Coalgate and Judicial Review of Distribution of Natural Resources

In the previous two posts, Manish has exhaustively analysed the Supreme Court’s verdict in M.L. Sharma vs Principal Secretary ["Coalgate"]. In the broader scheme of things, the judgment makes an important contribution to the Supreme Court’s evolving jurisprudence with respect to the judicial review of distribution of natural resources. Recall that in the First Spectrum Case, the Supreme Court had taken a highly interventionist stance with respect to the 2G Spectrum Scam, not only quashing the allocation of spectrum, but also – in effect – imposing a public auction as the only legitimate method for governmental distribution of natural resources. Recall also that in the Second Spectrum Case (a Presidential reference), the Supreme Court backtracked, limiting the holding of the First Spectrum Case (public auction required) to its specific facts (distribution of spectrum, not all natural resources), and also observing that while an auction was, presumably, the only legitimate method if the objective of distribution was to raise maximal revenue, it was also open to the government to set goals other than revenue maximisation, consistent with the common good. In such cases, clearly, an auction might not be the best method of distribution.

In Coalgate, the Supreme Court affirms the view of the Constitution Bench in the Second Spectrum Case. It accepts the government’s contentions that the requirements of the industry at the time of liberalisation provided strong reasons (in 1993) not to distribute coal blocks via auction. Nonetheless, it holds the allocation itself to be illegal. It does so by examining the minutes of all 36 Screening Committee Meetings (where the allocation decisions were taken), and finds that there were no relevant guidelines to determine inter-se merit and priority between applicant companies, and that whatever guidelines were there, were constantly changed. It also finds that there was no discussion about inter-se merit before allocations were awarded. On these grounds, it finds an Article 14 (arbitrariness) violation in the State action.

I’ve written in detail about the place of Coalgate within the broader framework of the Supreme Court’s natural resources jurisprudence elsewhere (see here and here). In this post, I want to focus on something specific: the standard of review that the Court does not directly expound, but which implicitly emerges out of its analysis.

The primary reason why the Court holds the allocations illegal – as mentioned just above – is because of the absence of guidelines that would help the Screening Committee decide which applicants would succeed. In the first set of meetings, it notes, there are no guidelines at all. When some kind of guidelines are framed, they make no mention of determining inter-se merit. Notice that there are three things that the Supreme Court does not do (or rather, it is spared doing, because of the absence of guidelines): examining the sufficiency of the guidelines for actually determining inter-se merit, examining the government’s factual assessment of inter-se merit within the framework of the guidelines, and examining the outcomes of the allocations.

All this sounds very familiar. Indeed, it is analogous to the Court’s jurisprudence under Article 356 (in the emergency powers chapter) of the Constitution. Article 356 allows for President’s Rule if “on receipt of report from the Governor of the State or otherwise, [the President] satisfied that a situation has arisen in which the government of the State cannot be carried on in accordance with he provisions of [the] Constitution.” In S.R. Bommai vs Union of India, the Supreme Court held:

“The President’s satisfaction [under Article 356] has to be based on objective material. That material may be available in the report sent to him by the Governor or otherwise or both from the report and other sources. Further, the objective material so available must indicate that the government of the State cannot be carried on in accordance with the provisions of the Constitution. Thus the existence of the objective material showing that the government of the State cannot be carried on in accordance with the provisions of the Constitution is a condition precedent before the President issues the proclamation. Once such material is shown to exist, the satisfaction of the President based on the material is not open to question. However, if there is no such objective material before the President, or the material before him cannot reasonably suggest that the government of the State cannot be carried on in accordance with the provisions of the Constitution, the proclamation issued is open to challenge.”

As the Law Commission points outS.R. Bommai limits judicial review of an Article 356 proclamation to verifying whether there existed material that was relevant to a consideration that the government of a state cannot be carried on in accordance with the Constitution. What the Court cannot do is substitute its own opinion for whether a state government could or could not be carried on in accordance with the Constitution, and nor can it impugn the process by which the President (i.e., in effect, the Council of Ministers) came to that conclusion.

We can now see the similarities. The Court held the first batch of allocations (pursuant to the first twenty-one meetings) illegal because of the absence of any guidelines for determining how to select applicants on the basis of merit. It held the next batch illegal because even the guidelines that were framed were of no aid in determining the merit. Thus, the first batch related to the existence of objective 356 material, and the second batch related to its relevance – which, together, constitute the limits of judicial review under 356, and beyond which the Court, in Coalgate, did not go.

What will be particularly interesting in the future will be to see how far the Court takes its 356-analogous line of thought. Coalgate was a particularly easy case because of the absence of guidelines, or their prima facie irrelevance. What will happen if, for instance, the government does frame guidelines, which are at least prima facie relevant to determining merit – but its allocations are then challenged on the grounds that it has incorrectly – or unreasonably – applied its guidelines to the actual question of allocation, or misconstrued the objective requirements of the guidelines? Will the Court then adopt the Article 356 framework fully, and defer to the government? Or will it – keeping in mind Article 39(b) – adopt a more interventionist framework when it comes to questions of distributing natural resources to private entities? This is a fascinating question, and M.L. Sharma leaves it open – perhaps to be settled by another Court, adjudicating another scam.

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Guest Post: The Supreme Court’s “Coalgate” Judgment – II

(In this second, and concluding part, Manish examines the constitutional issues that arose in the Supreme Court’s “Coalgate” judgment)

The main argument advanced on behalf of the petitioners, challenging the allocation, was that the allocations made on the recommendations of the Screening Committee were illegal and ultra vires both the provisions of the 1957 and 1973 Acts, as well as Article 14 of the Constitution. It was argued that the Screening Committee failed to adhere to any consistent criteria while processing the applications, as a result of which coal blocks were allocated even to companies that were not engaged in any of the end-uses notified under section 3 of the 1973 Act. It was alleged, relying on the CAG report,  that some of these companies further sold the coal to government entities that were engaged in the notified end-uses, thus reaping “windfall profits” at the expense of the exchequer.

The Supreme Court accepts this argument after a long and detailed review of the Screening Committee’s work. It is unclear why the court chose to get into the substantive aspect of this argument – having declared that the issuance of allocation letters by the Central Government was in excess of its powers under the 1957 Act as well as the 1973 Act, the entire proceedings could have been quashed on that ground alone. Perhaps, the court was conscious of the fact that there was a major natural resource at stake here and that its order could have large economic impacts (the judgment opens with the lines “Coal is king and paramount Lord of industry”), therefore justifying greater substantive reasoning. As we will see, this consciousness permeates through to the final order as well. The Court merely begins the next part of its reasoning in para 69 with “Assuming that the Central Government has competence to make allocation of coal blocks…”, and then holds that the issuance of the allocation letter amounts to a grant of largesse by the State – thereby subjecting it to judicial review in light of the test of non-arbitrariness, as explained in Ramana Dayaram Shetty v. International Airports Authority and other cases. In para 82, it formulates three questions to be addressed in this regard:

(i) Whether the allocation of coal blocks ought to have been done only by public auction?

(ii) Whether the allocation of coal blocks made on the basis of recommendations of the Screening Committee suffer from any constitutional vice and legal infirmity?

(iii) Whether the allocation of coal blocks made by way of Government dispensation route (Ministry of Coal) is consistent with the constitutional principles and the fundamentals of the equality clause enshrined in the Constitution?

The first question is easily answered in the negative by the Court, relying on its opinion in the 2012 Presidential Reference Re: Natural Resources Allocation as well as earlier cases on the allocation of natural resources by the State. The Court recognises that in order to fulfill the mandate of Article 39(b) of the Constitution (distribution of material resources to serve the common good), auction may not necessarily be the best available method, and this would ordinarily be a matter of executive privilege. In para 105, the Bench observes that despite the fact that competitive bidding would have ensured “transparency, objectivity and very importantly given a level playing field to all applicants…”, it was not the prerogative of the Court to examine or evaluate the various methods available. The court in this respect defers to the Government’s stance that there was a grave shortage of power in the country at that time and hence auctioning, which would have driven prices higher, could not have been the best method to be adopted in the circumstances, holding that “in our view, the administrative decision of the Government not to pursue competitive bidding cannot be said to be so arbitrary or unreasonable warranting judicial interference.”

In respect of the second and third questions, though, the Court is less circumspect:

However, if the allocation of subject coal blocks is inconsistent with Article 14 of the Constitution and the procedure that has been followed in such allocation is found to be unfair, unreasonable, discriminatory, non-transparent, capricious or suffers from favoritism or nepotism and violative of the mandate of Article 14 of the Constitution, the consequences of such unconstitutional or illegal allocation must follow.

The Screening Committee constituted by the Central Government held 36 meetings between 1993 and 2010. The Supreme Court goes into a detailed review of each of these meetings (paras 108-149) and points out several infirmities in the procedure adopted by the Committee (para 150). First, there was no objective criteria for the selection of applicants laid down by either the Central Government or by the Committee itself. The court observes that the Committee only laid down vague guidelines at its first meeting which it kept varying subsequently, and blindly relied on the information provided by the applicants without verifying them. Further, the Committee functioned in a wholly non-transparent manner, with no advertisements released inviting applications, and allocations being recommended in favour of parties without considering their requirements, location or capacity, in breach of the Committee’s own guidelines. The norms for inter se priority allocation to two or more equally qualified applicants for the same block were not laid down until 2003, and even then the Court found serious problems with the application of these norms to selected parties. Thus, the entire proceedings of the Screening Committee were found to be tainted with manifest arbitrariness. It should be noted that besides a few passing references, the Court does not really engage with the question of arbitrariness vis-a-vis fairness in respect of grant of largesse or allocation of natural resources by the State. it seems to presume a settled position in this regard and largely focuses on establishing whether the facts at hand supported the petitioners’ position.

A peripheral point was also raised about the allocation of blocks by the Central Government to public sector undertakings (PSUs) run by the States, in furtherance a 2001 circular that permitted state PSUs to engage in coal mining. The Court quashed the circular as being ultra vires the legislative scheme of the 1973 Act which only permitted commercial mining by the Central Government or its companies, or companies engaged in notified end-uses. It held that the allocation of coal blocks to the state PSUs for engaging in commercial mining were also illegal, observing (para 153) that these blocks had, in many cases, been further handed over to private companies through joint ventures, thereby defeating the entire legislative object and scheme of the 1973 Act.

In its conclusion, the Court is scathing in its indictment of the Screening Committee:

To sum up, the entire allocation of coal block as per recommendations made by the Screening Committee from 14.07.1993 in 36 meetings and the allocation through the Government dispensation route suffers from the vice of arbitrariness and legal flaws. The Screening Committee has never been consistent, it has not been transparent, there is no proper application of mind, it has acted on no material in many cases, relevant factors have seldom been its guiding factors, there was no transparency and guidelines have seldom guided it. On many occasions, guidelines have been honoured more in their breach. There was no objective criteria, nay, no criteria for evaluation of comparative merits. The approach had been ad-hoc and casual. There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth. Common good and public interest have, thus, suffered heavily. Hence, the allocation of coal blocks based on the recommendations made in all the 36 meetings of the Screening Committee is illegal. (emphasis supplied) [para 154]

The allocation having been declared illegal, the next question that arises is to the fate of the coal blocks that have already been allocated. The logical conclusion might be to assume that all these allocations would stand cancelled, or be expressly quashed by the Court as it did in the 2G Spectrum judgment. However, the Court, seemingly conscious of the criticism of its decision in that case, as well as the wide-ranging consequences of cancelling all coal block allocations since 1993 – many of which were made to currently functioning power plants and other infrastructure projects – chooses to tread cautiously, merely stating that “to this limited extent, the matter requires further hearing.” While this manner of splitting the verdict and the consequences seems to be drawn from criminal procedure (where separate hearings are held to determine guilt and sentence), it is seemingly unprecedented in a writ petition. The “further hearing” is scheduled for September 1, and all eyes will be on the Court to see how it deals with the matter.

 

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Guest Post: The Supreme Court’s “Coalgate” Judgment – I

(In this two-part series, Manish examines the recent judgment of the Supreme Court in the coal blocks allocation scam, popularly known as “Coalgate”. In the first post, Manish examines the factual background and history of the case, and in the second post, the core constitutional arguments)

On August 25, in M.L. Sharma v. Principal Secretary, the Supreme Court disposed of a group of public interest litigations challenging the allocation of coal blocks by the Government since 1993. The petitioners alleged that the allocation was a scam of epic proportions – popularly known in the media as ‘coalgate’ since news of it broke in 2012 – that had been carried out in violation of statutory norms and involved large-scale corruption, and sought two-fold relief from the court in cancelling the impugned allocations and initiating a criminal investigation against those involved. In Tuesday’s judgment, the Court dealt with the first prayer, declaring all the allocations illegal but stopping short of cancelling them en masse.

The statutory framework surrounding ownership and exploitation of coal resources is complex, and a brief historical perspective is necessary to understand it in full (dealt with in detail in paras 12-41 of the judgment). Coal mining in India has been carried out for over two centuries by private as well as public enterprises. Coal, being a natural resource (like other minerals), is licensed by the government for exploitation under section 4 read with section 10 of the Mines and Minerals (Development and Regulation) Act, 1957 (“1957 Act”) and Rule 22 of the Mineral Concession Rules, 1960 (“1960 Rules”). All private coal mines in the country were nationalised by the Central Government between 1971 and 1973 through a series of legislative and executive measures that culminated in the Coal Mines (Nationalisation) Act, 1973 (“1973 Act”), creating a government monopoly in respect of coal mining. Section 3 of the 1973 Act originally restricted coal mining to the Central Government, companies owned or managed by it, or companies engaged in iron and steel production. This was being carried out by Coal India Limited (CIL), a Government company that was set up in 1975, and its subsidiaries.

After the liberalisation of the Indian economy in 1991, the Planning Commission suggested that private participation in coal mining be permitted for power projects to overcome the electricity crisis in the country. Accordingly, section 3 of the 1973 Act was amended in 1993 to include companies engaged in other notified end-uses of coal, including power generation, cement production and production of gas. Once private players had been allowed into the field again, the question that arose was how to identify and allocate coal blocks (which were till then under the control of CIL) to these private parties. The procedure that was followed involved the Central Government preparing a list (“booklet”) of available coal blocks and inviting applications for mining leases from private parties. These applications were then processed by a Screening Committee that was constituted (and later reconstituted) by an executive order, and the Central Government then issued letters of allocation based on the recommendations of the Screening Committee. This process continued from 1993 till 2010 when the 1957 Act was amended to insert section 11A, providing for allocation of coal blocks by competitive bidding.

Both the power of the Central Government to allocate coal blocks, as well as the procedure therefor, came to be questioned by the petitioners in the instant case. The preliminary argument advanced on behalf of the petitioners was that the Central Government had no power to allocate coal blocks either under the 1957 Act read with the 1960 Rules, or under the 1973 Act. The Court accepts this submission, observing that neither of the Acts provided any procedure for grant or allocation of coal blocks:

First, although the Central Government has pre-eminent role under the 1957 Act (…) but that pre-eminent role does not clothe the Central Government with the power to act in a manner in derogation to or inconsistent with the provisions contained in the 1957 Act. Second, the CMN Act, as amended from time to time, does not have any provision, direct or indirect, for allocation of coal blocks. Third, there are no rules framed by the Central Government nor is there any notification issued by it under the CMN Act providing for allocation of coal blocks by it first and then consideration of an application of such allottee for grant of prospecting licence or mining lease by the State Government. Fourth, except providing for the persons who could carry out coal mining operations and total embargo on all other persons undertaking such activity, no procedure or mode or manner for winning or mining of coal mines is provided in the CMN Act or the 1960 Rules or by way of any notification. (…) [paras 58-59]

The Court observes that the issuance of an allocation letter to an entity by the Union Government is not merely an exercise in identification, but rather amounts to a selection of a beneficiary and the grant of a right to the allottee. This is significant and based on section 11(1) of the 1957 Act, which reads as follows:

Where a reconnaissance permit or prospecting licence has been granted in respect of any land, the permit holder or the licensee shall have a preferential right for obtaining a prospecting licence or mining lease, as the case may be, in respect of that land over any other person

The Court effectively equates the issuance of the allocation letter with that of the issue of a permit, mining lease or license under section 11. There is one crucial factor, however, that plays an important part in the Court’s subsequent determinations. The issue of a mining lease under section 11 of the 1957 Act is carried out by the State Government. The Court observes that since the allocation letter itself were to amount to the grant of a right, then the State Government’s role under section 11 would be reduced to a mere formality. (A number of attempts were made to suggest that this was in violation of the State Government’s executive power, but this was rejected by the court and in any case is not germane to the analysis being attempted here.) The court eventually concludes that:

…the exercise undertaken by the Central Government in allocating the coal blocks or, in other words, the selection of beneficiaries, is not traceable either to the 1957 Act or the CMN Act. No such legislative policy (allocation of coal blocks by the Central Government) is discernible from these two enactments.     [para 65]

(Part II will examine the constitutional issues)

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Media Law Consultation

Following up on the Consultation Paper that the Law Commission had released in May 2014, the Commission is now holding a public consultation, in association with the National Law University, Delhi, on September 27th and 28th, in Delhi. The Consultation will cover the five broad topics that the Paper outlined. Details are available here.

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What is the State – V: Zee Telefilms, the Death of the Functional Approach, and an Alternative

In the last post, we saw how Ajay Hasia, and the cases following it up to Pradeep Kumar Biswas, gradually began to adopt the legal approach to the meaning of “State” under Article 12, at the expense of the functional approach. 

If Pradeep Kumar Biswas impliedly did away with the public function test, Zee Telefilms vs Union of India did so expressly. In that case, the question was whether the Board of Control for Cricket in India was “State” within the meaning of Article 12. The Board argued that its autonomous nature took it out of the ambit of Article 12, per Pradeep Kumar Biswas. Zee Telefilms, on the other hand, pointed to the “governmental functions exercised by the Board in the area of cricket.” The Court held in favour of the Board. Following Pradeep Kumar Biswas, it noted that the Board was not created by statute, the Government held no share capital, provided no financial assistance, conferred no monopoly, exercised no pervasive control, and had not transferred a government-owned corporation. Consequently, Article 12 was not applicable. Responding to the petitioners’ contentions, the Court then stated: “Even assuming that there is some element of public duty involved in the discharge of the Board’s functions even then as per the judgment of this Court in Pradeep Kumar Biswas that by itself would not suffice for bringing the Board within the net of “other authorities” for the purpose of Article 12″ (paragraph 25)

The petitioners also argued a variant of the functional test – i.e., the power of the Board, by virtue of its near-exclusive control over cricket in India, to impact an important fundamental right on a national scale: the Article 19(1)(g) right to carry on a trade, business or profession – brought it within the ambit of Article 12. Rejecting this contention, the Court held that “the pre-requisite for invoking the enforcement of a fundamental right under Article 32 is that the violator of that right should be a State first… [but] we have already held that the petitioner has failed to establish that the Board is State within the meaning of Article 12. Therefore assuming there is violation of any fundamental right by the Board that will not make the Board a “State” for the purpose of Article 12.” (paragraph 28)

The functional argument – as we have seen through this series of posts – has two (connected justifications). First, there is an idea of a “public function” – certain tasks that, because of their very nature, a government ought to perform, and that shouldn’t be left to the market (policing and defence are uncontroversial examples), such as provisions of social or individual goods that we think every person is entitled to in a modern democracy (education and healthcare are more contested examples). Secondly, it is argued that “centres of power” (a term used by the Supreme Court) are under particular obligations because of their ability to affect basic rights in a deep and pervasive manner, across the board (for instance, control over the country’s police force) – whether those centres of power are State entities, or private ones (like large corporations). In the two paragraphs excerpted above, we can see that the Zee Telefilms court directly rejected both these arguments, unambiguously consigning the functional argument to judicial oblivion.

The Court also rejected the contention that the control of cricket was in the nature of a “State function”, holding that “the State/Union has not chosen the Board to perform these duties nor has it legally authorised the Board to carry out these functions under any law or agreement. It has chosen to leave the activities of cricket to be controlled by private bodies out of such bodies’ own volition (self-arrogated). In such circumstances when the actions of the Board are not actions as an authorised representative of the State, can it be said that the Board is discharging State functions? The answer should be no. In the absence of any authorisation, if a private body chooses to discharge any such function which is not prohibited by law then it would be incorrect to hold that such action of the body would make it an instrumentality of the State.”

But what if, tomorrow, the State “chooses” to leave the function of policing – or maintaining prisons – or national defence – or the judicial system – to private parties? Here, we have the classic problem of a purely descriptive baseline for State function, that we first highlighted in our discussion of R.D. Shetty. With a descriptive baseline, as the State retreats, the areas within which fundamental rights operate become more and more constricted. In fact, this is precisely the argument that the Court made at the end of Zee Telefilms. Cases such as Rajasthan Electricity Board and Sukhdev Singh, it held, were decided in a different socio-economic climate; now, on the other hand, “the State is… distancing itself from commercial activities and concentrating on governance rather than on business.” Yet surely, this cannot be right. Constitutional rights cannot depend upon the economic policy that a State follows at any given time. Intuitively, as well, it seems somewhat strange to visualise a situation where, for instance, a private corporation is given control over the country’s water supply, which it then withholds from people of a particular religion – and to imagine that the Constitution will have nothing to say about that. Again, these thought experiments highlight the need for a normative baseline of “State functions”, that the Court – throughout its jurisprudence – has consistently failed to engage with.

After Pradeep Kumar Biswas and Zee Telefilms, it seems clear that Article 12 is strictly limited to instances of pervasive governmental control, and the public function test is irrelevant to the enquiry. We must look elsewhere for the solution to the problems highlighted above.

One possible solution lies in R.D. Shetty. Recall our original analysis of the case: the Court’s reasoning proceeded along two distinct prongs. One was an Article 12 analysis. The other – which preceded it – was a public law analysis. That is, the Court began with examining the government’s obligations when it acted as a contractor – that is, obligations of fairness and non-discrimination – and then extended the argument to instrumentalities or agencies of the government (which included a strong functional component). It then located another source of those obligations within Article 14 of the Constitution, which launched it off into its Article 12 analysis. In other words, obligations of fairness and non-discrimination stem both from Article 14 and from general principles of public law. The judiciary’s subsequent narrowing down of Article 12 affects the reach of Article 14, limiting it to pervasively government-controlled bodies, but leaves the reach of public law – as outlined in R.D. Shetty - untouched.

Two Supreme Court cases support this proposition. The first is Justice Mohan’s concurring opinion in Unnikrishnan.  The question in that case was whether Article 14 applied to private educational institutions. Justice Mohan observed: “What is the nature of functions discharged by these institutions? They discharge a public duty. If a student desires to acquire a degree, for example, in medicine, he will have to route through a medical college. These medical colleges are the instruments to attain the qualification. If, therefore, what is discharged by the educational institution, is a public duty that requires… [it to] act fairly.

The duty to act fairly – which, in content, is identical to the Article 14 obligation – stems directly from the public duty performed by the entity. As R.D. Shetty teaches, the source of that duty might be either the Constitution, or public law. Pradeep Kumar Biswas and Zee Telefilms close off the first avenue, but not the second.

The second case is – interestingly enough – Zee Telefilms itself. Recognising the trouble with unaccountable private bodies wielding vast swathes of power, the Court held that “it cannot be denied that the Board does discharge some duties like the selection of an Indian cricket team, controlling the activities of the players and others involved in the game of cricket. These activities can be said to be akin to public duties or State functions and if there is any violation of any constitutional or statutory obligation or rights of other citizens, the aggrieved party may not have a relief by way of a petition under Article 32. But that does not mean that the violator of such right would go scot-free merely because it or he is not a State. Under the Indian jurisprudence there is always a just remedy for violation of a right of a citizen. Though the remedy under Article 32 is not available, an aggrieved party can always seek a remedy under the ordinary course of law or by way of a writ petition under Article 226 of the Constitution which is much wider than Article 32.”

Thus, the Court does not hold that non-State bodies do not have a duty to abide by the content of the fundamental rights; it expressly limits its holding to restricting the application of Part III, qua Part III, to non-State bodies. In fact, it specifically refers to Article 226, which vests in the High Court to issue orders and writs to “any person or authority” for the “enforcement of any of the rights conferred by Part III, and for other purposes.” The implications are that it is at least conceptually possible to hold a non-State body accountable for a substantive Part III violation – only not by invoking Part III via an Article 32 petition before the Supreme Court. The only way this is possible is by holding that while the content of the duties in both cases is identical (e.g., the duty to act fairly), their source is different (Article 14 and public law).

This, I would suggest, is sensible. Instead of applying Part III in a blanket manner to any “centre of power”, leading to strange and incongruous results (e.g., what connection could exist between a corporation in control of the nation’s water supply, and the right of minorities to preserve their culture?), the public-law approach allows us to calibrate the scope of an entity’s obligations to its function. For example, in Zee Telefilms, this would entail applying the substance of Article 19(1)(g) to the BCCI; and in Unnikrishnan, the substance of Article 14 to the admissions decisions of educational institutions. Ultimately, the logic boils down to this: entities that – as a structural (and not individual, or isolated) matter, have control over the effective exercise of individuals’ fundamental rights, ought to be accountable within their sphere of control.

If we examine Marsh vs Alabama (which the R.D. Shetty Court relied upon), we find something of this logic at work. In Marsh, one important reason why the Court held that First Amendment rights applied to the sidewalks and streets of a privately-owned company town, was the lack of a feasible exit option: people living in the company town couldn’t simply pack up and go elsewhere to engage in free speech and expression; thus, they would simply be denied any effective exercise of their constitutional rights, if the private owners’ property interests were allowed to trump the First Amendment. Or, in other words, the company-town was in a position where it effectively had  exclusive power and control over the constitutional rights of a significant number of people. Consequently, the First Amendment applied. I suggest that, in the last analysis, examining the extent to which such power and control exists in individual cases, and accordingly deciding the scope of the (public-law sourced) obligations of private entities (for which there is precedent, in the form of Unnikrishnan and Zee Telefilms), is both intellectually the most defensible approach, and pragmatically the most sensible one.

 

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What is the State – IV: Agency/Instrumentality as a Function of State Control

In the last post, we saw how the impact of R.D. Shetty was to create a blended legal-functional approach towards interpreting Article 12. Two years afterwards, in 1981, a Constitution Bench of the Court considered the question yet again, in Ajay Hasia vs Khalid MujibJustice Bhagwati, who wrote for the Court in R.D. Shetty, also authored the unanimous opinion in Ajay Hasia. This makes the marked shift in tone between the two cases both striking and surprising.

In Ajay Hasia, the question was whether the Regional Engineering College of Srinagar was “State” within the meaning of Article 12. The College had been established, and its administration was carried on, by a Society that was registered under the J&K Societies Act. Consequently, the first argument of the Society was that it had not been set up by the government under a statute, and so could not come within the meaning of Article 12. Unsurprisingly, following R.D. Shetty, the Court rejected this contention. It cited R.D. Shetty copiously, and declared itself to be following its decision. The impact, however, was rather different.

From the beginning of its analysis (which starts at paragraph 7 of the judgment), the Court focused continuously – and almost exclusively – upon government control as the determining test for Article 12. The tone of the judgment resembles a corporate-veil analysis from company law. The purpose of Article 12’s expanded definition, according to the Court, was to cover those corporations where, “behind the formal ownership which is cast in the corporate mould, the reality is very much the deeply pervasive presence of the Government… it is really the Government which acts through the instrumentality or agency of the corporation and the juristic veil of corporate personality worn for the purpose of convenience of management and administration cannot be allowed to obliterate the true nature of the reality behind which is the Government.” (Paragraph 7) What seemed to be concerning the Court was the government’s attempt to doing an end run around its Part III obligations by creating the corporate form as a separate legal personality, while maintaining control over it: or, in other words, fraud. Comments to that end are scattered throughout the core of the Court’s analysis, in paragraph 7.

Immediately after that, the Court cited extensive excerpts from R.D. Shetty, before “summarising” that case through six markers of the ambit of “State”: (1) holding of the corporation’s entire share capital by the government; (2) extensive financial assistance; (3) a State-conferred monopoly status; (4) deep and pervasive State control; (5) functions of public importance, or closely related to governmental functions; and (6) transferring a government department to a corporation. (Paragraph 9)

While all six of these features were admittedly present at various points in the R.D. Shetty judgment, the Court here dilutes the functional aspect of the test, by relegating it to one among six factors, most of which are directly about governmental control. In R.D. Shetty, on the other hand, government control (which could be financial, or administrative, or both) was treated as being equally important as the performance of a public function. Not so in Ajay Hasia, where the judgment – and its six criteria – are primarily about preventing the State from acting colourably via a corporate shield.

The Court’s application of the principles to the facts of the case (paragraph 15 onwards) bears this out. After examining the composition of the Society and its board of governors, its finances and its administration, the Court concluded that the “control of the State and the Central Governments is indeed so deep and pervasive”, that the Society was undeniably an instrumentality or agency of the State under Article 12. On the other hand, the Court paid no attention to the function performed by the Society – that of higher education – in its analysis. The functional test, therefore, is conspicuously missing from the Court’s analysis (interestingly, the function of education as a ground for attracting Part III obligations was considered a few years later by Justice Mohan, in his concurring judgment in the Unnikrishnan case).

In cases following Ajay Hasia – P.K. Ramachandra Iyer vs Union of IndiaB.S. Minhas vs Indian Statistical Institute, Central Inland Water Transport Corporation vs Brojo Nath Ganguly, and Chander Mohan Khanna vs NCERT – the judgment invariably turned upon the aspect of control. However, the triumph of the legal test was completed in 2002, in the case of Pradeep Kumar Biswas vs Indian Institute of Chemical Biology, a judgment delivered by a seven-judge bench. The factual matrix of the case is complex: briefly, it involved the reconsideration of Sabhajit Tewari’s case, in which a Constitution bench had held that the Council of Scientific and Industrial Research was not “State” within the meaning of Article 12. In Pradeep Kumar Biswas, Justice Ruma Pal went into the history of the Supreme Court’s Article 12 jurisprudence, and distinguished between a “narrow” and a “broad” approach to Article 12. For her, however, the difference was not between the legal and the functional approach, as we have discussed, but between the statutory approach (in the earliest cases), and the legal approach (Rajasthan Electricity Board onwards). In her judgment, the functional test is erased out of history: Justice Mathew’s concurrence in Sukhdev Singh and the judgment in R.D. Shetty are simply treated as affirming the legal approach, which was ultimately crystallised in Ajay Hasia.

Having listed Ajay Hasia’s six factors, Justice Ruma Pal decided to crystallise them further. The teaching of the cases that culminated in Ajay Hasia, she held, was “whether in the light of the cumulative facts as established, the body is financially, functionally and administratively dominated by or under the control of the Government. Such control must be particular to the body in question and must be pervasive. If this is found then the body is a State within Article 12. On the other hand, when the control is merely regulatory whether under statute or otherwise, it would not serve to make the body a State.” Here, the entire focus is on control, and the public-function aspect has disappeared altogether.

Justices Lahoti and Raju recorded a dissenting opinion. They argued that the majority – as well as the line of cases that it had relied upon – had gone fundamentally wrong in equating “instrumentality or agency” with “other authorities”, under Article 12. If – following Justice Bhagwati’s opinion in Ajay Hasia – the point of the “instrumentality or agency” test was to prevent the government from hiding behind the corporate form, then the actions of the corporation so created could simply be equated to those of the “State” itself, without the necessity of going through “other authorities”. Or, in other words, the actions of a corporation whose directing mind and will is the State, are actions of the State, simply put. Article 12 defines “State” inclusively, but there is no need to resort to terms such as “other authorities”, when the corporate veil has been – colloquially – pierced, and the identity of the corporation equated with the identity of the State.

What then does “other authorities” mean? Justices Lahoti and Raju commenced their enquiry from Article 13. Article 13(1) states that all laws inconsistent with Part III, at the time of the commencement of the Constitution, are void to the extent of such inconsistency. Article 13(2) prohibits the State from passing laws contravening Part III. Article 13(3) defines a “law” as “any Ordinance, order, bye law, rule, regulation, notification, custom or usages having in the territory of India the force of law.” Latching upon this definition of “law”, Justices Lahoti and Raju argued that because the whole point of Part III – as Article 13 demonstrated – was to protect citizens from certain kinds of laws, Article 12’s “other authority” must be such that is competent to make these kinds of laws. This took them back to the “narrow” approach, which they drew from the writings of Seervai, and attributed (in my submission, incorrectly) to Justice Mathew’s concurrence in Sukhdev Singh’s Case. They held that “to be an authority, the entity should have been created by a statute or under a statute and functioning with liability and obligations to public. Further, the statute creating the entity should have vested that entity with power to make law or issue binding directions amounting to law within the meaning of Article 13(2) governing its relationship with other people or the affairs of other people – their rights, duties, liabilities or other legal relations.”

While Justices Lahoti and Raju’s objections to the majority’s use of “instrumentality or agency” are compelling, in my submission, in their interpretation of the term “other authorities”, the conclusion does not necessarily follow from the premise. It is, of course, true that Article 13 lists a specific way in which fundamental rights can be violated (by a law, which will be accordingly void), but that does not imply that that is the only way in which fundamental rights can be violated. Consider the wordings of two different kinds of fundamental rights. Article 14 reads: “The State shall not deny to any person equality before the law, or equal protection of the laws within the territory of India.” Article 15(1) reads: “the State shall not discriminate against any citizen on grounds only of religion, race, caste, sex, place of birth or any of them.” The difference between the two provisions shows that where the framers envisioned fundamental rights as being violated only by a “law” (under its expanded definition in Article 13(2)), they were explicit about it; at the same time, many of the fundamental rights are worded affirmatively, and make no mention of violation through law. Indeed, in cases like Kharak Singh, the Court has held that Articles 19(2) to 19(6) – which permit reasonable restrictions – by law – on Article 19 fundamental rights – apply only when there is a “law”; if there is no “law”, but only State action, then there is a straightforward violation of fundamental rights. This buttresses the conclusion that – at least in theory – it is possible for violations of fundamental rights to take place in the absence of law. Justice Lahoti and Raju’s dissent is eloquently argued, and their view has much to recommend itself, but the case still remains to be made out.

 

 

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What is the State – III: Adopting the “Instrumentality or Agency” Test

In the last post, we discussed two approaches towards interpreting the term “other authority” in Article 12, exemplified by the majority and the concurrence in Rajasthan State Electricity Board v. Mohan Lal. The “legal approach” assimilates to the State those entities that the State creates (via statute), or has extensive control over. Or, in other words, the State must, in some way, be closely connected with the workings of the entity in question. The “functional approach”, on the other hand, brings within Article 12  all entities that perform State-like functions. Justice Mathew’s concurring opinion in Sukhdev Singh v. Bhagat Ram, as we saw, shuttled back and forth between the two conceptions, and his “agency and instrumentality” test appears to be agnostic about which approach it favours.

The question came before the Court again, in the 1979 case of R.D. Shetty vs International Airport AuthorityThe International Airport Authority was a corporate body constituted under the International Airport Authority Act of 1971. It invited tenders for running restaurants and snack bars at the Bombay International Airport, and ultimately accepted the highest bid. This decision was challenged, on the ground that in awarding the contract, the Authority had failed to abide by its own stipulations, and in treating similarly situated persons differently, had violated Article 14. The first question, therefore, was whether the International Airport Authority was subject to Article 14 obligations.

The Court’s analysis can be divided into five parts (although the Court itself does not do the division). In the Part I (paragraphs 10 to 12), the Court set out some general principles constraining the action of the government, when it acts as a contractor. In Part II (paragraphs 13 to 18), it analysed the situations under which a corporation can be subjected to the same public law constraints that apply to the government, as listed out in the Part I. In the Part III (paragraphs 19 to 27), it cited precedents that also located Article 14 as the source of these constraints. In Part IV (paragraphs 28 to 32), it extended its analysis in the first and second parts to Article 12, in order to determine when Article 14 obligations would apply to corporations. And in Part V (paragraphs 33 to 36), it applied its legal findings to the case of the International Airport Authority. The key conclusion of the Court is found in paragraph 28 of the judgment, where it referred to the two lines of precedent that we have discussed before, and adopted the broader “instrumentality and agency” test Justice Mathew propounded in his concurring opinion in Sukhev Singh vs Bhagat Ram, as a “perhaps more satisfactory [test]… for determining whether a body… falls within the definition of ‘State’.”

The Court first established the unexceptionable proposition that even when the government is acting as a contractor, it is bound by public law obligations of fairness, non-discrimination and non-arbitrariness. It held that these obligations arose both from Article 14, and from general principles of public and administrative law. The basis for this, the Court found, was in the rapidly expanding functions of the State in the welfare era, where “the power of the executive Government to affect the lives of the people is steadily growing. The attainment of socio-economic justice being a conscious end of State policy, there is a vast and inevitable increase in the frequency with which ordinary citizens come into relationship of direct encounter with State power-holders. This renders it necessary to structure and restrict the power of the executive Government so as to prevent its arbitrary application or exercise.”

Having established this proposition, the Court then held “that the Government which represents the executive authority of the State, may act through the instrumentality or agency of natural persons or it may employ the instrumentality or agency of juridical persons to carry out its functions.” Once again, the Court referred to the expanding role of the State, which created the environment for the creation and flouring of the public corporation, “as incidental to or in aid of governmental functions.” Naturally, such corporations would be subject to the same public and constitutional law obligations as the State. The key question then became the question of determining when a corporation was an “instrumentality or agency” of the State.

The Court held that that there could be no “cut and dried formula” that would provide the answer, and proceeded to examine a range of alternatives. Citing the American doctrine of State action, it noted that “extensive and unusual financial assistance” from the government might be a relevant consideration. The same considerations applied to an “unusual degree of [State] control over the policies and management” of the corporation (paragraph 15).

These two considerations – financial and administrative control – are, as we can see, part of the legal approach to the meaning of State. In the next paragraph, however, the Court shifted gears: “another factor which may be regarded as having a bearing on this issue and it is whether the operation of the corporation is an important public function.” This, as we have seen before, is a deeply fraught question, and depends almost entirely upon resolving the normative question about the proper role of the State. The Court was acutely aware of the problem, referring to the difficulty in determining “what functions are governmental, and what are not”, and noting that the answer to that question was changing continuously, even as the place of the State in society changed over the years. Nonetheless, ultimately it seemed to settle upon a largely descriptive test: “the modern State operates a multitude of public enterprises and discharges a host of other public functions. If the functions of the corporation are of public importance and closely related to governmental fun ctions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of Government.” (Paragraph 16). Of course, there is a very important problem with this: what do you do when the State retreats from functions that it used to perform (as is happening under the present, neo-liberal model?). It is quite clear that a descriptive test can be of no help in such a situation: a normative baseline of “State function” is essential.

In affirming the public function test, the Court relied upon the American case of Marsh v. Alabama, which we have discussed before on this blog. In Marsh, a privately owned company-town was required to permit a Jehovah’s Witness to exercise her First Amendment rights by preaching on the sidewalk. In Marsh, there were a number of considerations that went into the final decision: the fact that traditionally, parks, public squares and sidewalks were places for the exercise of First Amendment rights, that there was no viable alternative for the residents of the company town (leading to unequal treatment between people who lived in company towns, and those who lived in ‘regular towns’), and that First Amendment rights were deemed to be superior in importance to property rights. Therefore, Marsh was not decided solely on the ground of a “public function”, and this ambiguity is reflected in the Court’s conclusion, where it held that “the public nature of the function, if impregnated with governmental character or “tied or entwined with Government” or fortified by some other additional factor, may render the corporation an instrumentality or agency of Government.” (Paragraph 18) The exact distinction between a “public function” and “governmental character” remains unclear.

The Court then went on to cite precedents that also required the government to act fairly, when contracting, under Article 14. At this point, the Court had established the public law obligations that apply to the government when it acts as a contractor (Part I), extended those obligations to corporations that were acting as instrumentalities or agencies of the State (Part II), and located a further ground of the obligations in Article 14). Part IV, therefore, became a mirror image of Part II: also extending the Article 14 obligations – in addition to public law obligations – to corporations, by interpreting Article 12. It is here that – as we saw above – the Court simply lifted its “instrumentality or agency” discussion from Part II, and applied it to Article 12 as well, concluding that “[what is relevant and material] is  “whether the Corporation is an instrumentality of the Government in the sense that a part of the governing power of the State is located in the Corporation and though the Corporation is acting on its own behalf and not on behalf of the Government, its action is really in the nature of State action.”

In its analysis of whether or not the International Airport Authority fell within the definition of “State”, the Court undertook an extensive investigation of the nature and form of governmental control, from state financial and administrative control, to the corporation performing the erstwhile governmental function of administering airports, and so on. Crucially, the fact that the International Airports Authority was set up under a statute did not play a determinative (or even significant) role in the Court’s analysis, as it had in previous cases.

Thus, in R.D. Shettythe Court adopted the language of Justice Mathew – “instrumentality or agency” – but subsumed within it both the legal and the functional approaches, developing one composite test that took into account financial and administrative control as well as public function (the Court’s reliance upon Marsh is particularly significant, since in that case the holding turned not upon the company town’s formal association with the State, but almost entirely upon what it was doing), in a holistic, case-specific enquiry.

In the next post, we will continue to chart this development in subsequent cases.

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