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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repealed or amended appropriately, the Government should be restrained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

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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

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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

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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 â\200\223 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 â\200\223 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

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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

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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

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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

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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

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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.