Summary: This blog examines when private sector companies and Government companies can be regarded as ‘State’ under Article 12 of the Constitution of India, and the legal jurisprudence surrounding this subject. The authors address key questions about when such entities will be considered as ‘State’ and hence amendable to Writ Jurisdiction for the enforcement of fundamental rights guaranteed under the Constitution. The blog analyses the evolution from structural to functional approach in judicial interpretation, including various SC judgments and the law laid down in the landmark case of P. K Biswas vs IICB
Background
The recent Kerala High Court judgment classified LIC Housing Finance Limited, a subsidiary of Life Insurance Corporation (“LIC”),as State, under Article 12 of the Constitution of India (“Constitution”). This reignited the debate on how companies are classified as State and the distinction between such companies and government companies under the Companies Act, 2013 (“Act”).
The Act recognises various types of companies under different classifications — private, public and government companies — basis their ownership, control and purpose. Among its key classifications is the “government company”, a concept central to understanding the legal status of corporate entities owned or controlled by the Central or State governments. Section 2(45) of the Act defines government companies as:
“any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company”.
This implies that a company would be classified as a government company basis its ownership structure, i.e., if 51% of its paid-up share capital is held by the Central or State Government(s), or jointly by the Central and State Government(s). Also, a subsidiary of a government company would be considered a government company. This definition reflects the legislative intent to extend the regulatory and audit oversight applicable to government companies to multi-layered government corporate structures.
Challenges arise (in the latter part of the definition) when multiple government companies hold shares of a company, but none, individually, has majority voting powers or control over the Board composition. In such a scenario, the company is technically not a subsidiary of any of the government companies, as per the definition of subsidiary under Section 2(87) of the Act and hence should not be classified as a government company, but the ultimate holder, i.e., the President of India, holds majority stake through different government entities.
Another challenge that emerges is whether such private companies should be classified as ‘State’ under Article 12 of the Constitution, and if fundamendtal rights can be enforced against them. The definition of ‘State’ under Article 12 of the Constitution includes “all local or other authorities within the territory of India or under the control of the Government of India”. The Supreme Court has interpreted the term “other authorities” through various landmark judgements, establishing criteria for when government-controlled companies may be considered ‘State’ under Article 12 of the Constitution.
In this blog, the authors will try to elucidate the legal jurisprudence on this issue and address some of the conundrums in relation to government controlled private companies being considered ‘State’ under Article 12 of the Constitution.
Judicial threshold
It is pertinent to note that the classification of a company as a government company does not per se bring it within the definition of “State” under Article 12 of the Constitution. Article 12 defines State for the purposes of Part III (Fundamental Rights) of the Constitution and includes the Governments and legislatures of both the Centre and the States as well as “all local or other authorities” within the Indian territory or controlled by the Government of India. While the first part of this definition is fairly unambiguous, the residuary expression – “other authorities” has historically presented interpretive complexity, especially in relation to the scope of “control” and the identification/ contours of entities that may fall within it.
Once an entity is characterised as State under Article 12, fundamental rights can be enforced against it vertically, alongside the general horizontal application of certain rights against all private bodies; subjecting the actions of such entities to judicial scrutiny on grounds of equality, fairness, non-arbitrariness, and other constitutional guarantees. A key example is the series of cases challenging Air India’s employment policies during its period as a public sector undertaking.
At the same time, the Supreme Court has cautioned against treating all public sector enterprises as State. Over time, it has developed a series of tests to determine when an authority should be classified as State.
Structural Approach
Earlier, whether an authority qualified as “State” was judged mainly by its structure, as established by the constitution bench in Rajasthan State Electricity Board, Jaipur v. Mohan Lal[1]. In this case, while referring to an earlier constitution bench, the court by a 4:1 majority held that the expression “other authorities” is of wide import. Accordingly, it should include all constitutional or statutory authorities that have been conferred powers by law. Importantly, the Court clarified that even if some powers were commercial or non-sovereign by nature, statutory conferment would suffice to bring the body within the ambit of Article 12.
This structural test, which focused on the origin and form of the entity rather than its functions, was applied again in Sukhdev v. Bhagatram[2], where statutory corporations like Oil and Natural Gas Commission and LIC were held to be covered under Article 12. Justice KK Matthew’s concurring opinion in Sukhdev, however, planted the seeds of a functional understanding by drawing from the American “State Action” doctrine.
Functional Approach
Justice Matthew’s concurrence broadened the horizons beyond mere incorporation under a statute. In his concurrence, he traced a series of cases in American jurisprudence, which consider actions taken by private entities as state action — when private entities perform functions so closely connected with governmental responsibilities or public interest that they effectively become extensions of the State. This led to the development of the concept of an entity being an agent or instrumentality of the State and their actions being considered as State action. He clarified that financial aid alone is insufficient and an unusual degree of control over the management and policies of the entity is required. Though Justice Matthew did not offer a rigid hierarchy of factors, he evaluated LIC by analysing the State’s financial support to it, the extent of the State’s administrative control, the public importance of its activities, and the statutory monopoly it enjoyed. The concurrence introduced a multi-factor approach that moved beyond structural analysis to the substantive realities of control and function.
This approach was formally adopted in R.D. Shetty v. IAAI[3],wherein the Court examined not only its structural features, but also the governmental control it was subject to and the public character of the functions it discharged. The ratio of RD Shetty was followed in Ajay Hasia v. Khalid Mujib[4], wherein the Court came up with a six-factor test to determine whether an entity qualifies as state. The six factors were (i) the ownership of the share capital by the government; (ii) the degree of financial assistance and whether such assistance is utilised to meet almost most of the expenditure of the entity; (iii) the entity enjoying a state-conferred or state-protected monopoly; (iv) deep and pervasive state control; (v) the nature of functions of the entity and whether they are of public importance and related to governmental functions and (vi) whether a department of the government was transferred to the corporation. Both RD Shetty and Ajay Hasia significantly broadened the doctrine by holding that even non-statutory entities can be classified as “State” when they exhibit deep and pervasive governmental control and perform functions of public importance.
All these approaches were consolidated, refined and articulated into a cumulative functional test, by a seven-judge Constitution Bench in P.K. Biswas v. IICB[5].Accordingly,the presence of three essential factors was considered for an entity to be held as an instrumentality or agency of the State. First, the organisation should be financially controlled by the State in terms of the ownership of its assets and through substantial funding. Second, the State must exercise control over the entity’s administration and decision-making processes. Third¸ the functions performed by the entity must be of public importance or closely related to the functions traditionally associated with the State. An entity is, therefore, treated as “State” only when it is financially, administratively and functionally dominated by governmental control.[6] The cumulative nature of the test ensures that entities are not lightly brought within Article 12. For instance, bodies such as Board of Cricket Control in India[7] and Institute of Banking Personnel Selection[8] have been held to not qualify as “State” as they did not meet the combined criteria. As the P.K. Biswas judgment was delivered by a seven-judge bench, it is widely regarded as the “law of the land” in relation to classification of entities as State under Article 12.
[1] Rajasthan State Electricity Board, Jaipur v. Mohan Lal, (1967) 3 SCR 377.
[2] Sukhdev Singh v. Bhagatram Sardar, (1975) 1 SCC 421.
[3] Ramana Dayaram Shetty v. International Airport Authority of India, (1979) 3 SCC 489.
[4] Ajay Hasia v. Khalid Mujib, (1981) 1 SCC 722.
[5] Pradeep Kumar Biswas v. Indian Institute of Chemical Biology, (2002) 5 SCC 111.
[6] Para 40, Pradeep Kumar Biswas.
[7] Zee Telefilms v. Union of India,
[8] Rajbir Surajbhan Singh v. Chairman, Institute of Banking Personnel Selection, Mumbai, (2019) 14 SCC 189.