MMS_Group_5 Law (Ril Rnrl & Jet Sahara)Final

8/4/2019 MMS_Group_5 Law (Ril Rnrl & Jet Sahara)Final

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Class: MMS (2010-2012)

Sub : Legal aspects of business

Topic: 1) RIL-RNRL Dispute

2) JET-SAHARA Dispute

Group No: 5

Submitted to: Prof. Anant Amdekar


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No. NAME ROLL NO.

1 Mayuri Rathod M1041

2 Bhakti Redij M1043

3 Mayuresh Sardesai M10454 Shallot Paul M1047

5 Rohan Shinde M1049

6 Tejas Shirodkar M1051

7 Govind Surwase M1053

8 Kranti Tondvalkar M1055

9 Raj Malkan M1057

10 Vineeta Raju M1059

Sr. No. Table of Contents


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1) Introduction2) RIL & RNRL3) New Exploration & Licensing Policy I4) Memorandum of Understanding5) Supreme Court Verdict6) Gas Supply Master Agreement7) Conclusion8) Jet-Sahara Deal9) The Deal Falls Apart

10) The New Deal Strikes11) Tax Liability Dispute12) Legal Issues Involved13) Conclusion14) Bibliography


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Introduction

While studying these two corporate cases, we have following objectives:

To understand perspectives of all the parties involved

To find out and study the legal issues involved in the case

To study the purpose of law applicable to the case

To provide suggestions for amendments in law if it has any flaws


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RIL-RNRL Dispute

Reliance Industries Limited (RIL)

The Reliance Group was founded by Dhirubhai H. Ambani in 1966 as a polyester firm. The

Group's activities span exploration and production of oil and gas, petroleum refining and

marketing, petrochemicals, textiles, retail and special economic zones. The flagship company,

Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector

company in India.

Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fiber

producer in the world and among the top five to ten producers in the world in major

petrochemical products.

Major Group Companies are Reliance Industries Limited (including main subsidiary Reliance

Retail limited) and Reliance Industrial Infrastructure Limited.

Reliance Natural Resources Limited (RNRL)

Reliance Natural Resources Limited was originally incorporated on the March 24, 2000, under the Companies Act, 1956 as Reliance Platforms Communications.Com Private Limited. The

status of the Company changed from private limited to public limited on July 25, 2005. The

name has since been changed to its present name, viz. Reliance Natural Resources Limited.

Reliance Natural Resources Limited (RNRL) is engaged in the business of sourcing, supply and

transportation of gas, coal and liquid fuels. The company is concentrating on building a strong

foundation for the business of fuel management and has already established itself as a contending

player in the Indian market.


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RIL-RNRL dispute- Background

On 6th

June, 2002, Mr. Dhirubhai Ambani passed away. Sometime thereafter, differences started between Mukesh Ambani and Anil Ambani over the management and control of the group

companies. Both the brothers, at the relevant time, were looking after the affairs of RIL in all

respects, including the group companies. In June 2005, Reliance Group finally got split up. Elder

brother, Mukesh Ambani managed to receive businesses of petrochemicals and retail whereas

Anil got telecommunications, financial services, electricity and some more verticals. They signed

non-compete agreement in each others fields. Moreover, they signed MoU (Memorandum of

Understanding) stating that RIL would provide RNRL 80 mmscmd (million standard cubic

meters per day) of gas from the Krishna-Godavari Basin for 17 years at $2.34 per mmbtu

(Million Metric British Thermal Unit) - for its Dadri power plant. With RIL not supplying the

gas, RNRL went to court against it for not implementing this part of a family MoU signed when

the empire was being separated between the two brothers.


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What is NELP?

In 1999, the Government of India announced a New Exploration and Licensing Policy ( NELP I ),1999. This policy provided that various petroleum blocks could be awarded for exploration,

development, and production of petroleum and gas to private entities. It is the policy of the

Government that Petroleum Resources which may exist in the territorial waters and the exclusive

economic zone of India be discovered and exploited with in the overall interest of India and in

accordance with good international petroleum industry practice.

RIL-NIKO bids for KG basin

Krishna-Godavari basin is a basin in India and it is spread across more than 50,000 square

kilometers in the Krishna River and Godavari River basins in Andhra Pradesh. The site is known

for the D-6 block where Reliance Industries discovered the biggest natural gas reserves in India

in 2002. It was also the world's largest gas discovery of 2002.

In the same year, i.e. 1999, RIL has formed a consortium with the Canadian company-NIKO.

Their consortium was the successful bidder for Block KG-D6 and was called the Contractor as

their consortium went into contract with the Indian Government for extracting Natural Gas from

allotted D-6 block. This contract is further called a Production Sharing Contract (PSC) . Niko has

a 10 percent interest in the D6 block.

What was there in PSC under NELP I?

On 12 th April, 2000, A Production Sharing Contract was entered into between the Government of

India and the Contractor. As per the PSC, RIL got Block D6 in KG basin as its exploration

block. The exploration in such areas requires employment of highly skilled and experienced

technical personnel and an extremely expensive and time-consuming exercise. As per PSC, all

exploration expenses required to locate petroleum resources have to be borne by the Contractor.

Therefore, RIL is bound to incur huge cost and resources for discovery of reserves in the area at

its risk. As per the PSC, all the expenses relating to the exploration, development and production

of cost incurred by the Contractor could only be recovered from the petroleum/gas actually

produced and sold by the Contractor. As per PSC under NELP I, the Contractor had freedom
http://en.wikipedia.org/wiki/Reliance_Industrieshttp://en.wikipedia.org/wiki/Reliance_Industries


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to sell the gas produced from the block subject to the terms of profit sharing between the

Government and the RIL as mentioned in the PSC.

What is MoU?

A memorandum of understanding (MOU) is a document describing a bilateral or multilateral

agreement between parties. It expresses a convergence of will between the parties, indicating an

intended common line of action. It is often used in cases where parties either do not imply a legal

commitment or in situations where the parties cannot create a legally enforceable agreement.

What was the MoU between Ambani brothers?

In 2005, RNRL and RIL signed a memorandum of understanding on the terms under which gas

would be supplied for the RNRLs Dadri power project in UP.This MoU specified that the price

at which the gas would be supplied would be the same as the price at which RIL would supply

gas to an NTPC project. In 2004, RIL made successful bid for NTPC to supply gas at a price of

2.34 per mmbtu.

Was the MoU between Ambanis a valid contract?

MoU was signed by Ambani brothers only in the presence of their mother, Kokilaben Ambani

and shareholders were not taken into consideration although terms in the deal had capacity toaffect their wealth indirectly.

Was MoU Limited to only brothers or also binding on their companies?

MoU was not binding on the company, as it had never been shown to its board of directors. But

even if it was, RIL would be unable to supply 28 mmscmd of gas to RNRL at $2.34 per mmBtu

as it contradicted the governments gas pricing and utilization policy.

Gas Utilization Policy decides the tenure, quantity and receiving parties while providing

guidelines to all contractors. Policy also gives preference to sectors such as electricity, fertilizers,

etc.

Rejection by Oil Ministry for RIL-RNRL deal


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To proceed the deal, RIL sent a pro forma the gas supply master agreement (GSMA) and a gas

sale and purchase agreement (GSPA). According to which, RIL was to supply 28 million cubic

meters of gas a day at $2.34 per million units to RNRL for 17 years. RIL sent copy to oil

ministry for approval of the price. However, Oil ministry refused to approve the price of gas

agreed to between RNRL and RIL under GSMA saying that natural gas belongs to government

of India and none of the parties have right to decide the price at which it will be offered.

Changes in NELP VII

In 2007, the government changed the model PSC and the changes first came about in NELP VII

terms around the same time when the RIL RNRL fight was heating up. As per new policy, no

one other than government can decide the price of Natural Gas. Thus, RIL could not provide gas

to RNRL at pre-determined price and it also said that it would be totally governments decision

to fix up pricing. It further asked the companies to whom RIL had planned to supply gas to quote

rate at which they would prefer to buy. Moreover, it came up with a price on basis of prices

provided by the concerned companies. This price was later approved by the Oil Ministry of

India.

Role of RIL-NTPC deal as a basis for MoU

NTPC had removed a global tender for supply of gas to its Power projects. RIL succeeded to win

this bid and NTPC became the first buyer of RIL. According to this bid RIL had to supply 12

mmscmd (million standard cubic meters per day) of gas to NTPC at $ 2.34/ mmbtu annually for

a period of 17 years to NTPCs 1,300 MW Kawas and Gandhar projects in Gujarat. NTPC had

gone for a transparent competitive bidding after which the letter of intent was given to RIL, the

receipt of which was acknowledged. But the contract could never materialize and NTPC went to

court against RIL. The lawsuit between NTPC and RIL dates back to December 2005, with the

point of contention being the existence and terms of a valid contract between the two. The

royalty loss is expected to be around Rs 25,000 crore over 15 years. RIL had offered to deliver natural gas to NTPC at $3.18 per million British thermal units exclusive of taxes. Under article

21 of the PSC (Production Sharing Contract), gas sold to the government or any other

government nominee, is to be valued on terms and conditions, including pricing formula and

delivery, approved by the government. According to this NTPC can claim gas at $2.34 per

million British thermal unit, a price RIL had quoted in its tender way back in 2004.


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Considering the price of the RIL - NTPC deal and the demand of NTPC that RIL should supply

gas at $2.34/mmbtu RNRL also demanded gas at the same price from RILs KG D6 block which

was fixed in the family MOU by the two brothers in its appeal in the court.

RNRL moved the Bombay High Court

Due to this approval, RNRL alleged that Oil Ministry favored the RIL while deciding on pricing

policy and filed petition in Bombay High Court. In June, 2009, The Bombay High Court ruled

that RIL should supply gas to RNRL at $ 2.34 per mmbtu which was nearly half the $ 4.20 price

it had set in January, 2009.

RIL moved the Supreme Court

The dispute between the Ambani brothers over the gas supply moved the Supreme Court in 2009

challenging Bombay High Court verdict on the row. The Bombay High Court ordered RIL to

supply 28 million cubic meters per day of gas from its Krishna-Godavari basin fields at USD

2.34 per mmBtu-- 44 per cent lower than the government-approved rate-- for 17 years to Anil

Ambani group firm Reliance Natural Resources Ltd.

The court gave the two companies a month's time to work out firm gas volumes, price, timelines

and other commercial details for sourcing the fuel from K-G basin fields.

Three days after the HC verdict, RNRL on June 19, 2009, filed a caveat before the Supreme

Court to preclude the chances of an ex parte order (in the interests of one side only) is being

passed against it on the gas-sharing deal.

RNRL submitted that it should be given an opportunity to defend the matter before the apex

court and it moved the Supreme Court seeking modification in the Bombay High Court order to

make binding the gas supply from Reliance Industries. It alleged that the high court erred indeciding the three terms as to quantity, tenure and price of gas supply to power plants of RNRL

affiliate.


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In the PSC, the government gets a share of RIL's KG profits. Since profits were related to the

price, the government said that it had the right to vet each contract RIL signs to sell gas. The

ministry used this to reject the RIL-RNRL contract, saying it was not an arms-length one.

Oil ministry filed petition in the Supreme Court

Oil and petroleum ministry also filed a petition in court claiming that KG basin and its natural

assets are public property .The petroleum ministry said that the Ambani family pact be declared

null and void. The ministry told the Supreme Court that the Indian government had the sovereign

ownership over natural gas and its distribution, and RIL was just a contractor on behalf of the

government. The ministry also stated that the family agreement between the Ambanis could not

be binding upon the government.

Petroleum Minister Murli Deora said that the KG basin gas belongs to the government and not to

either of the Ambani brothers, Mukesh and Anil, who have taken the battle to court.

The Supreme Court gave verdict

The Supreme Court judgment on 7 th May, 2010 ruled in favor of Reliance Industries in the RIL-

RNRL Case that the government was the legal owner of the gas in the RIL-RNRL gas dispute

and said Government has right to decide price and utilization of fuel, which is a natural asset.

The government contract overrides any private deal, the court ruled. The apex court also toldRIL and RNRL to renegotiate their deal within a period of six weeks or else the matter could be

taken to the Company Law Board.

Gas Supply Master Agreement (GSMA)

On 25 th June, 2010, RIL and RNRL signed new Gas Supply Master Agreement which was made

on the basis of directions given by judgment of an apex court. GSMA was compliant with the

Gas Utilization Policy of the Government and the decisions of the Empowered Group of Ministers. GSMA mentioned that RNRL will get gas from RIL's Krishna-Godavari (KG)-D6

block, but at prices set by the Government, which will be much higher than the $ 2.34 per

mmBtu that it had hoped to pay under the terms of an agreement between the two brothers when

they signed an MoU. The Government will also decide the quantity and the tenure of supply.


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Before GSMA, on May 23, both brothers signed an agreement cancelling all existing non-

compete arrangements between them. Mukesh Ambani also said that his company looked

forward to a harmonious and constructive relationship with ADAG (Anil Dhirubhai Ambani

Group) and would provide them gas once RNRLs plants are ready to receive it.


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CONCLUSION

We can say, in early 2000, there were some shortcomings in production sharing contract (PSC)

and policy-makers had some kind of myopia as government could not foresee consequences of

terms and conditions of NELP and it seems that some provisions in contract were made

arbitrarily.

Besides this, governments attempt to amend law as per its requirement can make people lose

believe in the judicial system. As government allowed contractors (extracting companies) to

decide their own price earlier in 2000 and it suddenly changed the pricing policy to protect

interests of the society. In spite of capital expenditure borne by contractor, law does not have any

provision by which these companies can fix up the price to required extent.

As a group, we think that after meeting market demand, government should allow contractors to

set up price for excessive quantity. Before revising pricing policy, government should inform

this change to all extracting companies and other concerned entities and should also seek their

views on such changes before taking final decision.

However, we also appreciate the way government controls the pricing of Natural Gas which has

considerable effect on inflation. Government does this in the interest of general public but shouldnot exercise its control at the expense of contractor companies projected earnings at the time of

getting into PSC.

As RNRL signed MoU with RIL in 2005, they must have projected their earnings in upcoming

years. However, government suddenly changed the pricing policy which forced RNRL to revise

their projected profits because this was going to have a direct impact on the revenue which they

were expecting. According to changes made by government, RNRL have to depend upon policy

for the quantity which they would receive from RIL and the tenure in which they would receiveit. It has major consequences on long-term planning/corporate planning of RNRL.

According to our group, RNRL should have received gas supply from RIL as per the MoU,

subjected to its validity. But, supplying gas which is a scarce resource to particular company

probably below market price for 17 years could not have been in the interest of the government


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as well as of general public. But government should not have denied the supply to RNRL and

could have found out a mid-way solution by which they could have right to regulate the price of

electricity produced at Dadri plant if RNRL had not charged their customers in the proportion of

their production cost. But, restricting right to RNRL was harsh decision as it mainly affected

ADAG. It will make them suffer huge financial loss.

Moreover, as MoU was signed in 2005 and NELP VII was made in 2007; changes made in

policy should not be applicable to the contracts which were signed before 2007 as giving

retrospective legal effect is unfair to the parties involved.

In case of RIL-NTPC deal, it is already questionable as matter is still in the court of law. RNRL

considered this deal as a basis for deciding pricing for Natural Gas in MoU. However, while

taking this basis, it was not aware of legality of the deal. As RIL was a successful bidder in this

deal, it can be understood that government was aware of fact that RIL would provide gas to

NTPC at $ 2.34 per mmbtu. Knowing this government did not take any objection on this deal but

kept RNRL away from deal with RIL i.e. MoU. This was a unfair treatment on the part of

government. Such approach can hamper relations between government and private players

especially when government policy is responsible for financial loss suffered by these companies.


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JET-SAHARA CASE

Jet Airways

Jet Airways is an airline based in Mumbai, India. It is Indias third largest airline after Air India

and Kingfisher airlines. It operates over 400 daily flights to 64 destinations worldwide. Its

primary base is Mumbais Chatrapati Shivaji International Airport with secondary hubs at

Brussels, Chennai, Delhi and Ahmadabad, Bangalore, Hyderabad, Kolkata, Pune as focus cities.

Jet Airways also operates two low-cost airlines, namely Jet lite (formerly Air Sahara) and Jet

Airways Konnect. Jet Airways was incorporated as an air taxi operator on 1 April 1992. It started

Indian commercial airline operations on 5 May 1993 with a fleet of four leased Boeing 737-300

aircraft. In January 1994, a change in the law enabled Jet Airways to apply for scheduled airline

status, which was granted on 4 January 1995. It began international operations to Sri Lanka in

March 2004. While the company is listed on the BSE, 80% of its stock is controlled by Naresh

Goyal.

Air Sahara

The airline was established on 20 September 1991 and began operations on 3 December

1993 with two Boeing 737-200 aircraft as Sahara Airlines. Initially services were primarily

concentrated in the northern sectors of India, keeping Delhi as its base, and then operations were

extended to cover all the country. Sahara Airlines was rebranded as Air Sahara on 2 October

2000, although Sahara Airlines remains the carrier's registered name. On 22 March 2004 it

became an international carrier with the start of flights from Chennai to Colombo. It is part of the

major Sahara India Pariwar business conglomerate. The uncertainty over the airline's fate has

caused its share of the domestic Indian air transport market go down from approximately 11% in

January 2006 to a reported 8.5% in April.


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The Background

In 2005 Sahara group got in touch with management consultants to chalk out a road map for the

airline component of its business. There was a clear feeling amongst the management that the

airline could not remain at the existing size and it either needed to grow or consolidate.

In the beginning the option of bringing in private equity was examined. But, Ernst and Young,

the consultants to Air Sahara felt that this model would not work here due to infrastructure

bottlenecks. Also, according to one of the airline official money could have been raised through

an IPO, but, the utilization of money would not have been that fast. Eventually, however, the top

management of the Sahara Group veered around to the view that it would be best to exit the

airline business and instead focus more on areas such as Para banking and real estate

development.

The management of Air Sahara then got into talks with Jet Airways. When asked why the airline

was in talks only with Jet Airways, the then Exec VP Mr. Sharma said that there was a lot of

commonality between the two airlines. Both were full service airlines, and the kind of aircraft

that both operated were similar.

A couple of glitches cropped up during the negotiations. One was the sponsorship deal of the

Indian cricket team by Sahara. In the previous month, Air Sahara won the right to sponsor the

Indian cricket team for the next four years for Rs 313.80 crore. Sources said that the balance

sheet of the airline company was submitted during the bidding process and this could turn into a

liability for the acquiring company.

Officials in investment banking circles said that since Jet was not very keen on sponsoring

cricket, it was unlikely to pick up the cricket tab. But the sale of the airline would not create

problems for the team sponsorship. Officials of the Board of Control for Cricket in India

maintained that the logo of any other Sahara group company could be used, and the deal was notrestricted to Air Sahara alone.

Another hitch in the buyout negotiations is said to be indications from Government sources that

any sale would not mean an automatic transfer of flying rights.


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The Deal

Due Diligence

Before signing on the deal, detailed due diligence was done. A complete report on the balance

sheet and the operations of the airline was available. This was also discussed at a board meeting

attended by the entire board in late January, 2006. Moreover, the indemnification clause in the

SPA provided for indemnification of liability not disclosed in vendor due diligence. The report

was based on a joint certification by Ernst &Young and Chaturvedi and Shah (the auditors of

Sahara and Jet Airways, respectively). After that anything more that shows up was a subject

matter of indemnification, which means that Air Sahara would have to pay for any other

liabilities that arise. So, there was no the question of suddenly discovering huge liabilities.

Contingent contract

Finally, signing of the largest deal in Indian aviation between Air Sahara and Jet Airways on

January 19, 2006 brought to an end a process that had started around July 2005. Under the

agreement signed for the buyout on January 19, Jet had put an enterprise value of $500 million

(Rs 2,217 crore) on Air Sahara. This amount took into account all the liabilities of Sahara. The

contract signed was a contingent contract which states that certain pre-requisites (like obtaining

all necessary approvals from government) need to be filled to have a deal in place. And it wasdrafted in such a way that Jet Airways could walk out of the deal without any liabilities if the

deal doesnt materialize.

Legal Clearances

The first step towards the integration of Air Sahara with Jet Airways had been initiated with

documents seeking formal clearance for the buyout being submitted to the authorities. Several

approvals from different departments like the Aircraft Acquisition Committee (AAC), MRTPC,

civil aviation, government approval and security clearances were necessary for the deal to go

through.

In March 30, 2006, after a detailed review, the Aircraft Acquisition Committee cleared the 100%

transfer of Saharas assets to Jet, including the transfer of properties as well as rights to parking

bays and slots. The Ministry of Company Affairs also gave its green signal to the merger under


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section 108A of the Companies Act, 1956, under which the Central Governments prior approval

has to be taken if a corporate body acquires more than 25% of the paid-up equity share capital of

a public company, and either the acquirer or the target is a dominant undertaking (i.e., it controls

25% or more of any services that are rendered in India).

MRTPC approval

BJP MP, Uday Singh, was responsible for deal being probed by MRTP Commission as he

complained of the deal and then PMO (Prime Ministers Office) had to intervene the matter. On

22nd May, 2006, MRTPC gave its go ahead after the Director General of Investigation and

Registration (DGIR) found that the merger between the two entities did not violate the

provisions of the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) .

Experts view

Mr. Prem Chand Gupta, then Minister of State for Company Affairs said " being large or in a

dominant position per se is not a problem, unless an entity indulges in abuse of dominant

position. And there are provisions in the MRTP Act where the Ministry can take action if abuse

of dominance is found ."

Evidence of abuse of dominant position

If the firm is charging excessively high prices; However, this might be difficult to judge but if they are making high profits then this is an indication.

Predatory Pricing. This involves cutting prices and selling below average cost to forcerivals out of business.

As merged entity had not started functioning then, abuse of dominance was not applicable tothe deal.

An Escrow Account


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An escrow account was then set up with the ICICI bank to facilitate the deal and deposited Rs

500 crores against the banks guarantee. Escrow generally refers to money held by a third-party

on behalf of transacting parties. An escrow account is an account established by a broker (third

party), for the purpose of holding funds on behalf of the broker's principal or some other person

until the completion or termination of a transaction. There was a 65 day deadline (March 24 th

2006) for the acquisition to be completed.

Share Purchase Agreement crosses the deadline

The agreement, signed on January 19 th 2006, created a mental picture that Air Sahara's entire

aviation business, including some aircraft leases, real estate and assets such as auxiliary power

units and engines, being acquired by Jet Airways. The deal seemed almost through before reports

started coming in about Jet Airways having second thoughts on the buyout. This was reportedly

because the Government might not be likely to allot all the landing and parking rights of Sahara

to Jet, said to be one of the main considerations behind the Jet acquisition move. Other

unconfirmed reports suggested that on inspection, Jet had found the quality of Sahara assets

below expectations.

Despite all this, Jet Airways has agreed to pay an advance of Rs 500 crore to Air Sahara as part-

payment for buying out the latter , thereby, putting at rest speculation that the deal had run into

rough weather. The airline then announced that it has reached an understanding with Sahara

Airlines and its shareholders to extend the share purchase agreement just before the 65 day

deadline expired on March 24 th 2006. The two airlines have also agreed to extend the term of the

Escrow Arrangement by 90 days.

According to revised period, Jet was told to get an approval for share purchase agreement (SPA)

from government by 21 st June, 2006. Failing to do so was to be led by cancellation of the deal.

Jet awaited Government approval for the share purchase agreement and security clearance of the board of directors as the deadline approached. However, Home Ministry gave its approval on

22nd June, 2006. This led to cancellation of the deal.

Why Ministry failed to meet deadline?


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In Indian Aviation Industry, when the new company is being created and whenever that happens,

clearances from the Directorate-General of Civil Aviation (DGCA) are required. Generally, the

DGCA gives clearances to the Board after the names have been given security clearance by the

Home Ministry. However, reports came out that Mr. Naresh Goyal, Owner of Jet Airways, has

links with Al Qaida and Lashkar-e-Taiba. Due to this, ministry could not give security clearance

to Mr. Goyal as director on the Board of merged entity.

The Deal falls apart

Unclear Guidelines

The policy related to mergers and acquisition in the aircraft industry did not clearly specify the

terms of transfer for airport infrastructure. The guidelines though clear on parking bays and

landing slots, did not specify the status of aircraft hangars, check-in counters, cargo warehouses,

passenger lounges and other such airport facilities.

However, on 11 th May, 2006, the Minister for Civil Aviation, Mr. Praful Patel told the Lok Sabha

that the Government had accepted the recommendations of the Ministry's AAC and the policy on

the use of airport infrastructure in the case of merger or takeover of airlines and sale or transfer

of aircraft approved by the competent authority.

Difference of opinions

International flying rights was probably the single most valuable asset of Air Sahara that

attracted Jet Airways to buy the airline. However, the regulatory body i.e. Director General of

Civil Aviation and the Civil Aviation Minister had different opinions on the automatic transfer of

Sahara's flying rights to Jet Airways. DGCA officials opined that Jet would have to re-apply for

such rights and the re-allocation would be done based on Jet's requirements. However, the Civil

Aviation Minister, Praful Patel was clear that rights were considered the asset of an organization

and like other assets; it would get transferred to the buyer.

Overvaluation


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Also, Jet Airways enthusiastically overvalued Air Sahara, and later wanted a discount on the

original price (20 to 25 percent). This is typically a case of overvaluing a company whose

business model was not that profitable.

Non-cooperation by parties involved

The collapse of the deal for Jet Airways to acquire Air Sahara could have been avoided if both

the airlines had sent a letter to the Directorate-General of Civil Aviation (DGCA) agreeing to

constitute the board with four persons.

Consequently, Government could not approve Share Purchase Agreement before the deadline of

21st June, 2006. After haggling for a price discount, Jet finally walked out of the deal in June

2006, after operating Air Sahara for about three months in which Jet had infused 160 crores as

operating expenses. This was possible because the agreement between the two parties was

drafted such that if the necessary conditions precedent the deal (like obtaining government

approvals etc) were not met, then the party (Jet Airways) would walk out of the deal without anyliability. Consequently, both the airlines moved the court.

Both the sides hired the best legal brains Mr. Harish Salve by Jet Airways and Mr. Fali

Nariman by Air Sahara.

Contrived Breach of Contract

Unfortunately, in most cases, conditions precedent are not met because one or the other party did

not want them met and this opens the door on several challenges that lawyers must meet.

First, there is the problem of inaction. If a seller is to achieve the conditions precedent, and the

market is bullish, he can easily make a deal with the buyer and then wait for a better deal to

come along. If it does, the seller makes sure that conditions precedent under the first deal are not


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met, waits for the deadline to pass and then goes and makes a new deal with a new buyer on

better terms. Conditions precedent sometimes make an options contract out of a binding one and

the legal challenge is not only to compel all contracting parties to make a reasonable bona fide

effort to achieve the condition precedent but to also penalize anyone who tries to profit from

failing to do so. This is never simple because it is never easy to prove.

Thus inaction, if any, on the part of Jet Airways was the reason perceived to be the cause for the

delay as per the legal experts. However, as we have seen above, this is very tough to prove and

hence cannot be categorically stated.

The Battle reaches court

Freezing an escrow account

Each of the private carriers took recourse to legal action. Developments took a surprising turn

when Air Sahara moved a Lucknow court and got an interim order restraining Jet from

withdrawing Rs. 500 crore from the escrow account. Jet moved to the Bombay High Court

seeking a similar restraint on Air Sahara, saying the conditions agreed upon such as transfer of

infrastructure by June 21 had not been met. Hence, Air Sahara should not be allowed to operate

the escrow account.

Mr. Goyal had taken the legal battle with Sahara chief Mr. Subrata Roy a few notches higher by

filing a petition with the Bombay High Court, holding Mr. Roy personally liable for refunding

Rs 500 crore by July 4. According to the Jet petition, Mr. Roy had stood as a personal guarantor

to the deal. Sahara was to refund Rs 500 crore paid as guarantee money within seven days of the

termination of the agreement.

Air Sahara petitioned the Lucknow court, saying that Jet Airways terminated the takeover

agreement and secured an interim stay on operation of escrow account till June 23, 2006. District

and Sessions Judge Shiv Charan Singh also restrained ICICI Bank, where the account has been

opened, not to make any payment to Jet Airways.

In his interim order Mr. Singh said: " It has been alleged on behalf of the petitioner that the

opposite party (Jet Airways) has terminated the contract, hence there is a dispute, for which


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arbitrator is to be appointed in due course. " The court gave Jet Airways time till June 23 to file

objections to Sahara's contention on the deal.

The order came on a petition filed by Sahara India Commercial Corporation Ltd, holding

company of Air Sahara, under Section 9 of the Arbitration and Conciliation Act.

While parking the entire money for the deal in the account, Jet had paid Rs. 500 crore against

guarantees to Air Sahara in March and given an advance of Rs. 100 crore to Sahara without

guarantees. Under the agreement, Air Sahara was entitled to claim Rs. 500 crore from the escrow

agent only on completion of the takeover. According to the deal, Jet maintained that Sahara

had to repay Rs. 500 crore within seven days of termination of the agreement without any

dispute.

Set-up of Arbitration Tribunal

In August, 2006, the Supreme Court transferred two petitions filed by Sahara in a Lucknow court

to the Bombay High Court for hearing. An arbitration panel was set up to deal with the case

under Bombay high court jurisdiction. The three-member tribunal consisted of retired Supreme

Court chief justices S P Bharucha, Jeevan Reddy and Lord Stein.

On November 26, Air Sahara claimed an amount of Rs. 3020 crore before the Arbitration

Tribunal.

New Deal Strikes

External Pressure

During this period (Jan 2006-April 2007), many low-cost carriers captured the more market

share. Air Deccan managed to get almost 33% market share. Air Saharas market share dropped

from 12% to 8%. Dispute led to a sharp decline in the stock market valuations for Jet Airways

over this period. The market capitalization of Jet Airways got shrunk from Rs 9,200 crore to Rs

5,400 crore a 41 per cent drop. Deal created almost negative environment in aviation industry.

Both the parties started realizing that legal procedure is not taking them anywhere but to a loss of

opportunity cost.


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Out-of-court settlement

It is also understood that both the parties were in constant touch with each other and were trying

to reach deal in some or other way. It was also reported that the legal working draft of the

agreement was exchanged at the meeting which happened in Oberoi hotel and representatives of

both the parties were present for the same . Finally, parties submitted a revised Share Purchase

Agreement to Arbitration panel and on April 17, 2007, a new deal was signed. As per the new

deal, Jet Airways agreed to buy out Air Sahara for Rs 1,450 crore, which was about 40 per cent

less than the Rs 2,217 crore that Jet had agreed to pay for the acquisition in January 2006.

An all-cash deal was struck between the two parties with Jet Airways paying Air Sahara Rs 400

crore immediately to seal the deal. In addition, from March 2008, Jet Airways would pay

interest-free installments Rs 137.50 crore annually for the next four years to Air Sahara.

Air Sahara was further rebranded as JetLite.

Is Jet Airways a real winner?

Benefits

The buyout made the merged entity the largest domestic private carrier, with a market share of about 42 per cent and a fleet of 88 aircraft, including the 27 operated by Air Sahara. The buyout

not only allowed Jet Airways to operate on Air Saharas routes but also helped Jet in its plans to

go international.

While reacting to the development, the Jet Airways stock increased by 3.24 per cent to close at

Rs 628.65 on the BSE on 12 th April, 2007.

Still long way to go

If we look at total sale consideration of 1450 crore, it represents almost 34 per cent discount to

the original acquisition price of Rs 2,217 crore agreed to by the two companies in January 2006.

However, Air Saharas market share dropped from 12% to 8% when aviation industry was

growing at considerable rate.


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Deal did not mention anything about the cash invested by Jet in Air Sahara as an operational

expense. Jet also allowed Sahara to retain some tangible as well as intangible assets. Jet also

decided to retain the entire staff of the acquired operations, as opposed to its earlier plan of

absorbing only the pilots and technical staff.

Default in payment of installment (2008)

In March 2008, the income-tax department demanded pending taxes of Rs 37 crore from Sahara,

then owned by Jet. Jet Airways argued that since the amount was due from Sahara before the

deal, it was not responsible for the liability. Jet cleared the income-tax demand but deducted

Rs37 crore while paying its March 2008 installment to Sahara.

Failure to Out-of-court settlement

In June, 2009, court asked them to settle the matter on their own. It was also reported that Jet

Airways proposed to pay around Rs300 crore to Sahara as an advance payment to settle.

In December 2009, both the parties informed High Court that they failed to reach an out-of-court

settlement.

Sahara claimed that Jet had defaulted on its payment commitment and filed an application in

Bombay High Court. However, Jet Airways maintained that it deducted Rs 87.50 crore from the

two installments after a tax demand of 107 crore was raised by the IT department which was for

the period prior to the takeover. It deducted Rs 37.50 crore from the first installment and Rs 50

crore from the second installment as the airline claimed that it had deposited the amount.

According to the buy-out agreement , Jet Airways was to pay the Sahara Group Rs 550 crore in

four installments of Rs 137.50 crore each from March 2008.

Claiming that Jet had defaulted on payment of the installment, SICCL (Sahara India Commercial

Corporation Limited) sought court direction for attachment of some of the carriers movable

properties. In the course of successive Court hearings, Jet claimed that there was an IT demand

of Rs 1,032 crore on Air Sahara which Jet is now liable to pay. The Rs 87.50 crore deductions

were made on the grounds that as per the share purchase agreement, any tax liability arising in


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excess of Rs 50 crore would have to be reimbursed by Sahara . Jet is now seeking

reimbursement of the balance Rs 821 crore while defending its decision to deduct a part of the IT

dues from the installments.

Sahara, on the other hand, has accused Jet of breaching a clause of the agreement which

stipulated that it had to pay the four installments in full without any setoff or deduction . As a

result, Sahara argued the negotiated price of Rs 1,450 crore would be revoked and Jet would

have to pay the originally agreed Rs 2,000 crore.

Ernst and Young report is the Key

On 15 th July, 2010, after hearing arguments from counsels of Jet Airways and Sahara India

Commercial Corporation the Bombay High Court asked both counsels to furnish details on thetax liabilities stated in the due diligence report by Ernst & Young. The report was prepared in

2006 by E&Y on Sahara Airlines, prior to its takeover by Jet.

The E&Y report came under the scanner as Sahara claimed in the Court that the report did

disclose the disputed tax liability.

Jet, however, said that the tax liability had not been disclosed, and was merely mentioned as

other income'. Of this, disclosed liability was Rs 124.35 crore and undisclosed liability was Rs908 crore.

Jet further argued that even after deducting Rs 87 crore from the undisclosed liability', which it

claimed to have paid to the I-T department there is still a tax liability demand of Rs 821 crore

from Sahara Airlines.

On December 20, 2010, Bombay High Court reserved the order in this case. The order was

reserved by Justice Dhananjay Chandrachud but did not disclose about when the verdict wouldhappen.


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Legal issues in Jet-Sahara deal

The MRTP Act, 1969

The MRTP Act 1969 came into existence on 1 st June 1970. The Monopolies and Restrictive

Trade Practices Act, 1969, aims to prevent concentration of economic power to the common

detriment, provide for control of monopolies and probation of monopolistic, restrictive and

unfair trade practice, and protect interest.

The Monopolistic and Restrictive Trade Practices Act, 1969, was enacted1. To ensure that the operation of the economic system does not result in the concentration

of economic power in hands of few,

2. To provide for the control of monopolies, and

3. To prohibit monopolistic and restrictive trade practices.

The MRTP Act extends to the whole of India except Jammu and Kashmir. Unless the

Central Government otherwise directs, this act shall not apply to:

1. Any undertaking owned or controlled by the Government Company,

2. Any undertaking owned or controlled by the Government,

3. Any undertaking owned or controlled by a corporation (not being a company established

by or under any Central, Provincial or State Act),

4. Any trade union or other association of workmen or employees formed for their own

reasonable protection as such workmen or employees,

5. Any undertaking engaged in an industry, the management of which has been taken over

by any person or body of persons under powers by the Central Government,6. Any undertaking owned by a co-operative society formed and registered under any

Central, Provincial or state Act,

7. Any financial institution.


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The Competition Act, 2002

The Competition Act, 2002, which still hasnt been completely enforced as yet, was devised as a

replacement of the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. This act

moved away from the earlier emphasis of curbing monopolies in particular industries, to a more

particular and directed approach towards promoting competition and thereby increasing the size

and scope of industry. Better competition is believed to lead to higher efficiency in competing

companies, thereby leading to a better allocation of given resources.

Contingent Contract

Section 31 of the Indian contract act defines contingent contract as A contract to do or not to

do something if some event, collateral to such contract, does or does not happen.

So in simple word, it may be defined as a conditional contract.

Essential elements of valid contingent contract

1. There must be valid contract.

2. The performance of the contract must be conditional.

3. The event must be future uncertain.

4. The event must be collateral to the contract.

Rules regarding the enforcement of the contingent contract

Section 32 - It depends on the happening of the future uncertain event. So the contract will be

enforced only if the uncertain event has happened.


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In other words, the law says that if I agreed to fly you to Malaysia as soon as I get my license,

you will have to wait for me to die because only then would you be sure I can't fulfill a contract

to personally fly you to Malaysia. The converse is equally true.

Section 33 - It depends on the Non-happening of the future uncertain event. So the contract will

be enforced only if the happening of that uncertain event becomes impossible as that event

cannot happen.

This means that if you agreed to pay me to never fly to Malaysia, you won't have to pay me till I

die because so long as I am alive, I can always fly to Malaysia.

Section 35 - It depends on the happening of the specified uncertain event within the fixed time.

So the contract will be enforced only if the uncertain event happens with in the fixed time.

Section 35 (second Para) It depends on the Non-Happening of the specified uncertain event

within the fixed time. So the contract will be enforced only if the happening of that uncertain

event becomes impossible within the fixed time as that event cannot happen.

Contingent contract dependent on the impossible event is void and cannot be enforced by law as

the impossible event will never happen. This will be void whether the impossibility of the event

is known or not to the parties at that time of making the contract.

The buyout Agreement

A Buyout Agreement is a legal agreement between the owners of a business that sets out how the

future sale or buyout of an owner's interest in the business will be handled. A buyout agreement

may also stipulate whether or not a departing partner has to be bought out and what specific

events will trigger a buyout.

If you are entering a business partnership, you should set up a buyout agreement when you create

your partnership agreement. It can be part of your partnership agreement itself or stand alone as a

separate legal document.


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The buyout agreement ensures that when one partner wants to quit, becomes bankrupt, divorced,

incapacitated or dies, the other partners will be able to continue to carry on the business. Without

a buyout agreement, when one partner wants or has to leave, your partnership may be forced to

dissolve and/or you could end up in court.

Indemnification Clause

An indemnification clause is a clause in a contract which states that a party to the contract agrees

to compensate the other party for any losses incurred as a result of the performance of the

contract or in association with the contract. Many times an indemnification clause is brought up

in the case of third-party claims. In this case, IT department is a third-Party who asked Jet

Airways to Air Saharas taxes.

However, an indemnification clause should have clarity and contain legal subject matter.

Otherwise, court can limit its interpretation and make it unenforceable.


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CONCLUSION

According to our group, this case is one of the complex matters in Indian corporate history which

has unavoidable impact on aviation industry.

MRTP act has no role to play in this deal. This is because a merged entity had not started

functioning when MRTPC scrutinized the deal. To be dominant player in market cannot be an

offence under any law. Thus, provisions in MRTP act were not applicable to Jet-Sahara deal.

Although it is understood that the involved parties settled the case outside the court due to

cumbersome legal procedures, Air Sahara was also allegedly responsible for hiding its liabilities

in due diligence procedure. Moreover, the collapse of the deal could have been avoided if both

the airlines had sent a letter to the Directorate-General of Civil Aviation (DGCA) agreeing to

constitute the board with four persons before the deadline. Thus, partys non-cooperation to

government is also responsible for failure of deal.

According to our group, a failure to do a detailed scrutiny of liabilities of Air Sahara was mainly

responsible for failure of deal in May, 2006.

The crucial factor which brought both the parties together to settle the issue outside the court was

opportunity cost due to delay in legal procedure. Although one party could have benefitted by

continuing the help from the court of law but it was still unclear that how much monetary and

strategic benefit the winning party could have got in actual terms.

A vague policy related to mergers and acquisition in the aircraft industry could not clearly

specify the terms of transfer for airport infrastructure. This was also one of the reasons due to

which concerned parties always doubted about valuation of deal.


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Government is also not able to strike a balance between the pace at which Indian Aviation

industry is growing and the pace at which laws related to merger and acquisitions in the industry

are being modified.

According our group, it is difficult to mention winner in this deal before all the legal issues are

sorted out. Moreover, it depends upon how efficiently Jet will use JetLites resources in order to

improve its profitability. Hence, only upcoming period can decide who has ultimately won the

battle.

Furthermore, we can say that verdict on tax liability issue will be largely dependent upon Ernst

and Youngs report and Indemnification clause in Share Purchase Agreement.

At the end, as a group, we also cannot deny occurrence of financial fraud in this much-awaited

case.


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BIBLIOGRPHY

Newspapers:

Economic Times

Mint

Hindu

Websites:

www.law4india.com

www.petroleum.nic.in

www.mca.gov.in

Books:

Business law (S. S. Gulshan)

The Indian Contract Act, 1872 (Bare Act)
http://www.law4india.com/http://www.petroleum.nic.in/http://www.mca.gov.in/http://www.law4india.com/http://www.petroleum.nic.in/http://www.mca.gov.in/


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MMS_Group_5 Law (Ril Rnrl & Jet Sahara)Final

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