Supreme Court quashes rejection of gas distribution authorization: Adani Gas Limited vs. Union of India (2019)

LEGAL ISSUE: Whether the Petroleum and Natural Gas Regulatory Board (PNGRB) was justified in rejecting Adani Gas Limited’s application for authorization to lay, build, and operate a city gas distribution network.

CASE TYPE: Petroleum and Natural Gas Regulatory Law.

Case Name: Adani Gas Limited & Anr. vs. Union of India & Ors.

[Judgment Date]: 29 January 2019

Date of the Judgment: 29 January 2019

Citation: 2019 INSC 82

Judges: Arun Mishra J., Vineet Saran J.

Can a regulatory board reject an application for authorization despite the existence of a “deemed authorization” clause? The Supreme Court of India addressed this question in a case involving Adani Gas Limited and the Petroleum and Natural Gas Regulatory Board. The core issue revolved around the rejection of Adani Gas’s application for laying a gas distribution network in Udaipur and Jaipur, despite having commenced work before the regulatory framework came into full effect. The bench consisted of Justice Arun Mishra and Justice Vineet Saran, with the judgment authored by Justice Vineet Saran.

Case Background

In 2005, the Government of Rajasthan invited bids for laying gas distribution networks in several cities, including Udaipur and Jaipur. Adani Gas Limited responded with an Expression of Interest for these two cities. On March 20, 2006, the government informed Adani Gas of its intention to grant a No Objection Certificate (NOC), subject to certain conditions. Adani Gas agreed to these conditions on March 22, 2006, and deposited a commitment fee of Rs. 2 Crore on March 24, 2006. Subsequently, on March 27, 2006, the Government of Rajasthan granted the NOC to Adani Gas for gas distribution in Udaipur and Jaipur. Adani Gas then began laying the City Gas Development Network in these cities.

The Petroleum and Natural Gas Regulatory Board Act, 2006, was notified on April 3, 2006, but its provisions regarding authorization (Section 16) were not yet in force. On July 21, 2007, Adani Gas requested authorization for its City Gas Distribution Project under the Act of 2006, also claiming “deemed authorization” under Sections 15 and 16. The Act came into full force on October 1, 2007, but Section 16 regarding authorization was enforced only from July 15, 2010.

Timeline:

Course of Proceedings

The appellant, Adani Gas Limited, initially received a No Objection Certificate (NOC) from the Government of Rajasthan to establish a gas distribution network in Udaipur and Jaipur. However, the Petroleum and Natural Gas Regulatory Board (the Board) later rejected Adani Gas’s application for authorization, citing insufficient physical and financial progress before the appointed date and violation of the Board’s directions. The Government of Rajasthan also withdrew the NOC and forfeited the commitment fee.

Adani Gas challenged these orders before the Rajasthan High Court, which dismissed their petition on April 29, 2015. Aggrieved, Adani Gas filed a Special Leave Petition before the Supreme Court of India.

Legal Framework

The core of the legal framework lies in the Petroleum and Natural Gas Regulatory Board Act, 2006 (the Act of 2006) and the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008 (Regulations of 2008).

Section 16 of the Act of 2006 states that no entity shall lay, build, operate, or expand any city or local natural gas distribution network without obtaining authorization under this Act. However, the proviso to Section 16 provides for “deemed authorization” for entities already engaged in such activities before the appointed day (October 1, 2007).

Section 17 of the Act of 2006 mandates entities to apply for authorization. It also states that entities authorized by the Central Government before the appointed day must furnish details of their activities to the Board within six months of the appointed day.

Regulation 18 of the Regulations of 2008 outlines the criteria for considering applications for authorization from entities not authorized by the Central Government before the appointed day. These criteria include minimum eligibility, physical progress, financial commitment, and compliance with technical and safety standards.

The relevant definitions from the Act of 2006 are as follows:

• “authorised entity” means an entity registered by the Board under Section 15 or authorized by the Board under Section 16.
• “city or local natural gas distribution network” means an interconnected network of gas pipelines and associated equipment for transporting natural gas.

The Supreme Court noted that Section 16 of the Act of 2006, which came into force on 12.07.2010, contains a proviso for deemed authorization for entities already operating before the appointed date.

Arguments

The arguments presented by both sides are summarized below:

Appellant’s Arguments:

• The appellant argued that they had commenced laying the gas distribution network in Udaipur and Jaipur based on the NOC granted by the Government of Rajasthan.
• They had invested a substantial amount of money and completed significant work before the appointed date.
• The appellant contended that the proviso to Section 16 of the Act of 2006 provides for “deemed authorization” for entities like them, who were already operating before the appointed date.
• They argued that the Board should have considered all the relevant factors under Regulation 18(2) of the Regulations of 2008, not just clause (d), and also the fact that they were asked to stop all incremental activities by the press note dated 30.10.2007.
• The appellant submitted that the rejection of their application was illegal and unfair, and the withdrawal of the NOC by the State Government was also unjustified.

Respondent’s Arguments (Board and Government of Rajasthan):

• The Board argued that Adani Gas did not meet the criteria under Regulation 18(2)(d) of the Regulations of 2008, as they did not achieve the required 25% physical and financial progress before the appointed date.
• The Board contended that Adani Gas continued laying pipelines even after being instructed to stop all incremental activities by the press note dated 30.10.2007.
• The Government of Rajasthan argued that Adani Gas failed to fulfill the conditions laid down in the NOC, justifying its withdrawal and forfeiture of the commitment fee.

The innovativeness of the argument by the appellant was that they relied on the “deemed authorization” clause in Section 16 of the Act of 2006, which came into force after the Regulations of 2008 were framed, to assert that the Board should not have rejected their application solely based on Regulation 18(2)(d).

Issues Framed by the Supreme Court:

The main issue for consideration by the Supreme Court was:

1. Whether the Board was justified in rejecting the application filed by the appellant under Section 17 of the Act of 2006 read with Regulation 18 of the Regulations of 2008, after the provisions contained in Section 16 of the Act of 2006 came into force on 12.07.2010 granting deemed authorization to those entities which had inter alia started laying and building local Natural Gas Distribution Network prior to the appointed date, i.e. 01.10.2007.

Treatment of the Issue by the Court:

The following table demonstrates how the Court decided the issue:

Authorities

The Court considered the following legal provisions:

• Section 16 of the Petroleum and Natural Gas Regulatory Board Act, 2006: This section prohibits laying, building, operating, or expanding a city or local natural gas distribution network without authorization, but provides a “deemed authorization” for entities already doing so before the appointed day.
• Section 17 of the Petroleum and Natural Gas Regulatory Board Act, 2006: This section mandates entities to apply for authorization and empowers the Board to accept or reject such applications.
• Regulation 18 of the Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008: This regulation specifies the criteria for considering applications for authorization, including physical progress, financial commitment, and compliance with technical standards.

The Court did not cite any specific case laws in its judgment.

Judgment

The Supreme Court held that the Board’s rejection of Adani Gas’s application was illegal. The Court noted that the Board had primarily focused on non-compliance with clause (d) of Regulation 18(2) of the Regulations of 2008, which requires a minimum of 25% physical and financial progress before the appointed date. However, the Court emphasized that the language of Regulation 18(2) indicates that the criteria are not mandatory but are relevant considerations. The Board should have considered all factors under clauses (a) to (j) of Regulation 18(2).

The Court also pointed out that the Board failed to consider the “deemed authorization” provision under Section 16 of the Act of 2006, which came into force on 12.07.2010. The Court noted that Adani Gas had already commenced operations before the appointed date and had invested a significant amount of money.

The court also held that the Government of Rajasthan’s decision to revoke the NOC was unfair and unjust. The court was of the opinion that the reply of the petitioner dated 16.03.2011 in response to the notice dated 26.02.2011 was not dealt with by the Government of Rajasthan while passing the impugned order dated 18.05.2011.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The fact that Adani Gas had commenced operations and invested significantly before the appointed date.
• The existence of the “deemed authorization” provision under Section 16 of the Act of 2006, which the Board failed to consider adequately.
• The Board’s narrow focus on clause (d) of Regulation 18(2) without considering other relevant factors.
• The unfairness and unjust nature of the decision of the Government of Rajasthan to revoke the NOC without considering the reply of the petitioner.

The Court emphasized that the Board should have taken a holistic view, considering all relevant factors and the “deemed authorization” provision.

In this case, the Court’s decision was influenced more by the factual aspects of the case such as the commencement of operations and investment by Adani Gas, while the legal aspect of the “deemed authorization” and misinterpretation of the regulation also played a significant role.

The Court’s reasoning was that the Board had acted illegally by rejecting the application of the appellant by only considering one aspect of the regulation and not considering the deemed authorization clause. The Court also held that the decision of the Government of Rajasthan was also unfair and unjust.

The Court did not discuss any alternative interpretations.

The Supreme Court’s decision was reached by considering the factual matrix of the case along with the legal provisions in the Act. The Court’s reasoning was that the Board had acted illegally by rejecting the application of the appellant by only considering one aspect of the regulation and not considering the deemed authorization clause. The Court also held that the decision of the Government of Rajasthan was also unfair and unjust.

The reasons for the decision are as follows:

• The Board did not consider the “deemed authorization” clause under Section 16 of the Act of 2006.
• The Board only focused on one aspect of the regulation i.e. Regulation 18(2)(d) and failed to consider all the other relevant factors.
• The Government of Rajasthan did not consider the reply of the petitioner while passing the impugned order.

The Court quoted the following from the judgment:

“It was incumbent on the Board to take into consideration various factors as specified in clauses (a) to (j) of Regulation 18(2) of the Regulations of 2008…”

“Besides the same, in the factual circumstances of the present case, the provision of ‘deemed authorisation’ contained in Proviso (ii) to Section 16 had also been enforced on 12.07.2010 and it was necessary for the Board to have considered whether it was a case where only certain safeguards were required to be observed in view of the ‘deemed authorisation’.”

“In view of the aforesaid discussion, we are of the opinion that there was illegality committed by the Board in deciding the application of the appellant while passing the order dated 19.05.2011, and as such the same deserves to be quashed.”

There were no majority or minority opinions in this case.

The Court’s reasoning involved interpreting the relevant provisions of the Act and Regulations, along with the factual context of the case. The Court emphasized the importance of considering the “deemed authorization” provision and all relevant factors under the Regulations.

The implications of this judgment for future cases are that the regulatory boards must consider all relevant factors and not just one clause of the regulation while deciding the application for authorization. The boards must also consider the “deemed authorization” clause in the Act.

The Court did not introduce any new doctrines or legal principles in this case.

Key Takeaways:

• Regulatory boards must consider all relevant factors under the regulations, not just one clause.
• The “deemed authorization” provision in Section 16 of the Act of 2006 must be given due consideration.
• Entities that have commenced operations before the appointed date have a strong case for authorization.
• The decision of the Government of Rajasthan to revoke the NOC was held to be unfair and unjust.

This judgment clarifies that regulatory authorities must take a holistic approach when considering applications for authorization, especially when “deemed authorization” clauses are present. It also highlights the importance of considering all relevant factors and not just one aspect of the regulation.

Directions:

The Supreme Court quashed the order dated 18.05.2011 passed by the Government of Rajasthan and the order dated 19.05.2011 passed by the Board. The Board was directed to take a fresh decision in the matter within 4 weeks, considering the “deemed authorization” provision and other observations made by the Court, after giving an opportunity of hearing to the appellant. The appellant was given liberty to file fresh written submissions before the Board within 10 days.

Specific Amendments Analysis

There is no specific amendment discussed in this judgment.

Development of Law

The ratio decidendi of this case is that when an entity has commenced operations before the appointed date and has invested a significant amount of money, the regulatory board must consider the “deemed authorization” provision under the Act and all the relevant factors under the regulations while deciding on the application for authorization. The Court also held that the decision of the Government of Rajasthan to revoke the NOC was unfair and unjust. This case clarifies the interpretation of the “deemed authorization” clause and the holistic approach required by regulatory boards.

Conclusion

The Supreme Court’s decision in Adani Gas Limited vs. Union of India is a significant ruling for entities involved in city gas distribution networks. The Court emphasized that the regulatory board must consider all relevant factors and the “deemed authorization” provision under the Act while deciding on the application for authorization. The Court also held that the decision of the Government of Rajasthan to revoke the NOC was unfair and unjust. The judgment provides clarity on the interpretation of the relevant provisions and regulations and ensures that regulatory decisions are made fairly and justly.