Industries Ltd Vs. State of U.P  INSC 104 (9 February 1994)
Singh (J) Kuldip Singh (J) Bharucha S.P. (J)
1994 AIR 2117 1994 SCR (1) 798 1994 SCC (2) 583 JT 1994 (1) 430 1994 SCALE
Judgment of the Court was delivered by KULDIP SINGH, J.- The validity of the
Uttar Pradesh State Cement Corporation Limited (Acquisition of Shares)
Ordinance, 1991 (the Ordinance) was challenged before the Allahabad High Court
by way of a writ petition under Article 226 of the Constitution of India. The
High Court by its judgment dated January 24, 1992 upheld the validity of the Ordinance and dismissed the writ
petition. This appeal by way of special leave is directed against the judgment
of the High Court.
Uttar Pradesh State 'Cement Corporation Limited (the Corporation) was a
Government Company wherein all the shares were owned by the State Government.
The Corporation was operating three cement factories situated at Churk, Dalla
and Chunar. Since the Corporation was running into huge losses from the year
1972 onwards except during the year 1982-83, the State Government in April
1990, took a decision to privatise the Corporation. A cabinet decision was
taken on April 29, 1990 to 585 convert the Corporation - a
wholly public sector undertaking into a joint sector Corporation. The decision
was conveyed to the leading cement manufacturers in the country in a meeting
held on May 19, 1990 at the office of the Principal
Secretary, Industries. The meeting was attended by 25 cement manufacturers. The
State Government appointed a privatising committee (the Committee) on September 11, 1990 to consider the offers of the
cement manufacturers in that respect. In October 1990, the State Government
appointed S.B. Billimoria & Company to value the share of the Corporation.
The said company, in December 1990, submitted its report wherein the share of
the Corporation was valued at Rs 20 against its face value of Rs 100.
there was a good response from the cement manufacturers for the purchase of the
Corporation shares but finally the Dalmia Industries Limited (the appellant)
alone remained in the field and all others backed out. The Committee considered
the offer of the appellant to buy the shares of the Corporation at a price of Rs
75 per share against the face value of Rs 100 and finally accepted the same.
The cabinet approved the recommendation of the Committee. On February 14, 1991 a Memorandum of Understanding (the
Memorandum) was entered into between the State Government and the appellant.
The memorandum, inter alia, provided that the appellant would hold 51 % shares
of the Corporation, it would take over the management of the Corporation with
all its assets and liabilities, it would nominate 5 Directors, the State Government
could nominate 4 Directors and the appellant would also be entitled to have one
of its Directors as the Managing Director. On February 21/22, 1991 share
transfer agreement and financial agreement were signed providing for the
transfer of 49% of the shares to the appellant. On March 7, 1991 a meeting of
the Board of Directors of the Corporation was held wherein 5 Directors
nominated by the appellant were appointed. On April 12, 1991 Praveen Kumar, one
of the 5 Directors nominated by the appellant, was appointed as the Managing
Director of the Corporation. According to the memorandum, the total amount
payable by the appellant for 51% of the shares at Rs 75 per share was a little
above 26 crores. Out of the said amount the appellant paid one crore at the time
of signing the memorandum. It was agreed to pay further two crores within three
months of the signing of the Memorandum which was paid. Another two crores were
to be paid within six months of the signing of the Memorandum and the balance
amount of about Rs 20 crores was payable within twenty-four months.
other financial arrangements were agreed between the parties but it is not
necessary for us to go into the same.
4.On October 11, 1991, the Governor promulgated the
Ordinance. The Ordinance clearly stated that its purpose was to acquire the
shares of the Corporation in public interest. The Preamble to the Ordinance
stated that the agreement between the State Government and the Dalmia
Industries could not be given effect to on account of the interim order dated
October 16, 1990 passed by the High Court and, as such, only 49% of the shares
were transferred by the State Government to the Dalmia Industries and, as such,
586 the purpose of the transfer having not been achieved it was expedient and in
the public interest to acquire back the shares in the Corporation held by the Dalmia
Industries Limited. Section 3 of the Ordinance provided that on the date of its
commencement all the shares held by the companies in the share capital of the
Corporation would stand transferred to and vest in the State Government. The
expression "companies" was defined to mean the companies specified in
the schedule which included the Dalmia Industries Limited and its associates.
Section 4 ensured the payment by the State Government of the full amount at
which the Corporation had transferred its shares to the companies.
this stage we may refer to the writ petitions filed before the Allahabad High
Court challenging the action of the State Government in privatising the
Corporation and agreeing to sell 51% of shares to the appellant.
workmen of the Corporation through their unions filed Writ Petition No. 26223
of 1990 challenging the Government's decision to privatise the Corporation and
seeking a mandamus to maintain the status of the Corporation as a Government
Company. The High Court on October 16, 1990
passed the following interim order in the writ petition :
learned counsel for the petitioner has stated that the State Government has
taken a decision to privatise the U.P. State Cement Corporation Ltd. and
necessary steps are being taken to implement the said decision.
further orders, the final implementation of the decision to hand over the
factory, run by the Corporation, shall remain stayed during pendency of the
writ petition. However, in the meantime, other formalities may be
completed." 7.Churk Cement Adhikari Kalyan Samiti filed a writ petition
before the Lucknow Bench of the High Court on March 15, 1991. The Lucknow Bench transferred the writ petition to the
Allahabad Bench to be heard along with Writ Petition No. 26223 of 1990. The
transferred writ petition was renumbered at Allahabad as Writ Petition No. 10607 of 1991.
8.On May 24, 1991 the interim order dated October 16, 1990 (quoted above)was clarified in the
following terms :
do not wish to express any opinion on the merits of the several contentions
raised while hearing the writ petitions or raised before us today at the
hearing of this application. Our limited concern at this stage is that the
Corporation be allowed to run on proper lines till the disposal of these writ
petitions. It is with that view that the following clarifications of the
aforesaid interim order are made :
Registrar of Companies, Kanpur shall verify whether transfer of 49
per cent of shares of U.P. Cement Corporation has been effected in favour of Dalmia
Industries or their nominees, as the case may be, as on today i.e. May 24, 1991. On such verification, if he is
satisfied that such a transfer has taken place, he shall issue a certificate to
587 that effect both to the Government of U.P., U.P. Cement Corporation and Shri
S.P. Gupta, Senior Advocate appearing for the petitioners.
the certificate is issued by the Registrar of Companies affirming transfer of
shares as contemplated by clause (1) above, the present Board of Directors will
be allowed to manage the affairs of the Corporation pending disposal of these
writ petitions and subject to such further orders or directions as may be
issued by this Court in these matters.
the employees and officers of the Corporation shall cooperate with the present
management for a better running of the Corporation. They shall act subject to
the control and directions of the present Board of Directors.
the officers and employees shall not be disturbed or shifted from their
respective places of posting held by them as on today. If any such shifting is
proposed to be effected by the Board of Directors they must obtain prior
approval of this Court.
all other respects status quo as on today shall continue pending further
orders." 9.On July
22, 1991 Writ Petition
Nos. 26223 of 1990 and 10607 of 1991 came up for hearing before a Division
Bench of the Allahabad High Court. The learned Judges directed as under:
a decision to privatise was taken, and before any offers were invited, one
would have expected the Government to have ordered a thorough valuation of the
assets and liabilities of the Corporation to find out what is worth. Any
reasonable and prudent owner of property would do this before he puts his
property for sale. He would first assess for himself the value of the property
he is selling. Since that alone would enable him to judge the offers received
unless, of course, it is a distress sale. This ought to have been done by the
State Government both as a prudent owner and also because it is in the nature
of a trustee of the public property.
however, surprising to note that no such effort was made. ...
we are not satisfied with the manner in which the Government and its agencies
have proceeded in the matter, we are of the opinion that before we can pass any
final orders in the writ petitions, we should have the net worth of the
Corporation valued, at least now, through a reputed and well-known agency. For
this purpose, we fall back upon the very same material as is disclosed in the
minutes of the first meeting of the PC. Five agencies were mentioned, who,
according to Shri A.K. Puri, were competent to value the assets and liabilities
of the Corporation to find out its net worth. Accordingly, we appoint two
agencies, namely, A.F. Ferguson & Co., New Delhi and Price Water House Associates, New Delhi, and request them to independently value the assets and liabilities of
the UPSCCL and to determine the net worth of the Corporation as on February 1, 1991. Both the agencies shall
independently do their job and submit their reports separately. The 588 reports
shall be submitted within two months of service of a copy of this order upon them."
10.While dealing with the two miscellaneous applications filed in the above
said two writ petitions, a Division Bench of the Allahabad High Court passed
the following order on August
21, 1991 :
October 16, 1990, a learned Single Judge passed an order
directing the State Government not to hand over the Corporation to any person.
The idea was to maintain status quo obtaining as on that day pending disposal
of CMWP No. 26223 of 1990 wherein the said order was passed. In spite of the
same, the Government chose to transfer 49% of the shareholding to Dalmia as
against 5 1 % agreed to be transferred under the MOU and the GO based thereon.
Though only 49% of the shareholding was transferred to Dalmias, they were
allowed to nominate five directors by a resolution of the Corporation dated
March 7, 1991. This resolution of the Corporation was stayed by Lucknow Bench
on March 15, 1991, though the said order was vacated later on April 10, 1991.
The above circumstances lead to the inference says the counsel, that Dalmias
took the risk of obtaining the transfer of share knowingly and all the
transactions in their favour are at their own risk, since they have been
arrived at during the pendency of the writ petition and in violation of the
order dated October 16, 1990.
findings recorded by this Court in the order dated July 22, 1991 clearly
establish that the procedure followed in selling 51% interest in the
Corporation in favour of Dalmias was not proper and bona fide. ...
learned Advocate General appearing for the State mentioned that he has not
received clear instructions in the matter and that, therefore, he is in no
position to make any submissions. He stated that the Government will abide by
any such orders as this Court may pass in the matter. ...
necessary consequence of those findings is not the cancellation of the
deal/transaction between the State Government and Dalmias. The matter is yet to
be examined after the receipt of the report of the valuers. Shri Sudhir Chandra
further submitted that Directions No. (3) clarification No. (3) as it is
called] in the order dated May 24, 1991 is
acting as a severe handicap in the proper management of the Corporation.
Because of the said restriction the management is not in a position to transfer
recalcitrant officials who are disobeying and defying lawful and valid orders
of the management. ...
have heard both Shri S.P. Gupta and Shri Sudhir Chandra at some length. We are,
however, not satisfied that any direction as sought for ought to be made. The
writ petitions are not finally disposed of. The hearing will continue after the
report of the valuers is received in pursuance of the order dated July 22, 1991. At this stage we do not wish to
alter the status quo obtaining as on today, nor do we propose to 589 pronounce
upon the correctness or otherwise of the several suggestions made by both the
is, thus, no dispute that Civil Writ Petition Nos. 26223 of 1990 and 10607 of
1991 were pending for final adjudication before the Allahabad High Court and
various interim orders passed by the High Court in the said writ petitions were
operating when the Ordinance was promulgated on October II, 1991.
learned counsel for the appellants vehemently contended that the High Court
failed to appreciate the arguments advanced before it challenging the validity
of the Ordinance. Since the fate of the challenge to the validity of the
Ordinance primarily depends on the question whether the control and the
management of the Corporation on the date of the Ordinance was with the
appellants or with the State Government, the main arguments were advanced by
the learned counsel on the said question. The learned counsel for the
appellants, however, for his own convenience, styled his contentions as under :
cement is an industry specified in the First Schedule to the Industries
(Development and Regulation) Act, 1951 (the Act). Entry 52 List 1, Entry 24
List II Seventh Schedule to the Constitution of India read with Section 2 of
the Act takes away the legislative competence of the State Legislature to enact
the subject-matter of the Ordinance and, as such, the Governor was not
competent to promulgate the Ordinance.
Ordinance in pith and substance is intended to take over the management and
control of the Corporation. That being so, it is hit by the provisions of
Section 20 of the Act.
Ordinance being a colourable piece of legislation could not be a legislation
under Entry 42 List III Seventh Schedule Constitution of India.
it is a legislation under Entry 42 List III Seventh Schedule Constitution of
India, it cannot be sustained because it is not in public interest.
The Ordinance is arbitrary in the sense that it deprives the appellants of
their property in violation of Article 300-A of the Constitution of India.
Writ petitions were pending before the Allahabad High Court and various orders
passed by the High Court were operating. The Ordinance directly interfered with
the judicial decisions and, as such, was liable to be struck down on that
mentioned above, the core question for our consideration is whether the
Ordinance was directed to take over the management or control of the
Corporation from the appellants. The High Court has answered the question in
the negative. Relying on the documents on the record and various interim orders
passed from time to time by it, the High Court reached the finding that on the
day when the Ordinance was promulgated, the appellants were neither managing
nor controlling the Corporation in any manner. We see no ground to differ with
the finding reached by the High Court. We briefly give our reasons.
The decision of the State Government to privatise the Corporation was
challenged before the Allahabad High Court by way of two writ petitions under
Article 226 of the Constitution of India. The High Court passed interim orders
dated October 16, 1990, May 24, 1991, July 22, 1991 and August 21, 1991. We
have reproduced the relevant parts of these orders in the earlier part of the
judgment. A bare reading of the orders clearly show that neither the management
nor the control of the Corporation was transferred to the appellants. With 51 %
shares in hand, the Government was controlling and managing the Corporation.
functioning of the affairs of the Corporation, if any, was being done by the
appellants under the directions of the High Court. The High Court by its order
dated July 22, 1991 deprecated the action of the State Government in taking a
decision to transfer 5 1 % shares of the Corporation to the appellants without
even getting the assets of the Corporation valued. The High Court appointed two
agencies to value the assets of the Corporation. The report was awaited when
the Ordinance came into operation.
question of transferring the control and management of the Corporation to the
appellants could only be decided after the assets of the Corporation were
evaluated. The High Court orders, thus conclusively show that the appellants
were nowhere near controlling or managing the Corporation.
2 and 20 of the Memorandum dated February 14, 1991 are as under :
2. Dalmia will take over the management of the Corporation.
This MOU is subject to the decision of the court whenever cases pending against
is thus obvious that the Memorandum on the basis of which the appellants claim
to have acquired the control and management of the Corporation, itself stated
that the terms of the Memorandum were subject to the decision of the High Court
in the pending cases. Similarly paras I and 15 of the financial agreement dated
February 22, 1991 were as under :
The parties hereto agree to collaborate in the conduct of the affairs and
business of the Corporation in the manner and to the extent as contained
While U.P. Government has decided to sell 51 % shares of the Corporation as
mentioned above to Dalmia and others, due to pending stay of Allahabad High
Court, only 49% shares will be transferred at present.
2% shares will be transferred only after the stay is vacated though all the
other formalities would be completed as per clause 6 above, now itself."
may also refer to the letter dated February 23, 1991 from the Joint Secretary,
Government of Uttar Pradesh to the Chairman of the Corporation wherein the
contents of para 3 are as under :
the joint sector, partnership of the share capital of the State Government and
M/s Dalmia Industries Ltd. and the companion nominated by them shall be in the
ratio of 49:5 1. As a suit in this regard 591 is pending before the Hon'ble
High Court and stay order has been granted by the court in view of these orders
only 49% shares will be transferred at present. In view of the Department of
Justice, if at present 49% shares are transferred it would not amount to
contempt of the orders of the Hon'ble High Court as the status of the company
shall continue to be that of the Government Company."
The various interim orders issued by the High Court from time to time and the documents
mentioned above clearly show that not only the control and management of the
Corporation remained with the Government but even the status of the Corporation
continued to be that of a Government Company. We have, therefore, no hesitation
in agreeing with the finding of the High Court that factually as well as
legally the appellants were not in the management of the Corporation on the day
when the Ordinance was promulgated.
this background we may take up the first contention of the learned counsel for
the appellants. The Act has been enacted by Parliament under Entry 52 List 1.
Section 2 of the Act read with Item 35 in the First Schedule to the Act makes
it clear that the Union has taken over under its control the cement industry.
It follows that the State Legislature cannot legislate with respect to the
cement industry under Entry 24 List II Seventh Schedule Constitution of India.
The question, however, for our consideration is whether the Ordinance was
promulgated under Entry 24 List II or Entry 42 List III? The High Court has
dealt with the question in detail and has reached the conclusion that the
Ordinance was promulgated under Entry 42 List 111. We are inclined to agree
with the High Court.
3 of the Ordinance provided for the transfer of all the shares held by, the
companies in the share capital of the Corporation to the State Government. All
the shares, stood vested in the State Government with effect from the date of
the commencement of the Ordinance. On the plain language of its provisions, the
Ordinance related to the acquisition of property (shares of the Corporation).
The Ordinance, therefore, falls under Entry 42 List III which reads
"acquisition and requisitioning of property". The field of
acquisition under Entry 42 List III is not occupied by the Act which deals with
the control, management, regulation and development of the declared industries.
The power conferred upon the Union under the Act can as well be effectively
exercised after the acquisition of the shares of the companies.
This Court in Ishwari Khetan Sugar Mills v. State of U. P. 1 had an occasion to deal with a
similar situation relating to sugar industry. Sugar was a scheduled industry
under Section 2 of the Act. An Ordinance called the U.P. Sugar Undertaking
(Acquisition) Ordinance, 1971 was promulgated by which the sugar undertakings
were transferred to and vested in the Uttar Pradesh State Sugar Corporation
Limited. The validity of the Ordinance was challenged on similar ground. A
Constitution Bench of this Court held that the power to legislate in respect of
acquisition of property is an independent 1 (1980) 4 SCC 136: (1980) 3 SCR 331
592 and separate power emanating from Entry 43 List III. It was further held
that the Ordinance in pith and substance was for acquisition of scheduled sugar
undertakings and as such it did not impinge on the field occupied by the Act.
We, therefore, agree with the conclusion reached by the High Court and reject
the contention raised by the learned counsel for the appellants to the effect
that the State Legislature had no legislative competence to legislate on the
subject-matter of the Ordinance and, as such, the Governor had no power to
promulgate the same. We agree with the High Court that the legislative
competence to promulgate the Ordinance could validly be traced to Entry 42 List
Second and third contentions raised by the learned counsel for the appellants
have to be rejected in view of the finding reached by us that the control and
management of the Corporation did not vest with the appellants on the date of
the promulgation of the Ordinance. Section 20 of the Act is as under :
After the commencement of this Act, it shall not be competent for any State
Government or a local authority to take over the management or control of any
industrial undertaking under any law for the time being in force which authorises
any State Government or local authority so to do." 23.This Court
considered the scope of Section 20 of the Act in Ishwari Khetan case' as under:
(SCC pp. 155-56, para 30) "The impugned legislation was not enacted for
taking over management or control of any industrial undertaking by the State
Government. In pith and substance it was enacted to acquire the scheduled
attempt was made to take over management or control of any industrial
undertaking in a declared industry indisputably the bar of Section 20 would
inhibit exercise of such executive power. However, if pursuant to a valid
legislation for acquisition of scheduled undertaking the management stands
transferred to the acquiring body it cannot be said that this would be in
violation of Section 20.
20 forbids executive action of taking over management or control of any
industrial undertaking under any law in force which authorises State Government
or a local authority so to do. The inhibition of Section 20 is on exercise of
executive power but if as a sequel to an acquisition of an industrial
undertaking the management or control of the industrial undertaking stands transferred
to the acquiring authority Section 20 is not attracted at all. Section 20 does
not preclude or forbid a State Legislature from exercising legislative power
under an entry other than Entry 24 of List 11, and if in exercise of that
legislative power, to wit, acquisition of an industrial undertaking in a
declared industry the consequential transfer of management or control over the
industry or undertaking follows as an incident of acquisition, such taking over
of management or control pursuant to an exercise of legislative power is not
within the inhibition of Section
Therefore, the 593 contention that the impugned legislation violates Section 20
has no merit."
have held that the Ordinance was promulgated under Entry 42 List III and not under
Entry 24 List II. We do not agree with the learned counsel that the Ordinance
is a colourable piece of legislation and in pith and substance it falls under
Entry 24 List II. We, therefore, reject the contentions of the learned counsel
in this respect.
do not agree with the learned counsel for the appellants that the promulgation
of the Ordinance was not in public interest. The High Court has elaborately
dealt with this aspect. After the transfer of 49% shares of the Corporation, it
was found that the Corporation suffered deterioration in the production of
cement and the overall market position in respect of the availability of cement
became worse. The unit of the Corporation at Dalla came to standstill due to
stiff opposition put up by the employees of the Corporation against the
decision to transfer the shares to the appellants. The production of cement at Churk
and Chunar was also adversely affected almost to the extent of 90 per cent. The
workers of all the units abstained from work to a large extent. As a result of
steep fall in the production the prices of cement went up considerably with the
result that the construction work in the State suffered badly. The workers of
the Corporation consistently opposed the privatisation. When the Memorandum was
signed the workers intensified their agitation virtually paralysing the units.
Workers from other State Corporations including the State Industrial Units
joined the agitation. Events took such an ugly turn at one point of time that
the police had to open fire resulting in the death of nine persons and injuries
to many. The deteriorating condition of the Corporation affected the financial
resources of the Government insofar as there was a reduction in the revenue
receipts of the State Government through various taxes which the Corporation
was paying to the Government before the transfer of the shares. It was in the
above background that the Ordinance was promulgated. We have no hesitation in
holding that it was in the public interest to acquire the shares of the
do not agree with the learned counsel for the appellants that the promulgation
was an arbitrary exercise of power by the Governor. The pleadings on the record
referred to by us go to show beyond reasonable doubt that the acquisition of
the shares of the Corporation was in public interest. The Ordinance also
provided for just compensation for the acquisition of shares. The owners of the
property, who are affected by the Ordinance, were to be given the same price
for the shares at which they purchased them. The Ordinance was thus not only in
public interest and for public purpose but also just and fair.
The last argument advanced on behalf of the appellants, is that the impugned
Ordinance is bad because it interfered with the exercise of the power of
judicial review by the High Court. It is also contended that the Ordinance
virtually effaced the orders of the Court passed from time to time.
do not agree. It is clear from the bare reading of the orders of the Court that
they were interim in nature and passed during the pendency of the writ
petitions. None of the aforesaid orders finally determined the rights of the
parties before the Court. The orders were neither final judgments nor
preliminary judgments. They could not even be called as interlocutory
judgments. Even otherwise, the Ordinance does not in any manner go contrary to
the various interim orders passed by the High Court. In none of the orders
there is a direction contrary to the purpose for which the Ordinance was
promulgated. The acquisition of shares under the Ordinance did not, in any
manner, have the effect of nullifying any of the orders of the Court. We are,
therefore, of the view that, in the facts of the present case, the argument
that the promulgation of the Ordinance had encroached upon the power of the
judicial review of the Court is wholly misconceived.
We, therefore, see no force in any of the contentions raised by the learned
counsel for the appellants and, as such, dismiss the appeal. In the facts and
circumstances of this case, we leave the parties to bear their own costs.