Companies Act Case Law Centre for Public Interest Litigation Vs Union of India & Anr

CASE NO.:
Writ Petition (civil) 171 of 2003

PETITIONER:
Centre for Public Interest Litigation

RESPONDENT:
Union of India & Anr.

DATE OF JUDGMENT: 16/09/2003

BENCH:
S. RAJENDRA BABU & G.P.MATHUR

JUDGMENT:
J U D G M E N T

(WITH WRIT PETITION (CIVIL) NO. 286 OF 2003)

RAJENDRA BABU, J. :
In these two writ petitions filed in public interest the petitioners are
calling in question the decision of the Government to sell majority of
shares in Hindustan Petroleum Corporation Limited (HPCL) and Bharat
Petroleum Corporation Limited (BPCL) to private parties without
Parliamentary approval or sanction as being contrary to and violative of
the provisions of the ESSO (Acquisition of Undertaking in India) Act, 1974,
the Burma Shell (Acquisition of Undertaking in India) Act, 1976 and Caltex
(Acquisition of Shares of Caltex Oil Refining India Limited and all the
Undertakings in India for Caltex India Limited) Act, 1977.

The petitioners contended that in the Preamble to these
enactments it is provided that oil distribution business be vested in the
State so that the distribution subserves the common general good; that,
further, the enactments mandate that the assets and the oil distribution
business must vest in the State or in Government companies; that, they
are not opposed to the policy of disinvestment but they are only
challenging the manner in which the policy of disinvestment is being given
effect to in respect of HPCL and BPCL; that, unless the enactments are
repealed or amended appropriately, the Government should be restrained
from proceeding with the disinvestment resulting in HPCL and BPCL
ceasing to be Government companies. It is further submitted that
disinvestment in HPCL and BPCL could result in the State losing control
over their assets and oil distribution business and, therefore, it is contrary
to the object of the enactments.

It is the submission of the learned counsel for the petitioners that
acquisition of HPCL and BPCL has taken place in pursuance of Article
39(b) of the Constitution; that, Article 39(b) subserves the object of
building a welfare State and an egalitarian social order; that, therefore,
these enactments have been passed with the object of giving effect to
Article 39(b) of the Constitution and the provisions of the enactment
provide for vesting of these undertakings in the State or in a Government
company; that, it is not open to the Government to disinvest the same
without first changing the law in this regard either by repealing the
enactments or by making appropriate changes by way of amendments in
the enactments. The learned counsel further relied upon a decision of
Superior Court of Justice of Ontario between Brian Payne vs. James
Wilson and Her Majesty the Queen in Right of Ontario dated April 19,
2002. In that decision the Superior Court of Justice of Ontario declared
that any sale of the common shares of Hydro One Inc. held in the name of
Her Majesty in right of Ontario, whether pursuant to an initial public
offering of common shares or by way of a secondary offering, or
otherwise, contravenes sub-section 48(1) of the Electricity Act, 1998. In
that enactment Section 48(1) provides that the Lieutenant Governor in
Council may cause two corporations to be incorporated under the
Business Corporations Act and shares in those corporations may be
acquired and held in the name of Her Majesty in right of Ontario by a
member of the Executive Council designated by the Lieutenant Governor
in Council. That order was appealed to the Court of Appeal of Ontario.
During pendency of the appeal the Electricity Act, 1998 was amended by
replacing Section 48(1) thereof which expressly authorises the Minister of
Environment and Energy to dispose or otherwise deal with the shares of
the Hydro One Inc. and on that basis, disposed of the appeal. It was
further noticed in that decision that the reasons given by the Superior
Court of Justice cannot be read as a general pronouncement on the rights
of the Crown to deal with its assets; that, the learned Judge purported to
analyse a specific provision in a specific Act; that, he did so in the context
of the entirety of the Electricity Act, 1998, the specific circumstances
surrounding its enactment and the comments of the Minister responsible
for that specific Act.

In the counter-affidavits filed on behalf of the contesting
respondents, it is urged that the policy of disinvestment followed by the
Government of India has been upheld by this Court in BALCO
Employees’ Union vs. Union of India, 2002 (2) SCC 333; that the
decision to disinvestment and the implementation thereof is purely an
administrative decision relating to the economic policy of the State; that, it
is the prerogative of each elected Government to follow its own policy;
that, the contention of the petitioners that prior approval of Parliament for
disinvesting Government’s holding in HPCL and BPCL is not necessary
since in the Acquisition Act setting up these companies there are no
restrictions on the disinvestment of these companies; that, the said
companies are registered under the Companies Act, 1956; that, the sale
of shares thereof do not require Parliamentary approval; that, the
Memorandum and Articles of Association of the said companies also do
not contain any such restriction on transfer of shares; that, the Acts in
question have worked themselves out after acquisition; that, the
provisions of the Companies Act, 1956 and Securities and Exchange
Board of India’s guidelines govern the companies in question under which
there are no restrictions on disinvesting Government share holding in
these companies; that, there is no other statutory bar to such sale of
shares; that, indeed, the Disinvestment Commission examined the issues
relating to disinvestment of IBP Co. Ltd. and found that there was no
necessity of Parliamentary approval for its disinvestment; that, in fact,
shares in HPCL and BPCL were sold during the period 1991-92 to 1993-
94 through executive decisions; that, similarly, another public sector
undertaking, Maruti Udyog Limited where acquisition was through an Act
of Parliament, was disinvested through executive decisions over the last
two decades; that, even in those cases, Parliamentary approval was not
required and the present case does not stand on a different footing as the
legal regime is similar; that, in the enactments in question there are no
express or implied provisions restraining transfer of shares of HPCL or
BPCL; that, oil is an important sector of the economy and can grow only
with increasing efficiency and that the key to efficiency is competition and
disinvestment is an important instrument to achieve competition; that,
after dismantling of the Administered Prices Mechanism with effect from
1.4.2002, the Government’s main responsibility in the petroleum sector is
laying down the broad policy framework with the objectives of ensuring oil
security in the country and protecting the interests of consumers; that,
under the ensuing market scenario in the oil sector, there is a need for an
independent statutory regulatory mechanism to ensure competition,
encourage investment and protect consumers’ interest in the oil sector;
that, steps have been taken to introduce in Parliament a Bill for
establishing a statutory regulatory authority; that, two private parties viz.,
M/s Reliance Industries Limited and Essar Oil Limited, have already been
granted authorisations to market transportation fuels and the Government
has already deregulated Exploration and Production, Refining and
Pipelines; that, there is now widespread private sector participation in
Exploration and Production, Refining and Pipelines; that, petroleum
sector and consumers are expected to benefit as a result of such
increased competition; that, in this global economic scenario and the
need for greater private participation and private finance initiative,
disinvestment by Government of its share holding in State owned
companies is an instrument of economic policy accepted globally. It is also
brought to our notice by him that assets of the HPCL and BPCL were
acquired by the Central Government through Acts of Parliament but in
course of time of more than quarter of a century the assets have changed
their nature and today they bear hardly any resemblance to the assets
which were acquired under the statures; that most of the present assets
of the two companies have been acquired after acquisition by means of
investment by the Government and those assets which were initially
acquired under statute have also been transformed into substantially
different assets; that, data placed before the Court will clearly indicate
that the assets of HPCL and BPCL today have only a remote semblance
to the assets that had been acquired in 1974 and 1976 and a large
proportion of the assets of the two companies have been added after
acquisition; that, even the assets that were taken over are no longer the
same as capital has been spent on them over the past several years;
that, all these assets now belong to HPCL and BPCL which are
incorporated under the Companies Act, 1956; that, at the highest, the
petitioner’s contention can be that the assets taken over cannot be
privatised but there clearly cannot be any requirement of Parliamentary
approval or sanction for disposal of assets added post-acquisition; that,
assets acquired by HPCL and BPCL either by acquisition through
legislation or through purchase have all now indistinguishably merged and
form the assets of the companies, disposal of which will be governed only
by the provisions of the Companies Act, 1956 and there is no need for any
Parliamentary approval or sanction. In this context, he relied upon the
decisions of this Court in Western Coalfields Limited vs. Municipal
Council, Birsinghpur Pali & Anr., 1999 (3) SCC 290, and Municipal
Commissioner of Dum Dum Municipality & Ors. vs. Indian Tourism
Development Corporation & Ors., 1995 (5) SCC 251, to indicate the
nature of holding by a Government company of the assets held by it.

In addition, Shri Harish Salve contended that as per Section 7 of
the Act, the Central Government may vest the assets acquired by it in any
Government company which becomes a complete owner of the acquired
assets and the Central Government has no further interest in the assets
so transferred to the companies. The company holding the acquired
assets is like any other company incorporated under the Companies Act;
that such companies do not hold or administer these properties for and on
behalf of the Central Government; that there is no express or implied
prohibition in Section 7 of the Act on the transfer by the Central
Government of its shares in these companies; that, the only reason why
the assets were acquired by the Government by legislation was that part
of the assets included the marketing part of a foreign company; that the
parliamentary debates specifically show that the understanding was that
for the transfer of the shares and assets in an Indian company did not
require the enactment of a law. That part of the assets belonging to the
two oil companies were obtained by negotiated purchase, rather than
through acquisition; that in the case of Burmah Shell, the assets belonging
to the Indian subsidiary were bought through a commercial transaction;
that, it cannot be gainsaid that the companies are free to sell off their
assets without any change in the law; that thus if the companies desire to
sell off at this distance of time the old machinery inherited by them (and
the value of which is a small fraction of its current net worth), there is no
legal embargo even if it amounts to the company no longer holding any of
the assets vested in after nationalisation; that if the contention of the
petitioners is accepted, the Central Government cannot sell its shares
even in such a company ; that, the definition of a Government Company
can be amended under the Companies Act generally and unrelated to
purposes nationalisation laws or can amalgamate these companies with
another company which may ultimately impact the Central Government’s
shareholding;that thus, there is nothing in law to prevent the Central
Government to amend the articles to provide that even if it continues to
hold 51%, it will not interfere in the management with the private strategic
partner who holds less shares; that the Government can attain the same
object in a manner more favourable to the Government – viz. by selling off
its shares to reduce its holding; that, the submission that the policy
underlying a statute has to be determined from a reading of the preamble;
and that reference to the preamble of a statute can be had only when the
words of a statute are ambiguous and placed reliance on Smt. Sita Devi
(Dead) by LRs. v. State of Bihar & Ors. 1995 Supp (1) SCC 670, para
2; that, the legislative policy as spelt out in the preamble which is to
ensure that the assets are so managed and the undertaking is so run to
ensure that its business remains vested in the State so that it can be run
for the public good; that even by transfer of a company other than
Government company the assets can be distributed in a manner that
would subserve the common good and “the common good” is a matter of
economic policy; that with the passage of time, the needs of the economy
may dictate changes – a change cannot be condemned on the ground that
it would be deterimental to common good. In this context, it is submitted
that the nationalisation was a part of a larger policy to bring in the oil
sector under Government control; that, the control of the oil sector was not
attained by a legislation but by administrative policy; that the prices of oil
products were also controlled by executive orders. These have been all
modified by the Government in exercise of executive power; that in view of
these changes, the continuance of Government ownership of shares in
these companies is no longer considered to be necessary; that the
perception now is that the “common good” will best be subserved by the
privatisation of these undertakings; that this perception is a matter of
economic policy not amenable to judicial review.
We start our discussion of the matter from a constitutional angle.
When the government decides to set up a new company, the investment
for setting it up is shown as a ‘new instrument of service’ and exhibited
separately in the demand for grants for the concerned Ministry while
presenting the Annual Budget. Under Article 113(2) of the Constitution,
estimates are presented to Parliament in the form of demand for grants.
This fulfills the technical requirement of parliamentary approval when a
new company is set up. The President, in exercise of his powers conferred
under Article 113(2) of the Constitution has framed the General Financial
Rules, in which under Rule 71, it is provided that no expenditure shall be
incurred during a financial year on a new service not contemplated in the
Annual Budget for the year except after obtaining the supplementary grant
or an advance from the Contingency Fund. Setting up a new public sector
company is defined as a ‘new instrument of service’ for which approval of
Parliament is required for expenditure from the Consolidated Fund of
India. If this is the background in which a new company is set up, can
such a company be dismantled without some kind of parliamentary
mandate? In this background we will now consider the case on hand.

The pleadings filed and the arguments raised before this Court
indicate that the question for consideration before us is whether or not
there is any express or implied limitation on the Government to privatise
HPCL and BPCL. It is no doubt true that the two companies are
Government companies and being instrumentalities of the State, they can
enter into contracts among other things, but question is whether this
power is circumscribed by any statute either expressly or by necessary
implication. It is also clear that there is no provision in the Act expressly
stating that the Government shall, at all times, hold not less than 51% of
the paid-up capital of each corresponding new company, as has been
stated in the Banking Companies (Acquisition & Transfer of Undertakings)
Act. Nor is there any provision as in the Coal Mines Nationalisation Act,
1973 to the effect that “no person, other than the Central Government or a
Government company or a corporation owned, managed, or controlled by
the Central Government shall carry on coal mining operation, in India, in
any form”.

For the purpose of understanding the provisions we will set out the
relevant provisions of one of the enactments. We make it clear that the
three enactments stated above in this case are identical.
Preamble to the ESSO (Acquisition of Undertaking in India) Act,
1974 (hereinafter referred to as ‘the Act) reads as follows :-

“An Act to provide for the acquisition and transfer of the right, title
and interest of ESSO Eastern Inc. in relation to its undertakings in
India with a view to ensuring co-ordinate distribution and utilisation
of petroleum products distributed and marketed in India by Esso
Eastern Inc. and for matters connected therewith or incidental
thereto.

WHEREAS Esso Eastern Inc., a foreign company, is carrying on,
in India the business of distribution and marketing petroleum
products manufactured by Esso Standard Refining Company of
India Limited and Lube India Limited, and has, for that purpose,
established places of business at Bombay and other places in
India;

AND WHEREAS it is expedient in the public interest that the
undertakings, in India, of Esso Eastern Inc. should be acquired
in order to ensure that the ownership and control of the petroleum
products distributed and marketed in India by the said company
are vested in the State and thereby so distributed as best to
subserve the common good;”

 

Section 2(d) of the Act defines a ‘Government company’ to mean
“a company as defined in section 617 of the Companies Act, 1956.”
Section 617 of the Companies Act, 1956 provides that a Government
company means “any 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 partly by the Central Government or partly
by one or more State Governments and includes a company which is
subsidiary of the Government company”. Thus, holding of only 51% or
more of the shares in a company either by the Central Government or
State Government makes a company a Government company. Chapter II
of the Act provides for acquisition of the undertakings in India of Esso
companies. Section 3 provides for transfer and vesting in the Central
Government of the undertakings of Esso in India. Section 4 provides for
general effect of vesting. Section 5 provides for the Central Government
to be lessee or tenant under certain circumstances. Section 6 deals with
removal of doubts. For the present purpose, Section 7 of the Act is
important and it reads as follows :-

“Section 7(1). Notwithstanding anything contained in sections 3,
4 and 5, the Central Government may, if it is satisfied that a
Government company is willing to comply, or has complied, with
such terms and conditions as that Government may think fit to
impose, direct, by notification, that the right, title and interest and
the liabilities of Esso in relation to any undertaking in India shall,
instead of continuing to vest in the Central Government, vest in
the Government company either on the date of the notification or
on such earlier or later date (not being a date earlier than the
appointed day) as may be specified in the notification.

(2) where the right, title and interest and the liabilities or Esso in
relation to its undertakings in India vest in a Government company
under sub-section (1), the government company shall, on and
from the date of such vesting, be deemed to have become the
owner, tenant or lessee, as the case may be, in relation to such
undertakings, and all the rights and liabilities of the Central
Government in relation to such undertakings shall, on and from
the date of such vesting, be deemed to have become the rights
and liabilities, respectively, of the Government company.

(3) the provisions of sub-section (2) of section 5 shall apply to a
lease or tenancy, which vests in the Government company, as
they apply to a lease or tenancy vested in the Central Government
and reference therein to the “Central Government” shall be
construed as a reference to the Government company.”
Section 7 provides that subject to the conditions that may be
imposed by the Government, right, title and interest and liabilities of Esso
in relation to any undertaking in India can be vested in a Government
company and sub-section (2) thereof enables such Government company
to become the owner from such date.

In order to interpret the enactments in question it is necessary to
look to the Preamble to the Act. The Preamble to the Act clearly stated
that acquisition is done “in order to ensure that the ownership and control
of petroleum products, distributed and marketed in India by the said
company are vested in the State and thereby so distributed as best to
subserve the common good.” (emphasis supplied). Preamble, though
does not control the statute, is an admissible aid to construction thereof.
The Act sets out that the assets of the undertaking shall vest in the
Government as provided under Section 3 of the Act. However, Section 7
of the Act enables the Government to transfer the undertaking to a
Government company as defined under Section 617 of the Companies
Act, 1956. If the Act intended that the undertaking so vested in the
Government company can be transferred, wholly or partly, to any
company other than a Government company, there certainly would have
been an indication to that effect in the Act itself. The question, therefore, is
whether absence of specific provision as contained in the Banking
Companies (Acquisition & Transfer of Undertakings) Act or in the Coal
Mines Nationalisation Act, 1973 that the share holding shall always be
held by Government, will give a different complexion to these provisions.
When the provisions of the Act provide for vesting of the property of the
undertaking in the Government or a Government company, it cannot mean
that it enables the same being held by any other person, particularly in the
context that the object of the Act is that the ownership and control of the
petroleum products is distributed and marketed in India by the State or
Government company and that thereby so distributed as best to subserve
the common good. The argument that there is no specific provision in the
Act as contained in the Banking Companies (Acquisition & Transfer of
Undertakings) Act or in the Coal Mines Nationalisation Act, 1973 does not
carry the matter any further because the idea embedded in those
provisions are implicit in the provisions of this enactment, as explained
earlier. If disinvestment takes place and the company ceases to be a
Government company as defined under Section 617 of the Companies
Act, to say that it is still a Government company as contemplated under
Section 7 of the Act will be a fallacy. What is contemplated under Section
7 of the Act is only a Government company and no other. In relation to a
Government company Sections 224 to 233 are substituted and the audit of
the company takes place under the supervision and control of the
Comptroller & Auditor General of India who shall give effect to Section 224
(1-B)(1-C). The Auditors shall submit a report to the Comptroller & Auditor
General of India and even when audit takes place, subject to his
instructions, Comptroller & Auditor General of India may also conduct
supplementary audit and a test audit. Under Section 19(1) of Comptroller
& Auditor General’s (Duties, Powers and Conduct of Service) Act, 1971
audit of companies is to be conducted by him in terms of the Companies
Act. Annual Reports on the working of affairs of the company is laid
before Parliament under Section 619(1)(b) of the Companies Act. Such
control will be lost if a company ceases to be a Government company.

Argument of Sri Harish Salve that a simple amendment of Section
617 of the Companies Act unrelated to the acquisition can alter the
position in law is only perceived but not attained and hence does not
require any examination. He contended that to facilitate disinvestment of
the shares the public sector enterprises are allowed to list the shares on
Stock Exchanges, irrespective of the percentage of shares disinvested by
the Government and, therefore, submitted that there is no need for the
Government to obtain Parliamentary approval. Sales of shares of these
companies, though uninhibited, cannot be to such an extent so that the
substratum of the character of the Government companies is allowed to
be lost and converted into an ordinary company without being approved
by the General Body of shareholders and, in this case, the Government.
Government, in turn, is subject to the statutory limitations, to which we
have adverted to now. Hence, the argument begs the question which is
put in issue before us.

Again accretions to the Government company’s assets subsequent
to acquisition of the undertaking is an irrelevant factor in the context of the
question we are considering. Here what is required to be seen is, not
which asset can be transferred or not, but whether the undertaking can
change its character from a Government company to ordinary company
without Parliamentary clearance in the light of the statute of acquisition.

The debate as to whether a privatization law is necessary has been
going on all over the world. This aspect has been discussed by Pierre
Guislain in his book entitled ‘The Privatization Challenge’ published by the
World Bank. The views of the learned Author are reproduced hereunder:

“Whether a country needs to enact a privatization law or can do
without one depends on several factors: the political situation and
legal traditions of the country, the scope of its privatization
program, and the nature of the enterprises to be privatized. Two
different issues have to be addressed: does legislation need to be
enacted to authorize or facilitate privatization, and if so, should the
new provisions take the form of amendments to the pertinent laws
or be grouped together in a specific privatization law?

Some countries have opted to enact privatization laws even when
privatization could have been implemented without amending the
existing legislation. This may have the advantage of mobilizing
explicit political support and commitment in favour of privatization
from the very start. It may confer a stronger, clearer mandate on
the government and agencies in charge of implementing
privatization and make them more accountable. A privatization
law also provides an opportunity to introduce changes in
legislation that, although not required for commencing the
process, may substantially facilitate it. On the other hand, a
privatization law involves risks, including potentially long delays in
getting parliament approval, the sometimes excessively restrictive
scope of legislative provisions, and a tendency on the part of
some parliaments to interfere too much in the implementation of
privatization transactions. Furthermore, special legislation may
not be needed for the transfer of the subsidiaries, participations, or
assets of State Owned Enterprises or public holding companies.”
[pp.296-297]
The learned Author has further enunciated that if legislation is to be
brought for privatization, the same should reflect the broad political lines of
the privatization strategy and programme and that it should also endow
the Government or privatization agency with the required implementation
powers, and it should avoid restrictions that may unduly tie the hands of
the executing agencies and slow down the process. The legislation must
allow adequate flexibility, in the choice of the privatization technique best
suited to each, while providing basic safeguards guaranteeing the integrity
and efficiency of the process. Success of the programme hinges on,
among other things, a basic consensus among Parliament, Government,
and head of state on the scope and broad lines of the programme; a clear
mandate given to the executing agencies along with the powers necessary
for fulfilling that mandate; and unambiguous, flexible, and competitive
privatization procedures applied in a transparent manner by officials
accountable for their actions.

Apart from United Kingdom, there have been privatization
programmes in France and Italy in Europe. Similarly massive programme
has been carried out in Argentina, Mexico and Brazil. In these countries,
Privatization Acts have been enacted and numerous routes are adopted to
achieve privatization, some of which are illustrated below:

1. A public offering of shares combined with a listing on the stock
exchange has brought share ownership to many millions of people and
have been the mechanism through which the Government’s desire to
widen share ownership has been brought to fruition.
2. A trade sale to another private sector company or to a consortium and
such a transaction is inherently more private than a share offering and
some of the privatizations executed in this manner have faced some
criticism for being insufficiently open to public examination and debate.
3. A ‘management buy-out’ where the public sector entity’s management
team combine together to raise finance and, in conjunction with the
financier, purchase the business through a newly formed vehicle
company.
4. A private placing of shares in a business with a group of investors.
5. Making State assets available under concession so that the assets
may then be worked out by the concessionary.
6. Special features of making provision for a golden share that is a
special share in the privatized entity which is retained by the
Government and which typically entrenches certain provisions within
the company’s articles of association in such a way as to prevent
specified changes occurring without the consent of the Government.
Such processes are adopted in certain businesses which are important
in defence and strategic grounds and so should be insulated from the
possibility of take over or, more generally, that businesses which are
new to the private sector should not be blown off course by an
unsolicited take over offer made early in their newly private lives. This
special share can be a double-edged sword and it may give protection
to the Government in certain sensitive circumstances but leave the
Government with the risk of incurring the wrath of shareholders who
would be denied the right to accept what might be a very attractive
offer for their shares.
[Vide C.Graham and T. Prosser Golden Shares : Industrial Policy by Stealth]

7. There were certain other categories where debt equity swaps were
followed.

We have an overview of the position world over on whether there is
any need for law regarding privatisation or what routes are to be adopted
for achieving the same. Irrespective of those considerations, we base our
decision on the statutes with which we are concerned.

In the case of BALCO (supra) executive action to disinvest was
not challenged probably due to the fact that there was no statutory
backing of the nature with which we are concerned in the present case. In
the case of Maruti Udyog limited (supra), though acquired under an
enactment, there was no challenge to the same to disinvest merely by
executive action. Thus, these cases stand on a different footing.

There is no challenge before this Court as to the policy of
disinvestment. The only question raised before us whether the method
adopted by the Government in exercising its executive powers to disinvest
HPCL and BPCL without repealing or amending the law is permissible or
not. We find that on the language of the Act such a course is not
permissible at all.

In the result, we allow these petitions restraining the Central
Government from proceeding with disinvestment resulting in HPCL and
BPCL ceasing to be Government companies without appropriately
amending the statutes concerned suitably.

 

 

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