For nearly five years, the price of natural gas in India was the subject of a bitter dispute between two of the country's richest men, Mukesh Ambani, whose net worth is estimated at US$29 billion (Dh106.51bn), and his younger brother Anil, whose wealth totals $13.7bn.
Mukesh's Reliance Industries (RI) was to supply gas to Anil's Reliance Natural Resources (RNR) to provide fuel to Reliance Power, which plans to build a major power plant to serve Delhi and its environs. They had agreed on a price set in 2000, which would remain fixed for 17 years. Within six years, the brothers split and the group divided assets. Supported by the Indian state, RI wanted a higher price. RNR protested: the high court sided with RNR. The Indian supreme court gave its verdict this month: neither side controlled the gas, and the price had to be renegotiated, bearing in mind the standard set by the government.
This complex dispute has far-reaching consequences on the sanctity India attaches to contracts, the role the government might play in a dispute, and how India prices its assets. Mukesh Ambani heads the $44bn RI; Anil's businesses are smaller (only in comparison with RI) and more diversified. Sons of the late Dhirubhai Ambani, they were once united but separated their interests within years of their father's death, ostensibly pursuing different business models.
Breaking up an integrated business is never easy: one part of the business is dependent on another, and for each part to function smoothly, all movements have to be synchronised. It was the genius of the father, and later the sons, to develop a strategy where the business absorbed surplus costs and slack at each stage of the manufacturing cycle, from refining to petrochemicals to polyester yarn, all the way to textiles, integrating processes to drive down costs and increase margins.
Under the agreement, Mukesh's RI was to sell gas from the Krishna Godavari basin off India's south-eastern coast to the power project that Anil's RNR is to set up. The long-term price on which the companies agreed was set at a time when world gas prices were low. If the price is renegotiated, RNR might have to pay 80 per cent more. Its stock lost a 10th of its value after the court ruling. The windfall from a higher gas price will not necessarily go to the government. According to industry practice, RI may get more benefits in the early years of exploration, to account for the risks the company takes on, although in later years the state's share rises.
The government will require utilities to supply fertiliser companies as a priority, but then the fertiliser will be sold at a subsidised price to farmers, who are politically powerful. So whatever gains might be made through a higher price might be lost in the complex arithmetic of Indian subsidies. Gas and electricity utilities and consumers may have to pay more. The dispute came to a head because four years after the death of their father in 2002, the brothers decided to split the assets of the Reliance Group. Dhirubhai knew how to exploit opportunities offered by India's formerly restrictive regime: he secured the licences he wanted, placed impediments in the path of rivals, and invested in building world-scale plants.
He was a visionary who wanted to build corporate assets that were significantly bigger than those of his rivals in the private or public sector. He saw the world, and not just Indian companies, as his competition. The guiding principle of Reliance was to squeeze costs from the supply chain: integrate processes; absorb slack; control access to raw materials; and squeeze the maximum yield from each component in the value chain.
That system was built on the assumption that various arms of the Reliance Group worked together, as parts of the whole. But when the brothers split, things changed. The price of gas in 2000 was $2.34 per million British thermal unit (BTU). The price agreed on in 2000 was not entirely arbitrary. It was based on a bid floated by the state-owned National Thermal Power Corporation. The recent dispute arose because RI wanted a higher price - $4.20 per million BTU - reflecting the changed market conditions.
The government reminded the companies that neither owned the gasfield. The supreme court went further. The majority opinion not only cited the chief architect of the Indian constitution, the late BR Ambedkar, but also took shots at the global economy. "The neoliberal agenda has increasingly eviscerated the state of stature and power, bringing vast benefits to the few, modest benefits to some, while leaving everybody else, the majority, behind," the judgment said. "Historically ? predatory forms of capitalism seem to organise themselves, first and foremost, around the extractive industries that seek to exploit the vast, but exhaustible natural resources."
This charming song sheet did not get unanimous approval: Justice P Sathasivam declined to join this simplistic critique of modern economy. Family disputes are common in India. And while the size of the Ambani brothers' businesses makes this dispute important, there are wider issues that deserve greater scrutiny. Consider the sanctity of contracts. Granted, some government officials insisted that the original agreement between the two companies, to trade gas at $2.34 per million BTU, was not an arm's-length transaction, that the price was not plucked out of thin air.
Granted, too, that fixing a price for 17 years is unusual, but Indian law permits forward contracts, and another company could have hedged to secure such a price, by accounting for such a risk by dealing in derivatives to control costs. Related is the question of how India prices its assets. Industry observers say that the process of setting prices is not consistent or reliable. When the state changes prices and does not explain its actions adequately, it creates uncertainty in the market.
And uncertainty does not help build India's reputation in international markets. Oil industry experts say the reason that oil majors have not flocked to India is not just that the country's reserves are unproved, but also that they have concerns over policy stability and certainty. In 2006, no foreign company offered a bid for Indian exploration blocks on offer, and foreign interest was low the year after.
Clearer pricing would attract more bidders. The supreme court's verdict has settled the dispute for now. But it has not done much to remove the uncertainty. Investors now know that they can enter into contracts in India. But the terms can change. And the government has the last word. That is not exactly soothing for the markets. business@thenational.ae