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The Bombay High Court has asked Reliance Industries (RIL) to sell gas at a sharply reduced price to an Anil Ambani group firm, causing some uncertainty in India’s nascent natural gas industry and delivering a sharp blow to the valuations of RIL, the country’s biggest private sector firm by market value.

In a move that is likely to have many significant and unintended consequences, the court asked Mukesh Ambani controlled RIL to sell gas at $2.34 per mmBtu to Reliance Natural Resources (RNRL), which is owned by the younger Ambani. This price is 44.2% lower than the $4.2 per mmBtu that RIL has agreed to charge power and fertiliser firms under recently-signed agreements, and which is based on a government-approved formula. RIL wanted the court to uphold the government-approved price, but the court sanctified the lower price of $2.34 per mmBtu, which is stipulated in an agreement signed between Mukesh and Anil at the time of their separation in 2005-06.

The court’s decision will cause financial losses to Reliance Industries, which will have to sell at least 35% of its natural gas production, assuming a production level of 80 mmscmd, at lower than the $4.2 rate set by the government. RIL will probably have to share revenues with the government assuming the higher rate of $4.20.

Amitabh Chakraborty, president-equities at Religare Securities, estimates that the move will lower RIL’s earnings per share to Rs 132 in 2009-10 from an estimated Rs 141 per share. Revenue from the KG basin’s D6 block (RIL’s main gas field) is projected to fall to Rs 6,100 crore from Rs 8,100 crore while earnings before interest, tax, depreciation and amortisation are likely to slip to Rs 3,100 crore from Rs 5,800 crore.

RIL is believed to be readying itself to challenge the order before the Supreme Court. “We are still reading the court’s order and will take appropriate action,” RIL counsel Milind Sathe said. “The full text of the judgement has been received by us and is being reviewed by us. We will decide on the future course of action, based on legal advice,” an RIL spokesperson said later in a statement.

The judgement will also have a major impact on two other stakeholders—the government and the country’s natural gas industry. The government’s efforts to put in place a pricing structure for the industry has received something of a setback.

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