Mumbai, May 08: Justice has finally been delivered and the victory belongs to consumers and shareholders. The Supreme Court today delivered its verdict in the gas supply dispute between Mukesh Ambani owned Reliance Industries versus the Anil Ambani owned Reliance Natural Resources Limited (RNRL). The key questions that the apex court was to decide on were:
Is a family Memorandum of Understanding (MoU) signed by promoters, binding on their companies?
Can Reliance Industries supply gas to RNRL on terms that don’t meet the government’s approval?
And the answer to both those crucial question is—NO!!!
Hence the Supreme Court has directed RIL to renegotiate the gas supply terms or GSMA with RNRL within 14 weeks and place the decision before the company court. The renegotiation must keep in mind that the production sharing contract (PSC) has overriding effect. It cannot vitiate government gas policies and national interest. It should take into account the family MoU, even though the MoU is not legally binding. Also, the negotiations should fall within conditions of government policy.
What implications does this have across India Inc? And what does it mean for the Ambani epic battle? Is it finally over?
CNBC TV18’s Menaka Doshi caught up with senior Supreme Court advocates HP Ranina; Gopal Jain and Berjis Desai, Managing Partner, J Sagar Associates wherein they discuss the road ahead for both the companies.
Below is a verbatim transcript of the interview. Also watch the video.
Q: Are MoUs signed by promoters of companies—family MoUs—binding on their companies? The company judge in the very first round of this battle said binding, the division bench of the Bombay High Court said binding but the Supreme Court has said not binding. In fact, the one judge in this, who has claimed to be the dissenting judge, is been even less kind in throwing out the MoU and saying there is no way this is going to work. On what grounds are MoUs not binding now?
Desai: I think that is the central takeaway of this judgement that private promoter interest have to be subject to the interest of the shareholders in the listed company as a whole and private business interest are subject to the national interest. That is the central takeaway from this judgement. As far as the MoUs or any agreement between promoters inter se are concerned, unless they are reproduced in the articles of association of the company, they are not binding on the company or the shareholders of the company.
This principle has once again been re-established by this judgement, which states that the MoU is not legally binding on RIL or RNRL. The court is not pronouncing on the validity or the enforceability of the judgement between the Ambani brothers but it is certainly not binding on the two companies though it is going to be what is called an external aid to interpretation in arriving at this very famous phrase of this judgement—“the suitable arrangement”.
Q: At some point Anil Ambani must be kicking himself today because if you read the Bombay High Court judgement as well as the Supreme Court judgment—at various points they have raised the issue that the solicitor to the demerger agreement, Cyril Shroff, at many point said, “Should we put the MoU in the corporate domain?” Obviously, it wasn’t taken seriously, so they didn’t put in the corporate domain. It didn’t pass through shareholders. It did not get approval from the board like the scheme of arrangement did and therefore now it is no longer binding. This is a lesson for promoters across the country—isn’t it?
Ranina: It’s a lesson to be learnt namely that you have to be transparent. If there is a MoU, if there is an understanding, if there is an agreement—you got to place it before the shareholders. This is the great impact of the judgement, which is why welcome it. Of course there will be MoUs and all MoUs are signed between promoters. Initially, nobody is taken into confidence because it’s very confidential, secret etc. But once it is signed, in the case of the public limited company, it has to be placed before the shareholders and the approval should be obtained.
Q: And it must become part of the articles of association for it to be given any effect by that company or for it to be binding on that company?
Ranina: Yes because then you have put it before the company and you have to pass a resolution to change the articles. It becomes part of the corporate scheme and the shareholders approval is then obtained.
Q: Interestingly, the other big argument that Ram Jethmalani made both in the Bombay High Court as well as in the Supreme Court, using the doctrine of identification saying that if Mukesh Ambani signed off on this MoU its as good as Reliance Industries signing off on the MoU because Mukesh Ambani is Reliance Industries and vice versa. But this Supreme Court judgement says, “The doctrine of identification can only be applied to small companies and not large companies where there are many million shareholders.” What kind of precedent is that going to set?
Jain: Exactly the point that Mr Ranina made that this is all about transparency, this is all about good governance principles. Maybe popular perception has it that Mukesh Ambani is the alter ego of the company. But legally speaking, it’s not correct. If you have a very large shareholder base their rights have been recognised and this is no different from what the Supreme Court did way back in Rangarajan’s case as well in 1992.
So it’s a continuation of principle but because its come in a high profile case and it lays down several other principles, I suppose, it buttress it and makes it more stronger and the impact is more forceful.
Q: Do you agree that striking down at the doctoring of identification saying that it’s only applicable to small companies? In fact, the dissenting judge says that this is typically applicable in criminal and tortuous liability cases it’s not applicable in corporate cases of this nature at all.
Desai: The doctrine of identification in the first place was a bit of an exotic doctrine. It almost sounds like Louis XIV saying, “I am the state.” The Supreme Court has clearly not accepted this doctrine of identification and certain judgments were relied upon by RNRL. But the Supreme Court seems to be saying that it applies of course to small undertakings. But what they mean is may be to private companies where there is a clear identification between the promoters and it’s a company, which is owned by them.
So it’s an instrumentality of the promoters but certainly not to a listed company. The moment it’s listed the interest of other shareholders and the public interest comes in. So the doctrine of identification has been given a quiet burial so far as listed companies are concerned.
Q: Do you think that everything that has been discussed about the binding-ness of MoU’s that as a shareholder I think people should be very happy or as shareholder people should be happy because this is a move like you said for more transparency better corporate governance and at least shareholders now know that promoters cant sign all these agreements between themselves giving themselves stakes and not giving themselves stakes and distributing assets without shareholders having the ability to vote on it. But is it going to make life very difficult for the shareholder community in some sense?
Desai: No, it’s certainly not going to spell an end of family agreements, which happen all the time and as Mr Ranina rightly said they are confidential and secret when it concerns their private interests. But the moment you want to enforce a family agreement through the instrumentality of a listed company, as was the case over here, that’s when trouble starts. So long as the promoter agreements or promoter arrangements are purely within their private space or through their private investment companies or companies controlled and owned by them—wholly or exclusively—it cannot enter the public domain and therefore it cannot affect the shareholders of a listed company. It’s an old principle, which has once again been annunciated clearly and to that extent, of course, it’s a welcome move.
Q: But the fact that single judge in the Bombay High Court and then the divisional bench both held that the MoU is binding on both companies—what will companies use as reference for what applies to them so to speak? Is it just a Supreme Court decision that’s a final one?
Ranina: Yes of course. Supreme Court certainly will prevail.
–Agencies