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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