Companies Not 'State' U/Art 12 Merely Because They Comply With Rules & Regulations Of Ministries, Public Regulators: Allahabad HC

With this, the bench held that 'Nayara Energy' (formerly Essar Oil Limited), an oil refining and marketing company, does not fall under the definition of 'State' under Article 12 of the Constitution.

A bench of Justice Shekhar B. Saraf and Justice Vipin Chandra Dixit clarified that Nayara Energy is distinguishable from government-owned companies like IOCL, BPCL, and HPCL as these state-run companies operate under the extensive functional, financial, and administrative control of the Government of India. In contrast, Nayara Energy operates independently, without such pervasive government control.

With this, the bench rejected the petitioner's argument that since the sale of petroleum products, being an inflammable product, is strictly governed by entries 52 and 53 in List 1 of the seventh schedule to the Constitution of India, Nayara Energy, which deals in this area, would also fall under the definition of State under Article 12.

The Court said that if the logic of the petitioner were to hold good, then all banks public (such as SBI, PNB, etc) or the private (such as HDFC, ICICI, AXIS, Induslnd, Federal Bank, Kotak Mahindra) would fall within the definition of 'State' under Article 12 of the Constitution of India as entry 45 in List 1 of the seventh schedule to the Constitution of India contains 'Banking'. However, the same isn't true.

“Similarly, if one were to look into the telecom industry, it is only the government-controlled company like BSNL that are treated as 'State' while private companies such as Vodafone, Airtel and Jio do not fall within the meaning of 'State' and are not amenable to writ jurisdiction. The fact that private companies such as Vodafone, Airtel, Jio, HDFC Bank, ICICI Bank, Axis Bank, Induslnd Bank, Federal Bank, Kotak Mahindra Bank amongst others comply with the rules and regulations established by the various Ministries and public regulators such as the Reserve Bank of India (RBI) and Telecom Regulatory Authority of India (TRAI) do not by itself bring them within the meaning of 'State' under Article 12 as none of these companies are under the pervasive control (functionally, financially and/or administratively) of the Government of India,” the bench remarked.

The case in brief

In brief, the petitioner had moved the High Court challenging the termination of a franchise agreement between Petitioners (M/S Manoj Petroleum and another) and Respondent No. 3 (Nayara Energy Limited), a company which has acquired an authorisation from Union Ministry of Petroleum and Natural Gas to distribute franchise for sale and purchase of essential commodities like petroleum and diesel products.

Essentially, Petitioners were granted a franchise for the sale of petroleum and diesel products at a retail outlet in Bulandshahr, Uttar Pradesh.

However, an inspection was conducted on August 18, 2021, by the officials of Nayara Energy, and thereafter, a report from BPCL highlighted several anomalies in the product samples, which led to a show-cause notice being issued to Petitioners on August 26, 2021 by Nayara Energy.

Despite the Petitioners' detailed response, the franchise agreement was terminated due to alleged violations on December 28, 2021. 

At the very outset, a preliminary objection was raised by Nayara Energy's counsel with regard to the maintainability of the present writ petition.

It was contended that since the dispute was between petitioners and Nayara Energy, the Court should not adjudicate the same in its extraordinary writ jurisdiction on the ground that Nayara Energy is not 'State' as per Article 12 of the Constitution of India.

Arguments advanced

Addressing the preliminary objections raised by Nyara Energy's counsels, the Petitioner's counsel, Senior Advocate Arun Kumar Gupta, submitted that since Nayara Energy has been granted the authority for the sale of essential commodities, such as petroleum products, it is prohibited to sell these commodities in the open market.

Therefore, it was argued that Nayara Energy, being the 'extended hand' of the Union of India, comes under the aegis of the Central Government and is ultimately discharging functions in the public interest on behalf of the Union of India and would, therefore, fall under Article 12.

It was also submitted that Nayara Energy's work is comparable to that of other oil companies, such as HPCL, BPCL, and IOCL, which are 'state' as they work on behalf of respondent no.1 to distribute franchises of retail outlets for the sale of petroleum and allied products. 

On the other hand, the counsels for the respondents submitted that even though Nayara Energy is operating in the same domain as HPCL, BPCL and IOCL, the administrative and financial control of Nayara Energy is entirely independent, and the Central Government has no control over the management or finances of the the company.

It was also firmly argued that being a private limited company, no element of public law is involved in the contractual relationship between petitioners and Nayara Energy.

Having heard  the arguments for both sides, the Court, feferring to several judgements of the Supreme Court, extracted the following principles regarding making a company amenable to writ jurisdiction:

A. To determine whether an authority/body would fall under 'State' within the meaning of Article 12 would have to be determined on the cumulative facts of financial, functional and administrative dominance and/or control of the Government upon such a body. If such control is factually found, then the body would be treated as 'State' within Article 12.

B. Simpliciter because a private institution is carrying out a public duty or function and may come within the definition of 'State' under Article 12 of the Constitution of India making it amenable to writ jurisdiction would not by itself make every dispute concerning the said institution amenable to writ jurisdiction. The same would largely depend upon the nature of the dispute and the enforcement of the right by an individual against such an institution. A right which purely originates from a private law cannot be enforced taking aid of the writ jurisdiction irrespective of the fact that such institution is discharging the public duties and/or public functions.

C. The scope of issue of a writ of mandamus is basically limited to an enforcement of the public duty and therefore it is the ardent duty of the court to ascertain whether the nature of the duty comes within the peripheral of public duty. The public duty cast may be either statutory or otherwise and where it is otherwise, the body/authority must be shown to owe that the duty or obligation to the public involves the public law element.

D. It has to be kept in mind that individual wrongs or breach of mutual contracts without having any public law element as its integral part cannot be rectified through a writ petition under Article 226.

Against this backdrop, the Court rejected the petitioners' argument that since only the Parliament has the right to regulate Petroleum, Nayara Energy, which deals in that arena, should be considered an instrumentality of the state.

The Court observed that the relation between the petitioners and Nayara Energy, both private entities, was contractual in nature, created via a franchise agreement solely for the sale of petroleum and diesel products for commercial purposes.

The bench further noted that although the sale of petroleum products is governed by guidelines and regulation issued by the Ministry of Petroleum and Natural Gas, a department of the Government of India, the Nayara Energy has been appointed as an agent to distribute franchise to private firms, one of those being the petitioners. Still, it is neither created under a statute nor does the Government financially or administratively control it.

“…termination of the franchise agreement by the respondent no.3 it is crystal clear that the same were as a result of non-compliance and flagrant violation of the franchise agreement. Such being the case, no element of public duty comes into play in the present factual matrix and the arguments raised by the petitioners that the actions of the respondent no.3 in termination of the agreement would be subject to the writ jurisdiction is superfluous and fallacious,” the bench held.

Against this backdrop, arguing that the objection raised by respondent no.3 with regard to the maintainability of the writ petition is justified, the court dismissed the writ petition as not maintainable.