As the supreme law of the land, the Constitution of India outlines the framework for the functioning of the government and its relationship with the citizens. One of the foundational provisions of this legal structure is Article 12, which defines the term 'State' for the purposes of Part III of the Constitution, which includes Fundamental Rights. Article 12 holds great importance as it plays a crucial role in ascertaining which entities are subject to the enforcement of Fundamental Rights, a collection of fundamental rights that are ensured for every citizen. Among these rights are the right to equality, freedom of speech, and the protection of life and personal liberty.

Government-owned companies have played an important role in India's economic growth and public welfare, particularly in sectors critical to national interests. However, a critical question arises about their constitutional status: can these entities be classified as "State" under Article 12 of the Indian Constitution? The answer has far-reaching implications for their accountability, transparency, and obligation to uphold fundamental rights. Article 12, which defines "State," includes not only government bodies but also other authorities that carry out public functions. It should be also noted that, "merely performing public functions does not automatically bring an organization within the definition of State1".

Determining whether Public Sector Undertakings (PSUs) and other government-controlled companies meet this definition necessitates a thorough examination of judicial interpretations, the scope of government control, and the nature of the functions performed by these entities. This exploration uncovers the balance between the public role of government companies and their autonomy in the competitive market.

Article 12 and its Background

Article 12 of the Indian Constitution defines, 'State' includes the Government and Parliament of India, the Government and 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. This broad definition has been subject to extensive judicial interpretation, particularly as to what constitutes 'other authorities'.

Taking a glance at the history of Article 12, we can see that it first appeared in Article 7 of the Draft Constitution of India, 1948. This draft version included the same wordings, but did not include the phrase "under the control of the Government of India", which was later added to the final version of Article 12 in the Constitution of India, 1950.

Draft Article 7, debated on November 25, 1948, served as a gateway provision for Part III on Fundamental Rights, defining the term 'State' as it is used throughout this Part. Members of the Constituent Assembly expressed concerns about the Article's ambiguous wording, particularly the term 'other authorities', which some believed could broaden the definition of 'State' to include almost any government agency or officer. One member objected to including district boards and municipalities in the definition of 'State'.

In response, the Chairman of the Drafting Committee, Dr. B.R. Ambedkar, clarified that 'other authorities' would refer to entities with the power to make laws or exercise discretion vested in them. He also stated that listing all of the institutions covered by Part III would be bothersome, so the term 'State' is a practical solution. The Assembly eventually adopted the Article with only a minor amendment on 25 November 1948.2

Constitutional Oversight of Government Companies

The government operates through both natural people (officials, civil servants, and bureaucrats in conventional government departments) and juridical persons (independent organizations that exist outside the departmental system, such as firms, corporations, and so on). In reality, government departments certainly fall under the term of 'state' under Article 12, but the question is whether autonomous and non-departmental groups will also fall within the category of 'other authorities'. An autonomous body can be either statutory, which is a body established directly by a statute, or non-statutory, which is a body registered under general law, such as the Companies Act.

Government companies mentioned under Section 2(45) of the Companies Act, 2013 defines it as one in which not less than 51% of the paid-up share capital is held by the Central Government, by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments. These companies, known as Public Sector Undertakings (PSUs), are critical to India's economic framework. PSUs were established to ensure that the government maintains a significant presence in critical sectors, particularly those deemed critical to national development and public welfare.

The case of Ramana Dayaram Shetty v. International Airport Authority of India and Others 3 dealt primarily with the status of a Government Company as a State. The Supreme Court built on a criteria to determine whether corporations formed under the legislation are government agencies or instrumentalities. The test includes:

1. Share capital source
2. State control (deep and pervasive)
3. Monopoly status
4. Public importance and close relationship to governmental functions
5. Transfer of assets from a government department

In the case of Som Prakash v. Union of India (1981)4, the question was whether Bharat Petroleum Corporation, a government company registered under the Indian Companies Act, was considered an authority or state under Article 12 of the Indian Constitution. The Court determined that the corporation would fall under Article 12. The company should be viewed as the government's alter ego.

In the case of R.V. Dnyansagar v. Maharashtra Industrial and Technical Consultancy Organisation Ltd. (2003)5, the court ruled that whether a company is a state under Article 12 must be determined by taking into account a number of established facts, including whether the company is under the control of the government and whether the company is financially or functionally governed by it. In this instance, it was determined that the corporation was not a government company as defined in Section 617 of Companies Act 1956, and so could not be considered a state under Article 12 of the Constitution.

However, it should also be taken into consideration that when the company is no longer a government entity or the privatisation of the same is done then it'll no longer be considered as "State" as per Article 12. The same has been held in R.S. Madireddy and Another Vs Union of India and Ors. (2024)6, Upholding a Bombay HC decision, the bench said,:
"There is no dispute that after Government of India having transferred its 100% share to Talace India Pvt Ltd, ceased to have any administrative control or deep pervasive control over the private entity (Air India) and hence, the company after its disinvestment could not have been treated to be a State anymore after having taken over by the private company.

Thus, unquestionably, Air India after its disinvestment ceased to be a State or its instrumentality within the meaning of Article 12 of the Constitution. Once Air India ceased to be covered by the definition of State within the meaning of Article 12, it could not have been subjected to writ jurisdiction under Article 226 of the Constitution."

Public Sector Undertakings play an important role in sectors such as energy, infrastructure, finance, and manufacturing, where they not only contribute to economic growth but also achieve social goals that private enterprises may overlook. PSUs that serve strategic national interests while operating in highly competitive markets include the Oil and Natural Gas Corporation (ONGC), National Thermal Power Corporation (NTPC), and Steel Authority of India Limited (SAIL).

The determination of whether Public Sector Undertakings (PSUs) qualify as a 'State' under Article 12 of the Indian Constitution is critical both legally and practically. If PSUs are classified as 'States', they are required by the Constitution to uphold the Fundamental Rights guaranteed in Part III. This classification ensures that these government companies operate transparently, accountably, and in accordance with the principles of justice, as intended by the Constitution to safeguard citizens' rights.

Furthermore, this classification brings PSUs under the purview of the Right to Information Act of 2005 (RTI Act), a critical piece of legislation aimed at increasing transparency and accountability within public authorities. The RTI Act empowers citizens to obtain information from public authorities, allowing for greater scrutiny of their actions and decisions. Section 2(h) of the RTI Act defines a 'public authority' as any authority, body, or institution of self-government established or constituted.

Moreover, this classification brings PSUs under the purview of the Right to Information Act, 2005 (RTI Act), a crucial legislation aimed at promoting transparency and accountability within public authorities. The RTI Act empowers citizens to access information from public authorities, thus enabling greater scrutiny of their actions and decisions. According to Section 2(h) of the RTI Act, a 'public authority' is defined as any authority or body or institution of self-government established or constituted:

1. by or under the Constitution;
2. by any other law made by Parliament;
3. by any other law made by State Legislature;
4. by notification issued or order made by the appropriate Government,
5. and includes any:
   1. body owned, controlled, or substantially financed;
   2. non-Government organization substantially financed, directly or indirectly, by funds provided by the appropriate Government.

As a result, the PSU is legally required to provide information in response to public requests under the RTI Act. This obligation applies to a wide range of information, including operational procedures, financial records, decision-making processes, and project details for the PSU. Mandatory disclosure of such information not only builds public trust, but also serves as a mechanism to prevent corruption and ensure that PSU activities are in the public interest.

In the case of Leelabai Gajanan Pansare v. Oriental Insurance Co. Ltd. (2008)7, it was quoted by the Hon'ble Justices S.H. Kapadia and B.S. Reddy that, "Public character of an undertaking is determined by the functions performed by it. However, there is no conclusive test for determining the status of an undertaking as a PSU. In judging the character of an entity, the court has to keep in mind the context in which the word PSU is used in a given enactment.

There are a number of tests which could be applied in judging the character of an entity, namely, the test of origin, the test of agency or instrumentality of the State, the functional test, the monopolistic status of an entity, test concerning areas of operations, the test of economies of scale, the test of control, the role of entity in the priority sector, etc. There is no single conclusive test applicable to decide the character of an entity. Nationalised banks have been held to fall within the definition of "State" by applying the test of control.

Similarly, the test of 'agency or instrumentality', brought the government companies, as defined under Section 617 of the 1956 Act, to be included within the concept of "State" for the purposes of Article 12 of the Constitution. Though none of these tests is conclusive in itself yet government companies under Section 617 of the Companies Act are understood by the legislature to be a part of PSUs. Even on the website of the Central Government, undertakings under the caption of PSUs/PSEs, government companies and State-owned government companies are listed under the caption of PSUs/PSEs.

These items have. been enumerated on the basis of legislative understanding. Statutory corporations, public sector companies and government companies are merely corporate forms. India's PSUs may be in the corporate form or in the form of statutory corporations or in the form of public sector companies. This is the legislative understanding indicated by various Parliamentary Committees like Estimates Committee, Administrative Reforms Commission and Study Team on PSUs constituted by the Administrative Reforms Commission."

For instance, the RTI Act's transparency requires stakeholders, including the general public, to assess whether a PSU is using public resources efficiently and effectively. Financial transparency allows citizens to monitor the flow and use of government funds, ensuring that these companies are profitable while also fulfilling their public mandate. Similarly, transparency in decision making processes ensures that PSU actions are guided by fairness and accountability principles, rather than arbitrary ones.

However, this classification presents difficulties, particularly in balancing the need for commercial autonomy with the obligations imposed by the Constitution and the RTI Act. PSUs operate in competitive markets, and the disclosure of sensitive information under the RTI Act may put them at a disadvantage when compared to private sector companies that are not subject to the same level of public scrutiny. For example, the requirement to disclose strategic business decisions, financial strategies, or future plans may expose a public sector entity to competitive risks, affecting its market position and commercial interests.

In the case of Delhi Metro Rail Corporation V. Sudhir Vohra (2010)8, the DMRC is considered as a private entity and any query under the RTI from the DMRC is denied. "But in a public-private partnership, where both types of entities are there the public partner." Thus, in private-public partnerships one can get access to public documents by putting a query to the 'public partner'. Interpreting the Act, Justice S. Muralidhar said there is no need to have deep or pervasive government control over an institution to bring it under the ambit of the transparency law.

Furthermore, while the duty to uphold fundamental rights is critical, PSUs must carefully balance their commercial objectives with their obligation to act in the public interest. These companies' legal status as 'State' under Article 12 necessitates a delicate balancing act, as they must comply with constitutional mandates while maintaining the operational flexibility required to succeed in a market driven environment.9

The classification of PSUs as 'State' under Article 12 and their corresponding obligations under the RTI Act strengthen the core constitutional values of transparency, accountability, and fundamental rights protection. However, it also calls for a more nuanced approach to ensure that these businesses can meet their public responsibilities without jeopardizing their efficiency, competitiveness, or ability to innovate. This ongoing interplay between constitutional obligations and commercial autonomy continues to shape the legal landscape for Indian government companies, raising important questions about how to govern these entities in a way that benefits both the public and the economy.

Conclusion
The exploration of Government companies as "State" under Article 12 highlights how vital they are in maintaining constitutional values while navigating the complexities of a competitive market. Classifying these entities as "State" ensures that they are held accountable for fundamental rights, but it also necessitates a delicate balance of public responsibility and commercial independence. As judicial interpretations evolve, this classification will keep determining the future of Public Sector Undertakings, ensuring they contribute to both national welfare and economic progress while adhering to the Constitution's core principles.

References:

• Zee Telefilms Ltd. v. Union of India 2005 SCC OnLine SC 213
• https://www.constitutionofindia.net/articles/article-12-definitions/
• Ramana Dayaram Shetty v. the International Airport Authority of India and Ors. AIR 1979 SC 1628
• Som Prakash v. Union of India AIR 1981 SC 212
• R.V. Dnyansagar v. Maharashtra Industrial and Technical Consultancy Organisation Ltd. [2003] 46 SCL 153
• R.S. Madireddy and Another v. Union of India and Ors., 2024 SCC OnLine SC 965
• Leelabai Gajanan Pansare v. Oriental Insurance Co. Ltd., (2008) 9 SCC 720
• Delhi Metro Rail Corporation v. Sudhir Vohra 2010 SCC OnLine Del 4579
• https://www.lawctopus.com/academike/government-companies-state-article-12/#_edn3

Written By:

• Aditya Porwal, 2nd Year, B.B.A.LL.B. (Hons.), Maharashtra National Law University, Aurangabad
• Aishwarya Patil, 5th Year, B.A.LL.B. (Hons.), Maharashtra National Law University, Aurangabad