PUBLIC SECTOR UNDERTAKINGS / COMPANIES AND ARTICLE 12 OF CONSTITUTION OF INDIA

CAN PUBLIC SECTOR UNDERTAKINGS / COMPANIES BE CONSTRUED AS STATE UNDER ARTICLE 12 OF CONSTITUTION OF INDIA?

This article deals with the question whether public sector undertakings can be considered as State under Article 12 of the Constitution of India? If yes what are the implications of the same?

Article 12 of the Constitution defines the expression “State” as including, for the purpose of Part III of the Constitution (Fundamental Rights), all local or other authorities within the territory of India or under the control of Government of India. Article 12 thus reads as under:

“12. In this Part unless the context otherwise requires, ‘the state’ includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the Control of the Government of India”

It will be noticed that Article 12 does not, in so many words, provide that undertakings / companies in the public sector fall within the definition of “State”. The Supreme Court of India has held in number of decisions that Public Corporations and Undertakings fall within the inclusive definition of “State”. Therefore these corporation and undertakings are subject to Part – III of the Constitution. Consequently the Supreme Court and High Courts have power of judicial review under Article 32 and 226 of the Constitution. The Supreme Court has interfered with the orders of Public Corporations and Undertakings in relation to service matters and also with regard to commercial transactions.

Generally the expansive interpretation of Article 12 is taken to have begun with a judgment holding that Rajasthan State Electricity Board falls within “State”. In coming to this conclusion, the Supreme Court emphasized the fact that such authorities are constitutional or statutory authorities and that they exercised powers conferred by law. It may be mentioned that State Electricity Boards are constituted under electricity (Supply) Act, 1948. The ingredient of ‘authority’ (apart from other additional factors) seemed to have weighed with the courts in coming to this conclusion. In order to analyze the link between the State and the undertaking in question, it was necessary to evolve some formula and that has been the principal approach adopted by Supreme Court in its well known judgment relating to International Airport Authority. In the case of R D Shetty vs. International Airport Authority of India, International Airport Authority is a body corporate constituted under International Airport Authority Act, 1971. The director of authority had issued a notice, inviting tenders for putting up and running a second class restaurant and two snack bars at the International Airport at Bombay. Tenders were received in response to the notice. Shri R.D Shetty, the appellant, who was not a tenderer, filed a writ petition which was rejected by the Bombay High Court. He urged that the notice inviting tenders by the Airport Authority had stipulated a condition of eligibility, but subsequently the same was charged without any rational justification, as a result of which he could not submit his tender. It was further urged before the Supreme Court that the International Airport Authority, being a “State” within the meaning of Article 12 of the Constitution, was bound to give effect to the condition of eligibility set by it and not entitled to depart from it at its own sweet will without rational justification.

Supreme Court held that “where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or issuing quotas or licenses or granting any other form of largesse, the Government cannot act arbitrarily at its sweet will and like a private individual deal with any person it pleases, but its action must be in conformity with a standard or norm which is not arbitrary, irrational or irrelevant. The power or discretion of the government in the matter of grant of largesse including award of jobs, contracts, quotas, licenses etc. must be confined and structured by rational, relevant and non-discriminatory standards or norms and if the Government departs from such standard or norm in any particular case or cases, the action of the Government would be liable to be struck down, unless it can be shown by the Government that the departure was not arbitrary, but was based on some valid principle which in itself is not irrational, unreasonable or discriminatory.” After making aforesaid observations, the Supreme Court further held that Corporations established by statute or incorporated under law are an instrumentality or agency of the Government, it they satisfy certain tests which may be summed up as under:

(i) The source of the share capital;

(ii) The extent of State Control over the Corporation and whether it is “deep and pervasive”;

(iii) Whether the functions of the Corporation has a monopoly status;

(iv) Whether the functions of Corporation are of public importance and closely related to governmental functions; and

(v) Whether, what belonged to a Government Department formerly was transferred to the Corporation.

After laying down the aforesaid tests, the Supreme Court observed that the list is not exhaustive and by its very nature, it cannot be, because, with increasing assumption of new tasks, growing complexities of management and administration and the necessity of continuing adjustment in relations between the Corporation and Government, calling for flexibility, adaptability and innovative skills, it is not possible to make an exhaustive enumeration of the tests which would invariably and in all cases provide an unfailing answer to the question whether a Corporation is a Governmental instrumentality or agency. The court observed that no one single factor will yield a satisfactory answer to the question and the court will have to consider cumulative effect of these factors, in arriving at its decision on the basis of facts and circumstances of each case.

Government Companies

One consequence of the broader test of ‘agency or instrumentality’ that came to be laid down (as stated above) was that Government Companies as defined in section 617 of Companies Act, 1956 came to be included within the concept of ‘State’, for the purpose of Article 12 of the Constitution. This, the Bharat Petroleum Corporation was held to fall within its ambit. Comparatively, recently, the Indian Oil Corporation has also been held to fall within the ambit of Article 12. Accordingly, the sudden stoppage of supply of lubricants to the petitioner firm by the Indian Oil Corporation, without notice, was held to be violative of Article 14 of the Constitution as arbitrary, against natural justice and fair play and unreasonable and practically amounting to black listing the petitioner firm. It may be mentioned that Government Companies are not created directly by statute, but like any other company, is / are incorporated under statute.

Statutory and Non-Statutory Status

To state the position broadly, it became possible for courts to hold an entity to be ‘State’, even if it did not have a direct statutory origin. No doubt, if it is a statutory undertaking vested with the functions analogous to those of the Government, it would be falling within the ambit of ‘state’. But the absence of direct statutory origin may not be material, if the entity in question is an agency or instrumentality of the state. This was illustrated in Ajay Hasia vs. Khalid Mujib. This case involved a society registered under the Jammu and Kashmir Registration of Societies Act, running the Regional Engineering College at Srinagar, sponsored by the Government of India. The ingredients which weighed with the Supreme Court in holding this society to be a ‘State’ – to mention the principal characteristics – were the following –

(i) The composition of society is dominated by the representatives of the Government;
(ii) The expenses of the society are entirely provided by the Central Government;
(iii) The rules made by the society require prior sanction of the Government;
(iv) The society is required to comply with all the directives of the Government;
(v) Government can appoint and remove members from the society;
(vi) Thus an overall control is exercised by the Government;

Tests not exhaustive

It could be pointed out at this stage, that none of the tests which have come up for consideration in the decision of the Supreme Court mentioned is conclusive in itself, nor is the enumeration exhaustive. The financial contribution of the Government, its deep and pervasive control, the nature of the functions performed by the Corporation, the monopolistic status of the corporation and other relevant factors may make a difference. Sometimes one or the other factor may come to be emphasized but essentially, it is the totality of the circumstances which would be taken into account.

Effect of being regarded as ‘State” or its instrumentalities

– If a corporation is regarded as ‘State’, all actions, deed, conducts etc of the Corporation must not adversely affect the fundamental rights of the citizens of India;
– Corporation cannot act arbitrarily, irrationally or in utter disregard to the rights of the citizens of India or its employees;
– Corporation shall be subject to writ jurisdictions under Article 32 & 226 of the Constitution of India.

Contact Information

Lokesh Rajpal
advocate_lokesh@yahoo.co.in
+919036033535

Tags: Law