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Balco Employees Union (Regd.) V. Union Of India: Case Analysis


INTRODUCTION *Anjani Nandan1

Disinvestment of a company basically means the action of an organization or government selling or liquidating an asset or subsidiary. It is also known as divestiture. It may also be a reduction in capital expenditure, or the decision of a company not to replenish depleted capital goods. Thus Disinvestment refers to the sale or liquidation of an asset or subsidiary of an organization or equity and bond capital by the government to the private sector. It also implies the sale of governments loan capital in PSUs through securitization. However, it is the government and not the PSUs who receive money from disinvestment. In the BALCO Disinvestment case, Supreme Court considered the complex questions relating to effect of disinvestment on the employees and workers and whether the questions of policy and administrative matters and decision can be heard by Supreme Court. The Supreme Court delivered a very elaborate, exhaustive and thoughtful opinion on various issues related to the aspects of disinvestment. Through this article I have tried to analyze in brief the concept of disinvestment, discuss the case and relate it with the aspects of company law.

FACTS OF THE CASE: The decision of the Government of India to disinvest M/s Bharat Aluminum Company Limited, popularly known as BALCO was challenged by the employees of BALCO , State of Chattisgarh (the state in which BALCO is located) and by some public spirited individuals before various High Court and finally before the Supreme Court. It was challenged that the decision to disinvest BALCO was contrary to the legal and social interests of the employees as well as certain other legal issues were raised by different parties. LEGAL PROCEEDINGS On 23rd February, 2001, Dr. B. L. Wadhera filed Civil Writ Petition No. 1262 of 2001 in the Delhi High Court (as PIL) This was followed by Writ Petition No. 1280 of 2001 filed by the employees of BALCO on 24th February, 2001 in the High Court of Delhi.

2nd Semester, Roll 100, Sec B, National University Of Study And Research In Law, Ranchi.

On 24th February, 2001 another employee of BALCO, namely, Mr. Samund Singh Kanwar filed Civil Writ Petition No. 241 of 2001 in the High Court of Chhattisgarh. While the aforesaid writ petitions were pending there was a Calling Attention Motion on Disinvestment with regard to BALCO in the Rajya Sabha and the matter was also discussed in the Lok Sabha. Soon thereafter on 2nd March, 2001, Shareholders Agreement and Share Purchase Agreement between the Government of India and Sterlite Industries Limited was signed. Pursuant to the execution of sale, 51% of the equity was transferred to Sterlite Industries Limited and a cheque for Rs. 551.5 crores was received. With the filing of the writ petitions in the High Court of Delhi and in the High Court of Chhattisgarh, an application for transfer of the petitions was filed by the Union of India in the Honorable Supreme Court, which was accepted on 9th April 2001. After the notices were issued, the company received various notices from the authorities in Chhattisgarh for alleged breach of various provisions of the M. P. Land Revenue Codeand the Mining Concession Rules. This led to the filing of the Writ Petition No. 194 by BALCO in the Supreme Court, inter alia, challenging the validity of the said notices.

QUESTIONS INVOLVED (ISSUES) Whether such a decision is amenable to judicial review and if so within what parameters and to what extent? Whether disinvestment of the BALCO Ltd was against the interest of the workers and the employees? Whether the employees have the right to hearing in the cases of policy and administrative matters and decision? Whether in the case of decision regarding disinvestment of the company the principles of natural justice would be applicable and that the workers, or for that matter any other party having an interest therein, would have a right of being heard? Whether PIL can be filed by a stranger to challenge the administrative decision of the government?

ARGUMENTS ADVANCED By:-

BALCO Employees Union: (Petitioner) I. Workmen have been adversely affected by the decision of the Government of India to disinvest 51% of the shares in BALCO in favour of a private party. They have lost their rights and protection under Articles 14 and 16 of the Constitution. They had a right to be heard before and during the process of disinvestment. Further there was no effective protection of the workmens interest in the process of disinvestment. II. Balco was a profit-making company and had a huge capital base of about Rs. 500 crores. It was the only public sector enterprise that had paid its 50% equity, i.e., Rs. 244 crores to the exchequer. Further The cost of the Korba aluminium plant and Bidhanbag plant, land, quarters and buildings (Rs 800 crores) and new cold-rolling projects (Rs 184 crores), was been grossly underestimated. Thus the government should not jeopardize the future of the workers by disinvesting it. III. It was contended that before disinvestment, the entire paid-up capital of BALCO was owned and controlled by the Government of India and its administrative control co-vested in the Ministry of Mines. BALCO was, therefore, a State within the meaning of Article 12 of the Constitution. So it was liable. IV. Workmen have reason to believe that apart from the sale of 51% of the shares in favour of Sterlite Industries the Agreement postulates that balance 49% will also be sold to them with the result that when normally in such cases 5% of the shares are disinvested in favour of the employees the same would not happen in the present case. V. The impugned decision defeats the provisions of the M. P. Land Revenue Code and goes against the fundamental basis on which the land was acquired and allotted to the company.

UNION OF INDIA & Ors.: (Respondent): Disinvestment is necessary as neither the Centre nor the States have resources to sustain enterprises that are not able to stand on their own in the new environment of intense competition. BALCO was running on outdated technology and was making profits only because aluminium prices in international market were ruling high. A downturn in prices would

have taken the company to the state of sickness from which it had recovered in 1988-89. Therefore it was better to sell the company when it was earning profits to get a good deal. The cash reserve of Rs 437 crores accumulated by Balco by giving fewer dividends to the government was too little for the modernization of the company. According to government estimates, a total of Rs 4,000 crores was required for the modernization and expansion of the company and it could be infused only by bringing in a strategic partner. The wisdom and advisability of economic policies of Government are not amenable to judicial review. It is not for Courts to consider the relative merits of different economic policies. It is neither within the domain of the Courts nor the scope of the judicial review to embark upon an enquiry as to whether a particular public policy is wise or whether better public policy can be evolved. Further the Process of disinvestment is a policy decision involving complex economic factors. The entire rationale and process of disinvestment was explained to the workers through BALCO Samachar News letter. A meeting was held in May, 2000 by the then Chairman and Managing Director with the Union leaders where the Joint Secretary of the Ministry of Mines, who was also Director of the company, was also present. In addition thereto, the workers unions had been making various representations to the Government which were considered by it before finalizing of various documents. There was a dialogue between the Government and the Union Leaders where it was culled out that the trade unions are not against the disinvestment, if interest of the workers is taken care off. So the employees were heard before taking the decision. There is no case made out by the petitioner that the decision to disinvest in BALCO is in any way capricious, arbitrary, illegal or uninformed. Even though the workers may have interest in the manner in which the Company is conducting its business, inasmuch as its policy decision may have an impact on the workers rights, nevertheless it is an incidence of service for an employee to accept a decision of the employer which has been honestly taken and which is not contrary to law. In taking of a policy decision in economic matters at length, the principles of natural justice have no role to play. Also merely because the workmen may have protection of Articles 14 and 16 of the Constitution, by regarding BALCO as a State, it does not mean that the

erstwhile sole shareholder viz., Government had to give the workers prior notice of hearing before deciding to disinvest. When government chooses to run an industry by forming a company and it becomes its shareholder then under the provisions of the Companies Act as a shareholder, it would have a right to transfer its shares. When persons seek and get employment with such a company registered under the Companies Act, it must be presumed that they accept the right of the directors and the shareholders to conduct the affairs of the company in accordance with law and at the same time they can exercise the right to sell their shares.

JUDGEMENT (B. N. Kirpal, Shivaraj V. Patil and P. Venkatarama Reddi, JJ.): The employees have no vested right in the employer company continuing to be a Government company or other authority for the purpose of Article 12 of the Constitution of India. The employees cannot claim any right to decide as to who should own the shares of the company. The State which invested on its own wish, can equally well disinvest. Article 12 of the Constitution does not place any embargo on an instrumentality of the State or other authority from changing its character and disinvesting itself. The Government has taken a policy decision that it is in public interest to disinvest in BALCO. An elaborate process was undergone and majority shares sold. In this process, the change in the character of the company cannot be validly impugned. While it was a policy decision to start BALCO as a company owned by the Government, it was a change of policy that disinvestment took place. If the initial decision could not be validly challenged on the same parity of reasoning, the decision to disinvest also cannot be impugned without showing that it is against any law or malafide. There is in law no such obligation to consult in the process of sale of majority shares in a company. Thus the Honourable Supreme Court distinguished the present case with the landmark case of National Textile Workers Union and others v. P.R. Ramakrishnan2 on the basis of facts. The Supreme Court followed the case of Southern Structurals Staff Union v. Management of Southern Structurals3 where it was held that the consent of the employees is not required for disinvest of a government company as it does not effect their right.
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National Textile Workers Union and others v. P.R. Ramakrishnan, AIR 1983 SC 75 Southern Structurals Staff Union v. Management of Southern Structurals, 1994 81 CompCas 389 Mad, (1994) IILLJ 1243 Mad

The company will not retrench any worker(s) who are in the employment of BALCO on the date of takeover of the management by the strategic partner, other than any dismissal or termination of the worker(s) of the company from their employment in accordance with the applicable staff regulations and standing orders of the company or other applicable laws. (as confirmed by the shareholders agreement and the Senior Counsel on behalf of the company) The workers interests are adequately protected in the process of disinvestment. The existing laws adequately protect workers; interest and no decision affecting a huge body of workers can be taken without the prior consent of the State Government. The service conditions are governed by the certified orders of the company and any change in the conditions thereto can only be made in accordance with law. The court further said that it is evident that the Central Government was aware of the interests of the workers and employees as a class. It was precisely for this reason that safeguards were inserted in the Share Holders Agreement. The Supreme Court stayed all notices issued by the state government to Balco management asking it to show cause why the land leased to its plant not be cancelled as it was situated in a tribal land. The court asked the government to justify its stand in canceling the land allotment to Balco while permitting such allotment to two other private companies - Daewoo Power and Essar Steel. It held that the ratio of the decision in Samatha v. State of A. P.,4 is inapplicable as the legal provisions here are different. The land was validly given to BALCO a number of years ago and today it is not open the State of Chattisgarh to challenge the correctness of its own action. Furthermore even with the change in management the land remains with BALCO to whom it had been validly given on lease. The principles of natural justice would not be applicable and that the workers, or for that matter any other party having an interest therein, would not have a right of being heard. There is no provision in law which would require a hearing to be granted before taking a policy decision. If the decision is otherwise illegal as being contrary to law or any constitutional provision, the persons affected like the workmen, can impugn the same, but not giving a pre-decisional hearing cannot be a ground for quashing the decision. It is not for this Court to consider whether the price which was fixed by the Evaluation Committee at Rs. 551.5 crores was correct or not. What has to be seen in exercise of judicial review of administrative action is to examine whether proper procedure has been followed
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Samatha v. State of A. P., 1997 AIR SCW 3361

and whether the reserve price which was fixed is arbitrarily low and on the face of it, unacceptable. After having a long discussion on the concepts and the cases about PIL the court held that the decision to disinvest and the implementation thereof is purely an administrative decision relating to the economic policy of the State and challenge to the same at the instance of busy-body cannot fall within the parameters of Public Interest Litigation (as filed by by Shri B.L. Wadhera) and therefore the court declined to entertain such PIL. Therefore, it was held that the disinvestment by the Government in BALCO was not invalid. RATIO DICENDI OF THE JUDGMENT i. Thus it can be concluded that the Wisdom and advisability of economic policies are ordinarily not amenable to judicial review unless it can be demonstrated that the policy is contrary to any statutory provision or the Constitution. Courts would interfere only if there was a clear violation of Constitutional or statutory provisions or non-compliance by the State with its Constitutional or statutory duties and none of these contingencies had arisen in this case. ii. The policy of disinvestment cannot be questioned as such; the facts herein show that fair, just and equitable procedure has been followed in carrying out this disinvestment. The allegations of lack of transparency or that the decision was taken in a hurry or there has been an arbitrary exercise of power is without any basis. Thus the policy of disinvestment followed by the Government of India was upheld by the Supreme Court stating 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.

CRITICAL ANALYSIS OF THE JUDGEMENT The Honble Supreme Court, while validating BALCO-disinvestment and dismissing the petitions, remarked, Thus, apart from the fact that the policy of disinvestment cannot be questioned as such, the facts herein show that fair, just and equitable procedure has been followed in carrying out this disinvestment. This judgement facilitated the path of other successful privatizations.

By selling the controlling stake to a strategic partner what the company gets is a professional management with proven skills and expertise in the field of metal. As far as fear regarding the workers interest getting affected - the government still has control over 49 percent of the equity holdings in the company which it could use effectively to safeguard workers interest. So one cannot say it is over for the government. It will also have right over the future cash flows in the form of dividends and could play a significant role in decision making. But the critics lovingly call it - an example of selling family silver to butler. The Balco Disinvestment deal was at the center of controversy as opposition parties and worker unions at Balco had been fighting tooth and nail to see that the Disinvestment deal doesnt get to see the light of the day. The move to affect a strategic sale of equity in the profitable and cash-rich public sector Bharat Aluminium Company Ltd. at a throwaway price is a questionable one for a host of reasons. a) The bids were valued by four different methods. However, the value arrived at by these bids was not disclosed. Also, the reserve price was not disclosed nor the value of the bids by Hindalco and Alcoa and whether they were higher or lower than the reserve price. In my view once bidding process is finished, and the governments decision has been communicated, it would have been better to have disclosed all the facts. Thus, the Government lost an opportunity to lay down new norms of transparency b) A direct valuation of BALCOs assets suggests that with an investment of just Rs.550 crores Sterlite is to get control over assets that according to some are worth around 10 times that value. c) A 51 per cent equity sale at an indefensible price also undermines the value of the remaining stock that would be held by the government. d) The whole procedure has been gone through in haste. Even though the bids had been invited some time back, the valuation of the firm, the setting of the reserve price and the acceptance of Sterlites bid were all allegedly done within the span of a month. e) The deal allegedly violates a Supreme Court order banning private sector units from running mines and industries in tribal population areas. Hence in my thoughts the disinvestment was improper and ill managed. In my view if the above mentioned points and criticisms would have been taken care of and the disinvestment was planned properly with the help of experts (economists, legal experts and sociologists) keeping in

mind its all effects, at a higher rate, it would have been proved to be a successful and much accepted disinvestment.

CONCLUSION I seriously like to criticize this judgment because in my view it is the duty of the judiciary, which is at the threshold, to dispense justice and fairness. But by holding that judiciary cant interfere into policy matters and further employees do not have the right to challenge the administrative and policy decision of disinvestment of the company taken by the central government, it gave unlimited and unchecked powers in the hands of the executive. So it can now take decisions at its whims and fancies and behave like an unruly horse. Further it has taken away the power of hearing and right of the employees to approach the courts for justice if their rights are affected. This judgement has given power and authority in the hands of private companies and left the employees to their fate. Further there is no check on ongoing parallel politics and violations of law and contracts taking place after such disinvestment. Disinvestment in my view is a good and effective policy to revive the corporate sector owned by the government. But it needs to be free from politics and other curses and flaws it suffers from. Everything done should be for the welfare of the nation and its people as a whole.

BIBLIOGRAPHY From the following sources, the valuable & relevant materials cum supplements were extracted:a. http://www.indiankanoon.org/doc/1737583/ b. http://www.damodarcollege.org/dhiru_final/makarandvol3.1.html c. A critical analysis of the BALCO case by TARUNA JAIN . http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1087593&http://www.google.co.in/u rl?sa=t&rct=j&q=balco case supreme court&source.

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