and
subsequently the management of RIL was led by Mukesh D. G
Ambani, the elder son, as the Chairman and Managing
Director and Anil D. Ambani, the younger son, as the Vice-
Chairman and Joint Managing Director. On May 21, 2003, RI~
submitted its conclusions to Gol that the reservoir discovered
H
848 SUPREME COURT REPORTS [2010] 5 S.C.R.

A was a· commercial discovery, which was subsequently certified
t() be so by Gol on 10.01.2004.

26. In May 2004, RIL submitted to the Management
Committee of the PSC an Initial Development Plan, inter-alia,
describing the nature of the discovery, the potential extent of
8
natural gas that could be extracted, the kind of infrastructure and
expenditure necessary for the same, and the potential market
for natural gas in India. It was stated that natural gas produced
from KG-06 could be used by entities operating in the power
and fertilizer sectors located in Andhra Pradesh, Maharashtra,
C Karnataka, Gujarat and Uttar Pradesh. It was stated that such
users could use up to 82 MMSCMD of natural gas. It was also
stated that NTPC's demand could be as much as 17
MMSCMD. The production of natural gas was projected to be
possibly 40.MMSCMD and that it could go up to 80 MMSCMD
D a few years later. It was also stated that natural gas supply in
India was highly constrained and the short fall had led to many
units that use natural gas as a fuel or feedstock being stranded.
RIL also stated that it expected to be the exdusive agent for
selling natural gas produced from KG-06. This Initial
E Development Plan was approved by the Management
Committee of the PSC in November 2004. The Gol ·issued a
Petroleum Mining Lease with respect to KG-06 on 02.03.2005.

27. In the meantime, in mid 2003 RIL bid in response to
F an international tender floated by the National Thermal Power
Corporation and won the bid on the substantial terms that it
llJOl,.lld supply 12 MMSCMD, for seventeen years, at a well head
price of USO 2.34/mmBtu, plus transportation and marketing
charges for a total of USO 3.18imm Btu at the Delivery Point
at Kakinada. Negotiations began to execute a full fledged gas
G supply and purchase agreement and various drafts were
produced, including the drafts of May, 2005 in which
governmental approvals were stated to be required for RIL to
supply natural gas to NTPC.

H 28. From the record it is also clear that between 2002 and
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 849
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]
2005 various discussions were conducted in RIL and the A
Reliance Group about using the natural gas that was likely to
be produced from KG-D6, to support various internal business
divisions and undertakings, such as petro-chemicals, captive
power plants, the power plant of Reliance Patalganga Power
Limited and power plants to be set up by Reliance Energy B
Limited. An announcement was made that a 3500 MW power
generating plant was to be set up in Dadri, l.Jttar.Pradesh using
natural gas.

29. On July 27, 2004, in a Board Meeting of RIL it was
decided that, in light of the fast emerging opportunities and C
exigencies and to facilitate quick response, all the powers of
the Board be vested in MDA except those powers that the
Board was required, by the Companies Act, 1956 and the
Articles of Association, to retain. This exacerbated an already
festering dispute between the two brothers, necessitating the D
intervention of their mother, Smt. Kokilaben D. Ambani leading
to a Memorandum of Understanding, dated June 18, 2005, that
was drafted with the help of lawyers and marked strictly
confidential. Only a portion of the MoU was placed on record
in the later stages of proceedings before the Division Bench. E
It is an admitted fact that it has been executed by and between
the mother and her two sons only.

30. The MoU provided that - with disputes between the
brothers, the other matters of family assets, and interests in F
various businesses being settled - the best way forward would
be by way of a scheme of reorganization in which the energy
producing, financial services and the telecommunications
divisions were to be demerged to the ADA Group for
ownership and control. The remaining divisions were to be with G
the MDA Group, including petroleum exploration and production
division. The MoU specifically provided that the approvals of
statutory and regulatory bodies, the shareholders and the
boards of Directors of various companies would be conditions
precedent for operationalising the reorganization. It was also H
850 SUPREME COURT REPORTS [2010] 5 S.C.R.

A specifically stated that personnel of both MDA Group and ADA
Group would participate in the process of preparation of the
Scheme so that their mutual interests could be protected. It was
also agreed that the same lawyer who drafted the MoU would
also draft the Scheme.
B
31. In addition, the MoU also had a section titled "Gas
Supply" in which it was provided that, from all P1 reserves of
existing and any future gas fields from which RIL may produce
natural gas: (i) 12 MMSCMD would be supplied to NTPC;
C however, if the contract did not go through, then that would be
supplied to the ADA Group; (ii) in addition, another 28
MMSCMD would be supplied to REL. The quantity of gas
referred to in (ii) was to be at a price no greater than the price
for supply of gas to NTPC and the terms of such supply were
to be the same as to NTPC and even surpass them to provide
D ADA Group an added level of comfort. Further, with respect to
all other future production of natural gas by RIL, under any
contract and in any gas field, it was to be split in a 60:40 ratio
between the MDA Group and the ADA Group. This right was
an option right exercisable by the ADA Group and to be
E supplied to it at the then prevailing market prices and has been
referred to as the Option Volumes by the parties. The gas
supplied to ADA Group was only meant for trading within the
group.

F 32. In addition to the above, and in the same section "Gas
Supply", it was also stated, after KDA exhorted her elder son
to ensure that stability was given to the ADA Group with respect
to gas supply, that the MDA Group would act in "utmost good
faith" and exert their "best endeavours" to work for and obtain
G all the necessary governmental and regulatory approvals. It was
also provided that the ADA Group would be given an
irrevocable power of attorney to be able to independently
pursue the same, though that was not to mitigate the burden to
be borne by the MDA Group. KDA reserved the right to
intervene and it was stated that ADA Group would have a right
H
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 851
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]
to damages in the event that MDA Group did not act in good A
faith. The binding gas supply agreements were to be executed
within 45 days.

33. KDA issued a press statement, the day that the MoU
was executed, stating that the differences between her sons
were settled and that ADA will be responsible for Reliance B
lnfocom, Reliance Energy and Reliance Capital. On the same
day the Board of Directors of RIL also met. The minutes reveal
that MDA stated in broad terms the terms of the settlement -
that the energy, telecom and financial businesses were to be
demerged to ADA, with himself remaining in charge of the other C
businesses. Thereupon he placed a ccpy of the press statAment
of KDA and left the meeting stating potential conflict of interest
issues. Other Directors continued and after expressing their
thanks to KDA, it was recorded that some Directors felt that
any reorganization be undertaken only if it is in the best interests D
of all the shareholders. To this effect it was resolved that a
Corporate Governance and Stakeholders Interface Committee
comprising independent Directors examine in depth all the
issues relevant for reorganization and suggest a proposal to
the Board, including any scheme. It was also resolved that the E
said committee of independent Directors also be assisted' by
professionals, such as chartered accountants, solicitors,
merchant bankers etc., including the lawyer who had drafted the
MoU.
F
34. Based upon such authorization the CG Group
proceeded to perform its assigned duties, assisted by various
professionals, and with the active participation of personnel of
both ADA and MDA groups. On August 3, 2005 Term Sheets
were prepared and executed by representatives of the two
groups and it was provided therein that the Scheme would be G
based on the terms agreed. With regard to the principal
disclosures to be made in the scheme, it was decided that one
of them would be about the fuel agreement for supply of gas
that was to be executed. It was also provided that the Scheme
H
852 SUPREME COURT REPORTS [2010] 5 S.C.R.

A would be framed in such a manner that the Resulting
Companies, which were all to be 100% subsidiaries of RIL,
would be listed on the same stock exchanges as RIL, and that
after issuance of shares by the Resulting Companies to RI L's
shareholders they would then cease to be subsidiaries of RIL.
B The CG Committee formulated the Scheme's rationale of the
demerger as one of substantial benefits that would accrue to
the Resulting Companies on account of focused attention.

35. On August 5, 2005 the Board of Directors of RIL met
and the CG Committee presented its recommendations. Some
C outside professionals from the fields of law, accounting and
finance also rendered their opinions and provided inputs. The
minutes of the meeting show that one of the Directors of RIL
particularly stated and emphasised that the gas supply
agreement should specifically state that price and terms and
D conditions shall be subject to Central Government's approval.
It is also recorded that all those present, including Cyril Shroff,
who had prepared the MoU, was in charge of preparing the
Scheme and was advising ADA with respect to gas based
energy business, agreed with that view. The Board then
E resolved, inter-alia, that pursuant to proposals of certain
professional organizations and the solicitor firm M/s Amarchand
Mangaldas and Suresh A. Shroff and Co., and
recommendations of the CG Committee, to segregate by a
process of demerger the undertakings relating to C"al based
F Energy, Gas based Energy, Financial Services and
Telecommunications. They also further resolved that, pursuant
to provisions of Section 391-394 of the Companies Act, 1956,
a Scheme of Arrangement be filed by which each of the
undertakings would be transferred to four different Resulting
G Companies, including the transfer of the Gas based Energy
Undertaking to Global Fuel Management Services Limited,
which through various transmutations of its name became
Reliance Natural Resources Limited, the main protagonist in
these proceedings.
H
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 853
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

36. A Company Application for reorganisation of RIL was A
filed in September 2005 in the High Court and based on its
directions, meetings of the shareholders and the stakeholders
under the aegis of a retired High Court Judge were conducted
on October 21, 2005. The Scheme as presented was approved
near unanimously by the shareholders and the stakeholders. B
Subsequently, the High Court sanctioned the Scheme on
December 09, 2005. The MoU and the terms in it relating to
gas supply do not find any mention in any of the petitions as
well as the sanctioned Scheme.

37. Beginning on June 30, 2005 representatives of both
c
the groups started negotiating the terms of gas supply
agreements. Voluminous correspondence (Exh. F) ensued,
mostly in the form of emails. Neither prior to the filing of the
Scheme nor thereafter could the two groups arrive at any
agreement. It is clear from the correspondence, that even until D
end of February, 2006 there was no controversy that was raised
regarding the requirement of governmental approvals. The draft ·
NTPC-GSPAs of May, 2005 containing the requirement of
governmental approvals had been' handed over to the ADA
Group and it was agreed by an ADA Representative that it E
would form the basis for negotiation of gas supply agreements.

38. On January 12, 2006 a meeting of the Board of
Directors of RNRL was called for, in which, a Gas Supply
Master Agreement and a model Gas Sale and Purchase F
Agreement, approved by the Board of RIL, were placed for
consideration of the Board of RNRL. Two Directors, both
nominees of the MDA Group, voted to accept the said gas
supply agreements, and one Director, the sole nomin~e of the
ADA Group, strongly protested. The said nominee of ADA G
Group also wrote a letter protesting the same, and, inter-alia,
alleged that he had been given the gas supply agreements the
previous night, had no time to properly read through them, no
one in the ADA Group got a chance to vet them and further that
..... -
the gas supply agreements were illegal because they should H
'
854 SUPREME COURT REPORTS [2010] 5 S.C.R.

A have been executed by RNRL only after ADA Group was fully
in charge of RNRL.
/
39. On January 27, 2006, RNRL was listed on the stock
exchanges that RIL was listed on and the shares of RNRL were
given to the shareholders of RIL as provided for in the Scheme.
8
In particular, each shareholder of RIL was given one share of
RNRL for each of the shares he/she/it held with RIL, except
certain specified shareholders of RIL as provided for in the
Scheme. On February 7, 2006 RNRL was handed over to the
C ADA Group for focused leadership of ADA after reconstitution
_of the Board of RNRL as per the wishes of ADA and ADA
Group. Thereafter on February 28, 2006 a letter was written by ·
RNRL to RIL alleging various malafide actions by RIL with
respect to gas supply agreements, amongst other things.

D 40. In April, 2006, RIL applied to MoPNG for approval of
the the well-head price of USO 2.34/mmBtu for the natural gas
to be supplied to RNRL on the grounds that it was the same
as the agreed price for supply of gas to NTPC. The MoPNG
rejected it on July 27, 2006 and the same was communicated
E by RIL to RNRL. In the meanwhile, RNRL had also written to
MoPNG asking for the approval of the same, though in the
letter RNRL stated that the Gol's rights with respect to price
formula/basis are only with respect to the valuation that Gol
might wish to place en natural gas to determine its share of
F profit petroleum.

41. In the meanwhile RNRL was also writing to a number
of governmental, statutory and regulatory bodies regarding the
status of its gas supply agreements with RIL. In its statements
made with respect to issuance of Global Depository Receipts,
G in Luxembourg, RNRL specifically stated that gas supply
agreements including price formula/basis would be subject to
governmental approvals and if approved it would then be able
to sell it to end customers at market prices.

H 42. On August 1, 2006 the MoPNG constituted a
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 855
- INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]
Committee to "Formulate Transparent Guidelines for Approving A
Gas Price Formula/Basis" for giving Government Approval
under the PSC for the same. On August 17, 2006, the said
Pricing Committee issued letters to various stakeholders,
seeking their comments and thereupon submitted its report in
November 2006. B

43. On November 8, 2006, RNRL filed Company
Application under Section 392 of the Companies Act, 1956
seeking directions from the High Court to order RIL to change
the gas supply agreements in a certain specific manner. C
According to RNRL, the gas supply agreements were not
bankable in international financial markets, did not demerge the
business of supply of gas to gas based energy producing
companies within the ADA Group and thereby the very purpose
for which RNRL had been set up was negated. Further, RNRL
also claimed that unless the said changes were made, the D
Scheme would be unworkable and hence the reliefs as prayed
for. RIL countered that the Company Application of 2006 was
not maintainable, as the clauses that were being sought to be
changed were not unconscionable, and the jurisdiction under
Section 392 was only to ensure that the Scheme as presented E
to the shareholders and stakeholders was implemented and not
to substitute better terms or to frame a better Scheme.
According to RIL, Clause 19 of the Scheme provided that
suitable arrangements with respect to gas supply were to be
made and the gas supply agreements put in place by it were F
suitable because they protected the interests of both RIL and
RNRL. Further, RIL also took the affirmative defense that under
the PSC it was obligated to obtain approvals of the
government. The MoU was not pleaded specifically by RNRL,
though in the pleadings it raised issues about what had been G
· promised to it which could be linked to the MoU. The
correspondence between the two groups after the MoU,
regarding the gas supply agreements were placed on record
and analysed.
H

..
_,

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

A 44. In May 2007, RIL submitted a price formula/basis to
the MoPNG for its approval so that all gas from KG-06 could
be sold at a price derived from that formula. Around the same
time, RNRL also made a representation to the Ministry of
Chemicals and Fertilizers that the Government should put in
8 place a Utilisation Policy which RNRL stated was a right of the
Gol under the PSC and also take its share of profit petroleum
in kind and distribute the same to power and fertilizer sectors
at a reasonable price.

45. Be that as it may, in August 2007 an Empowered
C Group of Ministers, consisting of Senior Cabinet Ministers, was
constituted by the Gol, which met in a series of meetings
(numbering six in all) between August 27, 2007 and January
8, 2009. The substantive decisions taken were: (i) acceptance
of the price formula/basis submitted by RIL, based on, inter-
D alia, an evaluation by the Prime Ministers Economic Advisory
Council that the price band that would be derived pursuant to
the price formula/basis was comparable to prices at which non-
APM regime natural gas prices were prevailing. The formula
was modified to set an upper limit to the crude oil at USO 60
E and set the biddable factor to zero so that the alleged non-
transparency aspect could be mitigated; (ii) set in place an
Utilisation Policy that specified the sectoral allocations and
priority list of the sectors; (iii) that all users should be in a
position to consume gas right away or within a short period of
F time and that there was to be no reservation of gas; and (iv)
the policy was to be effective for five years.

46. While the EGOM meetings were being held the
litigation between RIL and NTPC, and RIL and RNRL were in
various stages before the High Court. It appears that while
G exercising its sovereign right to frame policy of national
importance, EGOM was also sensitive to the issue of decisions
to be made by the concerned courts, and hence noted that the
decisions of EGOM would be without prejudice to the rights of
the litigants as decided by the Courts.
H
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE '857
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]
47. A final order and judgment was passed, on A
15, 10.2007, by the Learned Company Judge. The judgment
held: the Application under Section 392 to be maintainable, that
the Company Court was not competent to dictate the specific
changes sought, that the GSMA was in breach of the Scheme,
that the MoU was binding on both parties, and that "suitable B
arrangements" in Clause 19 of the Scheme had to be read in
light of the MoU and that it was necessary for the Scheme. The
Learned Company Judge also held that such gas supply
contracts would be subject to Government's approval, pursuant
to NELP and PSC and it was further held that Government c
should normally approve such contracts unless clearly in breach
of public policy and public interest. The Learned Company
Judge then ordered the parties to renegotiate.

48. Both sides filed appeals before the Division Bench
against the said judgment. As a number of interim orders were D
passed at the stage of the proceedings before the Learned
Single Judge and then later on before the Division Bench, the
Gol intervened in the proceedings as it had been realized that
it had a vital stake because the dispute involved issues that
could affect national development, national interest and also E
Gol's revenues.

49. The Division Bench disposed off the appeals of RIL
and RNRL by its order and judgment dated 15.06.2009. The
decision at the level of the Division Bench turned, it seems, on F
the fact that a portion of the MoU was jointly tendered by RIL
and RNRL and apperception of the Division Bench that under
the PSC, RIL is entitled to a physical share of natural gas, as
a part of cost gas and profit gas. Further, the Division Bench
seemingly agreed with the conclusions of the Learned G
Company Judge and then departed from it. Substantively it was
held that a fixed quantum of 28 MMSCMD plus 12 MMSCMD
in the event that NTPC contract did not fructify stood allocated
and to be supplied for use in any of REL's power projects, and
that the allocations made were a class apart in themselves.The H
858 SUPREME COURT REPORTS [2010] 5 S.C.R.
;Ji,

·Aprice of supply was to be in accordance with the PSC - but as
there was no clause in the PSC prohibiting RIL from sellir.g. it
at a price lower than that arising from the price formula/·
approved by the Government, natural gas up to the first 40
MMSCMD at a well head price of USO 2.34/mmBtu of natural
B gas stands allocated to RNRL, as RIL would still make profits
at that price point. Further, the Division Bench also ordered the
parties to renegotiate with respect to issues regarding identity,
definition of affiliate and limitation of liability to make the gas
supply agreements bankable.
c 50. There is considerable confusion as to what the Division
Bench ordered with respect to Utilisation Policy and its
applicability with respect to the Option Volumes of natural gas
provided for in the MoU. The three parties to this case have
urged three different interpretations regarding the same.
D
51. Aggrieved by the said Judgment and Order of the
'Division Bench all the parties have approached this Court in
appeal by way of special leave. The Union of India which was
allowed to intervene before the Division Bench, being
E aggrieved by certain findings, has also preferred an appeal
against the Judgment and Order of the Division Bench. After
initially raising objections, the Learned Senior Counsel
appearing for RNRL, Shri. Ram Jethmalani withdrew his
objections to leave being granted. Further, in as much as on
F the face of the record it would appear that the PSC, to which
the Uol is a party, has been interpreted without the Gol having
had an opportunity to be properly impleaded and present its
case and the potentially serious public interest implications that
arise therefrom, leave has been granted to the UOL

G 52. Now we shall proceed to summarise the contentions
of the parties made during the oral hearings spanning 27 days
and in the many thousands of pages of written documents. A
number of authorities were also cited by each of the counsel
in support of their arguments. We make it clear that we shall
H
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 859
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]
advert only to those submissions and citations which are A
necessary for disposal of these appeals.

PART Ill

SUMMARY OF THE SUBMISSIONS OF THE PARTIES:
B
53. Though the first party to file a special leave petition in
rhese proceedings was RIL, and it is Shri Harish Salve, the
learned senior counsel for RIL who led the arguments, because
of the fact that it was RNRL's petition and the main attack was
initiated by RNRL in the courts below, we consider it c
appropriate and convenient to note their submissions first.
\Nhile there is a welter of facts and arguments it would also
be quite clear that there has been a set of consistent themes
flowing right through this case. in addition, at the earlier stages
of proceedings the public interest and public law elements were D
not properly before the courts. Though late, with the entry of
Union of lnd!a as a full fledged party to the case, the issue of
public interest and welfare has also come to be crystallized.

CONTENTIONS OF RNRL:
E
54. The line of argument that RNRL has taken in the
course of these proceedings can be gleaned from the Six
Protested Points they have raised about the underlying gas
supply agreements. They are about Price, Quantity, Tenure,
Identity of Buyer, Definition of Affiliate and Limitation of F
Liability. We note each one of them below as substantively
argued by Shri. Mukul Rohtagi, learned senior counsel
appearing on behalf of RNRL.

1. Price: The natural gas that is to be supplied to it,
not including the Option Volumes, should be at a G
fixed price of USO 2.34/mmBtu well head cost plus
marketing margins and transportation charges at
the delivery point for a total of USO 3.18/mmBtu.
Contemporaneously, while various commitments
H
860 SUPREME COURT REPORTS [201 OJ 5 S.C.R.

A were being made by RIL between 2002 to 2005 to
the gas based energy producing division while it
was a part of RIL, a bid was offered on the
international tender floated by NTPC at the said
price. In as much as that was the only
B contemporaneous arms length and a market
determined price, it is contended that the same
price should apply to RNRL as it is the derivative
of and the successor in interest to. that gas based
energy producing division.
c 2. Quantity: The quantum that RNRL should receive
28 MMSCMD plus, in the event that NTPC's
contract does not go through, an additional 12
MMSCMD. It is argued that the size of the_ gas
based energy producing plant, at Dadri, of 7500
D MW of generating capacity is the first determinant
of the requirement of 28 MMSCMD. The other 12
MMSCMD is based on the required supplies for
RPPL and other gas based energy producing plants
it had proposed to set up. According to RNRL
E these were commitments that RIL had made prior
to the demerger and even prior to the MoU and
hence ought to honour them.

3. Tenure: The tenure should be a firm 17 years, as
that was the term that had been promised to NTPC
F
and that the provision regarding the same should
be as stated in the draft agreements with NTPC.

4. Identity of Buyer. In as much as the gas supply
agreements mandate that it nominate an affiliate
G from within the ADA Group that is engaged in gas
based energy production as a buyer, and the gas
is directly supplied to it and payments made to RIL
are also from that quarter, the very purpose for which
RNRL has been set up, to supply gas to gas based
H

tf
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 861
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

energy producing companies and thus promoting A
the setting up of such companies, would be
negated. It is contended by RNRL that a fair
reading of the Scheme would reveal the same.

5. Definition of an Affiliate: According to RNRL the 8
definition of an affiliate should not require 51 %
ownership, but rather the definition as contained in
either the PSC or the NTPC draft agreements. It is
argued that by restricting its nominees to only those
companies in which RNRL owns at least 51%, the C
freedom of RNRL to set up gas based energy
producing companies is automatically restricted
and in as much such a restriction was not placed
on NTPC it should be accordingly changed.
Further, RNRL also contends that the definition of
affiliate as provided for in the PSC could also be D
appropriate.

6. Limitation of Liability: The promise made to RNRL
was that gas would be supplied to it from any of the
gas fields given to RIL by Gol, and consequently it E
should be possible to draft a liability clause that
becomes operative in the event that there is no gas
available at any of the gas fields or for reasons
beyond the control of RIL.
F
55. The three themes that RNRL presses are and they
relate to Government Approvals, binding nature of the MoU and
maintainability in seeking the 1 eliefs claimed as above.

1. Government Approvals: In its claimed reliefs, RNRL
seeks the deletion of Section 13.9 of the GSMA and Clauses G
(d) and (e) of Schedule 3.2 of the GSPA, which substantively
deal with the issue of approval of the price formula/basis and
also of applicability of governmental utilization policy or any
other powers of the Gol to curtail production or otherwise
prevent RIL from supplying natural gas. The first contention of H
862 SUPREME COURT REPORTS [2010] 5 S.C.R.

A RNRL, as pressed by both Shri. Jethmalani and Shri. Rohtagi,
is that under the PSC what is shared between RIL and Uol are
physical quantities of natural gas, and that is what a PSC
mearis - sharing of production. For this proposition reliance is
placed on CIT v Enron Oil and Gas India Ltd. 9 Further, it is
B also argued that because the Contractor expends monies on
exploration, development and production and is allowed to
recover its costs first, it should be deemed that the title to
natural gas to the extent of cost and profit petroleum pass to
the Contractor at the Delivery Point when natural gas is first
c brought on-shore. To this effect they rely upon the provisions of
Article 27.2 of the PSC. Consequently, they also argue that the
approval of price formula/basis in Article 21.6.3 of the PSC is
only to facilitate Gol in placing a value on natural gas so that
its share to physical quantity of natural gas under the Profit
Petroleum component can be calculated. They also argue that
0
if Gol is allowed to determine price and also frame a utilization
policy, then the absolute freedom to market, as promised in
NELP and in Article 21.3 of the PSC would become otiose.

Alternately, it is also argued by Shri. Jethmalani and Shri.
E Mukul Rohtagi that, even if one were to assume' that the title
do"es not pass through to the Contractor and that the Gol did
have such rights, when the binding commitments were made
by RIL to RNRL, there was no utilization policy in place,
consequently RIL was free to find its own buyers under the
F marketing freedom promised by NELP, the only policy in place.
· Moreo~r. it is argued, the Gol knew about supply of natural gas
to RNRL in as much as it was specifically mentioned in the IDP
approved by the MC of the PSC. Arguing that the State has to
act justly, fairly and reasonably even in_ contractual field, they
G have relied upon KumariShrilekha Vidyarthi v State of U.P., 10
Mahabir Auto Stores v Indian Oil Corpn., 11 UC of India v

9. (2008) 305 ITR 75
10. (1991) 1 sec 212.
H 11. (1990) 3 sec 752
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 863
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

Consumer Education & Research Center12 • Further, they also A
argue that EGOM decisions cannot be held to be applicable
in a manner that would affect its pre-existing contractual rights
with RIL as executive action cannot interfere with contractual
rights. To this effect they rely upon Rai Sahab Ram Jawaya
Kapur & Ors. v State of Punjab 13 , State of Madhya Pradesh v B
Thakur Bharat Singh 14 , and Poonam Verma v OOA 15 . Even if
one were to consider EGOM decisions as policy, it cannot have
retrospective effect and to this effect they placed reliance on
Union of India & Ors. v Asian Food lndustries, 16 and
Kusumam Hotels (P) Ltd. v Kera/a SEB 17 • Moreover, in as c
much as in the EGOM minutes it is clearly recorded that their
decisions are without prejudice to the rights of RNRL in the court
cases, RNRL's rights were beyond the pale of EGOM's
decision. For interpretation of the expression "without prejudice"
they relied upon NTPC Ltd. v Reshmi Constructions, 18 Builders
0
& Contractors. Finally, arguing that Article 297 of the
Constitution does not give sovereign rights to Gol with respect
to dealings with its own citizens to change contractual rights and
that sovereignty is restricted to the sphere within the
international context, Shri. Jethmalani relied upon Madhav Rao
Jivaji Rao Scindia v Union of /ndia 19 • E
2. Binding Nature of MoU: It is the contention of RNRL
that the MoU is binding upon all and hence, the main
commercial terms provided in its gas supply section should be
faithfully followed, as they relate to the Six Protested Points. F
Shri. Jethmalani argues that at the time of the execution of the

12. (1995) 5 sec 482.
13. 1995 (2) SCR 2.
14. 1967 (2) SCR 454. G
15. (2007) 13 sec 154.
16. (2006) 13 sec 542.
17. (2008) 13 sec 213.
18. (2004) 2 sec 663.
19. (1971) 1 sec 85. H
864 SUPREME COURT REPORTS [2010] 5 S.C.R.

A MoU, MDA was not just the Chairman and M.D., but also armed
with all the powers of the Board. Consequently, he was the
controlling mind of the Company. To this effect he pressed the
Doctrine of Identification to state that MDA's actions should be
deemed to be the actions of the Company, and the Board. He
B relied upon Lennards Carrying Co. v. Asiatic Petroleum Co.
Ltd., 20 Bou/ting and Anr. v. Association of Cinematography,
Television and Allied Technicians21, R. v. McDonne/12 2 , Tesco
Super Markets v. Nattrass23 , Meridian Global v Securities
Commission 24 , J.K. Industries Ltd. v. Chief Inspector of
c Factories & Boi/ers25 , Indian Bank v. Godhara Nagrik Coop.
Credit Society Ltd., 26 H.L. Bolton (Engineering) Co. Ltd. v. T.J.
Graham & Sons27 , Union of India v. United India Insurance
Co. Ltd., 28 Assistant Commissioner, Assessment-//, Bangalore
& Ors. v. M/s. Velliappa Textiles Ltd. & Ors29 • It was argued
D that the terms of gas supply, which are in the nature of day to
day agreements entered into by the Management and hence
need not have been placed before the sharehold~rs for approval
and that the powers of a Director to enter into contracts are very
wide and reliance is placed on UC v. Escorts Ud3° and Mohta
Alloy & Steel Works v. Mohta Finance & Leasing Co. Ltd3 1 •
E
3. Maintainability: It was also argued by the Learned
Senior Counsel for RNRL that the power of the Company Court
20. 2924-25 ALL ER 280.
21. (1963) 2 QB 606.
F
22. (1966) 1 ALL ER 193.
23. (1971) UKHL 1; (1972) AC 153.
24. (1995) 3 ALL ER 918.
25. (1966) 6 sec 665.
G 26. (2008) 12 sec 541.
27. (1956) 3 ALL ER 624.
28. (1997) 8 sec 683.
29. AIR 2004 SC 86.
30. (1989) 1 sec 264.
H 31. (1997) 89 Comp. Cases 227.
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 865
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]
is of the widest amplitude and that in fact it is the duty of the A
court to ensure that the Scheme is fully implemented and the
only limitation on the powers of the court is that it cannot change
the character, purpose or basic structure of the Scheme. He
relied on S.K. Gupta v K.P. Jain 32.
B
CONTENTIONS OF RIL:

56. RIL's position with regard to the Six Protested Points
was argued by Shri. Harish Salve as follows:

The basic contention of RIL is that under the PSC the Gol c
has the right to approve the price formula/basis on which sales
can be effectuated, pursuant to Art. 21.6 et. seq. Additionally,
it says that ordering it to supply at USO 2.34 mmBtu well head
price even if the valuation placed by Gol is much higher is
misconceived, because it cannot recover its interest costs and D
its investments are recouped over a long time frame, its rate
of return which is very, very modest will be threatened and that
it would amount to RIL subsidizing RNRL, which was never
contemplated in the Scheme. The Scheme cannot be changed
to the detriment of shareholders of RIL.
E
It was submitted that RIL can commit to supply only that
amount of gas as have been certified to be proven reserves.
In early 2006, the total amount of natural gas in gas field that
would be required to commit 28 MMSCMD and the Option
Volumes had not yet been certified; and it was not known F
whether P1 reserves were available beyond the 12 MMSCMD
needed for NTPC.

RIL contends that the kind of certitude that is being
demanded by RNRL could have been given by it only if certified G
and proven reserves were known. Further Shri Salve submitted
that as and when new reserves became known, new GSPA's
would then be executed with a nominee of RNRL. In fact it is
RI L's contention that if certified reserves were known and firm
32. (1979) 3 sec 54. H
866 SUPREME COURT REPORTS [201 O] 5 S.C.R.

A commitments had been made, given that the project in Dadri,
in 2006, was nowhere near completion, RNRL would have had
to suffer the very onerous "take or pay" clauses in the Industry.
Shri Salve also argued that in any event it cannot commit
supplies beyond the validity of the Mining Lease which expires
B in 2025.

It was argued by Shri. Salve that the protest of RNRL about
limitation of liability was in fact frivolous and that the clause is
being protested by only selectively reading it. The phrase "short
fall" in the clause in the GSMA, RIL says, refers to non-
e availability of natural gas and not a voluntary shutting of gas
supply by RIL.

RIL contents that the Scheme itself postulates supply of gas
only to power plants of REL and RPPL. However, the fact that
D GSMA has included a definition of affiliate so that it can take
on the higher responsibility of supplying gas even to power
generating units started by entities other than REL and RPPL
providE!d RNRL owned at least 51 % of that company
demonstrates the good intentions of RIL. It further contends that
E in fact the GSMA is more flexible than the Scheme or for that
matter the MoU and hence, on that count RNRL has no right to
contend that the definition of affiliate should be wider than what
was provided in the GSMA.

It was submitted that the GSMA and GSPA fully comply
F with the requirements of Clause 19 of the Scheme, which
requires that arrangements be entered into with RNRL for
supply of gas to the power plants of REL and RPPL. Under the
GSMA, RNRL would have the right to nominate affiliates to
whom gas is required to be supplied under different GSPAs.
G The GSPA's are to be entered into with companies who are
engaged in generation of electricity like the REL. R(L also
further contends that the Scheme does not contemplate RNRL
purchasing the gas and selling the same to its affiliates at a
profit. RIL says that the buyers under the Scheme were to be
H companies which actually own and operate power plants and
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 867
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

moreover under the PSC the title can only pass to the end A
consumer at the delivery point. It was stated that the scheme
envisaged that RNRL take delivery of gas at the delivery point
on behalf of the buyers and arrange for its transportation to the
ultimate consumption point and for this purpose charge a
marketing margin which must be nominal and the transportation. B
charges incurred. The submission was that the very names Gas
based Energy Undertaking suggests that the value arises, not
from trading of gas, but from generating energy from gas. Shri
Salve explained that the procedure that RIL put in place,
whereby the GSMA is with RNRL and the GSPA with its . c
nominee company that is actually starting a gas based
electricity generating plant, would make it bankable for both the
power generating company as well as RIL. It was his contention
that in the event that RIL did not get paid and with "take or·pay"
penalty not being there, then it would at least have a company D
with some actual assets against which it can proceed to collect.

57. With regard to the issue of bankability of the GSMA
and GSPA, it was submitted that RNRL has not shown one
single document or produced any evidence suggesting that they
are not bankable in the international financial spheres. It was E
submitted that contrary to RNRL's assertions that they are not
bankable, RNRL has in fact raised substantial funds, both
domestically and abroad. RIL also contends that even though
such huge sums of money have been raised, not a brick has
been laid so far to begin the construction of the Dadri power F
plant in Uttar Pradesh. It was also stated that by entering into
GSPA's with the nominee companies that would be setting up
gas based power plants, it would actually make the agreements
bankable because it is the nominee companies which need to
raise monies to establish the power plants. G

58. Shri Salve argued that as a matter of both law and
logic, within the context of the scope of this litigation, the rights
of RNRL vis-a-vis RIL cannot transcend the rights possessed
by RIL and actually demerged by RIL. The rights of the Uol with H
.868. SUPREME COURT REPORTS [2010] 5 S.C.R.

A respect to approval of the price formula - and thereby affecting
the price - and to.. frame a government utilization policy
effectively delimit.s'RiL's own rights as to what it can do with
thli natural gas. Ii is mandatory that RIL strictly remain within
those boundaries. The width and nature of Gol's control can be
B discerned from its continuing and constant role in overseeing
a'"~~vities in all aspects and phases of the Petroleum
· · ·tY~erations. Further, Shri. Salve says that what RIL gets is not
a physical share but onl;t a share of the value, that the title only
passes to the end user and purchaser at the Delivery Point and
c not to RIL when natural gas is extracted and that RIL can really
only act as an agent of Uol.

59. According to Shri. Salve, what was approved by the
shareholders and formed the basis for sanction of the Scheme,
has in.faCt been propounded by the Board. The minutes of the
D Board meetings and the discussions recorded clearly show that
the' Board sought the opinion of the CG Committee and outside
. professionals in deciding whether to go with the reorganization
,,~-Qrnot, and also the nature of the Scheme that was to be put
~' ·'' ,•,:·,.... . '

· together. It is clear from the record that the Board acted
E independently and collectively. What it did not include in the
·Schemi:ttherefore cannot now be said to be a part of the
.. ·:'' :·:·: .. )¢~ . -·~- ,

Sche!TI¢ itself. With respect to gas supply agreements, the
Board''had c!ear~y recognized that they were not permissible
without governmental approvals, and in fact the personnel of
F ADA Group knew this and so did the lawyer who put the scheme
together, drafted the MoU and was advising ADA.

.60. Shri. Salve argued that the MoU was a confidential
document from the private domain of the promoters and was
._ G executed in the context of settlement of family disputes. In as
' rnutt:i as th.e MoU was never placed before the Board or the
'.'''''sharel;\Qlders, it cannot be deemed to have been approved by
them. According to Shri. Salve, Sections 193, 194 and 195 of
_the Companies Act, 1956 raise the presumption that the record

.H,..
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 869
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.)

of the proceedings of the meetings of the Board are accurate A
The minutes of the Board were never challenged and were
never put in issue in any proceeding.

61. With respect to the Doctrine of Identification, Shri
Salve argues that it has no relevance in the context of the facts B
of these cases. The resolutions of the Board vesting vast
powers upon MDA themselves speak of the fact that the powers
which the Board was required to retain, by the Companies Act,
1956 and the Articles of Association, it did so. Under Section:
293 of the Companies Act, the Board cannot sell off or
otherwise dispose off an undertaking without the consent of the C
shareholders. Consequently, the Board cannot relieve itself of
the powers wi.th respect to matters that only it can take a
decision on. The record clearly indicates that Directors ac:ted
independently and that the Board applied its collective mind
after obtaining the necessary inputs and recommendations of D
the CG Committee and other professionals and accordingly had
the Scheme prepared and recommended to the shareholders.
Consequently it is not MDA who acted but the Board itself.
Hence, the Doctrine of Identification which arises in cases
involving torts and criminal liability has no application here. E

62. MoU is an antecedent document that should not have
been considered by the Courts below. Even if considered, the
Mou itself contemplated that the actions necessary to start the
process of reorganization had conditions precedent which F
included approvals by the Board and the shareholders. Further,
the MoU itself also shows that governmental approvals were
always known to be necessary.

63. RNRL's Application Not-Maintainable: According to
Shri. Salve and Learned Senior Counsel Shri. R. F. Nariman, G
the powers of the Company Court under Section 392 cannot
be greater than the powers 4nder Section 391 of the
Companies Act, 1956. The width of the powers of the Company
Court are that of an umpire, ensuring that the rules of the game
are fair, and then allowing the parties to inter-se decide the H
870 SUPREME COURT REPORTS [2010] 5 S.C.R.

A appropriate terms of commercial exchange. The Court pursuant
to Section 391, for instance, cannot compel the parties to
substitute a Scheme approved by the members of the classes
required to approve the. Scheme with what the Court feels is a
better one. Shri. Nariman. relied upon Miheer H. Mafatlal v
B . Mafatlal lndustries. 33 Consequently, under Section 392 the
' Court cannot impose its own wisdom, and change the basic
fabric of the Scheme itself. Reliance was placed on S.K. Gupta
(supra). Further, Shri Nariman also argued that in search of
modification, it is impermissible to substitute a portion of the
c Scheme with a new Scheme. Reliance was placed on Meghal
Homes (P) Ltd. V Shree Niwas Girni K.K. Samiti & Ors 34 •
According to RIL there is nothing unconscionable in the six
clauses that have been protested and hence also the
application by RNRL was. not maintainable.
D 64. Scope of Clause 19 of the Scheme: Shri. Rohinton
Nariman argues that what was provided for in Clause 19 with
respect to the gas supply was a "suitable arrangement," which
means an uncrystallized arrangement to be negotiated. This,
according to Shri Nariman is to be contrasted with the
E crystallized agreements and rights to use Reliance brand logo
etc. whic,~ are also found in Clause 19 and this difference must
be interpreted to be intentional. Further, according to Shri.
Nariman the "suitable arrangements" with respect to gas supply
were to be between the Demerged Company owned by two
F million shareholders and the Gas Based Resulting Company,
whereas the MoU on the other hand is between three
shareholders out of two million shareholders and consequently
it cannot now be said that the gas supply provisions of MoU
constitutes the phrase 'suitable arrangement'. Shri Nariman
G also argued that what is contemplated in Sections 391-394 of
the Companies Act, 1956 is an arrangement between the
company and a class of shareholders. The present Scheme

33. (1997) 1 sec 579.
H 34. (2007) 7 sec 753.
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 871
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

treats all equity shareholders as a class. The Mou was between A
three shareholders and has notning tc do with the entire class
of shareholders who· approved this Scheme. Further, Shri
Nariman also argued that if the MoU were known to the Board,
then the fact that the terms and conditions of the gas supply
contained therein were kept out, indicates that the act of . B
omission was deliberate and hence foreign to the Scheme.

CONTENTIONS OF THE UNION OF INDIA:

65. According to Learned Solicitor General, Shri. Gopal
Subramaniam, there are two kinds of Production Sharing C
Contracts, one in which physical produce is shared and the
other in which revenue is shared. He relied on a book
"International Petroleum Fiscal Systems and Production
,
Sharing Contracts" by Daniel Johnston.
D
66. The Learned Solicitor General, presenting a synoptic
view of the history of oil production contracts, from early
concessions to mode·rn day arrangements, says that the PSC's
evolved to give the State greater control over all aspects of
petroleum operations. This includes the right to determine the E
expenses to be incurred, the rates of production, the equipment
to be used and also which markets to sell to or not to sell to.
Further, the Learned Solicitor General submits that PSC's have
many aspects which are negotiated and the specific set of
rights given, in terms of recoupment of costs, the extent and
delineation of such costs determines the particular bargain F
struck. Hence, an assumption or conclusion that because a
contract is titled "Production Sharing Contract", physical,
quantities of the produce are to l':le shared would be erroneous.
The specific terms of the contract ought to be determinative,
rather than a general assumption. G

67. According to the Learned Solicitor General the
concept of Permanent Sovereignty over natural resomces is a
widely accepted one in international law and UN General
H
872 SUPREME COURT REPORTS (2010] 5 S.C.R.

A Assembly Resolution 1803 of 1962 specifically recognizes tf. ~
same. Further, it was also argued that, in fact, forms C'f ;Jsc
developed as a result of such a resolution. Under the new
contractual systems in the petroleum industry. as opposed to
the historical concessions given by Persia for instance, the
8 ownership of the resource vests and continues to vest with the
sovereign until it is disposed off. It was pointed that Article 297
of the Constitution declares that minerals and other resources
underlying the ocean vest in the Union of India. Learned Solicitor
General specifically stated in his oral arguments that the PSC
c was placed on the floor of the Parliament.

68. It was argued thatthe EGOM decisions, regarding the
utilization of natural gas and the price formula/basis, have never
been challenged independently and that the present litigation
is an attempt, in a seeming internecine war, to waylay Gol
D policies in a Company Petition. Learned Additional Solicitor
General Shri. Mohan Parasaran points to Articles 77(3) and 73
of the Constitution and argues that the powers of EGOM are
not merely traceable to the PSC but also to the powers flowing
from such Constitutional provisions and its policy decisions
E have the force of law.

69. Arguing that distribution of national property and state
largesse has to adhere to the dictates of Article 14 of the
Constitution, Shri. Mohan Parasaran says that if the Gol had
F effectuated the distribution of natural gas in the manner in which
it is being claimed to have been allocated by the MoU, in
secret and without it being offered to others, it would be liable
to be struck down by the courts. To this effect he relies on R.D.
Shetty v. International Airports Authority of lndia 35 and F. C.1. v.
G Kamdhenu Cattle Feed lndustries 36 . Further, Shri. Parasaran
also argued that the State is enjoined to distribute the material
resources in a manner that promotes common good. In this
regard he assails the demands of RNRL for a reservation of
35. (1979) 3 sec 489.
H 36. AIR1993SC1601.
RELIANCE NATURAL RESOURCES LTD. v. RELIANCE 873
INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

gas that places vast amounts of it in the hands of one elltity as A
being detrimental to common good. He relied on State of Tamil
Nadu v. L. Abu Kavur Bai37 and Safar Jung Sugar Mills Ltd. v
State of Mysore 36 • Shri. Mohan Parasaran also stated that
natural gas is to be used for national development and placed
reliance on Association of Natural Gas & Ors. v. Union of India B :..j
& Ors. 39
70. Learned Additional Solicitor General Shri. _\1ivek
Tankha explained that natural gas. is a very scarce resource in
India and that many units which could use it have been stranded
C·
on account of its non-availability. In fact, he pointed out that, a
Chief Minister and others have also written to Gol with regard
to non-availability of natural gas from KG-D6 on ·account of the
clair:ned reservation of natural gas by RNRL. Additiona·11y, he
., submitted that the market for natural gas in India is undeveloped. D
Shri. Tankha pointed out that the network of pipelines that can
transport na\ural gas in India is very small in comparison to
developed Nations. This, he pointed out, mean·s that m!'lny
regions of the country cannot get access, and reservation of
such huge amounts of gas by one entity would mean that other
regions would not be able to access such gas after pipeline is E
developed there. He also stated that while some new
discoveries have been made, some of the older fields are likely
to run out of natural gas. In light of such factors, Shri Tankha
argued that, it is very important for Gol to be able to monitor
and frame policy forutilization of natural gas. It was emphatically F
stated by him, and also by Shri. Mohan Parasaran, that any
marketing freedom under the PSC can be only pursuant to a
gas utilization policy put in place by the Geil. ·

71. Shri Mohan Parasaran analysed Articles 27.1, 27.2, G
in conjunction with Article 21.1 and posited that title to PSC can
pass to an end user only upon sale, and su(;h sales have to be
37. 1984 (1) sec 515.
38. 1972 (1) sec 23.
39. 2004 (4) sec 489. H

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

A in accordance with a utilization policy. With respect to what is
shared between the contractor and the Gol, he argues that it is
revenue. To this effect he also drew our attention to the fact that
the PSC considered by this Court in CIT v Enron Oil & Gas
India Ltd. (supra) - is different from the PSC in hand, and
B . hence that case is not applicable.

72. Shri. Mohan Parasaran interpreted Article 21.6 to
mean that arms length prices and the price formula therein as
being applicable with respect to all gas produced and sold from
C KG-06.
PART IV

WHOSE GAS IS IT ANYWAY? WHETHER A
CONTRACTOR BECOMES THE OWNER OF THE
D GAS?

73. Shorn of all the details and lengthy submissions and
contentions we shall now proceed to consider the relevant and
substantive issues that are required to be dealt with. It may be
necessary to have a bird's eye-view about the importance of
E the natural gas and the evolution of the PSCs. We also set forth
a broad and a brief overview of the political economy of natural
gas industry and the evolution of the various arrangements
between sovereign nations and oil companies.
74. Natural Gas is a mixture of hydrocarbons, but mostly
F
methane and is a primary source of energy. It is formed by the
conjuncture of a random set of factors - biological, physical,
chemical & geological - intersecting precisely to trap the formed
gas in underground cisterns (See: Association of Natural Gas).
The known reservoirs across the globe are randomly
G distributed. Those regions that have many large reservoirs are
considered to have been favored by the cosmic dice. The
difficulties of exploration and mining, and the location specificity
of reservoirs have a direct bearing on identification of those
reservoirs, extraction from them and subsequently distribution
H
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INDUSTRIES LTD. [B. SUDERSHAN REDDY, J.]

of natural gas. Its gaseous nature makes it expensive and A
difficult to store and transport. Between continents it is shipped
in the form of LNG; and overland it is transported by pressurized
pipelines. It is used as a fuel and a feed stock in: (i) production
of fertilisers, (ii) generation of power, (iii) transportation, (iv)
households, .and (v) production of various products such as B
petro-chemicals, textiles, sponge iron etc. Its low carbon content,
relative to other fossil fuels, implies that its use may help in
combating global warming problems. Availability at an attractive
price point could potentially induce entities in those sectors to
switch to using natural gas. However, because it is also an c
exhaustible and non-renewable resource, there is an imperative
need to conserve it. Such conservation can be achieved by
restricting the amount available and also by modulating the
price. Because the differences in relative abilities to pay varies
between different sectors, in conditions of extreme scarcity, it D
is likely that certain sectors could out-bid others and corner the
entire available quantities in unregulated markets; and that
could lead to a shortage of supply to vulnerable sectors like
fertilisers, power, transportation and households. Availability of
natural gas to each of those sectors raises thorny questions of
equality and quality of life issues 40 . E
75. The size, scale, scope and nature of a market for
natural gas is a function of the total supplies, the level of
demand and relative abilities to pay by different user segments,
the length and density of network of pipelines, the number of
producers, distributors and retailers etc. One of the critical
F
features of a properly developed market for natural gas would
be the network of large capacity pipelines that can carry it to
different regions, and then a further local network to distribute
it to end users41 . Further, where that large capacity pipeline
goes to, determines which regions get natural gas. In a large G
country, if many regions are left without access, then inter-

40. Handbook of Natural Gas Technology and Business, ed. Parag Diwan and
Ashutosh Karnataka, Pentagon Energy Press (2009).
41. Ibid. H
876 SUPREME COURT REPORTS [2010] 5 S.. C.R.

A regional conflicts could develop, especially if competition for
primary energy sources intensifies.
·76. All of these factors play a role in classifying a market
as developed or undeveloped. The market for natural gas in
United States is considered to be the most developed, with
B historically large supplies being available, h'undreds of
producers, many lakhs of miles of pipeline and dense local
networks. Consequently spot markets have developed, in which
prices are determined and are sensitive to various factors,
including factors such as prices of alternative fuels and peak
C demand. In other jurisdictions with such features being less
developed, prices have been set through formulae linked to
prices of alternate fuels, including crude. Historicany natural gas
industry has been highly regulated and it is only over past three
decades that there has been a greater dependence on market
o forces to effectuate market coordination. Different jurisdictions
have chosen different paths, with variations regarding which of.
the various stages of the value chain from production to end
user access are regulated. The mechanisms for such regulation
also vary from direct state commands to setting of rules and
E allowing private players to operate with relative freedom within
those set of rules. The choices made seem to depend on
various historical events, and factors and already established
institutions and rules. 42 .4 3
77. We have referred to C! number of journals, articles and
F books in this regard, too numerous to all be cited 44 , and one
42. Ibid.
43. Robert J. Michales; "Natural Gas Markets and Regulation", in the Concise Encylcopedia
of Economics, 2nd Ed.
44. A small sample: Stephen Breyer: Regulation and its Reform, Harvard University Press
(1982); Paul Stephen Dempsey: Deregulation and Reregulation-Policy, Politics and
G Economics is Handbook of Regulation and Administrative Law ed. David H.
Rosenbloom & Richard D. Schwartz, New York (1994); Colin Scott: The Jurisidification
of Relations in the UK Utility Sector in Commercial Regulation & Judicial Review ed.
Julia Black Peter Muchlinski & Paul Walker, Hart (1998); Cosmo Graham: Regulating
Public Utilities-A Constitutional Approach: UNCTAD: Competition in Energy Markets
TD/B/COM.2/CLP/60 GE. 07-50741 (2007); Gas Reguation; in 35 jurisdictions, Global
Competition Review (2006); and Handbook of Natural Gas Technology & Business,
supra note 40. Also see Integrated Energy Policy-Report of the Export Committe,
H Planning Commission on India, Gal (2006).
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thing stands out: there are no completely unregulated free A
markets for natural gas anywhere in the world. By framing an
overarching analytical framework, it can be observed that every
jurisdiction grapples with three sets of issues relating to
ensuring: (1) adequate supplies to meet overall energy and
industrial needs; (2) equitable access across all sectors, B
especially those which have implications for quality of life; and
(3) equitable pricing, even if market forces are allowed to play
a much larger role. Three more issues are emerging with
respect to ensuring: (4) energy security of the nation; (5) energy
defense links; and (6) inter-generational equities. Under c
conditions of scarcity, these latter factors may indicate a greater
need for emphasis on conservation as opposed to current
consumption. It would appear that markets, with their emphasis
on current consumption and short run profits may lead to faster
depletion, and consequently necessitate far greater and indeed 0
a primary role for the State in coordination and making choices
between different objectives and value premises. While
markets and private initiatives have an important role in
garnering financial resources, developing and bringing new
technologies to practical use. expanding the infrastructure, and E
increasing supplies by identification of and extraction from new
sources, if unmonitored and completely unregulated markets are
also capable of causing great inequities, in access, overpricing
and sometimes even under pricing (if e·xternalities, such as -
environmental costs, are not taken into account) the resources.
F
78. It would be a gross understatement to say that India's
identified reserves and availability of natural gas for domestic
consumption are very small. The total proven and identified
reserves of natural gas in India are said to be about 1074
BCM 45 . That may appear to be very large. It is not. United States G
consumes around 22-23 Trillion Cubic Feet46 of natural gas
every year - yes every year. According to MoPNG documents

45. MoPNG Basic Statistic (2008-2009).
46. Ene1ijy lnformaflon Administration, Dept, of Energy, U.S. Government. H
878 SUPREME COURT REPORTS [201 O] 5 S.C.R.

A the total global reserves are around 6534 TCF 47 , and our
access to those global reserves are very limited, because of
relatively underdeveloped shipping infrastructure for transport
of LNG and the difficulties in laying international and undersea
pipelines for its transport from better endowed regions such as
B the Middle East. While some new discoveries, such as the one
in KG Basin, have raised hopes of the supply constraints
easing somewhat, we should always remember given India's
extremely low- in fact de-humanized - per-capita consumption
levels of energy, such easing of constraints only implies an
c easing with respect to the pressure of immediate and effective
demand, and not with respect to potential demand that could
arise with -economic growth and certainly not in relation to the
kind of levels of consumption that would enable our people to
live with a modicum of dignity. As the Planning Commission
has stated, India's energy challenge is of a fundamental order
0
with immediate resonance in respects of our constitutional
goals, internal and external security. India's energy security
cannot be taken for granted - that would be disastrous, ethically
impermissible and a fraud on the Constitution. Planning
Commission also warns that the hubris of having large coal
E reserves is unwarranted; according to it, much of that coat_ is
un-extractable and clean coal technologies are only possibilities
and not certainties 48 .

79. If, as many scholars state, oil production has peaked
F or will peak in the future 49 , India will increasingly have to
compete for primary sources of energy and this may lead to
geo-political instability on a global scale and even within
national boundaries. Identification of our own domestic sources,.
determination of whether they can be extracted from and
G 47. MoPNG Basic Statistics (2008-2009) citing BP Statistical Review of World
Energy, June 2008 & OPEC Annual Statistical Bulletin.
48. Integrated Energy Policy: Report of the Expert Committee, supra note 44 ..
49. Adam R. Brandt: Testing Hubbert (2006); Alekle, Hook, Jakobsson, Lardelli,
Snowden & Soderberger: The Peak of Oil Age, Energy Policy Vol. 38 (2010).
There are of course many more articles in the public domain regarding
H this. There are of course industry experts who do not agree.
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augmentation of such sources with new forms of energy A
production, and balancing of needs between current
consumption and future consumption, reserves for defense
purposes etc., are all absolutely essential tasks which have to
be performed by the Gol 50 .

80. The network of pipelines for transport of natural gas is
B
very small in length in India, of a few thousand kilometers only,
and the density is also very low51 . Except for a few states, and
that too a few small regions in those states, access to natural
gas in the rest of the country is non-existent. It is not a wonder
that at least one Chief Minister wrote to the Gol in the middle C
of the last decade protesting about non-availability of new
natural gas discovered off the sea shore of that state's coast
for various units located in that state which had already been
started and lying stranded on account of lack of domestic
supplies of natural gas. D

81. Historically, oil production had been undertaken by
major oil producing companies in the private sector52 . Their
relationship with sovereign owners of such petroleum
resources has changed over one hundred years of struggle of E
the sovereigns. These struggles reveal nine zones of problems
or great mischiefs that can occur: (1) of oil companies not
producing even after discovery and not relinquishing the area
of exploration; (2) of oil companies forming into pools and trusts
to reduce production levels and keep the market prices at a
F
high level 53 ; (3) of oil companies financing armed revolutions
50. Integrated energy report, supra note 44.
51. See Basic Statistics on Indian Petroleum & Natural Gas, 2008-2009,
MoPNG Gol.
52. Ernest E. Smith & John Dzienkowski, "A Fifty Year Perspective on World
Petroleum Arrangements" 24 TEX. INTL L.J. 13 (1989). This is a broad G
survey of the history of this industry post nationalization of Mexican Oil
Industry and the citiations therein are very valuable resources.
53. In United States legislature and courts combated with development of anti-
trust jurisprudence. See Ernest E. Smith & John Dzienkowski, ibid. Also
see Oswald Whitman Knauth; The Policy of United States Towards Industrial
Monopoly, Bibliolife (2010). H
880 SUPREME COURT REPORTS [2010] 5 S.C.R.

A and interfering in political aspects; (4)of oil companies claiming
ownership rights over the areas in which oil could be produced
from; (5) of oil companies claiming permanent rights to extract
petroleum resources in-situ and taking the physical quantities
away for marketing elsewhere; (6) of under development of
B facilities for refining the petroleum and the Nation not having
access to channels to market and distribute the resources 54 ;
(7) of deception by oil companies via low posted prices, and
thereby reducing the royalty payments to the sovereign owners
and reaping higher rewards in downstream activities that were
c also controlled by the oil companies; (8) sovereign owners not
having any rights to determine what levels of production can
take place and without rights in management of petroleum
operations; and (9) joint off take agreements between oil
companies and downstream divisions amongst them that
controlled production, at an international level, keeping posted
0
prices low so that even if sovereigns tried to take over the
industry, they could be beaten down with production from
elsewhere55 •

82. In response to such great mischiefs, different types of
E arrangements have emerged between sovereign nations and
oil producing companies. The philosophical and operational
differences are with respect to: (1) the lengths of time over
which exploration could take place and the requirement that
after the initial period, if requisite exploration is not undertaken
F or does not result in a commercially exploitable discovery, the
return of the contract area; (2) nature, extent and mode of
participation in management of the petroleum operations; (3)
participation in price setting and price modulation functions,

G 54. The great mischiefs 3 to 6 led to nationalization of the oil industry in Mexico,
in 1938. They also led to the first modern declaration that all natural
resources belong to the people as a nation and to be used for national
development and substantively informed the progress in international law,
led by former colonies, that the people in those lands are the rightful owners
and should benefits from the use of such resources .
.H 55. Ernest E. Smith & John Dzienkowski, supra note 52.
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through both administered price mechanisms and also through A
varying the quantity available in the market; (4) setting up of a
financial system between the oil produces and the sovereign
involving various parameters such as the tax regime, royalty
structures, and sharing of production - the last one being in
terms of physical quantities or in terms of realized value after B
sales; and (5) assertion of sovereign ownership rights of both
in-situ and also of extracted resources. These parameters
obviously vary across various regimes and jurisdictions. These
aspects enter into the complex conspectus of factors with
respect to negotiations of particular arrangements. Factors c
such as levels of competition for exploration activities on a
global-scale at the time of such negotiations, the certitudes of
fiscal systems proposed, assessments of the hydro-carbon
potential (which in turn depends upon historical discoveries
already made and extracted from) etc., would play a role in the
0
particular bargain as Learned Solicitor General Shri. Gopal
Subramaniam stressed.

83. 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 E
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 F
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
G
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

84. 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)"

85. 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
F 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
G 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.
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proportion of the gross revenue must be set aside to repay A
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 B
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 C
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 D
with this background in mind.

86. 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
87. 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.

88. 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
D 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
E 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
F of faith, with a specific set of instructions.

89. 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
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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
90. 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 F
between nation-states.

91. 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 G
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."

92. 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
C 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
D 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
E that subsumes within itself the benefits of the conditions of
justice.

93. 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
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affirmative obligation upon the State to ensure that distribution A
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 B
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.

94. 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 F
that such use does not lead to diminishment of the prospects
of their use by future generations.

95. The statutory matrix dealing with natural gas and other
petroleum resources also clearly indicates the importance of G
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.·

96. 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
C 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.

97. Much of the jurisprudence regarding restrictions of
D 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
E
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
F
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

98. The concept of public trust actually finds its genesis
G 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.
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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

99. 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 C
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 D
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 E
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 F
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.

100. 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
101. 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.

102. 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.

G 103. 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
H 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 A
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 B
may have to be held to be unsustainable.

104. 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 C
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 D
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.

105. 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.
D 106. 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 C
to be:

"1. The significance, desirability or utility of something. (as
a noun).

2. The monetary worth or price of something; the amount D
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
107. 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 F
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 G
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.

108. 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
109. 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

110. 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 B
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 C
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 D
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.

111. The title pursuant to Article 27.1 of the PSC can pass F
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 G
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.

113. 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.

114. We disagree. The sale at the Delivery Point takes
G 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
H 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 A
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
115. 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
116. 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 F
divisions do not constitute the Indian domestic market. That
phrase contemplates the entire class of eligible buyers in India.

117. Further, the said Article 21.1 proceeds to state that
all proposals of the Contractor for production, which includes G
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.

118. 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.

119. 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.

G 120. 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.]

we have delineated in this decision so far. In the instant case, A
what RNRL had demanded, as of the first time that it filed the
Company Application was for 28 MMSCMD (and in the event
that NTPC contract did not go through then 40 MMSCMD) and
the Option Volumes of 40% of all the gas to be ever produced
by RIL under any contract with the Gol. The notion that two
8
nominees of the Gol can effectuate policy decisions of such a
nature, in the context of their role as members of the
Management Committee to effectuate the working of a PSC,
is simply untenable and impermissible.

121. 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 D
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 E
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 F
of actual production.

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

The Learned Senior Counsel for RNRL also argued, very G
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
B
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
C 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
D at all. ·

123. 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.
F 124. 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

125. 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 C
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 D
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

126. 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
D 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
E all situations, because a market may not have developed
properly.

128. 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
129. 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
130. 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 F
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 G
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?

131. 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.

132. 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.

G 133. 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 C
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 D
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 F
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 G
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.

135. 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
C 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
D 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.]

136. 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 B
received shares after the demerger would have understood it.

137. 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 C
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, D
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 E
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.

138. The arguments made by RNRL that it has not been F
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.

139. 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
D workability of the Scheme itself.

140. 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
E
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
F 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 A
concept of class of members with similar interests voting on a
proposal for reorganization.

141. The minutes of the meetings of the Board of RIL
dealing with various issues concerning the reorganization do B
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 C
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 D
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 F
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 G
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
142. 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
D 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
E 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
143. 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 A
that the Scheme was something more and fundamentally
different from the MoU.

144. Clinchingly, with respect to the most contentious
aspect - governmental approvals - which RNRL claims were not B
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 D
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 E
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
145. 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
B 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
C 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.

146. Does the MoU support the contentions of RNRL with
F 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
G 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)

147. In the course of the proceedings before us, Shri.
Harish Salve repeatedly challenged that RNRL had singularly D
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 E
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 F
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
F 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
G 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.

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

DOCTRINE OF IDENTIFICATION: A

148. 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 B
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 C
that the Board and the Company also agreed to the same.
Consequently his argument is that th~ Mou is binding on RIL.

149. We disagree. Doctrine of Identification as developed
by the courts is typically applicable in criminal and tortious D
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 F
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 G
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,
C 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
D concurs with the view of Board members that the same are
necessary, implies that ADA was aware of the same.

150. 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
E 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
F both the parties relied upon in support of their submissions.

MAINTAINABILITY:

151. The learned Senior Counsel for RNRL have
contended that the powers of the Court, under Section 392 of
G 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).

152. 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
153. 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.

154. 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
E 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
F 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

G 155. 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.

156. 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.

157. 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.

158. "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
D 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
E 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
F 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
G 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 A
tenet of the Scheme that the two groups were to function
independently of each other.

159. If the question regarding what would make the
Scheme work had been framed properly by the courts below B
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 C
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 D
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 E
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.

160. The Learned Counsel for RNRL objected to reliance F
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 G
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.

161. 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.

C 162. 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
163. 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
F 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
G
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 C
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 D
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
E
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 F
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.

164. Before we part with the case, we consider it G
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.

A 165. 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

H
I /
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