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Attorney(S)
  • Sri A.N Jayaram, Advocate General with
  • Sri V. Sudhish Pai, AGA, for Appellant
  • Sri P. Chidambaram, Sr. Counsel with
  • Sri Ashok B. Hinchigeri, Advocate for R1 M/s. Sundaraswamy Ramdas, Advocate for R2 Sri K.G Raghavan, Advocate for R3
Judges
  • R.V Raveendran
  • K.L Manjunath, JJ.
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Sri A.N Jayaram, Advocate General with
  • Sri V. Sudhish Pai, AGA, for Appellant
  • Sri P. Chidambaram, Sr. Counsel with
  • Sri Ashok B. Hinchigeri, Advocate for R1 M/s. Sundaraswamy Ramdas, Advocate for R2 Sri K.G Raghavan, Advocate for R3
Judges
  • R.V Raveendran
  • K.L Manjunath, JJ.
Acts
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Smart Summary

Structured Summary of the Opinion (Judgment of Raveendran, J.)

Factual and Procedural Background

The appeal is directed against the order dated 27.8.2001 in Writ Petition No. 406/2001. The appellant in the appeal was the first respondent in the writ petition; the first respondent in the appeal (Nagarjuna Power Corporation Limited) was the petitioner in the writ petition. The dispute arises out of a proposed 1,015 MW coal-based thermal power project near Mangalore promoted by the Company (incorporated on 23.2.1996). The Company obtained multiple clearances and certificates from Central and State authorities, and after prolonged negotiations a Power Purchase Agreement (PPA) was initialled between the Karnataka Electricity Board (KEB, now KPTCL) and the Company on 23.7.1999.

The Company sought formal approval of the PPA from the State Government and sought execution of a State Support Agreement and a Government Guarantee. After interim directions from the Single Judge (2.4.2001) requiring the State Government to consider the Company's request, the State communicated by letter dated 8.5.2001 that it would not approve the draft PPA for reasons including clauses on escrow, government guarantee and deemed generation, and an assessment that the State may not require the quantum of power proposed around 2006. The Company amended its writ petition to challenge that communication as arbitrary and without jurisdiction, and sought directions compelling approval/ratification of the PPA and execution of the State Support Agreement and Government Guarantee, invoking promissory estoppel and legitimate expectation.

The Learned Single Judge allowed the petition in part by order dated 27.8.2001, quashing the Government's letter of 8.5.2001 and remitting the matter to the State Government for reconsideration within eight weeks, while recording specific findings on escrow, government guarantee and deemed generation. Aggrieved, the State Government appealed.

Legal Issues Presented

  1. Whether the State Government's decision communicated by letter dated 8.5.2001 refusing to approve the draft Power Purchase Agreement (PPA) was arbitrary, illegal or without jurisdiction.
  2. Whether the provisions in the draft PPA relating to (a) escrow account/escrow cover, (b) a Government Guarantee, and (c) a deemed generation clause were permissible and/or should have been approved by the State Government.
  3. Whether the decision to refuse approval was vitiated by procedural irregularity because the matter was decided by the Chief Minister instead of the Cabinet (i.e., whether it should have been placed before the Cabinet).
  4. Whether the document initialled/signed on 23.7.1999 between KEB and the Company was a concluded, binding PPA or only a finalised draft awaiting State Government approval (and thus not enforceable as a concluded agreement without such approval).

Arguments of the Parties

First Respondent / Petitioner (Nagarjuna Power Corporation Limited) — Principal Arguments

  • The Company relied on promissory estoppel and legitimate expectation because it had negotiated terms over two and a half years, obtained multiple clearances and approvals, and spent substantial sums acting on promises, assurances and representations made by the State Government and KEB.
  • Escrow cover: This was a standard payment security mechanism required by financial institutions (IDBI and nationalised banks). Thirteen other PPAs executed by KEB between November 1997 and October 1999 provided escrow cover with State approval; thus denying escrow cover in the Company's case was unjustified.
  • Government guarantee: Fourteen PPAs (including the Company's PPA) had provided for State guarantees; the State Government had earlier approved the format of the Government Guarantee. The Company contended there was no justification for refusing the guarantee in its case.
  • Deemed generation clause: The clause protected the Company against KPTCL "backing down" and had been incorporated in GOI tariff notifications and in other PPAs entered into by KEB. The Company argued it was necessary for project viability and had been accepted earlier in other agreements.
  • On the point of execution: The Company claimed the PPA was duly executed on 23.7.1999 and would come into effect upon State approval; it relied on the document's form, initialling/signatures and surrounding correspondence to assert it was a concluded agreement pending approval.
  • The Company contended the State's delay and purported failure to place the matter before Cabinet amounted to bureaucratic inaction and prejudiced the project.

Appellant / State Government and KPTCL — Principal Arguments

  • The State relied on a changed IPP policy influenced by recommendations of a High Power Committee (Deepak Parekh Committee) which recommended against escrow cover and government guarantees. The policy (IPP Policy dated 8.1.2001 / para 8.17) prohibits escrow cover or any form of guarantee to IPPs, so the draft PPA's escrow and guarantee provisions conflicted with that policy.
  • The deemed generation clause as drafted was said to be adverse to KPTCL's and public interest because it could result in payment for power not generated, imposing potentially exorbitant or avoidable liabilities. The State also relied on a GOI notification (dated 11.9.2000) and a change in legal/regulatory position affecting applicability.
  • The State said that, having regard to sanctioned and projected capacity, there might not be need for an additional 1,015 MW by 2006 and therefore refused approval on that basis.
  • On procedural grounds, the State argued the Chief Minister was empowered to decide such matters and it was not necessary to place the matter before the Cabinet under the Business Rules; thus the Single Judge's finding of procedural irregularity (that the issue should have been placed before Cabinet) was challenged.
  • The State also contended the document initialled on 23.7.1999 was only a finalised draft to be executed on approval (not a binding concluded PPA), pointing to lack of stamp paper and absence of official seals, and consistent conduct of parties treating it as a draft.
  • The State further contended that the Company could not compel the Government to execute a guarantee involving large financial liabilities or to approve provisions contrary to the declared IPP policy and public interest.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court examined the factual matrix, documentary record of approvals/clearances obtained by the Company and the conduct of State agencies. Two levels of reasoning are evident in the opinion: (A) the reasoning of the Learned Single Judge whose order was under challenge; and (B) the appellate court's (Raveendran, J.) analysis and modifications.

(A) Findings recorded by the Learned Single Judge (as summarized in the opinion)

  • The petitioner (Company) had obtained multiple no-objection certificates/approvals and substantial preparatory steps had been taken by both sides; these gave rise to a legitimate expectation that the approval would follow.
  • However, legitimate expectation cannot prevail if approval would cause public injury or is contrary to public interest or policy; courts must weigh legitimate expectation against larger public interest.
  • The Single Judge found procedural irregularity: the matter required Cabinet consideration but was decided by the Chief Minister; thus the rejection was vitiated by procedural irregularity.
  • The Single Judge recorded specific findings that the refusal to approve escrow cover and Government Guarantee was unsustainable because relevant materials had not been considered and inconsistent treatment (other PPAs had such provisions and earlier approvals) existed; likewise the rejection of deemed generation clause was found arbitrary given its acceptance in other PPAs.
  • On that basis the Single Judge quashed the Government letter of 8.5.2001 and remitted the matter for reconsideration within eight weeks, but did not grant the secondary reliefs sought by the Company (e.g., direct order compelling execution without reconsideration).

(B) Appellate court's analysis and disposition)

  1. The appellate court accepted that the matter warranted reconsideration by the State Government — but it modified aspects of the Single Judge's order and findings.
  2. The court analyzed the three disputed contractual clauses in the PPA:
    • Escrow cover: Clause 10.14 provided for an escrow agreement as payment security, a feature the Company's financiers required. The Single Judge had viewed refusal to permit escrow as ignoring relevant materials and inconsistent with prior approvals.
    • Government Guarantee: Clause 5.4 and the annexed guarantee would impose on the State the obligation to pay sums that the Board failed to pay. The Single Judge viewed refusal as arbitrary given prior State approvals for other PPAs.
    • Deemed generation: The PPA defined deemed generation and provided payment provisions where KPTCL "backs down"; the Single Judge noted that the IPP policy did not absolutely bar a reasonable deemed generation clause and that such clauses existed in earlier PPAs.
  3. The appellate court noted the State's legitimate policy change (IPP Policy) and the State's reliance on Committee recommendations. The court did not accept the Company's submissions uncritically but saw scope for meaningful reconsideration.
  4. The appellate court found persuasive material supporting the State's contention that the instrument initialled on 23.7.1999 was a finalised draft awaiting governmental approval rather than a concluded, enforceable PPA. Factors cited included: (a) correspondence by the Company describing the instrument as "initialled" and references to finalising/signing the PPA/SSA/GA after cabinet approval; (b) absence of requisite stamp paper and official seals; and (c) consistent conduct indicating the parties treated the document as a draft.
  5. Given the State's willingness to meaningfully reconsider the matter, the appellate court narrowed the controversy and recorded a practical procedure for reconsideration:
    • The finding of procedural irregularity by the Single Judge (that the Chief Minister improperly decided the matter rather than the Cabinet) was set aside; the question whether such matters must be decided by Cabinet was left open for future cases.
    • The State agreed to place the matter before the Cabinet in this case as a special measure; the court recorded this submission and left the broader legal question undecided.
    • The Company was permitted to submit within four weeks a representation setting out its case and alternative proposals on payment security mechanisms (escrow, guarantee or alternatives) and on deemed generation (including proposals to sell excess power to third parties and specifying minimum purchase obligations by KPTCL).
    • The State was to reconsider the PPA afresh in accordance with law, keeping an open mind and not being constrained by the Single Judge's observations on the three disputed aspects; and to communicate its decision within four months of receipt of the Company's representation.
  6. On substantive reasoning relating to deemed generation, the court observed that the IPP policy does not absolutely bar reasonable deemed generation protections; it bars clauses that impose "exorbitant/avoidable" liability. Thus the State could consider modified or limited deemed generation provisions or arrangements that reduce the need for deemed generation (e.g., allowing sale to third parties or minimum purchase arrangements).
  7. The court concluded that on the peculiar facts — a draft PPA initialled but dependent on Government approval, substantial steps taken by both sides, and a changed policy position — the appropriate remedy was remand for fresh consideration rather than immediate compulsion to execute the agreements.

Holding and Implications

Core Ruling: The appellate court allowed the appeal in part and reached the following operative conclusions and directions:

  • Quash and Remit: The court upheld the Single Judge's order quashing the State Government's letter dated 8.5.2001 refusing to approve the PPA and remitted the matter to the Government of Karnataka for fresh consideration in accordance with law (subject to the modifications recorded by the appellate court).
  • Procedural Finding Modified: The appellate court set aside the Single Judge's finding that the decision of the Chief Minister was vitiated by procedural irregularity for not placing the matter before the Cabinet; it left open the general question whether such matters must be decided by the Cabinet, but recorded the State's submission that in this case it would place the matter before the Cabinet.
  • Opportunity to Present Alternatives: The Company is permitted to submit (within four weeks) representations and alternative proposals on: (a) payment security mechanisms (escrow, government guarantee or alternatives acceptable to financiers/State), and (b) modifications to the deemed generation clause (including sale of excess power to third parties and minimum purchase commitments by KPTCL). The Company may further modify proposals during negotiations.
  • Fresh Decision Timeline: The State shall "meaningfully" reconsider the matter in an unbiased manner and communicate its decision within four months of receipt of the Company's representation.
  • Costs: Parties to bear their own costs throughout; any levy of costs on the appellant imposed below was set aside.

Implications for the Parties:

  • The immediate practical consequence is that the State Government's letter of 8.5.2001 (refusing approval) stands quashed and the State must re-examine the PPA and related instruments after considering fresh submissions from the Company and alternatives on security and deemed generation.
  • The Company is afforded a formal opportunity to present alternatives and improved proposals, but it is not granted an immediate directed execution of the PPA, State Support Agreement or Government Guarantee.
  • The State retains the discretion to refuse or approve the PPA upon fresh consideration consistent with policy, public interest and legal constraints; the appellate court's order does not mandate a particular outcome other than requiring a lawful, meaningful reconsideration within the time prescribed.

Note: The provided opinion did not cite any judicial precedents (case law) to support the analysis recorded in this summary.

Show full summary ...

    State Of Karnataka v. Nagarjuna Power Corporation Limited And Others

    JUDGMENT

    Raveendran, J.:—

    This appeal is directed against the order dated 27.8.2001 in WP No. 406/2001. The Appellant herein was the first respondent and respondents 2 and 3 herein were the second and third respondents in the said W.P No. 406/2001 filed by the first respondent herein.

    For convenience, in this order the appellant herein will be referred to as ‘the State’, the First respondent (Nagarjuna Power Corporation Limited) will be referred to as ‘the Company’, the Second respondent (Karnataka Power Transmission Corporation Limited) will be referred to as ‘the KPTCL’, the third respondent (Karnataka Electricity Regulatory Commission) will be referred to as ‘the KERC’, the Karnataka Electricity Board, predecessor in interest of KPTCL as KEB. The Electricity (Supply) Act, 1948 will be referred to as ‘the Act’,

    2. There is a widening gap between demand and generation of power in the States. As the existing State Electricity Boards whose financial position is fast deteriorating, were not able to meet the increasing demand for power, it was felt that future expansion and improvement of power sector cannot be fully achieved through public resources alone and that it was essential to encourage private sector participation in Power generation, transmission and distribution. Therefore, a common minimum national action plan for power was evolved by Central Government and the States. As per the said plan State Governments will encourage co-generation power plants and to facilitate evacuation of Power from such plants to the grids, formulate clear and transparent policies for purchase of power and wheeling charges, providing fair returns to the co-generation power plant owners.

    3. The Company was incorporated on 23.2.1996 with the object of taking up power generation. It drew up a scheme for establishing, operating and maintaining a 1015 MW Coal based Thermal Project near Mangalore involving an investment of Rs. 5500 Crores, with employment potential for about 3000 persons. The Company claims to have held series of detailed discussions with the KPTCL and the State Government in regard to setting up of the said project, in particular with reference to the existing demand supply position relating to power in Karnataka, short fall in the generation of power in Karnataka, projected future requirements of power, ideal location for generation of power, type of project and other, relevant circumstances.

    4. The Company also applied for and obtained the following certificates, clearances, consents from the concerned authorities:

    I. From Central Electricity Authority. State Government and Karnataka Electricity Board.

    (1) Letter dated 31.3.1996 from the Central Electricity Authority containing ‘In-Principle Clearance’ for the company's project.

    (2) Government Order dated 15.6.1976 issued the State Government permitting and authorising the Karnataka Electricity Board (now KPTCL) to purchase 1000 MW power generated by the Company on the terms and conditions envisaged under the Government Orders dated 27.1.1994 and 15.11.1995

    (3) Consent letter dated 27.11.1996 from Karnataka Electricity Board under Section 44 of the Electricity (Supply) Act, 1948, for the Company setting up 1000 MW Coal based Thermal Power Project near Mangalore, with a clarification that Power Purchase Agreement will be executed at a tariff computed as per the relevant Government of India notification and confirmation that it will make adequate arrangements for evacuation of power generated.

    (4) Communication dated 4.4.1998, from the State Government to the Central Electricity Authority confirming that the Company has published the draft model scheme as required under Section 29(2) of the Act in the leading local newspapers and in the Karnataka Gazette dated 2.3.1997

    (5) Letter dated 9.11.1998 from the State Government (Energy Department) to the Company granting permission to the company, under Section 18A of the Act for establishing, operating and maintaining 1015 MW Coal based project near Mangalore (and cancelling the earlier letter dated 10.6.1997 relating to 1000 MW power plant) subject to the condition that evacuation lines and sub-station at the load center etc., will vest in KEB or its nominee.

    (6) Letter of recommendation dated 9.3.1999 from the State Government to Central Electricity Authority certifying that the Company has complied with the provisions of Section 29 of the Act in respect of its proposed Coal based Thermal Power Project near Mangalore and recommending the case of the Company under Section 29(3) of the Act for further consideration by the Central Electricity Authority.

    (7) Office Memorandum dated 29.4.1999 issued by the Central Electricity Authority according Techno Eeconomic clearance in regard to the said scheme (extended from time to time upto 30.6.2001) of the Company.

    II FROM GOVERNMENT DEPARTMENTS. RAILWAYS. PORT TRUST. POLLUTION CONTROL BOARD ETC.

    (8) Site Clearance Certificate dated 19.3.1996 issued by the State Pollution Control Board on 19.3.1996 for establishing the Company's project.

    (9) Environmental clearance as per letter dated 20.3.1997 of Government of India (Ministry of Environment and forests) in regard to the said project.

    (10) Order dated 30.4.1997 of the State Government extending rehabilitation package in regard to Company's project.

    (11) Letter dated 20.5.1997 from the Government of India (Ministry of Power) confirming that Government of India has no objection for Company's proposal for import of coal for the project (in continuation of Letter dated 18.7.1996 confirming that it has no objection for import of coal for the project by the Company).

    (12) Clearance from the Superintendent of Police, Dakshina kannada, Mangalore as per letter dated 1.7.1997

    (13) Clearance letter dated 9.9.1997 the Directorate of Fisheries in Karnataka too the confirming that the State Government has cleared the project from fisheries point of view as per letter dated 8.9.1997

    (14) Clearance letter dated 9.9.1997/9.10.1997 from the Principal Chief Conservators of Forests, Aranya Bhavan, Bangalore confirming that the State Government has cleared the project from forest point of view as per letter dated 22.9.1997

    (15) ‘In Principle’ approval letter dated 10.8.1998 from New Mangalore Port Trust for allotment of Jetty with backup area for unloading and storage of coal.

    (16) Confirmation letter dated 17.3.1997 and 6.1.1998 from the Konkan Railway Corporation Limited confirming (a) the availability of rail facility between Thokur and Nandikur stations for use by the Company and (b) that it has no objection to transport about three million tonnes of coal per annum from the Mangalore Port Trust to the Site on the proposed project.

    (17) Memorandum of Understanding dated 16.3.2000, between Southern Railway and the Company for transport of coal (in continuation of Letter dated 3.3.1999 from Southern Railway in regard to proposed evacuation of 10 MT of coal from coal jetty at New Mangalore Port).

    (18) NOC dated 8.9.2000 from Airports Authority of India for construction of 275 meters high chimney for the project.

    5. The Company claims that apart from obtaining the required clearances etc., it has entered into the ups with several organisations for erection and commissioning of plant and machinery, establishment of captive jetty, procurement and transportation of coal etc., for implementing the project.

    6. The Company claims that after threadbare discussions, negotiations and deliberations for more than two and half years, KEB entered into a Power purchase Agreement dated 23.7.1999 with the Company. It is stated that the said agreement is in accordance with the guidelines issued by the Government of India, Ministry of Power, and the terms agreed to by KEB and the State Government. According to the Company, the said P.P Agreement provides for purchase of the entire power (to be produced by the company) by KEB at prices to be worked out in terms of the said agreement and evacuation of the power by KEB. The company alleges that the said P.P Agreement would come into effect and become operational, on the State Government performing the following three acts;

    (a) Grant approval to the Power Purchase Agreement dated 23.7.1999 entered between KEB and the Company.

    (b) Execute the State Support Agreement (as per the approved draft) agreeing to assist and support the Company in executing and completing the project.

    (c) Issue a Government Guarantee (as per the approved draft) guaranteeing due performance of the obligations of KEB (now KPTCL) under the Power Purchase Agreement.

    7. According to the Company, matter was pending with the State Government, for a long time, without taking a decision in the matter, thereby jeopardising the entire project. The company alleges that it has undertaken such a huge power project and has spent enormous amounts for completing the preparatory stages of the project, acting on the promises, assurances and representations made by the State Government. It is alleged that Finance Department and Energy Department have approved the said agreement and directions were issued on 31.12.1999, to place the proposal before the Cabinet for its approval, but however, Energy Department has not placed the proposal before the Cabinet for its approval. Consequently, the State Government has neither approved the PP Agreement nor executed the State Support Agreement or the Government Guarantee. Aggrieved by the inaction on the part of the State Government, the Company filed Writ Petition No. 406/2001 for the following reliefs, relying on the principles of promissory estoppel and legitimate expectation;

    (a) a direction to the State Government to approve and ratify the Power Purchase Agreement signed by the KPTCL; and

    (b) a direction to the State Government to execute and deliver the State Support Agreement and the Government Guarantee as per the approved draft expeditiously.

    8. The Learned Single Judge of this Court on 2.4.2001 issued an interim direction to the State Government to consider and pass appropriate orders on the request of the petitioner for approval of the Power Purchase Agreement, execution of State Support Agreement and Government Guarantee. In pursuance of it, State Government considered the matter and took a decision not to approve the power purchase Agreement and sent a letter dated 8.5.2001 to KPTCL communicating its reasons for such decision. The said letter is extracted below in its entirety:

    “Please refer to your letter dated 30.7.1999 along with the Draft Power Purchase Agreement initialled between Nagarjuna Power Corporation Limited (NPCL) and KPTCL which had been sent for seeking approval of the Government.

    The Government has carefully examined the draft Power Purchase Agreement in the tight of the material on record, Government policy from time to time and the need for power at the material time (which in this case is expected to be in or after 2006) and has come to the decision not to approve the said draft P.P.A for the following reasons:

    (i) Proposed PPA contains a clause for providing escrow:

    (ii) Proposed PPA contains a clause requiring a Government guarantee and

    (iii) Proposed PPA contains deemed generation clause.

    None of these conditions is acceptable to the Government.

    The proposal plant which is of 1015 MW is expected to be commissioned in or after 2006. The Government expects that there will be no need for this quantum of power at that time.

    You may therefore take further steps to inform the Company of the Government's above decision”.

    KPTCL sent a letter dated 29.5.2001 to the Company communicating the said decision and also enclosed a copy of the said letter dated 8.5.2001

    9. The Company thereafter amended the Writ Petition by including a prayer for quashing the said communication dated 8.5.2001 issued by the State Government as arbitrary, illegal and without jurisdiction. In brief, the company contended in the Writ Petition as follows:

    (i) Re: Escrow cover:— Escrow cover is a payment security mechanism to ensure payment of the Company's bills for the power to be supplied to the purchaser (KPTCL). It was not something special in the case of the company, but a condition requested by the Financial Institutions financing all Independent Power producers. The State Government, after considering the request of Financial Institutions (contained in IDBI's letter addressed to all State Governments) had instructed KEB by letter dated 17.8.1999 to adopt the model Escrow Agreement as circulated by IDBI for arriving at escrow agreement for Independent Power Producers. The Karnataka Electricity Board has entered into 13 other PP Agreements with other Independent Power Producers between November 1997 and October 1999 agreeing to provide escrow cover and the State Government has approved all those PP Agreements. Therefore there was no justification for denying the escrow cover only in the case of the company.

    (ii) Re: Government guarantee:— All the fourteen Power Purchase Agreements executed by the Karnataka Electricity Board with Independent Power Producers between November 1997 and October 1999 including the PP Agreement with the company, provided that the Government of Karnataka shall execute and deliver to the Independent Power producer, a Guarantee in the approved prescribed form, irrevocably and unconditionally guaranteeing to the Power Producers the due and punctual payment of each and every amount which becomes due from the Karnataka Electricity Board (later KPTCL) to the Independent Power producer. According to the Company, the State Government had earlier approved the format of the Government guarantee in its letter dated 4.2.1997 and the Karnataka Electricity Board forwarded the approved format of the Government Guarantee to the Company under cover of its letter dated 5.3.1997; and KEB had entered into the PP Agreement with the Company, providing for issue of such guarantee based on the earlier concurrence to grant such Guarantee; and the State Government has approved all such PP Agreements except in the case of the company, without any reason; and therefore, there is no justification for State Government to refuse to give such guarantee.

    (iii) Re: Deemed Generation Clause: According to the Company, as per the scheme of the PP Agreement, it is entitled only to generate power, the sole purchaser being the Karnataka Electricity Board (now KPTCL). Therefore, Company will be entirely dependent upon the KPTCL for the purchase of power produced by it. Investment in the project and operational requirements necessitate minimum production and sale to make the project viable. If KPTCL as the sole purchaser, ‘backs down’ from purchasing the power, for any of several reasons, which may be either legal or illegal, and instructs the Company not to generate power or refuse to accept the power that will be generated by the Company, the Company will stand to lose enormously as it cannot generate and sell power to anybody else. To safeguard against such contingencies, the Government of India had provided that while computing the level of generation, any extent of backing down ordered by the Electricity Board, shall be reckoned as generation achieved. In other words the Deemed generation clause provides for certain payment by the Electricity Board for Power which the company is prevented from generating, on the instructions of the Electricity Board or on the refusal of the Electricity Board to take such power. The Company claims that such provision for deemed generation has been made in the Government of India's Tariff Notification dated 30.3.1992 and has been incorporated in all the 14 Power Purchase Agreements entered by the Karnataka Electricity Board with Independent Power Producers between November 1997 and October 1999 and the State Government has approved all those power purchase agreements except in the case of the company.

    (iv) Re: Absence of need for Power produced by the Company: One other reason given by the State Government in its letter dated 8.5.2001 to refuse approval of the PP Agreement with the Company is that when the company starts generating power in or about 2006, there may not be need for such power at all. The Company contends that such a conclusion is without any basis as it is made on an erroneous assumption that by the year 2006, all the other 13 Independent Power Purchasers with whom KPTCL has entered into Power Purchase Agreements would generate and supply about 2434 MW of power to KPTCL; that the said conclusion obviously fails to take into account the fact that the biggest of the 13 Independent Power Purchasers with a projected capacity of 1013 MW namely, Cogentriz, had already backed out or the fact that most of the other Independent Power Producers who have entered into PP Agreements with KEB have not shown any inclination to establish Power Generation units or the fact that the state's need for power is growing from year to year and there is acute shortage of power. It is also pointed out the permission has been granted to two power projects as recently as 2001.

    (v) Re: Defect in decision making process: The Company contended that the State Government has approved the PP Agreements with 13 other producers without delay, whereas in the case of the company, the decision was not taken for 21 months on account of bureaucratic red tapism; and that but for the interim order of the Court on 2.4.2001 directing that a decision be taken in the matter, there would have been further delay. It is also contended that the Business rules of the Government require the matter relating approval of the PP Agreement and execution of State support agreement and the Government Guarantee to be placed before the Cabinet, and that though the former Chief Minister and the Present Chief Minister had also directed that the matter should be placed before the Cabinet, the decision has been taken without the matter being placed before the Cabinet. The delay in taking the decision and taking a wrong decision would affect the power starved State apart from escalating the cost of the project.

    10. The petition was resisted by the State Government and the KPTCL interalia on the following grounds;

    (i) The State Government had set up a High Power Committee during 1999 known as ‘Deepak Parekh Committee’ to examine the financial burden involved in generation of power, giving escrow cover etc. The said Committee strongly recommended against providing Escrow cover or Government Guarantee in regard to Independent Power Producers. The State Government has adopted such recommendations and declared an Independent Power Purchase Producers Policy on 8.1.2001 As the provision for Escrow cover and Government Guarantee in the draft power purchase Agreement were contrary to such Policy, it was justified in refusing to approve the said Agreement.

    (ii) The deemed generation clause in the draft power purchase agreement was adverse to the interests of KPTCL and ultimately adverse to interest of public as it contemplated payment to the company for, power which is not generated and supplied and the IPP policy of the State Government was to safeguard against payment of exorbitant/avoidable deemed generation charges to Independent Power producers. It is also contended that GOI Tariff Notification dated 30.3.1992 relied on by the company to support the deemed generation clause is not applicable to Karnataka, having regard to Notification dated 11.9.2000 issued by GCI under Section 51 Electricity Regulatory Commission Act, 1998.omitting Section 43A(2) of Electricity (Supply) Act, 1948 in respect of State of Karnataka. Therefore, the State Government was justified in refusing to approve the PP Agreement with such an onerous and disadvantageous provision relating to deemed generation.

    (iii) Having regard to the power generation capacity sanctioned, implemented and to be implemented, the State Government has assessed the requirements in or about 2006 and its conclusion that there may not be need for 1015 MW power proposed to be produced by the Company on commissioning its plant in or around the year 2006, is proper and just. It is also pointed out that the two projects sanctioned in 2001 were without escrow cover and with reference to special circumstances.

    (iv) The State Government had not assured or agreed to issue a Government Guarantee or unconditionally approve the PP Agreement. Therefore the Company cannot seek any relief by relying on the principle of promissory estoppel.

    (v) While it is true that some discussions were held by the company with KEB/KPTCL/State Government from time to time, the question of seeking relief on the doctrine of legitimate expectation will not arise having regard to the new IPP policy formulated by the State Government with effect from 8.5.2001

    (vi) Power Purchase Agreement has not been executed between KPTCL and the Company. The draft of the Power Purchase Agreement was merely approved and initialled by the KEB and the Company on 23.7.1999 on the understanding that it will be executed on appropriate stamp paper only after approval of such draft by the State Government. As it is undisputed that the agreement required the approval of the State Government, the document relied on by the Company is only a draft approved by the parties to it (KEB and the Company) and not a concluded agreement.

    (vii) The company cannot seek any direction to the State Government to execute a guarantee involving huge financial liabilities nor require it to approve an agreement which provides for Escrow cover and deemed generation clause contrary to the declared IPP policy of the State Government and deterimental to public interest.

    (viii) There is no infirmity in the decision making process culminating in the decision communicated as per letter dated 8.5.2001 The Chief Minister was empowered to take decision in such matters and it was not necessary to place such matters before the cabinet, under the Business. Rules.

    11. Learned Single Judge who heard the matter has allowed the petition in part by order dated 27.8.2001 He quashed the letter dated 8.5.2001 of the State Government refusing to approve the PP Agreement and remitted the matter to the State Government for reconsideration in accordance with law, within eight weeks. The said direction is based on the following reasoning.

    “60. These material facts reveal that the petitioner has obtained several no objection certificates/consent/approvals etc. to which the State Government and the KPTCL, is directly or indirectly party to these proceedings. In fact, the materials on record reveal that the State Government has extended time from time to time to Central Electricity Authority. Substantial money is spent by both the parties in the matter of approvals and initial preparation of the project. Though there is some dispute with regard to the exact quantum of money spending, nobody can deny spending of money by both the parties. The Power Purchase Agreement is also signed by the petitioner as well as the KPTCL, after elaborate discussion and the KPTCL, at no point of time has raised its little finger with regard to the same. The Finance Department and the Energy Department was actively involved as I see from the voluminous documents made available to this Court. However, the PPA has to be approved by the Government. These approvals/endorsement/no objection certificate etc., certainly provide for the petitioner legitimately expecting an approval in his favour. But if the approval results in public injury affecting public interest in the light of the policy of the Government, Courts cannot grant straightaway a relief based only on legitimate expectation. Legitimate expectation has to be weighed with a larger public interest as held by the Court of law. In the case on hand, though the petitioner's case border legitimate expectation, but that expectation by itself cannot be taken as a ground for grant of relief in the light of the doubtful character of the applicability of the policy as seen in the earlier paragraphs….

    61. The Courts have laid down the principles as to when and how these matters are to be governed when a policy intervenes, in the matter. But in the case on hand I have while considering the first legal point submission have ruled that the applicability of the policy is a matter that require reconsideration by the decision maker. In these circumstances, I deem it proper not to issue a direction straightaway and on the other hand I would prefer the decision maker to take an independent decision in terms of this order. More over, it is not safe to issue a direction straightaway on the peculiar facts and circumstances of this case. In the circumstances. I am not inclined to grant the second reliefs as sought for by the petitioner.”

    The learned Single Judge has recorded the following findings on the points at issue, in the course of his order:

    a) The matter relating to approval of PP Agreement between KEB and the company required to be considered by the Cabinet. The former Chief Minister and Present Chief Minister had also directed the matter to be placed before the Cabinet. But, the matter has been considered and decided by the Chief Minister and not the cabinet. The consideration and rejection of the request for approval of Power Purchase Agreement is therefore vitiated by procedural irregularity;

    b) The refusal to approve provision for Escrow cover is unsustainable as such decision is reached by taking into account irrelevant material and failing to consider relevant material. The Nothings leading to the decision disclose that following relevant factos have not been considered; (a) that power to be generated and supplied by the Company will be the cheapest when compared to the other Independent power producers, (b) that the State Government had approved the provision for such escrow cover in the case of other Independent Power producers in view of the request of the financial institutions (IDBI and others Nationalised Banks); (c) that such escrow cover has in fact been extended in the case of Tanir Bavi Project. There is no material to show that extension of escrow cover for power supply, in terms of the circular issued by IDBI and RBI will lead to financial instability of KPTCL. Further, the Policy of the Government not to provide such escrow cover being only prospective i.e, from 8.5.2001, it does not apply to the PP Agreement executed between KEB and the Company on 23.7.1999 and forwarded by the KPTCL to the State Government long prior to the new IPP Policy.

    (c) The refusal to approve a provision for issue of Government Guarantee is also arbitrary as the State. Government has approved all other PP Agreements containing such a provision, entered by KEB with other Independent Power Producers. The State Government has also issued a Government Guarantee in the case of an Independent Power Producer. There is also no basis for assumption that issue of such guarantee will give raise to any unwarranted financial liability upon the Government. The said provision has not been objected to either by KPTCL or the Government earlier and the noting in the relevant file shows that State Government had agreed to give the Company, the same treatment as Mangalore Power Corporation.

    d) The deemed generation clause has been incorporated in other PP contracts and when such clause had found favour earlier and has been accepted and approved, there is no reason why it should became unacceptable in the cases of the company. The policy of the Government does not bar such provision and the decision maker has failed to apply his mind to the material facts before rejecting the said provision.

    12. Feeling aggrieved, the State Government has filed this appeal reiterating its contentions urged before the learned Single Judge.

    13. To understand the submissions in the proper context, it is necessary to refer to the three clauses in the Power Purchase Agreement, objected by the State Government.

    13.1) Clause 10.14 of the PP Agreement relates to Escrow Account and it reads thus:

    “(a) To provide additional security to the Company for the Board's obligations hereunder, by way of an escrow, based on the escrowable capacity of the Board, Board shall execute and deliver an escrow agreement prior to the Financial Close to the Company and the escrow agent. The Company would be required to achieve Financial Close within one month of execution of the escrow agreement or any period mutually agreeable. The escrow agreement would be in the form and substance acceptable to the parties.

    (b) The parties shall also enter into a Security and Hypothecation Agreement, in a form and substance acceptable to the Company and to the Financing Parties, wherry the Board hypothecates to the Company the amounts deposited in the escrow account and the receivables (as defined in the escrow agreement).”

    13.2) Clause 5.4 of the PP Agreement relating to Conditions precedent to the Company's Obligations, requires execution of a Government Guarantee. The relevant portion of the said clause reads thus:

    The obligations of the Company under this Agreement, to develop, build, operate and maintain the Facility to commence the sale and delivery of electricity from the Facility in accordance with the payment provision specified in Article X are contingent upon satisfaction of the following conditions, in each case in form and substance reasonably satisfactory to the Company;

    (i) the GOK shall have executed and delivered to the Company the GOK Guarantee and the GOK Support Agreement and none of the foregoing shall have been terminated or repudiated;

    The format of the Government Guarantee which is an Annexure to PP Agreement requires the State Government (Guarantor) to give the following Guarantee to the Company apart from undertaking several other covenants:

    “The Guarantor irrevocably and unconditionally guarantees to the Company the due and punctual payment of each and every amount which from time to time becomes due from the Board to the Company under the PPA and which is not paid by the Board (including penalty interest, if any, payable by the Board under Section of the PPA). The Guarantor shall pay to the Company each and every such amount within twenty one days following submission by the Company of a demand in accordance with Section 2.2”

    13.3) Clause 1.1 of the PP Agreement defines ‘Deemed Generation’ and prescribes the formula to arrive at the quantum of deemed generation. Clause 10 of the PP Agreement provides the formula for payment of Fixed Charges, Energy Charges and Bonus Generation payments which involve payment for deemed generation, that is for power that is not generated and supplied on account of KPTCL backing out from its obligation to receive the contracted quantity of power. Clause 14.3 of the PP Agreement relating to payment obligations of KPTCL reiterates the liability of KPTCL to pay for deemed generation and the said clause is extracted below;

    “For avoidance of doubt, (i) the Company's obligation to make payments of money due and payable under this Agreement shall not be suspended or excused due to the occurrence of a Force Majeure Event affecting the Company or the Facility, and (ii) the Board's obligation to make payments of money due and payable under this Agreement shall not be suspended or excused due to the occurrence of a Force Majeure Event affecting the Board or the Board System, but shall be subject to the limitations set forth in the definition of Deemed Generation. If a Force Majeure Event in respect of the Company occurs, the amount of the Board's payment obligations under this Agreement shall be based upon the payment provisions in Article X and shall be subject to the limitations set forth in the definition of Deemed Generation.”

    14. It is also necessary to refer to the details of the 13 Power Purchase Agreement entered by KEB with independent power producers between November 1997 and October 1999, as there is constant reference and comparison to those agreements. The thirteen other PP agreements are in respect of the following projects;

    a) Cogentrix

    b) Hassan

    c) Mandya

    d) Peenya

    e) Tanir Bhavi

    f) Furo India, Mulki

    g) Smith Cogen, Bengre

    h) Atria

    i) Rayalaseema

    j) Tata-Belgaum

    k) Scintilla

    l) Tumkur

    m) Koppal

    It is not seriously disputed that the State Government has approved all these Power Purchase Agreements containing provisions for Escrow cover, Government Guarantee and deemed generation. But, the State Government points out that the above PP Agreements were approved long before the IPP policy and they cannot be relied on by the Company as its PP Agreement was not approved and its approval was considered only after the declaration of State's IPP Policy on 8.1.2001, it is also stated that out of the 13 projects, Cogentrix had withdrawn, that Tanir Bavi, Rayalseema and Tata-Belgaum Projects have become operational and generating power that in regard to Rayalseema, and Tata-Belgaum, though the PP agreements are approved, Escrow Cover and Government guarantee have not been granted in view of the Revised IPP Policy and cases are pending in Court in that behalf, that in so far as Tanir Bhavi project, Escrow Cover has been extended and Government guarantee had been furnished in pursuance of the orders of the Court; and that in regard to other nine, financial closure has not been achieved and the projects have not become operational and therefore the need to either operationalise escrow cover or issue Government Guarantee has not arisen. It is pointed out that all these thirteen agreements executed prior to the formulation of Independent Power Producers Policy on 8.1.2001 bears no comparison to the Company's case. It is also pointed out that after 8.1.2001, the State Government has not approved any PP Agreement providing for Escrow Cover or Government Guarantee.

    15. During arguments, learned Advocate General appearing for the State submitted that the State's grievance is not so much in regard to the direction for reconsideration, but in regard to the reasons given for such a direction and the findings recorded on the disputed aspects which the State is required to reconsider. He very fairly submitted that the State has no objection to reconsider the matter in accordance with law in a meaningful and unbiased manner with reference to its IPP Policy, provided it is not restricted or stifled by the findings recorded by the learned Single Judge on the three disputed issues relating to Escrow Cover, Government Guarantee and Deemed Generation Clause.

    16. When the State Government has in principle expressed its willing to reconsider the matter in a meaningful and unbiased manner, the scope of the appeal and the controversy between the parties in the appeal get narrowed down. We therefore requested the learned Advocate General to highlight the hurdles coming in the way of reconsideration and elicited response from the learned Counsel for the company. On hearing them, we were able to identify a consensus between parties as to how the matter shall be meaningfully reconsidered. We have set out the same below.

    Re: Consideration by Cabinet:

    17. The learned Advocate General submitted that the Business Rules do not require a decision by the Cabinet on the request for approval of the PP Agreement and a decision can be taken by the Chief Minister. He submitted that if the finding of the learned Single Judge on this issue is allowed to stand, it will create severe complications in future in regard to the decision making power of the Chief Minister vis-a-vis the cabinet. He submitted that without conceding or accepting that the matter is one which required to be placed before the cabinet, the State Government in this case is willing to place the matter before the cabinet. He made it clear that matter will be considered by cabinet, not because it is a legal requirement, but by treating this as a special case.

    18. Learned Counsel for the first respondent on instructions submitted that if the Government was in principle agreeable to place the matter for reconsideration and decision, before the Cabinet, the Company has no objection for the issue as to whether the matter should be decided by cabinet or not being left open for decision in an appropriate case.

    19. In view of the above submissions, there is no need to consider the question whether such a matter should be decided by the cabinet. It is sufficient if we record the submission of the appellant that in this case, it will place the matter relating to the company before the cabinet for reconsideration and decision, after setting aside the finding of the learned Single Judge on this issue and leave open the question for decision in an appropriate case.

    Re: Escrow cover and Government Guarantee:

    20. In regard to Escrow cover and Government Guarantee, learned Advocate General invited attention to para 8.17(7) of the IPP Policy which Prohibits escrow cover or any form of Guarantee to any IPP. He submitted that if Company wishes to put forth any alternatives, by way of payment security mechanisms, the State Government will consider the same with an open mind.

    21. Learned Counsel for the Company pointed out that payment security mechanism (by way of escrow cover and State Guarantee) were requirements insisted by financial institutions (in particular IDBI and nationalised Banks) which will be financing the major part of the investments in such power projects. He submitted that when 13 other PP agreements have been executed by KEB providing for payment security mechanisms like Escrow cover and Government Guarantee with the approval of State Government, there is no reason why the State Government should not consider proving such a payment security mechanism, in PP agreement which was finalised nearly 18 months prior to the new IPP Policy. He also stated that as the terms of power purchase agreement between KEB and the Company were finalised and agreed in July 1999, long prior to the evolving of the IPP Policy in January, 2001, the State should consider the PP Agreement with the Company, on par with the other thirteen agreement. He submitted that the delay on the part of the State in considering the matter cannot be used to defeat the legitimate expectation of the company on the basis of the earlier assurances by the State and KEB.

    22. The State Government has stated that cabinet will reconsider the matter in accordance with law keeping an open mind. Therefore the State may reconsider the entire matter relating to payment security mechanism afresh. It may consider request for escrow cover and Government guarantee, with reference to any fresh material placed by the company or it may consider any alternative proposals placed by the company, or may itself suggest a practical payment security mechanism which may find acceptance with the company and financial institutions.

    Re: Deemed Generation Clause:

    23. In regard to deemed generation clause, learned Advocate General pointed out that even according to the Company, the need for deemed generation clause has arisen because, order the PP Agreement, KPTCL would be the exclusive or sole purchaser of the power generated by the company. He stated that the State Government was willing to consider a request by the company to treat KPTCL as an non-exclusive purchaser with liberty to the company to sell its power to other parties also. He submitted that if the company has the choice or liberty to supply power to others also, the need for a deemed Generation clause disappears and therefore there will be no need for such a provision. He submitted that State Government was also willing to consider what should be the minimum quantity that KPTCL should purchase if it decides to approve the PP Agreement so that the Company can sell the balance power generated by it to any other person. He stated that State Government will consider all alternatives that may be placed by the company in regard to deemed generation clause including the minimum extent of power that should be purchased by KPTCL.

    24. The learned Counsel for Company pointed out that even if the quantity to be purchased by KPTCL is to be restricted and specified in the agreement and the company is permitted to sell the power produced in excess of what is specified as the requirement by the KPTCL, there will still be need for deemed generation clause in so far as the minimum power that is agreed to be purchased. He pointed out that by way of example that if KPTCL reduces its requirements to say 650 MW out of 1015 MW, there will still be an obligation on the part of the Company to set apart or reserve that much of its generation capacity for KPTCL and it can enter into agreements for sale only in regard to the quantity in excess of such 650 MW; and if after specifying the minimum quantity required by it as 650 MW, if KPTCL backs down in regard to that quantity, to the extent of such backing down from 650 MW there will be a need for deemed generation clause. In other words, he pointed out that even if there are other purchasers, all that can be done is to tone down the deemed generation clause, but the question of doing away with such a clause in entirety does not arise.

    25. We find that the Independent Power Producers Policy of the State Government does not absolutely bar deemed generation clause. Clause 6 of para 8.17 of the Policy reads thus;

    “Power Purchase Agreements shall include appropriate provisions for the following; for making evacuation arrangements by KPTCL or its successor entities, safeguards against commitment to pay exorbitant/avoidable deemed generation charges to IPPs…”

    It is clear from the above, that the IPP policy of the State Government does not object to any reasonable deemed generation clause. What is prohibited under the policy is a deemed generation clause which may impose an exorbitant and avoidable liability on the KPTCL. The State Government may therefore consider any proposal for a modified deemed generation clause which is reasonable and consider any suggestion enabling the company to sell excess power generated to third parties.

    Re: Additional grounds for rejection (absence of need for additional power):

    26. One of the grounds mentioned by the State Government in the letter dated 8.5.2001 for refusing to approve the PP Agreement is that there may not be any need at all for the power that will be generated by the company in or around 2006 which is a conclusion based on projections and estimate. The Company pointed out that having regard to the ever-growing demand and having regard to several IPPs having become non-starters, there will be need for the power that will be generated by it. In view of the ever changing power position, and what has been agreed on the other issues. Advocate General fairly submitted that the State Government is willing to reconsider the question of approval of PP agreement without reference to the said ground (that state may not require the power from the company).

    Re: Whether the PP Agreement is duly extracted:

    27. The last controversy is whether the PP Agreement was duly executed between KEB and the Company on 23.7.1999 as contended by the Company or was it merely initialled and signed as a duly approved draft to be approved by the State Government.

    28. The company contends that the PP Agreement is duly executed by KEB and the Company on 23.7.1999 and it will come into effect on the State Government approving it. It relies on the following features of the documents to show that it has been duly executed:

    (i) The agreement was prepared as a result of two and half years of negotiation and all terms were agreed between KEB and the Company.

    (ii) The date of execution is mentioned as 23.7.1999 at the beginning and at the end of the agreement. The Testimonium in the document States that “In witness whereof the parties have caused this agreement to be executed this 23rd day of July 1999”, showing that it is duly executed.

    (iii) Each page is initialled and the last page is duly signed by the Additional Secretary of the Board for and behalf of the Board and by the Authorised Signatory of the Company, for and on behalf of the Company.

    29. On the other hand the State Government and KPTCL submit that the document styled as PP Agreement was merely intialled/signed on 23.7.1999 to identify it as the final approved draft to be sent to the Government, and not a concluded Agreement, relying on the following:

    (i) It was not executed on the requisite Stamp Paper.

    (ii) Neither the Official Seal of the Board nor the Official Seal of the Company have been affixed to the agreement.

    (iii) The parties have all along proceeded on the basis that the document is a finalised draft to be executed on approval by the State Government.

    30. On careful consideration, we find several factors which support the contention of the State Government and KPTCL. We may briefly refer to them:

    (i) The Company in its letter dated 29.10.1999 to the Chief Minister stated thus “We have also initialled the Power Purchaser Agreement (PPA) with Karnataka Electricity Board (KEB) on 23.7.1999…

    (ii) The Company in its letter dated 6.12.1999 while referred to the meeting on 30.11.1999 has stated thus: During the meeting it was clearly brought out the necessity to finalise and sign the State support and Guarantee Agreements (SSA & GA) and Power Purchase Agreement (PPA) within December 1999…. In view of this, it is requested that the SSA, GA and PPA may be finalised at the earliest so that they can be signed between us in December 1999”. It is of interest that the said letter dated 6.12.1999 is signed by Sri Praveen Sinha, Dy. General Manager (Projects) who has ‘Signed/initialled’ the document titled ‘Power Purchaser Agreement’ on 23.7.1999

    (iii) The Company in its letter dated 10.3.2000 to the Government, after referring to the singing of the PP Agreement with KEB on 23rd July 1999, has stated at Page 2 as follows: “In the last three months, we have repeatedly informed you about the necessity to finalise and sign the SSA & GA and PPA as the same are required to be submitted to financial institutions/Banks…”

    (iv) In its Letter dated 22.6.2000, the Company has stated that “two issues which are pending approval from cabinet namely state support and Guarantee Agreement (SSA & GA) and Power Purchase Agreement (PPA) so that same can be signed and concluded between us.”

    (v) In para 30 of the Writ Petition, the Company has stated “Therefore, there is no legal inpediment in executing the Power Purchase Agreement (Ann-AA) already concluded with the respondent No. 2, state support agreement and the guarantee agreement, as per the approved drafts (Ann-AG and AH)”

    (vi) The document not being engrossed on requisite Stamp Paper is a significant indication that parties intended it to be only a ‘final concluded draft’ of PPA. The Company has stated (in para 13 of Writ Petition) that the reputed international solicitor firm ‘Clifford chance’, London, acting on behalf of the Company and reputed Rating agency, CRISL, acting on behalf of KEB, assisted the parties in reaching the agreement after two and half years of threadbare negotiations. It is therefore inconceivable that parties would have executed such an agreement on white paper if they intended it to be the final agreement. We are referring to this aspect only to show the intention of parties in this case and not with the intention of laying down any general proposition in regard to validity of agreements which are not executed on requisite stamp papers.

    In view of the above, we have no hesitation to hold that the parties have proceeded on the basis that the document intialled/signed on 23.7.1999 is only a finalised draft agreed to between KEB and the Company and it not intended to be acted upon as a concluded agreement, until it was approved by the State Government. In fact even the company's stand, as evident from the petition averments and prayer in the Writ Petition, is that without the approval of the State Government, the PP agreement cannot be acted upon and that the Agreement will not come into effect until the State Government approves it and executes the State support agreement. Be that as it may.

    Conclusion:

    31. We therefore confirm the direction of the Learned Single Judge that the matter (that is question of approve of the PP Agreement terms of which were finalised between KEB and the Company on 23.7.1999, and execution of State Support Agreement and Government Guarantee) should be reconsidered by the Government of Karnataka, but subject to the modifications/clarifications as above.

    32. We accordingly allow this appeal in part as follows:

    (a) We uphold the order of the learned Single Judge dated 27.8.2001 in Writ Petition No. 406/2001, quashing the letter dated 8.5.2001 (from the State Government to KPTCL) and remitting the matter to the State Government for fresh consideration in accordance with law.

    (b) We set aside the finding of the (earned Single Judge that the decision of the Chief Minister dated 30.4.2001 (communicated by impugned letter dated 8.5.2001) to reject the request to approve the PP Agreement with the Company, suffers from procedural irregularity on the ground that it was not placed before the Cabinet. The question whether in such a matter, a decision can be taken by the Chief Minister or whether the matter should be considered by the Cabinet is left open. We record the submission made on behalf of the State Government that in so far as the present case is concerned, the matter will be reconsidered by the Cabinet;

    (c) In regard to the three areas of controversy (that is provision for escrow cover, Government Guarantee and Deemed Generation) the Company is permitted to submit a representation setting forth its case and also put forth alternative proposals both in regard to payment security mechanisms and Deemed Generation Clause as indicated above (that is Escrow cover or Government Guarantee or alternatives as payment security mechanism; and sale of power to third parties, minimum power to be purchased by KPTCL and other modifications in regard to Deemed Generation Clause). The Company shall submit such representation to the appellant (with copy to KPTCL and KERC) within four weeks from the date of receipt of this order. The Company is at liberty to submit any further modified proposals during discussions and negotiations.

    (d) The submission on behalf of the State Government that it will “meaningfully” reconsider the matter and take a fresh decision in the matter after taking note of the fresh proposals to be put forth by the Company is recorded. It is made clear that none of the observations of the learned Single Judge made with reference to the three aspects (Escrow Cover, Government Guarantee and Deemed Generation Clause) will come in the way of such consideration and decision.

    (e) The appellant shall take a decision and communicate the same to the Company within four months from the date of receipt of the representation from the first respondent.

    (f) Parties to bear their respective costs throughout. The levy of costs on the appellant is set aside.

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