When a PSU takes parent to court

Disputes between government departments should not be fought in court, as both sides are funded by taxpayers

Some three years after a Supreme Court order wound up the Centre's Committee on Disputes, the Oil and Natural Gas Corporation (ONGC) board has decided to drag the Centre and its upstream regulatory arm, Directorate General of Hydrocarbons (DGH), as well as Reliance Industries Ltd (RIL), to court. The decision not only ruffled feathers with M Veerappa Moily, petroleum minister in the previous United Progressive Alliance (UPA) government, but added another chapter to the long-debated view on whether public resources should be "frettered away" in fighting the government.

The established system of the Committee on Disputes (CoD), created within the government to settle disputes between central government departments and public sector companies, or state and central entities, was questioned in 2011, after about two decades of functioning. While the committee and its functioning was established by the Supreme Court through various orders related to ONGC, the biggest of all government companies, since it was felt matters should be resolved in-house first, it was a case involving the Electronics Corporation of India and the government that led to the dissolution order in February 2011.

The reasons why the Supreme Court came out with the dissolution order for the disputes committee, initially called the High-Powered Committee or the Committee of Secretaries, were probably the same as those that gnawed at the existence of public sector companies-delays in resolution of disputes, the committee was found to be giving contradictory orders and, importantly, it had put public sector companies at a disadvantage vis-à-vis their private sector counterparts, which were free to approach courts. "The cases that went to CoD were mainly related to tax demands made on PSUs, as a lot of these companies were going to court against the revenue department. Overall, the committee's working was not very successful, though a lot of disputes were being settled," says R S Sharma, former chairman and managing director, ONGC.

In the current case involving RIL, it is not very clear what made ONGC approach the court for alleged theft of gas just a day before the results of general elections were to be announced, at a time when it was expected the then UPA dispensation would be voted out by the people's verdict. Speculation on the reasons varies from the company taking advantage of a political regime in its lame-duck stage to do what it wanted to do for long, to an attempt at preventing RIL from getting a higher price for KG-D6 gas from the government when hydrocarbon was allegedly being pumped out of ONGC's share of reserves.

It is believed ONGC made the government the first respondent and DGH the second in the case, which was essentially against RIL, as in its negotiations, the private sector oil major had maintained it was abiding by the production-sharing contract signed with the government and all its production and development plans had been approved by the Ministry of Petroleum and DGH. When asked why the company decided to opt for a legal recourse when the established global norm was to settle the issue of overlap of oil and gas reservoirs by setting sharing principles at the onset, D K Sarraf, chairman and managing director of ONGC, gave a one-line response: "It was a decision of the company's board."

Sarraf's reaction endorses the fact that government companies are increasingly becoming independent. "They will not hesitate in initiating legal proceedings against companies for claiming payments outstanding. Since they are government companies, they are under the control of their administrative ministries for reporting and monitoring, but the boards are independent and sometimes, may need to take post facto approval from the government, if necessary," says Raj Panchmatia, partner, Khaitan & Co.

Ramesh Vaidyanathan, managing partner, Advaya Legal, however, dispels the notion of PSU autonomy. "It will be naïve to suggest they have complete independence. In pursuing their legal remedies, not only are they severely constrained when the respondent is another government entity or PSU, sometimes, they are under pressure when the counter party is a corporate group with political clout." He cites the recent case of Kingfisher Airlines, which, he alleges, was given a "long rope and allowed to run up hundreds of crores of liability towards the Airports Authority of India, tax authorities, et al".

No More Committee on Disputes: Govt entities go to court

• In Oct 1991, in its second order involving ONGC, Supreme Court carries forward its order of setting up of High Powered Committee (HPC) with representatives of ministries of industry and law, and Bureau of Public Enterprises to monitor dispute between Union govt and PSUs. No litigation should come to court or to a tribunal without the matter being cleared by the committee
• In a fourth case filed by ONGC against Maharashtra govt's CIDCO, HPC converted to Committee of Secretaries and its domain extended to include dispute resolution involving the state governments and their instrumentalities
• Finally called Committee on Disputes, a secretary-level official in the Cabinet Secretariat was full time devoted to this task
• On a special leave petition filed by Electronics Corporation of India against the govt, SC ordered in Feb 2011 withdrawal of its earlier orders in ONGC cases. Court said the mechanism has failed

In the ONGC-RIL case, many believe there has been delay on the part of ONGC. But Panchmatia says if an official of a government company does not proceed and take appropriate action, there could be a vigilance inquiry. "Besides, if they do not take legal recourse and go for a settlement, they may need to obtain necessary approvals; else, some official could later question the decision of settling a matter. Only if an officer is inclined to settle a matter in the best interest of a PSU and is willing to take a decision will he opt for a settlement." In case of a dispute with the government, or one in which the government is dragged into a dispute involving a third party, Panchmatia says he will advise a company to first try to resolve the dispute amicably. "The option of going to court to challenge a policy issue or opting for arbitration can only delay the resolution of disputes."

Government entities going to court against each other could turn out to be embarrassing. A case in point is National Highways of Authority of India going to court against the environment ministry for delaying clearances relating to highway projects last year. Similar was a case related to jurisdiction over forwards contract. The government was arrayed as party in a litigation before the Bombay High Court (now pending in the Supreme Court) filed by the Forwards Market Commission; it related to a dispute over jurisdiction over forward contracts in electricity. "During the course of the hearing, the court, time and again, expressed it was for the government to resolve such issues by evolving a proper mechanism, rather than troubling courts with such disputes," recalls Amit Vyas, associate partner, Economic Laws Practice.

In some cases, however, the government becoming a respondent is inevitable. It might become necessary in various situations, either at the instance of the petitioner PSU or the court. "It is only when relief is claimed against the respondent government that there may be concerns. While it is ideal for such disputes to be resolved through a bi-partite internal process, a court process may be necessary when third parties are involved," says Vaidyanathan.

Though ONGC, in the current case, has sought a court-monitored independent agency to arrive at a compromise, hinting at lack of confidence in the government (also its promoter and a party to the production-sharing contract), there is near-unanimity that disputes between government departments should not be fought in a court of law, as both sides are funded by taxpayer money. Besides, even in the private sector, it is not common to see companies dragging their promoters to court. However, as Vaidyanathan says, as listing brings operational autonomy and the onus of self-preservation on PSUs, they should be free to pursue their legal interests.

Independence and Direction: ONGC knocks at HC doors

Petitioning the Delhi High Court, ONGC on May 15 sought issue of a “writ of mandamus or a writ in the nature of mandamus or any other appropriate writ” to the government and the Directorate General of Hydrocarbons. Mandamus, which means command in Latin, is a direction to the government asking it to perform its duty. In this case, ONGC wants the government to appoint “a truly independent agency to establish continuity of reservoir across the two blocks and for gas balancing in accordance with the production sharing contract signed between the government and RIL. The independent agency should function directly under the court’s supervision and control. The government and DGH should immediately take necessary estimation of volumes of gas for “gas balancing” (allocation of right share to all the holders of equity in the blocks) from RIL from the date it commenced actual commercial production till date, and for future production. ONGC also wants the court to direct the two to ensure that RIL agrees to compensate the ONGC if the independent agency establishes the PSU’s entitlement.