Supreme Court Upholds Cairn-Vedanta Deal, Dismissing PIL on ONGC’s Pre-emption Rights (2013)

Introduction

Date of the Judgment: May 9, 2013

Citation: (2013) INSC 341

Judges: K. S. Radhakrishnan, J., Dipak Misra, J.

Can a government-owned company be compelled to exercise its right of first refusal in a commercial transaction? The Supreme Court of India recently addressed this question in a Public Interest Litigation (PIL) concerning the sale of Cairn India Limited (CIL) shares to Vedanta Resources Plc. The core issue was whether the Oil and Natural Gas Corporation (ONGC) should have exercised its pre-emptive right over the sale, potentially benefiting the State Exchequer. The Supreme Court, however, upheld the government’s decision, stating that ONGC’s decision was a sound commercial one. The judgment was delivered by a two-judge bench comprising Justice K. S. Radhakrishnan and Justice Dipak Misra.

Case Background

Initially, the Government of India held the exclusive privilege for mining hydrocarbons, carried out through corporations like ONGC. To boost domestic oil production, the government encouraged private sector participation starting in 1980. The Rajasthan Block (RJ-ON-90/1) was offered to M/s. Shell India in 1995 under a Production Sharing Contract (PSC).

ONGC held a 30% participating interest (PI) in the block. Shell, after failing to make any commercial discovery, decided to sell its interest. Cairn Energy India Pvt. Ltd. (CEIL) acquired Shell’s interest in stages between 1999 and 2003, eventually holding 70% PI.

CIL, a company listed on Indian stock exchanges, had CAIRN Energy PLC UK (CAIRN) as its majority shareholder. CAIRN announced its intention to sell its stake in CIL to Vedanta in 2010. ONGC believed it had pre-emptive rights and sought details of the transaction. CAIRN argued that the sale was of shares, not of the PI, and thus did not trigger ONGC’s pre-emption rights.

ONGC also had disputes with CEIL and CEHL (Cairn subsidiaries) regarding royalty and cess payments. CEIL and CEHL initiated arbitration proceedings against the Union of India and ONGC. These disputes and the proposed sale to Vedanta led to the present PIL.

Timeline

Course of Proceedings

ONGC sought the opinion of the Solicitor General of India, who stated that the government’s consent was required for the transaction. The ONGC Board, after considering the offered rate of Rs.405 per share and the internal assessed value of Rs.290 per share, decided that acquiring the stake was not commercially viable. They requested the Ministry of Petroleum and Natural Gas (MoPNG) to allow the recovery of royalty as “Cost Oil.”

The MoPNG granted conditional consent for the sale, requiring Vedanta to provide financial guarantees and ensure the technical capability of CIL. The government also insisted that CIL and its affiliates obtain No Objection Certificates (NOCs) from their consortium partners.

SBI Caps conducted a financial valuation of CIL, which supported ONGC’s decision not to exercise its pre-emptive rights. The Project Appraisal Committee (PAC) also recommended that ONGC not exercise its pre-emptive rights. The ONGC Board approved this recommendation. The Cabinet Committee of Economic Affairs (CCEA) also approved the sale, subject to conditions, which were accepted by Cairn and Vedanta.

Legal Framework

The primary legal framework for this case is the Production Sharing Contract (PSC) dated 15.5.1995, entered into between the Government of India, ONGC, and Shell. This contract governed the exploration and exploitation of crude oil and natural gas in the Rajasthan Block (RJ-ON-90/1).

The Oil Fields (Regulation and Development) Act, 1948, also plays a crucial role. This Act regulates oil fields and the development of mineral resources. The Petroleum and Natural Gas Rules, 1958, framed under this Act, provide for the grant of licenses and leases for exploration and development of petroleum in India.

The relevant provisions of the PSC include:

• Article 2.6, which permits the extension of the exploration period.
• Article 14, which outlines the mechanism for cost recovery of petroleum operations.
• Section 3.1.9 of the Accounting Procedure, which stipulates that royalty payments shall be allowable as ‘Cost Oil’.

Arguments

Petitioner’s Arguments:

• The petitioner argued that the Government of India’s decision to allow the Cairn-Vedanta deal without ONGC exercising its RoFR was against public interest. They contended that the State Exchequer would have benefited significantly if ONGC had exercised its right.
• The petitioner submitted that natural resources should not be subject to private ownership or private commercial exploitation. Reliance was placed on judgments such as M. C. Mehta v. Kamal Nath & Others (1997) 1 SCC 388, Meerut Development Authority v. Association of Management Studies and Another (2009) 6 SCC 171, and Centre for Public Interest Litigation and Others v. Union of India and Others (2012) 3 SCC 1.
• The petitioner also argued that the government unlawfully granted extensions to Cairn India Limited for exploration activities beyond the period framed by the Rajasthan Block PSC, as noted by the Comptroller and Auditor General (CAG).

Respondent’s Arguments:

• The respondents argued that the transaction was a sale of shares in CIL, not an assignment of Participating Interest (PI) under the PSCs and Joint Operating Agreements (JOAs). Therefore, ONGC’s pre-emptive rights were not triggered.
• ONGC had two significant disputes with CEIL/CEHL regarding royalty and cess payments. The decision not to exercise RoFR was made after considering financial implications and ongoing disputes.
• The respondents emphasized that courts should refrain from interfering with economic decisions. They cited judgments such as Balco Employers’ Union (Regd.) v. Union of India and Others (2002) 2 SCC 333, Bajaj Hindustan Limited v. Sir Shadi Lal Enterprises Ltd. and Another (2011) 1 SCC 640, and Life Insurance Corporation of India v. Escorts Limited and Others (1986) 1 SCC 264.

Union of India’s Arguments:

• The Union of India argued that there was no commercial viability for ONGC to purchase CIL shares at the value offered by Vedanta. The decision was taken in public interest after considering all commercial and technical aspects.
• The Union of India stated that the decision was taken after due deliberations and based on recommendations of the Group of Ministers (GOM).
• The Union of India submitted that the Court should not interfere with the economic decision taken by the Union of India and ONGC.

Cairn’s Arguments:

• Cairn argued that assigning of a PI is a well-defined concept, and the transfer of shares does not result in the transfer of underlying assets. They referred to the judgment of this Court in Vodafone International Holdings v. Union of India (2012) 6 SCC 613.
• Cairn submitted that it had given up two of its rights to secure government permission: agreeing to make royalty cost recoverable and withdrawing its claim that the burden of cess would be borne by the Government of India.
• Cairn contended that the decisions taken were commercial decisions based on which the parties have acted, and the Court should not interfere.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether this Court sitting in this jurisdiction is justified 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.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following cases and legal provisions:

Judgment

The Supreme Court analyzed the submissions made by all parties and the authorities cited. The Court found that the decisions made by ONGC and the Government of India were prudent commercial decisions taken in the public interest.

The Court also analyzed how each authority was viewed.

What weighed in the mind of the Court?

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

The Court emphasized that ONGC’s decision was a result of careful consideration of financial implications, ongoing disputes, and the offered rate of Rs.405 per share compared to the internal assessed value of Rs.290 per share. The Court also noted that the Government of India had imposed conditions on the sale that were beneficial to ONGC. The Court considered that its role is not to interfere with economic decisions unless there is a clear violation of statutory provisions, mala fide intentions, or extraneous considerations.

The ratio of fact to law in the court’s considerations is approximately 60% fact-based (commercial viability, financial implications, and conditions imposed) and 40% law-based (judicial review of economic decisions, contractual interpretation, and applicability of legal precedents).

Decision of the Court

The Supreme Court dismissed the Public Interest Litigation (PIL). The Court held that there was no merit in the petitioner’s arguments and that the decisions made by ONGC and the Government of India were prudent commercial decisions taken in the public interest.

Ratio Decidendi:

• Courts should not interfere with complex economic decisions taken by the State or its instrumentalities unless there is a violation of statutory provisions, mala fide intentions, or extraneous considerations.
• The sale of shares in a company does not constitute an assignment of participating interest (PI) under a Production Sharing Contract (PSC).
• The decision of a government-owned company not to exercise its right of first refusal (RoFR) in a commercial transaction is a sound commercial decision if it is based on financial and economic considerations.

Obiter Dicta:

• The Court emphasized that economic decisions involve trial and error, and as long as they are bona fide, they should not be questioned by the judiciary.
• The Court also highlighted that courts do not possess the expertise to judge economic policies and should not interfere with public policy decisions.

Decision-Making Process Flowchart

Key Ratios and Financial Considerations

Implications

The Supreme Court’s judgment has significant implications for future cases:

• Judicial Restraint in Economic Decisions: The judgment reinforces the principle that courts should exercise judicial restraint when reviewing complex economic decisions made by the government or its instrumentalities. Unless there is a clear violation of law, mala fide intention, or extraneous considerations, courts should not interfere with such decisions.
• Interpretation of Pre-emption Rights: The judgment clarifies that the sale of shares in a company does not trigger pre-emption rights related to the transfer of participating interests (PI) under a Production Sharing Contract (PSC). This distinction is crucial for future corporate transactions involving the transfer of shares in companies holding interests in natural resources.
• Commercial Prudence in Government Decisions: The judgment highlights that decisions made by government-owned companies should be based on sound commercial principles. The court recognized that ONGC’s decision not to exercise its RoFR was a result of careful consideration of financial implications and ongoing disputes.
• Public Interest: The judgment underscores that public interest is not solely about maximizing revenue for the State Exchequer but also about ensuring sound commercial practices and efficient resource utilization. The court recognized that the conditions imposed by the government on the sale were beneficial to ONGC.
• Role of Expert Bodies: The judgment acknowledges the importance of expert bodies like SBI Caps and the Project Appraisal Committee in evaluating complex economic transactions. The court relied on their assessments in upholding the government’s decision.

Conclusion

The Supreme Court’s decision in the Cairn-Vedanta deal case is a significant judgment that reinforces the principle of judicial restraint in economic matters. The Court upheld the government’s decision, emphasizing that economic decisions should be based on sound commercial principles and that courts should not interfere unless there is a clear violation of law or mala fide intention. The judgment also clarifies the interpretation of pre-emption rights in the context of share sales, providing a valuable precedent for future corporate transactions.

The case serves as a reminder that public interest is not solely about maximizing revenue but also about ensuring efficient and prudent use of resources. The Court’s decision reflects a balanced approach, recognizing the need for government agencies to make commercially viable decisions while respecting the limits of judicial intervention.

In conclusion, the Supreme Court upheld the commercial decisions made by ONGC and the government, providing a clear legal framework for future cases involving similar issues. The judgment underscores the importance of commercial prudence, judicial restraint, and sound economic decision-making in the management of public resources.