2013 (5) TMI 270 - SC - Companies Law

Jurisdiction of this court in interfering with a complex economic decision taken by a State or its instrumentalities in the absence of violation of any statutory provision or proof of mala fide or on extraneous and irrelevant considerations PIL challenging the approval granted by the GOI for the acquisition of majority stake in Cairn India Limited (CIL) for US 8.48 billion and also for a direction ONGC to exercise its right of pre-emption over sale of shares of CIL on the same terms without causing any loss or profit to the Cairn Energy, and also for a direction to CBI to investigate the reasons for ONGC, a GOI Undertaking, in not exercising their legal rights under the Right of First Refusal (RoFR) and giving clearance to the CAIRN Vedanta Deal on the basis of the existing right to share the royalty and cess on pro-rata basis and also for the consequential reliefs. Held that - Decision taken by the ONGC not to exercise its RoFR was taken after an elaborate and due deliberations. The report of SBI Caps, after making a detailed financial analysis also supported the decision taken by the ONGC. The decision to grant no objection to the transfer of shares of CEIL from Cairn to Vedanta was also on the basis that the proposed share price of share was at ₹ 355 per share, was well in excess of its intrinsic value as were evaluated by SBI Caps. SBI Caps report evaluated each share of CEIL at ₹ 291 with the highest production profile under normal circumstances. It was concluded that even considering various other scenario makes possible value at ₹ 331 per share. UOI also endorsed the decision taken by the ONGC after due deliberations. The matter was finally placed before the Cabinet Committee of Economic Affairs, which placed the matter before the Group of Ministers who on 27.5.2011 granted its approval, based on certain conditions. The same was conveyed to the parties and the Vedanta Resources conveyed its acceptance to the conditions imposed by CCEA. Cairn also indicated to ONGC that CEIL Board had also accepted the conditions imposed upon it and that the cess arbitration, which had been initiated by Cairn against ONGC was also withdrawn.Thus ONGC and the GOI have considered various commercial and technical aspects flowing from the PSC and also its advantages that ONGC would derive if the Cairn and Vedanta deal was approved. This Court sitting in the jurisdiction cannot sit in judgment over the commercial or business decision taken by parties to the agreement, after evaluating and assessing its monetary and financial implications, unless the decision is in clear violation of any statutory provisions or perverse or for extraneous considerations or improper motives. States and its instrumentalities can enter into various contracts which may involve complex economical factors. State or the State undertaking being a party to a contract, have to make various decisions which they deem just and proper. There is always an element of risk in such decisions, ultimately it may turn out to be a correct decision or a wrong one. But if the decision is taken bona fide and in public interest, the mere fact that decision has ultimately proved to be a wrong, that itself is not a ground to hold that the decision was mala fide or done with ulterior motives. ONGC in its wisdom decided not to acquire any shares of CEIL at a high premium of ₹ 335 per share plus ₹ 50 per share as not to compete fee, which would have come to ONGC at a hefty cost of 4.44 billion US about ₹ 6,20,600 crores rupees, i.e. even if ONGC had exercised its ROFR it would be a 30% share holder of CEIL and the control of CEIL would have, in any event, remained with Cairn and Vedanta which would have then altogether 50% in CEIL , in other words, with the acquisition of 30% shares in CEIL, State of Rajasthan Block would remain unchanged and hence ONGC could not have got any increase in shares in the profits much-less any increase in profits by 40%. Thus view that on facts, as well as on law, the ONGC and the Government of India have taken a prudent commercial and economic decision in public interest. And the decision is not mala fide or actuated by any extraneous or irrelevant considerations or improper motive. Whether this Court can grant reliefs merely placing reliance on the CAG s report - Direction sought from CAG/GOI to calculate the alleged losses from payment of 100% royalty and cess by ONGC before the Cairn-Vedanta deal and for a direction to ONGC/Government to recover the excess royalty paid by ONGC from Cairn India - Held that - Article 2.6 of PSC permits extension of the exploration period for three years from the end of the seven year period prescribed in Article 2.2. The period extended in pursuance to Article 2.6 expired on 14.5.2005. The CAG, it is seen, has assumed that any exploration carried out beyond the period was beyond the provision of PSC. Article 2.6 specifically contemplates extension of the exploration phase pursuant to the terms of the PSC. The last part of Article 2.6 to Article 2.9, however, permits further extension of the exploration period for a period of 30 months, therefore, it is factually and legally incorrect to suggest that any exploration carried out beyond 14.5.2005 was beyond the provision of PSC. CAG views on that aspect cannot be accepted. No merits in the writ petition.

Summary

Issues Involved:
1. Approval of Cairn-Vedanta deal.
2. ONGC's right of pre-emption.
3. Government's conditional consent.
4. Financial implications and valuation.
5. CAG report and its implications.

Issue-Wise Detailed Analysis:

1. Approval of Cairn-Vedanta Deal:
The petitioner challenged the approval granted by the Government of India for Vedanta's acquisition of a majority stake in Cairn India Limited (CIL) for $8.48 billion. The Government had initially retained exclusive rights for hydrocarbon mining, later encouraging private sector participation to maximize domestic oil production. Cairn Energy acquired Shell's interest in the Rajasthan Block RJ-ON-90/1 after Shell failed to make commercial discoveries. The deal required various governmental and ONGC approvals, as Cairn was a majority shareholder in CIL.

2. ONGC's Right of Pre-Emption:
The petitioner sought a direction for ONGC to exercise its right of pre-emption over the sale of CIL shares. Cairn argued that the transaction was a sale of shares in CIL, not an assignment of Participating Interest (PI) under the Production Sharing Contracts (PSCs) and Joint Operating Agreements (JOAs), thus not triggering ONGC's pre-emptive rights. ONGC evaluated the financial implications and decided not to exercise its pre-emptive right due to the high acquisition cost and ongoing disputes over royalty and cess.

3. Government's Conditional Consent:
The Government granted conditional consent for the deal, requiring Vedanta to furnish financial and performance guarantees, ensure technical capability, and obtain No Objection Certificates (NOCs) from consortium partners. Cairn and Vedanta complied with these conditions, including treating royalty as cost recoverable by ONGC and withdrawing arbitration on cess disputes.

4. Financial Implications and Valuation:
ONGC, after detailed deliberations and financial analysis by SBI Caps, concluded that the acquisition cost offered by Vedanta was above ONGC's evaluated value, making the acquisition commercially unviable. The decision to grant NOC was based on the proposed share price being higher than the intrinsic value evaluated by SBI Caps. ONGC derived financial benefits from the agreement, including recovering royalty costs and avoiding potential arbitration liabilities.

5. CAG Report and Its Implications:
The petitioner relied on the CAG report, which criticized the extension of exploration activities and payment of 100% royalty by ONGC. The Court emphasized the role of CAG and the scrutiny of its reports by the Public Accounts Committee (PAC). The Court noted that the CAG report is subject to parliamentary debate and cannot be the sole basis for judicial relief. The Court found no merit in the petition, stating that the decisions taken by ONGC and the Government were prudent, commercially viable, and in public interest, with no evidence of mala fide or extraneous considerations.

Conclusion:
The Supreme Court dismissed the petition, upholding the Government and ONGC's decisions regarding the Cairn-Vedanta deal. The Court emphasized the limited scope of judicial review in complex economic decisions, highlighting the importance of commercial prudence and public interest in such matters.