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1996 DIGILAW 363 (KER)

Paulose v. Cochin Refineries Ltd.

1996-08-22

K.G.BALAKRISHNAN, T.RAMACHANDRAN

body1996
Judgment :- Balakrishnan, J. In an earlier decision reported in Thomas v. Cochin Refineries Ltd. (1982 KLT 553 = AIR 1982 Kerala 248) it was held that the Cochin Refineries Ltd. is not an "instrumentality of the State' within the meaning of Art.12 of the Constitution. These Original Petitions were filed under Art.226 of the Constitution challenging the administrative action of the Cochin Refineries Ltd. The petitioners seek re-consideration of the view taken in Thomas v. Cochin Refineries Ltd. (1982 KLT 553 = AIR 1982 Kerala 248) and they contend that the Cochin Refineries Ltd. is an instrumentality of the State under Art.12 of the Constitution. The learned single judge before whom these petitions came up for consideration was pleased to refer the matter to the Division Bench, 2. Petitioners in these Original Petitions contend that the view taken by the learned judge in Thomas' case is not correct in view of the various decisions of the Supreme Court on the point and also due to the subsequent change of ownership of shares of the respondent company. 3. The Cochin Refineries Ltd. is a Company incorporated under the Companies Act. The Company is engaged in refining petroleum products. As far as the shareholding pattern of the Company is concerned, 61.17% of shares are held by Union Government, 5.08% by the State of Kerala and some shares are held by the State owned Corporations and other authorities such as L.I.C., Unit Trust etc. 16.03% shares are held by public. Formerly, 26% of the shares were held by Philips Petroleum Company of United States of America. The shares held by Philips Petroleum Company were distributed among other sharers and for the time being the shares of the respondent Company are not held by any foreign company. The members of the Director Board are appointed by the Government of India and in all policy matters the final decision is taken by the Government of India ie., to secure repayment of borrowings, to undertake works involving capital expenditure exceeding Rupees Fifty lakhs, to invest money in securities, to set apart any part of profits to provide fund to provide pensions, gratuities etc. The Board of Directors can elect one of them as Managing Director. The Board of Directors can elect one of them as Managing Director. Respondent Company is a Government Company as defined under S.617 of the Companies Act which says that the Government company means any company in which not less than fifty one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by Central Government and partly by one or more State Governments and includes a company which is a subsidiary of the Government company as the case may be. 4. Art.12 defines the expression, "the State". This definition is used in relation to the fundamental rights guaranteed under Part III of the Constitution and Directive Principles of State Policy contained in Part IV of the Constitution. A large number of authorities were cited to show how the Courts interpreted the expression "the State" in Art.12 of the Constitution. Counsel for the respondent company contended that the decision in Thomas' case does not call for any re-consideration and a view similar to this was taken in Tekraj v. Union of India (AIR 1988 SC 469). That is in respect of the Institute of Constitutional and Parliamentary Studies (ICPS) registered under the Societies Registration Act 1860. The Supreme Court held that the objects of the Society were not governmental business but were certainly the aspects which were expected to equip members of Parliament and the State Legislatures with the requisite knowledge and experience for better functioning. Though the annual contribution from the Government has been substantial it was not the main source of funding. It was in this background the Supreme Court held that ICPS was not a "State" within the meaning of Art.12. We do not think that this decision has any application to the facts in the present case. 5. In another decision reported in Chander Mohan Khanna v. NCERT (AIR 1992 SC 76) it was held that the National Council of Educational Research & Training was not held to be State within the meaning of Art.12. This decision was rendered on the basis that the activities comprising undertaking of programmes and activities connected with co-ordination of research services and training was not wholly related to governmental function and the funding was not also exclusively by the Government. This decision was rendered on the basis that the activities comprising undertaking of programmes and activities connected with co-ordination of research services and training was not wholly related to governmental function and the funding was not also exclusively by the Government. The government control is confined only to proper utilisation of the grant and it was only one of the sources of income. This decision also is not helpful to resolve the controversy. The same view was taken in Sabhajit Tewary v. Union of India (AIR 1975 SC 1329) wherein it was held that the Council of Scientific and Industrial Research is not an authority within the meaning of Art.12 as it was only a society and it was not having a statutory character like ONGC or the LIC or Industrial Finance Corporation. 6. One of the earliest decisions is Rajasthan State Electricity Board, Jaipur v. Mohan Lai (AIR 1967 SC 1857). The Constitution Bench of the Supreme Court by majority held that the Electricity Board of Rajasthan constituted under the Electricity (Supply) Act, 1948 was "the State" as defined under Art.12 because it was "other authority" within the meaning of that Article. The Court held that the expression "other authority" was wide enough to include within it every authority created by a statute, on which powers are conferred to carry out governmental or quasi-governmental functions and functioning within the territory of India or under the control of Government of India. 7. Another decision oh this issue was reported in Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi (AIR 1975 SC 1331). Two questions fell for determination in this case. Firstly, whether statutory corporations could be comprehended within the expression "the state" as defined in Art.12 and secondly, whether the regulations framed by a statutory corporation in exercise of the power conferred by the statute creating the corporation have the force of law. The Supreme Court answered both these questions in the affirmative. It was held: "The State" as defined in Art.12 comprehends bodies created for the purpose of promoting economic interests of the people and the circumstances that statutory bodies are required to carry on some activities of the nature of trade or commerce does not indicate that they must be excluded from the scope of the expression "the State". It was held: "The State" as defined in Art.12 comprehends bodies created for the purpose of promoting economic interests of the people and the circumstances that statutory bodies are required to carry on some activities of the nature of trade or commerce does not indicate that they must be excluded from the scope of the expression "the State". It was also held that the institutions engaged in matters of high public interest or performing public functions are by virtue of the nature of the function performed government agencies, Mathew, J., (at page 1356-57) held thus: "The fact that these corporations have independent personalities in the eye of law does not mean that they are not subject to the control of government or that they are not instrumentalities of the government. These Corporations are instrumentalities or agencies of the State for carrying on business which otherwise would have been run by the State departmentally. If the State had chosen to carry on these business through the medium of government departments, there would have been no question that actions of these departments would be 'State actions'. Why then should actions of these corporations be not State actions...." 8. In Ajay Hasia v. Khalid Mujib Sehravardi (AIR 1982 SC 487) the question arose whether the Regional Engineering College which was established and administered and managed by a society registered under the Jammu and Kashmir Registration of Societies Act, 1898 could be held to be "the State" within the meaning of Art.12. It was held: "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." 9. Another important decision on this point is the decision reported in R.D. Shetty v. International Airport Authority of India (AIR 1979 SC 1628). The position was explained in detail and it was described as to how the corporation veil could be lifted and the true nature of the corporation could be found. Another important decision on this point is the decision reported in R.D. Shetty v. International Airport Authority of India (AIR 1979 SC 1628). The position was explained in detail and it was described as to how the corporation veil could be lifted and the true nature of the corporation could be found. The following guidelines were issued: "(1) 'One thing is clear that if the entire share capital of the corporation is held by Government it would go a long way towards indicating that the corporation is an instrumentality or agency of Government'; (2) 'Where the financial assistance of the State is so much as to meet almost entire expenditure of the corporation, it would afford some indication of the corporation being impregnated with governmental character'. (3) 'It may not be a relevant factor.... whether the Corporation enjoys monopoly status which is the State conferred or State protected'. (4) 'Existence of deep and pervasive State control may afford an indication that the Corporation is a State agency or instrumentality'. (5) 'If the functions of the corporation are of public importance and closely related to governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of Government". 10. Yet another important decision on this point is reported in Central Inland Water Transport Corporation. Ltd. v. brojonath (AIR 1986 SC 1571 =1986 Lab I.C. 1312). The company in question was carrying on the business of maintenance and running of river services entered into a scheme of arrangement with the Central Inland Water Transport Corporation Ltd. It was a Government Company owned by Central Government. It was held at paragraph 69 of the judgment: "If there is an instrumentality of agency of the State which has assumed the garb of the Government company as defined in S.617 of the Companies Act, it does not follow that it thereby ceases to be an instrumentality or agency of the State. For the purpose of Art.12, one must necessarily see through the corporate veil to ascertain whether behind that veil is the face of an instrumentality or agency of the State. The Corporation, which is the Appellant in these two Appeals before us, squarely fails within these observations and it also satisfies the various tests which have been laid down". For the purpose of Art.12, one must necessarily see through the corporate veil to ascertain whether behind that veil is the face of an instrumentality or agency of the State. The Corporation, which is the Appellant in these two Appeals before us, squarely fails within these observations and it also satisfies the various tests which have been laid down". The above decision clearly establishes that if the Company is functioning under the Government and if there is deep and pervasive financial control over the affairs of the Company it could only be held that the Company would come within the definition "the State" under Art.12 of the Constitution. It is true that the company is a separate juristic personality but if the Company is carrying on governmental function and carrying on business which otherwise would have been run by the State departmental Sy such Corporations or agencies have to be construed as State. If the majority of the shares are held by the Government and the policy decisions are decided by the Government and even if the company enjoys a monopoly status it is divested of its character of an instrumentality of the State. 11. In the instant case, as already noticed, the majority of shares are held by the Union Government, State Government and other State owned corporations and Nationalised Banks. Of the remaining shares, only a fractional number of shares is held by the public. The distribution of petroleum products is a vital governmental function. After the nationalisation of petroleum companies, the distribution of petroleum products are through governmental agencies. In respect of the activities of the Company, there is deep and pervasive control by the Government. In view of the fact that Phillips Petroleum company is divested of all its shares is an additional factor to hold that the Company has now become a "State" within the meaning of Art.12. The earlier decision reported in KM. Thomas v. Cochin Refineries Ltd. (1982 KLT 553; AIR 1982 Ker. 248) to the effect that Cochin Refineries Ltd. is not an instrumentality of the State is not correct in view of the changed circumstances. We overrule that decision and hold that the Cochin Refineries Ltd. is a "state" within the meaning of Art.12 of the Constitution. (Paras 12 to 26 omitted being statement of facts) Original Petition Nos. 248) to the effect that Cochin Refineries Ltd. is not an instrumentality of the State is not correct in view of the changed circumstances. We overrule that decision and hold that the Cochin Refineries Ltd. is a "state" within the meaning of Art.12 of the Constitution. (Paras 12 to 26 omitted being statement of facts) Original Petition Nos. 3114of 1985 and 10726 of 1990 are dismissed and O.P. No. 11037 of 1992 is disposed of as above.