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Report No. 126

Government and Public Sector Undertaking: Litigation Policy and Strategies

Chapter 1


1.1. The central objective of planning in India, as envisioned in 1952, was to initiate a process of development which will raise living standards and open out to the people new opportunities for a richer and more varied life. This reiterates the directive principle enunciated in Article 46 of the Constitution that 'the State shall promote with special care the educational and economic interests of the weaker sections of the people, and, in particular, of the Scheduled Castes and the Scheduled Tribes, and shall protect them from social injustice and all forms of exploitation'.

An under-developed economy is characterised by the co-existence, in greater or lesser degree, of unutilised or under-utilised manpower on the one hand and of the unexploited natural resources on the other. A nation, like an individual, has to work out its inner potentialities by a process of experimentation. One such experimentation was of economic planning for a transformation of the society along right lines. That was the genesis of the First Five Year Plan.

A planned economy aiming at the realisation of larger social objectives entails a vast increase in governmental functions.1 The essentials of Government policy in the sphere of industrial development have been stated in the Industrial Policy Resolutions of 1948 and 1956. The first Resolution lists certain industries like the manufacture of arms and ammunition, the production and control of atomic energy and the ownership and management of railway transport as being reserved exclusively for the Central Government.

In the case of certain other industries also, such as, coal, iron and steel, aircraft manufacture, ship building, manufacture of telephone, telegraph, wireless apparatus and mineral oils, the State, including the Central and State Government and other public authorities, will be responsible for further development except to the extent. that it regards the co-operation of private enterprise necessary for the purpose.

The rest of the industrial field is to be open to private enterprise, individual as well as co-operative, but the State will intervene whenever the progress of any industry under private enterprise is found to be unsatisfactory.2 This led to the enactment of the Industries (Development and Regulation) Act, 1951. The principal object of the Act was to enable the Government to implement its policy for the development and regulation of industries along the lines stated in the 1948 Resolution and in the First Plan document.

1. The First Five Year Plan Document, p. 11.

2. Ibid., p. 422.

1.2. It became crystal clear that there were certain core industries which required a heavy capital outlay and in which the energizing factor of profit in private sector will have relatively low profile. This led to the increasing participation of the Government in industrial development which, in turn, led to the question of the appropriate organisation for enterprises in public sector. The setting up of industries reserved for public sector by being managed by the Departments of the Government came in for a lot of criticism.

The drawbacks of departmental management of public enterprises are well known. Successful management of such enterprises requires a great deal of initiative and power to take quick decisions on the part of the executives incharge and this can hardly be secured if the enterprise is directly under a Government department. On the other hand, the extent of autonomy which can be insisted upon for such enterprises at the present stage is a matter on which a definite judgment cannot be hazarded except in the light of further experience.

Several of the industrial undertakings directly under the Central Government have already been organised as joint stock companies with Board of Directors vested with power of management in the same manner as in any undertaking in private sector. Recent inquiries into the working of industrial enterprises in some of the States reinforce the desirability of organising these enterprises as entities independent of day-to-day governmental control.

Accordingly, a policy decision was taken on the recommendation of the Planning Commission at the time of drawing up of the First Five Year Plan that industrial undertakings under the State Governments should be organised as joint stock companies and operated on business lines with the internal management entirely under the control of the Board of Directors. The main principle to be followed is that such enterprises should not be subject to governmental control in their day-to-day administration but should, nevertheless, be accountable to the public which is their ultimate owner as well as beneficiary."1

State monopolies were to be created in specified areas of trade, commerce and industry but it was apprehended that those who would be excluded from the trade, commerce and industry taken over by State monopoly may challenge it as being violative of the fundamental freedom guaranteed by Article 19(1)(g). This apprehension turned genuine when a monopoly of transport sought to be created by the U.P. Government in favour of State operated bus service was struck down as unconstitutional because it deprived citizens of their rights under Article 19(1)(g).2

In order to sustain and protect monopolies in favour of public sector undertakings from the challenge under Article 19(1)(g), Parliament amended clause (6) of Article 19 by the Constitution (First Amendment) Act, 1951, with effect from 18th June, 1951, by providing that nothing in clause (g) of Article 19(1) shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to,-(ii) the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise.

Amended clause (6) of Article 19 enabled the State, according to exigencies of the case and consistently with the requirements of any trade, business, industry or service, to exclude the citizens either wholly or partially. Such State monopoly, based upon the theory underlying the amendment, does not appear to be based on the pragmatic approach, but on the doctrinaire approach which socialism accepts. The amendment clearly indicates that State monopoly in respect of any trade or business must be presumed to be reasonable and in the interests of general public, so far as Article 19(1)(g) is concerned.3

1. The First Five Year Plan Document, pp. 429-430.

2. Moti Lal v. Government of the State of Uttar Pradesh, ILR (1951) 1 All 269.

3. Akadasi Padhan v. State of Orissa, AIR 1963 SC 1047.

1.3. These policy decisions led both the Central Government and the State Governments to set up corporations as instrumentalities of the State and yet, some of them were set up under an Act of the Parliament and some were registered as Government companies. State monopolies like Oil and Natural Gas Commission, Life Insurance Corporation and the Industrial Finance Corporation came into existence.

Similarly, State Road Transport Corporations were set up under Road Transport Corporations Act, 1950, and State Finance Corporations were set up under State Financial Corporations Act, 1951. This is the genesis of public sector undertakings.

1.4. Undoubtedly, even though constitutional challenge to the validity of State monopolies, also styled as public sector undertakings, failed in view of the amendment of clause (6) of Article 19, these public sector corporations were potential breeding grounds for conflicts. Two potential breeding grounds for conflicts surfaced over a period, viz., the conflict between the corporations and their large number of employees as well as the corporations and the consumers of their goods and services.

Occasionally there were conflicts between two public sector undertakings as well as State and one or more public sector undertakings. The issue about their status and position in constitutional scheme figured before courts of law in conflicts between these public sector undertakings and their employees. The employees of the Government, both Central and State, enjoy certain protection under the Constitution. They had the protection of Part III of the Constitution as well as Part XIV of the Constitution.

Even though the tenure of office of persons serving under the Union or a State was at the pleasure of the President or the Governor, as the case may be,1 yet they cannot be either dismissed, removed or reduced in rank without following the procedure prescribed by Article 311. Now the employees of the public sector undertakings felt alienated from the protection of Part III of the Constitution, though the undertakings themselves were the 'State' operating under a different garb. This raised a query as to what is the status and position of these public sector undertakings in, or in relation to, the constitutional scheme.

The further enquiry was whether the expression 'State', as denned in Article 12 of the Constitution, which included, inter alia, other authorities within the territory of India or under the control of the Government of India, would comprehend these public sector undertakings which are the instrumentalities of the State. The State could have done what a monopoly was required to do under the garb of a public sector undertaking, either set up as a corporation under an Act or registered as a Government company as understood in section 617 of the Companies Act, 1956.

The question raised was what are those 'other authorities' which the founding fathers intended to comprehend in the expression 'State' in Article 12. Scanning Article 12, it was held that it 'winds up the list of authorities falling within the definition by referring to 'other authorities' within the territory of India which cannot obviously be read as ejusdem generis with either the Government and the Legislature or local authorities.

The words are of wide amplitude and capable of comprehending every authority created under a statute and functioning within the territory of India or under the control of the Government of India. There is no characterisation of the nature of the 'authority' in this residuary clause and consequently it must include every type of authority set up under a statute for the purpose of administering laws enacted by the Parliament or by the State including those vested with the duty to make decisions in order to implement those laws'.2

Developing this line of approach, Electricity Board of Rajasthan was held to be "other authority" within the meaning of Article 12 on the ground that other authorities in Article 12 will include all constitutional or statutory authorities on whom powers are conferred by laws. It is not at all material that some of the powers conferred may be for the purpose of carrying on commercial activities. Under the Constitution, the State is itself envisaged as having the right to carry on trade or business as mentioned in Article 19(1)(g)3.

Despite this clearly enunciated legal position, Oil and Natural Gas Commission, Life Insurance Corporation and Industrial Finance Corporation, all State monopolies, raised the question whether they were 'other authorities' within the meaning of the expression in Article 12. That put into focus the question what is the 'State'. To some people State is essentially a class-structure, an organisation of one class dominating over the other classes; others regard it as an organisation that transcends all classes and stands for the whole community.

They regard it as a power-system. Some view it entirely as a legal structure, either in the old Austinian sense which made it a relationship of governors and governed, or, in the language of modern jurisprudence, as a community 'organised for action under legal rules'. Some regard it as no more than a mutual insurance society, others as the very texture of all our life. Some class the State as a great 'corporation' and 'others consider it as indistinguishable from the society itself.4 A note of a salutary fact must be taken.

"The tasks of government multiplied with the advent of the welfare state and consequently, the framework of civil service administration became increasingly insufficient for handling the new tasks which were often of a specialised and highly technical character. At the same time, 'bureaucracy' came under a cloud. The distrust of Government by civil service, justified or not, was a powerful factor in the development of a policy of public administration through separate corporations which would operate largely according to business principles and be separately accountable."5

The question was then posed whether such a corporation is an agency or instrumentality of the Government for carrying on a business for the benefit of the public and the answer was in the affirmative. Once it became the instrumentality of the Government, it was comprehended in the expression 'other authorities' in Article 12.

Applying the same criteria, International Airport Authority set up under International Airport Authority Act, 1971, was held to be an instrumentality or agency of the Government and, therefore, comprehended within the expression 'other authority' in Article 12.6 Moving away from the dispute between employees and the Corporation, in a dispute between a registered society which had set up an engineering college and the students seeking admission to the same, the status of society came in for consideration.

The court, applying the well-established criteria, held the society registered under Jammu and Kashmir Registration of Societies Act, 1898, to be an instrumentality or agency of the State and the Central Government, and was, therefore, held to be an authority within the meaning of Article 12.7 Departing from the earlier view, it was held that the Council of Scientific and Industrial Research, a society registered under the Societies Registration Act, was not an instrumentality of the State.8

The trend proceeded in the direction of clearly establishing that where a function of the State was carried on by a body established by the State, it is none-the-less an instrumentality of the State and, therefore, 'other authority' within the meaning of Article 12 of the Constitution.9

An attempt to distinguish the case of a Government company, as defined in section 617 of the Companies Act, 1956, which would mean that it is a company in which not less than 51% of the paid up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, including its subsidiary, failed when Project and Equipment Corporation of India Ltd., a wholly owned subsidiary company of State Trading Corporation, which itself was a Government of India undertaking, was held to be an instrumentality or agency of the State and, therefore, governed by Part III of the Constitution.10

It is thus now unquestionably established that either a corporation set up under a statute enacted by Parliament or State Legislature or a Government company or even a co-operative society if it satisfies certain criteria, namely, it is carrying on a public or Governmental function and is either aided by the State or its management is captive under the State, then, notwithstanding the form it has adopted, would be comprehended in the expression 'other authorities in Article 12 of the Constitution and would for practical purposes be State for the purposes of the Constitution.

1. The Constitution of India, Article 310.

2. Ujjan Bai v. State of Uttar Pradesh, (1963) 1 SCR 778 (969).

3. Rajasthan State Electricity Board, Jaipur v. Mohanlal, (1967) 3 SCR 377.

4. Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi, (1975) 3 SCR 619 (644) (Mathew, J.).

5. Ibid., p. 645.

6. Raman Dayaram Shetty v. International Airport Authority of India, (1979) 3 SCC 489.

7. Ajay Hasia v. Khalid Mujib Sohravardi, (1981) 1 SCC 722.

8. Sabhajit Tewary v. Union of India, (1975) 3 SCR 616.

9. P.K. Ramachandra Iyer v. Union of India, (1984) 2 SCR 200.

10. A.L. Kalra v. Project and Equipment Corporation of India Ltd., (1984) 3 SCC 316.

1.5. If the public sector undertakings by and large are comprehended in the expression 'other authorities' in Article 12 and are shown to be the instrumentalities and agencies of the State and hence 'the State' for all purposes, consistent, of course, with the purpose for which they have been set up, they should act like State and when a body is supposed to act like a State, amongst others, it must be fair and just and rational in its activities, in its relation to its employees, on the ground that the State is an ideal employer and its activities must be conducive to the formation and setting up of a welfare State.

The ideal of the Constitution unquestionably is to set up a welfare State. And, apart from other things, the welfare State must eschew litigious attitude. This report deals with the problem of litigation policy and strategy of public, sector undertakings as part of the ongoing programme of the Law Commission for recommending basic judicial reforms.

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