Are Government Companies considered a ‘State’ under Constitutional Law?

Introduction

In the context of Indian Constitutional Law, the definition of “State” under Article 12 includes various entities that are directly either part of the government or function as its instruments or agencies. This includes government companies, which play a significant role in the economic and social development of the country. Understanding the legal framework and the judicial interpretation regarding government companies as “state” entities is crucial for comprehending their responsibilities, rights, and liabilities.

However, a company is classified as a 'Government Company' when the Central Government, a State Government, or a combination of both holds at least 51% of its stake or capital. These companies are also referred to as 'Public Enterprises' or 'State Enterprises' and must be legally registered under the Companies Act. Section 2(45) of the Companies Act, 2013, defines a Government Company as any company where not less than 51% of the paid-up share capital is held by the Central Government, one or more State Governments, or a combination of both. This definition also extends to any subsidiary of such a Government Company.

Definition of “State” under Article 12

Article 12 of the Indian Constitution states that, “Definition in this part, unless the context otherwise requires, the State includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the Government of India.”

Key Components

Article 12 of the Indian Constitution defines the term 'State' for the purposes of Part III, which deals with fundamental rights. It states that, unless the context requires otherwise, the term 'State' includes:

• The Government and Parliament of India, which refers to the Executive and Legislature at the Union level.
• The Government and Legislature of each State, representing the Executive and Legislature at the State level.
• All local or other authorities within the territory of India.
• All local and other authorities under the control of the Government of India.

What are Government Companies?

Government companies, which operate under the Companies Act, and are primarily owned or controlled by the government, possess several key characteristics that enable them to be classified as state entities under constitutional law. The following are the main features that demonstrate their role as extensions of the state:

• Public Interest: Government Companies often engage in activities that serve the public interest, such as providing essential services, creating infrastructure, and contributing to economic development. Their operation not only addresses immediate public needs but also contributes to long-term goals of equity, sustainability, and prosperity.
• Government Control: In Government Companies, the government exercises significant control over the operations and decision-making policies of these companies. The ownership composition gives the government significant influence over the strategic direction and operations of the company. The government typically has the authority to appoint members to the Board of Directors and senior management positions are often filled by a person chosen or approved by the government, ensuring that the company’s leadership reflects government priorities and objectives.
• Accountability: Government Companies, being an instrument of the state are subject to ensuring transparency and their public responsibilities. Government Companies operate not just as commercial entities but as an instrument of State to serve the public good while adhering to principles of transparency and accountability.

Judicial Interpretation of Government Companies

1. Government Companies as Authorities Under Article 12 

In the case of Ajay Hasia and Others v. Khalid Mujib Sheravardi & Others^[1] Justice Bhagwati noted that a government company can be considered equivalent to the "State" under Article 12 of the Indian Constitution. As an authority, a government company must uphold the same obligations as the state. If a company operates as an instrumentality or agency of the government, it qualifies as an authority within the meaning of Article 12.

2. Criteria for Determining "State" Status Under Article 12 

The determination of whether an entity is a "State" under Article 12 depends on whether the entity is financially, functionally, and administratively dominated or controlled by the government. The Supreme Court laid out several tests in Ramana Dayaram Shetty v. International Airports Authority of India^[2] to assist in this determination:

• If the entire share capital is held by the government, it suggests the corporation is an instrumentality or agency of the state.
• Deep and pervasive state control indicates the entity is a state agency.
• Whether the corporation enjoys state-conferred or protected monopoly status is relevant.
• If the functions are of public importance and closely aligned with governmental functions, this supports classifying the entity as a state instrumentality.
• If a government department's functions are transferred to a corporation, it strongly suggests that the corporation is an agency of the government.

Government Companies as “State”

The recognition of government companies as "State" under Article 12 of the Indian Constitution stems from the tests established for determining whether an entity qualifies as an agency or instrumentality of the government. Section 2(45) of the Companies Act, 2013, which defines government companies, has led to their classification as "State" entities. This was reaffirmed in various Supreme Court judgments.

• In Som Prakash v. Union of India^[3], Bharat Petroleum, a government company, was deemed an alter ego of the government, thereby falling under the purview of Article 12. The Court's reasoning was based on the extensive governmental control over the company.
• However, the ruling in Chander Mohan Khanna v. NCERT^[4] showed a shift in judicial interpretation. The Court ruled that mere governmental control, however pervasive, does not automatically classify an autonomous organization as a "State." The judgment emphasized that Article 12 should not be expanded to cover every body with some governmental connection, signalling a narrowing of the definition.
• In Mysore Paper Mills Ltd. v. Mysore Paper Mills Officers' Association^[5], the Court reiterated that a company under significant government control, especially in its day-to-day operations, meets the criteria set in Ramana Dayaram Shetty case and qualifies as a "State" under Article 12.
• In contrast, R.V. Dnyansagar v. Maharashtra Industrial and Technical Consultancy Organization Ltd.^[6] and P.B. Ghayalod v. M/S. Maruti Udyog Ltd.^[7] revealed instances where companies were not considered "State" entities. In R.V. Dnyansagar case, the company was not a government company under Section 2(45), and in P.B. Ghayalod case, substantial foreign holdings and control by a foreign partner meant the government did not exercise pervasive control, precluding its classification as a state instrumentality.
• The Constitution Review Committee, led by Justice M. N. Venkatachaliah^[8], recognized the evolving nature of the state and recommended amending Article 12. The committee suggested limiting the scope of "other authorities" under Article 12 to align the Constitution with contemporary political and economic realities. This reflected a growing recognition that the judiciary must adapt the interpretation of constitutional provisions to modern governance structures.

Conclusion

Government companies, while not directly created by statutory provisions, can be considered "State" under Article 12 of the Indian Constitution. This classification is contingent on the extent of government control exercised over the company, encompassing financial, functional, and administrative aspects. 

The Supreme Court's landmark judgments have established a set of criteria to determine whether a government company qualifies as a state instrumentality. These criteria, such as government shareholding, pervasive control, monopoly status, public importance of functions, and transfer of government department functions, have been instrumental in classifying government companies as "State" entities. 

However, the judicial landscape has witnessed some fluctuations in the interpretation of Article 12. While initial decisions affirmed the classification of government companies as "State," later judgments have emphasized the need for a case-by-case analysis, considering factors beyond mere government control.

In conclusion, while the general principle is that government companies can be treated as "State" under Article 12, the specific application of this principle depends on the facts and circumstances of each individual case. The evolving judicial interpretations and the potential need for constitutional amendments highlight the dynamic nature of this legal issue.

^[1] (1981) 1 SCC 722.

^[2] (1979) 3 SCC 489.

^[3] (1981) 1 SCC 449.

^[4] AIR 1992 SC 76.

^[5] 1998 SCC ONLINE KAR 485.

^[6] 2004 (2) SLR 213.

^[7] 1991 SCC ONLINE DEL 501.

^[8] National Commission to Review the Working of the Constitution (NCRWC), 2000.

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