Government Companies as State Under Article 12

By Anonymous

Introduction

Article 12 of the Constitution of India defines “the state” as follows; “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.”[i]

The meaning of the word ‘State’ depends entirely upon the context in which it is used. When this expression is used in Parts III and IV of the Constitution, the meaning is not confined only to the Union of India or the federating states or even to both. According to Article 12, the expression, ‘the State’ includes:

(i) The Government of India;

(ii) Parliament of India;

(iii) The Government of each of the States which constitute the Union of India;

(iv) The Legislature of each of the States which constitute the Union of India;

(v) All local authorities within the territory of India;

(vi) All local authorities under the control of the Government of India;

(vii) All other authorities within the territory of India; and

(viii) All other authorities under the control of the Government of India.[ii]

Clearly, none of this category expressly includes a Government Company. The Government works through the natural persons (in traditional government departments by officials, civil servants, bureaucrats) as well as the juridical persons (autonomous bodies which exist outside the departmental structure such as companies, corporations etc.). As a matter of fact, Government departments unquestionably fall within the definition of ‘state’ under Article 12, but the question is whether the autonomous and non-departmental bodies will also come within the definition of state under the category of ‘other authority’. An autonomous body can be a statutory i.e. body set up directly by a statute or non-statutory body i.e. body registered under general law such as Companies Act.  So, is a Government Company a state under the Constitution of India? This is the central question that will be dealt with in this paper.

Is a Government Company a state?

Section 617 of the Companies Act[iii] defines a Government Company. If there is a State agency or instrumentality that has assumed the attire of a Government Company as according to the definition in Section 617, it does not mean that it thereby terminates to be an agency or instrumentality of the State. One must certainly look through the corporate veil to determine whether the face behind the veil is that of an agency or instrumentality of the state. The case of Ramana Dayaram Shetty v. the International Airport Authority of India and Ors[iv] dealt majorly with the issue of a Government Company being a State. The Supreme Court elaborated on a test, which would suggest whether the corporations incorporated under the law are agency or an instrumentality of the government. The test[v] may be summed up as: –

(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.[vi]

One of the consequences of the above test of agency or instrumentality was that the Government Companies as under Section 617 of the Companies Act, 1956 were started to be regarded as State as given under Article 12 of the Constitution.

This is evident from a series of cases where the Apex Court has held that government companies fall within the definition of State as given under Article 12. In the case of Som Prakash v. Union of India[vii], the question was whether Bharat Petroleum Corporation, which is a government company registered under the Indian Companies Act, would be regarded as an authority or state under Article 12 of the Indian Constitution. The Court held that the company would fall under Article 12. The company should be regarded as an alter ego of the government.

A decade after the Som Prakash’s decision came to another Supreme Court decision in the case of Chander Mohan Khanna v. The National Council of Educational Research and Training[viii]. This case ruled that Article 12 cannot be stretched to cover every autonomous organization with some connection with the Government under the purview of the expression ‘State.’ However vast and pervasive the state control is over a body, it cannot be a deciding factor that the body is a ‘State.’ Evidently, there has been a perceptible difference in the perception of judiciary vis-à-vis the scope of Article 12 along with the passage of time. But this has never stopped floodgates of litigation impugning the action of public sector from the altar of Article 12.[ix]

In the case Mysore Paper Mills Ltd. v. Mysore Paper Mills Officers’ Association[x] the main issue was whether a Government Company as under Section 617 of Companies Act is a “state” with reference to Article 12. It was held that the state government had extensive control over the working of the company and its day to day functioning; therefore the company was agency or instrumentality of the government thereby complying with the test which evolved in the case of R D Shetty. The Court, therefore, held that Government Company would be State as given under Article 12.

In the case R.V. Dnyansagar v. Maharashtra Industrial And Technical Consultancy Organization Ltd.[xi], the court while looking into the question that whether a company is a state referring to Article 12 has to be decided by keeping in mind a series of facts as established i.e. whether the company is under the control of the government and the whether the company is financially or functionally governed by the government. In this case it was held that the company was not a government company within the scope of Section 617 and therefore the company could not be regarded as State under Article 12 of the Constitution.

The case of P.B. Ghayalod v. M/S. Maruti Udyog Ltd.[xii]also shed light on this issue. It said that if there is a substantial foreign holding in a Government Company, the foreign partner has the right to nominate the Board’s direction. Furthermore, majority of the decisions taken for the company requires approval of the foreign partner and the company, therefore, cannot be considered to be an agency or instrumentality of the State.  The reason being that the Indian Government never enjoyed an all-pervasive control over the company and nor was its only financial source.

The Constitution Review Committee formed under the chairmanship of former Chief Justice of India, Justice M. N. Venkatachelliah addressed these issues and certain changes were recommended in Article 12. In its submission made to the Government, the committee recommended for an addition of an explanation to this particular constitutional provision for limiting the scope of “other authorities” under the Article. It was the time to amend the constitution for the reasons of reality and economic dictates. “With the highly subdivided and fragmented political situation, it is utopian to think of arriving at the required number to effect the necessary amendments to the Constitution to reflect the changed hopes and aspirations of the people. One should not allow “medievalism to linger on” in our constitutional framework.”[xiii]

Formatted on 18th February 2019.

References

[i] Article 12, The Constitution of India, 1950

[ii] Abhinove Mishra “Meaning of State as per Constitution Of India-Article 12”

[iii] “617. Definition of ‘Government Company’ – For the purposes of this Act Government company means any company in which not less than fifty-one per cent 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 and includes a company which is a subsidiary of a Government company as thus defined.”

[iv]Ramana Dayaram Shetty v. the International Airport Authority of India and Ors. 1979 AIR 1628

[v]See also Ajay Hasia v. Khalid Mujib

[vi] PUBLIC SECTOR UNDERTAKINGS / COMPANIES AND ARTICLE 12 OF CONSTITUTION OF INDIA | CORPORATE LAW DOSSIER, http://coporatelaws.wordpress.com/2010/05/11/public-sector-undertakings-companies-and-article-12-of-constitution-of-india/

[vii] 1981 AIR 212

[viii] (1991) 4 SCC 578

[ix] D. Varadarajan “State behind the veil”

[x] (2002) 2 SCC 167

[xi] [2003] 46 SCL 153

[xii]P.B. Ghayalod v. M/S. Maruti Udyog Ltd. And Others AIR 1992 Delhi 145

[xiii] The Hindu Business Line : State behind the veil, http://www.thehindubusinessline.in/2002/06/13/stories/2002061300210900.htm

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