OPINION: Independence of gas trading exchanges – A regulatory conundrum
“The establishment of a gas trading exchange in India will be a big step in aiding India’s vision of an efficient, wider and transparent gas trading system.”
In a recent development, India has established its first Gas Trading Exchange (Gas Exchange) or the Indian Gas Exchange (IGX) to enable the trade and supply of natural gas through a market-based mechanism instead of multiple formula driven prices,  thereby establishing a transparent pricing mechanism for the trade and supply of natural gas. It is a digital online platform where no physical delivery happens between the buyer and seller. The Gas Exchange is expected to work on the lines of power exchanges, which determines the price based on supply and demand and market forces. The newly established platform will allow trading of imported natural gas across imported natural gas, excluding domestic gas , across hubs in Dahej and Hazira in Gujarat, and Kakinada in Andhra Pradesh.
In India, the Petroleum and Natural Gas Regulatory Board (PNGRB) regulates access to trunk pipelines, distribution infrastructure, storage, transport, and physical delivery of gas such as pipelines, etc. It is set to take up the role of the market regulator for the natural gas trading platform. The establishment of a Gas Exchange in India will be a big step in aiding India’s vision of an efficient, wider and transparent gas trading system. Trade of several types of gas will increase liquidity, and shorter contracts for delivery will also provide sellers and buyers with greater flexibility. At the same time, there are concerns regarding government set
prices of these projects which involve expensive Exploration and Production stages, which may require reconsideration.
Since the launch of IGX’s AI-enabled online natural gas trading platform, several giants such as GAIL and Petronet LNG  have shown interest in this first-of-its-kind novel venture, including other major industry players like Manikaran Power, Torrent Power and Adani Gas, thus exposing the sector to substantial opportunities.  More recently, there was news of GAIL floating an Expression of Interest (EOI) to possibly acquire approximately 26 per cent in the new exchange, thereby raising a few eyebrows regarding the independence of IGX.
In 2019, PNGRB had stated that “gas pipeline company will not be allowed to take majority stake in these new exchanges” . It is therefore essential to assess what would consist of a ‘majority’. From a Companies Law perspective, acquisitions resulting in entitlement of 25 per cent or more of voting rights trigger open offer obligations . Further, the definition of ‘Control’  under the Takeover Code includes a vast variety of rights which would entitle it to exercise control over the acquired entity. A similar definition is present under the Companies Act, 2013.  The nature of control spanning over several kinds of rights is discussed in several cases . Further, the majority typically decides how the affairs of the company shall be conducted . The acquisition of GAIL and several other large entities may also lead to cartel concerns in the IGX, thereby creating unfair market practices for other players. Presently, access to the requisite infrastructure for the storage, and supply of natural gas is exercised largely by the dominant players of the sector which have developed it after incurring significant costs. The authorized entities should have transportation and storage of natural gas as their sole business activity and not have any business interests in the gas marketing or gas distribution networks to avoid a conflict of interest in the gas storage and transportation business which is likely to affect competitive pricing.
Further, Section 21 of the PNGRB Act, 2006 also states that marketing and transmission functions should not be performed by the same entity, which further indicates the unlikelihood of allowing GAIL to acquire a significant stake in the IGX. In a press release, Mr Dharmendra Pradhan has also stated that “the government has no business to be in business and the consumer is the king in a free market” . By this logic, it may still be possible for GAIL to acquire a minority stake in IGX. Historically, the Courts in India have observed that the independent directors must not have a fiduciary relationship with any shareholder of Power Exchange . Similar provisions could be applicable to GAIL vis-a-vis the IGX. The rules of IEX mandate an extensive committee overlooking its management, which can be adopted for IGX as well, subject to the legal requirements laid down by PNGRB.
While this acquisition may be undesirable for such reasons, GAIL continues to have the largest network of pipelines and considerable LNG terminals in India, which could be a big contribution in success of the exchange, thereby indicating the government’s commitment to increasing the share of natural gas in the country’s energy mix. Further, a government entity directly acquiring and therefore financially backing the gas exchange may instill confidence in the investor community. Incidentally, the transparent gas price discovery and trading of gas on the newly established gas exchange has already commenced at a time where the market rules and bylaws have been notified without the regulations and procedures  being in place. This in itself is a conundrum as it appears that a regulatory framework for operationalization of the gas exchanges is still incomplete. Since the PNGRB regulations governing the gas exchanges are not yet notified in the official gazette, the precise implication of this move continues to remain unclear. It will also be interesting to see how the proposed regulations will deal with comingling of gas from various suppliers and issues related to that.