Ambani brothers end war but agree to compete

Replace all non-compete agreements with a ‘simpler pact' on gas-based power generation.

Our Bureau

Mumbai, May 23

In a move that will change the competitive landscape between the Ambani scions Mukesh and Anil, the brothers have cancelled all existing non-compete agreements between their groups, drawn-up during the Reliance re-organisation in 2006.

A new and “simpler” non-compete agreement has instead been formalised relating only to gas-based power generation, said identical statements issued separately by the two groups on Sunday.

The agreement cancelling earlier non-compete agreements (except in the matter of gas-based power production) was signed between the Mukesh Ambani-led Reliance Industries Ltd (RIL) and Anil Ambani led-Reliance ADA Group companies on Sunday.

The new agreement opens up sectors that were hitherto out of bounds for either groups, such as telecommunications and the financial sector for the older brother Mukesh.

Gas-based power generation continues to be off-limits for RIL up to March 31, 2022. An appropriate exception has been made in respect of RIL's captive gas-based power plants, the note explained.

For younger brother Anil, the doors are now open to sectors such as oil and gas and petrochemicals.

COURT FALLOUT?

The latest development comes two weeks after the Supreme Court had ruled on the gas-pricing dispute between the two brothers. The apex court had directed the Mukesh-owned RIL and the Anil-owned RNRL to renegotiate a gas supply agreement within six weeks of the court judgement and to report the agreement to the court within eight weeks.

However, there is no clarity on whether the latest agreement between the Ambani brothers is an off-shoot of the apex court-directed negotiations and merely a precursor to a new gas sharing agreement which the Supreme Court has mandated.

The latest statement did say that RIL and Reliance Natural Resources Ltd (RNRL) will expeditiously negotiate gas supply arrangements in accordance with the orders of the Supreme Court. “We hope to conclude these negotiations very soon,” the note added.

Further, the new non-compete agreement will eliminate the possibility for further disputes between the two groups, “on matters relating to the scope and interpretation of the non-compete obligations,” the note added.

The agreement has removed road blocks for each of the two groups to expand in new areas, an industry-watcher agreed, adding however, that it may be too early to say if RIL would be interested in any of the areas where ADAG is already present.

In the past, the two brothers have fought over Mr Anil Ambani's efforts to acquire South African telecom company MTN and more recently, over the gas supply arrangement between Mr Mukesh Ambani's RIL and Mr Anil Ambani's Reliance Natural Resources Ltd.

A few years ago, there was another public spat when Mr Anil Ambani protested against a 2,000-MW captive plant that was proposed for the RIL-promoted Haryana Special Economic Zone. He had then cited violation of the non-compete agreement between them, while the RIL camp held that the plant was only incidental to the SEZ business. RIL has a captive power plant at its new refinery in Jamnagar too.

POWER: Truce or war?

After Dhirubhai Ambani's death in 2002, his empire was re-organised between the warring Ambani scions under the stewardship of their mother Ms Kokilaben, in June 2005.

But industry watchers differ in their interpretation of the latest development, calling it variously as “a road to a truce”, and an “out-and-out war”, or a “total severing of relations”.

Some felt that there would be greater consolidation activity between the groups. “There are certain indications that point to M&A activities between the two groups, especially with Mr Mukesh Ambani showing keen interest in the telecom sector,” said Mr Kishor P. Ostwal, head of CNI Research.

Others, however, felt this was unlikely. “We think it is out-and-out no-holds barred war. It's a you-do-what-you-like, I'll-do-what-I-like situation. Only in the case of gas they are forced to have an agreement,” said another analyst.

“The settlement is positive for both the groups But what will be more interesting is when they announce the monetary component of the deal. The ADAG group especially is dry of money,” said Mr Harjit Singh Sethi, Country Head, Institutional Equity Broking at Almondz Global Securities.

There was much speculation on whether Mr Anil Ambani has conceded more, as it is easier for Mr Mukesh Ambani to enter telecom, finance (in particular) and non-gas based power, than it is for the former to enter a capital intensive industry such as refining or exploration.

The press statements from the two brothers, though, had reconciliatory overtones.

“RIL and Reliance ADA Group are hopeful and confident that all these steps will create an overall environment of harmony, co-operation and collaboration between the two groups, thereby further enhancing overall shareholder value for shareholders of both groups,” the note said.

The boards of directors of both RIL and Reliance ADA Group companies have given their green signal to the latest agreement.

Ambanis end non-compete pact in reconciliation bid

India's billionaire Ambani brothers took a step towards reconciliation of their long-running feud on Sunday, ending non-compete agreements in a step they hoped would lead to cooperation between the two groups.

Both groups said they hoped to reach a conclusion soon in a gas supply agreement between Reliance Industries (RIL) and Anil's Reliance Natural Resources that had been at the heart of their dispute.

"RIL and Reliance ADA Group are hopeful and confident that all these steps will create an overall environment of harmony, co-operation and collaboration between the two groups, thereby further enhancing overall shareholder value for shareholders of both groups," both companies said in statements.

The announcement comes weeks after the Supreme Court ruled in Mukesh Ambani's favour in a bitter dispute over gas pricing that had made headlines, riven India's richest family and raised questions about the influence of big business on government policy.

On Sunday, Reliance Industries and Anil's Reliance ADA Group said they had agreed to cancel all existing non-compete pacts which the groups had signed in 2006 and entered into a new and simpler non-compete pact only for gas-based power generation.

"If you weigh the positives and negatives, this is more positive for Reliance Industries than R-ADAG group, because this gives Reliance an opportunity to look into expansion in other areas, which they were not allowed to do earlier," said S.P. Tulsian, an independent investment consultant.

"You can't rule out the possibility of Reliance entering in sectors such as telecom," adding the Reliance shares are expected to open up on Monday, in the wake of this development.

The two brothers, who both live in Mumbai but had not been on speaking terms during their dispute, inherited their business empires from their father Dhirubhai Ambani in 2005.

Mukesh got the jewel - Reliance Industries, which has interests in oil and gas exploration, petrochemicals, infrastructure and textiles. Anil got the telecoms, power and financial services businesses.

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Mukesh Ambani wins family gas feud

Mukesh Ambani wins family gas feud

(FILE) In this picture taken on January 12, 2009, chairman of India's Reliance Industries Mukesh Ambani gestures as he speaks during the innauguration of the Vibrant Gujarat Investment Summit in Ahmedabad. The Supreme Court ruled in favour of billionaire Mukesh Ambani on May 7, 2010, in his dispute with his younger brother over a family agreement to divide the country's richest gas find, his lawyer said. (AFP)

More @ Mukesh Ambani wins family gas feud

Supreme Court favours RIL in gas dispute

NEW DELHI/MUMBAI: The Supreme Court has handed out an emphatic victory to Mukesh Ambani’s Reliance Industries (RIL), ruling that it need not supply gas to a company owned by estranged brother Anil at a previously agreed price, putting the profitability of many power plants of the younger sibling under threat and tightening government control over gas pricing.

The ruling is a setback for Anil, chairman of the eponymous Anil Dhirubhai Ambani Group (ADAG), who wants to build more than 10,000 mw of power plants across the country using gas from RIL. But the ruling would help RIL avoid potential losses it might have incurred had it lost the case, forcing it to sell gas at a lower price of $2.34 per million British thermal units (mmBtu) mentioned in the family MoU that formed the basis of the division of RIL in 2005.

In 2007, the government set a price of $4.20 per mmBtu, prompting RIL to say it would not be able to sell at the 2005 price. In a conference call after the verdict, Anil Ambani said he would not file a review petition. The only whiff of a positive outcome for the ADAG chairman was the court’s direction that RIL and Reliance Natural Resources (RNRL) should begin negotiations for a fresh gas supply agreement within eight weeks.

The negotiations, to be initiated by RIL, should end within six weeks from the day the talks begin, the court ruled. Such an agreement would have to be in consonance with government policy, it said. The RNRL scrip crashed 23% while RIL rose in a falling market.

“We direct both the parties to renegotiate to sort out the differences, but within the government’s policy of Gas Utilisation Policy and the EGoM decisions,” said Chief Justice KG Balakrishnan and Justice P Sathasivam in their separate rulings. Another member of the bench, Judge B Sudershan Reddy, said the MoU was not relevant at all, though he too directed the brothers to negotiate again.

The ruling, at its core, strongly reaffirmed the government’s right to set gas prices and to decide on its allocation. It said government policy would prevail over private contracts such as the family settlement, a position that could adversely impact private investment in sectors like minerals where the government is heavily involved.

A mechanism is provided under the PSC between the government and the contractor (RIL, in the present case). The PSC shall over-ride any other contractual obligation between the contractor and any other party," said Justice Sathasivam, writing the majority verdict.

As the case has dragged on through various courts, the government has tightened its control over the sector, not only approving the price but also directing the producer of the gas as to who it should sell to. This has suited RIL in this particular case, though it remains to be seen if the state would be willing to raise prices in line with the international prices.

RIL stressed its fealty to government policies in a statement issued on Friday evening. "The judgement recognises the dominant role of the production sharing contract and has upheld the policies formulated by government under which it has the authority to regulate the production and distribution of natural gas... In view of the judgement, RIL can only sell at the price approved by the government and only to the entities who have been allocated gas under the Gas Utilisation policy," the statement said. One possible outcome of the SC ruling might mean that a similar agreement between state-run utility NTPC and RIL for gas is also under a cloud after the verdict, though the circumstances of that case are somewhat different. NTPC lost nearly 1% to close at Rs 201.65.

Doubts over negotiations

In the post-verdict conference call, the younger Ambani was characteristically pugnacious seizing on some of the court’s observations on the need for a new gas supply agreement.

"The...court has also directed that suitable arrangements for gas supply should not only be suitable for RIL but also the shareholders of RNRL..(we) look forward to ..secure gas supply for the Group’s power plants in line with the Supreme Court order," Mr Ambani said.

But the ground rules for tweaking the MoU is far from clear and could set the stage for further legal tussles, belying hopes of RIL’s lawyer Harish Salve that the ruling from India’s highest court would encourage the warring brothers to put their bitter and seemingly unending feud behind them. "Price of gas has been upheld at $4.20 and there isn’t any change in that. Within that framework, the court has asked the two parties to renegotiate," said Mr Salve, the legal heavyweight who shepherded RIL’s case to a successful conclusion.

But a senior ADAG official said the price of $4.20 was applicable for a five-year period between 2007 and 2012. "Any power plant that we build will come up after that, so the price of $4.20 has no relevance for us," said the official, who spoke on condition of anonymity because of the sensitivity of the matter. "The government would have to eventually fix the price and it is certainly won’t be in a hurry to do so given that our gas-fired power plants are years away."

"RIL will renegotiate the gas supply agreements with RNRL in the manner and within the timeframe stipulated by the court. While the MoU may be kept in mind during the process of renegotiation, it is clearly held that the MoU is not binding," the statement from RIL said.

RIL gains, ADAG stocks crash

The Supreme Court ruling, though a victory for Mukesh Ambani, will not bring much additional monetary benefit for RIL, where investors had already factored in the $4.2-a-unit pricing for all the 80 mmscmd gas from the KG basin. Even in the worst case scenario, it might have had to supply ADAG companies only after 3-4 years when they begin operations.

RIL shares gained 2% to close at Rs 1,033.85 on Friday in a falling market, which sank with the rest of the globe due to the European crisis.

"Cash flows would (have been) negatively impacted by $700 million annually for selling 28 mmscmd of gas at $2.34/mmBtu as against $4.20 per mmBtu," Ambit Capital said in a note to investors.

RIL and its partner in the field, Niko Resources, are forecast to earn $10.63 billion in sales from the gas field. The government may earn $16.57 billion as its share of revenues from the KG-D6 field.

Shares of RNRL and Reliance Power run by Anil crashed as investors began to count the danger of owning stocks without much business. Both the companies’ fortunes were partly tied to the gas supply from RIL.

RNRL crashed 23% to Rs 53 and Reliance Power, which has the record of the biggest initial public offer in the country, tumbled 9% to Rs 140. The stock has lost 69% from its IPO price, adjusted for splits.

Reliance Power planned to build nearly 25,000 mw of power based on the assumptions that it may get gas from RIL at the agreed price. The biggest of them was at Dadri in Uttar Pradesh. In the conference call, though, Anil Ambani reiterated that he was committed to building 8,000 mw of capacity fired by gas, but he did not elaborate.

The ruling could also lead to a bigger blow to RNRL, the company that was supposed to get the gas and trade on it if SC had upheld the lower court ruling. While a favourable ruling would have given it a profit of Rs 3,000 crore a year, the absence of it makes it a near shell company with just some under-developed coal bed methane blocks and petroleum exploration licences.

There are no significant operations in both the segments to forecast revenues or profits, so there are no analyst forecasts.

The ruling dents, at least to some extent, hopes of Anil Ambani to establish a business empire comparable to his brother with power generation at the heart of it. When the brothers split with an agreement brokered by their mother Kokilaben Ambani in 2005, it was agreed that a specified amount of gas would be supplied to the younger Ambani at a particular price for his power plants. Subsequently, Mukesh’s RIL said it will not be able to do so given its agreement with the government on sharing of gas with the government. The matter was then taken to court.

Reliance Industries, the nation’s most valuable company, operates the biggest gas reserves in the Krishna-Godavari basin off the coast of Andhra Pradesh. The field known as KG-D6 has the peak capacity to produce 80 mmscmd. While RIL operates the field, the government decides the price and the quantity to be sold to various customers is laid down in the production sharing agreement. The gas was discovered before the split was formalised.

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RIL, RNRL shares to remain in focus on Friday

RIL, RNRL shares to remain in focus on Friday

MUMBAI: Shares of Reliance Industries and Reliance Natural Resource Ltd (RNRL) will remain in focus tomorrow as the Supreme Court is likely to deliver its verdict on gas pricing and supply dispute between the two companies, say analysts.

Marketmen said Reliance Industries and RNRL stocks, which saw profit booking today, are likely to affect investor sentiment and the movement of the market tomorrow.

"The market is keenly awaiting the judgement of RIL-RNRL case and the verdict would have significant impact on investor sentiments. Both the stocks would be in the focus," Geojit BNP Paribas Financial Services Research Head Alex Mathews said.

"Once the decision is out it will be good for the market, whichever way the verdict goes, as it will remove the uncertainty," Purpleline Investment Advisors Director & CEO P K Agarwal said.

Shares of RIL today closed nearly one per cent down at Rs 1,010.90, while RNRL shares fell marginally to Rs 68.35 on the Bombay Stock Exchange.

"The Supreme Court's verdict would certainly have impact on the movement of the market. RIL, being a heavyweight stock, would guide the movement in the key indices," Bonanza Portfolio Assistant VP (Research-Equity) Avinash Gupta said.

The dispute between Reliance Industries and RNRL, the companies led by billionaire brothers Mukesh Ambani and Anil Ambani, is over supply of 28 million cubic meter of gas a day to RNRL by RIL.

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RNRL is seeking gas from RIL's KG-D6 gas fields at USD 2.34 per mmBtu, 44 per cent lower than the government set price, for its proposed 7,800 MW power plant at Dadri.

While, RIL's contention is that it cannot sell gas at a price less than USD 4.20 per mmBtu as set by the government and to customers other than those identified in accordance with the Gas Utilisation Policy (GUP).



SC judgement on RIL-RNRL gas dispute on Friday

NEW DELHI: The Supreme Court will deliver tomorrow its verdict on the gas pricing and supply dispute between energy companies RIL and RNRL. ( Watch )

A three-judge bench headed by Chief Justice K G Balakrishnan, who will be demitting office on May 11, had reserved its judgement in the lawsuit after arguments concluded on December 18.

The dispute between Reliance Industries (RIL) and Reliance Natural Resources Ltd (RNRL), the companies led by billionaire brothers Mukesh Ambani and Anil Ambani, is over supply of 28 million cubic meter of gas a day to RNRL by RIL.

RNRL is seeking gas from RIL's KG-D6 gas fields at $2.34 per mmBtu, 44 per cent lower than the government set price, for its proposed 7,800 MW power plant at Dadri.

RIL's contention is that it cannot sell gas at a price less than $4.20 per mmBtu as set by the government and to customers other than those identified in accordance with the Gas Utilisation Policy (GUP).

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The Bombay High Court had last year upheld RNRL's claim for gas as made out in a family agreement that split the Reliance business empire between the two brothers.

The Apex court heard the case for 26 days since October 20. It also witnessed the recusal of Justice R V Raveendran from the Bench after hearing the matter for six days on the ground that he held shares of both RIL and RNRL.




Src: Economictimes