Department of Disinvestment, Ministry of Finance, Govt. of India
03 September 2014 12:17:29 AM
IN THE SUPREME COURT OF INDIA
WRIT PETITION (CIVIL) NO. 171 OF 2003
Public Interest Litigation
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
disinvestments but they are only challenging the manner in which the policy of
disinvestments 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unless the enactments are repealed or amended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 disinvestments resulting in HPCL and BPCL ceasing to be Government
companies. It is further submitted
that disinvestments 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 enalitarian 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 Pavne Vs. James Wilson
and Her Majesty the Queen in Right of Ontario dated April 19, 2002.
In that decision the Superior Court of Justice of Ontario declared that
any sale of the common shares of Hydro One Inc. held in the name of Her Majesty
in right of Ontario, whether pursuant to an initial public offering of common
shares or by way of a secondary offering, or otherwise, contravenes sub-section
48(1) of the Electricity Act, 1998. In
that enactment Section 48(1) provides that the Lieutenant Governor in Council
may cause two corporations to be incorporated under the Business Corporations
Act and shares in these 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 authorizes 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
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 Employee Union vs. Union of India,
2002 (2) SSC 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; 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 decision 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 Price Mechanism with effort from 1-04-2002, the
Government’s main responsibility in the petroleum sector is laying down the
broad policy framework with the objectives of ensuring oil security in the
country and protecting the interests of consumers; that, under the ensuing
market scenario in the oil sector, there is a need for an independent statutory
regulatory mechanism to ensure competition, encourage investment and protect
consumers’ interest in the oil sector, that, steps have been taken to
introduce in Parliament a Bill for establishing a statutory regulatory
authority; that, two private parties viz., M/s Reliance Industries Limited and
Essar Oil Limited, have already been granted authorisations to market
transportation fuels and the Government has already deregulated Exploration and
Production, Refining and Pipelines; that, there is now widespread private sector
participation in Exploration and Production, Refining and Pipelines; that,
petroleum sector and consumers are expected to benefit as a result of such
increased competition; that, in
this global economic scenario and the need for greater private participation and
private finance initiative, disinvestment by Government of its share holding in
State owned companies is an instrument of economic policy accepted globally.
It is also brought to our notice by him that assets of the HPCL and BPCL
were acquired by the Central Government through Acts of Parliament but in course
of time of more than quarter of a century the assets have changed their nature
and today they bear hardly any resemblance to the assets which were acquired
under the statutes; 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 statutes 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
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 where acquired by the
Government by legislation was that part of the assets included the marketing
part of the 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 law.
That part of the assets belonging to the two oil companies were obtained
by negotiated purchase, rather than through acquisition; that in the case of
Burmah Shell, the assets belonging to the Indian subsidiary were bought through
a commercial transaction; that, it cannot be gainsaid that the companies are
free to sell off their assets without any change in the law; that thus if the
companies desire to sell off at this distance of time the old machinery
inherited by them (and the value of which is a small fraction of its current net
worth), there is no legal embargo even if it amounts to the company no longer
holding any of the assets vested in after nationalisation; that if the
contention of the petitioners is accepted, the Central Government cannot sell
its shares even in such a company; that, the definition of a Government Company
can be amended under the Companies Act generally and unrelated to purposes
nationalisation laws or can amalgamate these companies with another company
which may ultimately impact the Central Government’s shareholding; that thus,
there is nothing in law to prevent the Central Government
to amend the articles to provide that even if it continues to hold 51% it
will not interfere in the management with
the private strategic partner who holds less shares; that the Government can
attain the same object in a manner more favourable to the Government viz by
selling off its shares to reduce its holding; that, the submission that the
policy underlying a statute has to be determined from a reading of the preamble;
and that reference to the preamble of a statute can be had only when the words
of a statute are ambiguous and placed reliance on Smt. Sita Devi (Dead) by
LRs. V. State of Bihar & Ors. 1995 Supp (1) SSC 670, para 2; that,
the legislative policy as spelt out in the preamble which is to ensure that the
assets are so managed and the undertaking is so run to ensure that its business
remains vested in the State so that it can be run for the public good; that even
by transfer of a company other than Government company the assets can be
distributed in a manner that would subserve the common good and “the common
good” is a matter of economic policy; that with the passage of time, the needs
of the economy may dictate changes- a change cannot be condemned on the ground
that it would be detrimental 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 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 a new instrument of
service for which approval of Parliament is required for expenditure from the
Consolidated Fund of India. If this
is the background in which a new company is set up, can such a company be
dismantled without some kind of parliamentary mandate?
In this background we will now consider the case on hand.
The pleadings filed and the arguments raised before this Court indicate
that the question for consideration before us is whether or not there is any
express or implied limitation on the Government to privatise HPCL and BPCL.
It is no doubt true that the two companies are Government companies and
being instrumentalities of the State, they can enter into contracts among other
things, but question is whether
this power is circumscribed by any statute either expressly or by necessary
implication. It is also clear that
there is no provision in the Act expressly stating that the Government shall, at
all times, hold not less than 51 % of the paid-up capital of each corresponding
new company, as has been stated in the Banking Companies (Acquisition &
Transfer of Undertakings) Act. Nor
is there any provision as in the Coal Mines Nationalisation Act, 1973 to the
effect that “no person, other than the Central Government or a Government
company or a corporation owned, managed, or controlled by the Central Government
shall carry on coal mining operation, in India, in any form”.
For the purpose of understanding the provisions we will set out the
relevant provisions of one of the enactments.
We make it clear that the three enactments stated above in this case are
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 maters connected therewith or incidental thereto.
WHERE AS Esso Eastern Inc, a foreign company, ie 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.
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 in 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 bouts. For the present
purpose, Section 7 of the Act is important and it reads as follows :-
7(1) Notwithstanding anything contained in Section 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
the right, title and interest and the liabilities of Esso in relation to its
undertakings in India vest in a Government company under sub-section (1), the
government company shall, on and from the date of such vesting be deemed to have
become the owner, tenant or lessee, as the case may be in relation to such
undertakings and all the rights and liabilities of the Central Government in
relation to such undertakings shall, on and from the date of such vesting be
deemed to have become the rights and liabilities respectively of the Government
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” shall be constituted as a reference to the
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 any 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” 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 property of the
undertaking in the Government or a Government company, it cannot mean that it
enable 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 Section 224 to 233 are substituted and the audit of the
company takes place under the supervision and control of the Comptroller &
Auditor General of India who shall give effect to Section 224 (1-B) (1-C).
The Auditors shall submit a report to the Comptroller & Auditor
General of India and even when audit takes place, subject to his instructions.
Comptroller & Auditor General of India may also conduct supplementary
Audit and a test audit. Under
Section 19(1) of Comptroller & Auditor General’s (Duties, Powers and
Conduct of Service) Act, 1971 audit of companies is to be conducted by him in
terms of the Companies Act. Annual
Reports on the working of affairs of the company is laid before Parliament under
Section 619(1)(b) of the Companies Act. Such
control will be lost if a company ceases to be a Government company.
Argument of Sri Harish Salve that a simple amendment of Section 617 of
the Companies Act unrelated to the acquisition can alter the position in law is
only perceived but not attained and hence does not require any examination.
He contended that to facilitate disinvestment of the shares the public
sector enterprises are allowed to list the shares on Stock Exchanges,
irrespective of the percentage of shares disinvested by the Government and,
therefore, submitted that there is no need for the government to obtain
Parliamentary approval. Sales of
shares of these companies, though uninhibited, cannot be to such an extent so
that the substratum of the character of the Government companies is allowed to
be lost and converted into an ordinary company without being approved by the
General Body of shareholders and in this case, the Government.
Government, in turn, is subject to the statutory limitations, to which we
have adverted to now. Hence, the
argument begs the question which is put in issue before us.
Again accretions to the Government company’s assets subsequent to
acquisition of the undertaking is an irrelevant factor in the context of the
question we are considering. Here
what is required to be seen is, not which asset can be transferred or not but
whether the undertaking can change its character from a Government company to
ordinary company without Parliamentary clearance in the light of the statute of
The debate as to whether a privatisation law is necessary has been going
on all over the world. This aspect
has been discussed by Plerre Guislain in his book entitled ‘The Privatisation
Challenge’ published by the World Bank. The
views of the learned Author are reproduced hereunder :-
a country needs to enact a privatisation law or can do without one depends on
several factors the political situation and legal traditions of the country, the
scope of its privatisation 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 privatisation, and if so, should the new provisions take the form of
amendments to the pertinent laws or be grouped together in a specific
countries have opted to enact privatisation laws even when privatisation could
have been implemented without amending the existing legislation.
This may have the advantage of mobilizing explicit political support and
commitment in favour of privatisation from the very start.
It may confer a stronger, clearer mandate on the government and agencies
in charge of implementing privatisation and make them more accountable.
A privatisation 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 privatisation 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 privatisation 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 privatisation, the same should reflect the broad political lines of the privatisation strategy and programme and that it should also endow the Government or privatisation agency with the required implementation powers, and it should avoid restrictions that may unduly tie the hands of the executing agencies and slow down the process. The legislation must allow adequate flexibility, in the choice of the privatisation 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 power necessary for fulfilling that mandate; and unambiguous, flexible, and competitive privatisation procedures applied in a transparent manner by officials accountable for their actions.
Apart from United Kingdom, there have been privatisation programmes in France and Italy in Europe. Similarly massive programme has been carried out in Agrentina, Maxico and Brazil. In these countries, Privatisation Acts have been enacted and numerous routes are adopted to achieve privatisation, some of which are illustrated below :
A public offering of shares combined with a listing on the stock exchange
has brought shares 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.
A trade sale to another private sector company or to a consortium and
such a transactions is inherently more private than a share offering and some of
the privatisations executed in this manner have faced some criticism for being
insufficiently open to public examination and debate.
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.
A private placing of shares in a business with a group of investors.
Making State assets available under concession so that the assets may
then be worked out by the concessionary.
Special features of making provision for golden share that is a special
shares 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 warth 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 Steatlth]
There were certain other categories where debt, equity swaps were
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 disinvstment. The only question raised before us whether the method adopted by the Government in exercising its executive powers to disinvest HPCL and BPCL without repealing or amending the law is permissible or not. We find that on the language of the Act such a course is not permissible at all.
In the result, we allow these petitions restraining the Central Government from proceeding with disinvestment resulting in HPCL and BPCL ceasing to be Government companies without appropriately amending the statutes concerned suitably.
[S. RAJENDRA BABU]