Supreme Court Allows Disinvestment of Residual Stake in Hindustan Zinc Limited, Orders CBI Probe (18 November 2021)

Introduction

Date of the Judgment: 18 November 2021

Citation: Not Available

Judges: Dr Dhananjaya Y Chandrachud, J and B V Nagarathna, J

Can the government sell its remaining shares in a company it once nationalized, without changing the original law? The Supreme Court of India recently tackled this question in a case involving Hindustan Zinc Limited (HZL). The court had to decide if the government could sell its remaining stake in HZL and whether a probe was needed into past dealings.

The core issue was whether the Union Government could disinvest its remaining 29.54% stake in HZL without amending the Metal Corporation (Nationalisation and Miscellaneous Provisions) Act 1976, under which HZL was initially acquired. The petitioners also questioned the CBI’s decision to close its preliminary enquiry into the 2002 disinvestment of 26% of HZL’s equity.

The judgment was delivered by a two-judge bench comprising Justice Dr Dhananjaya Y Chandrachud and Justice B V Nagarathna. The opinion was authored by Justice Dr Dhananjaya Y Chandrachud.

Case Background

Hindustan Zinc Limited (HZL) was initially incorporated as Metal Corporation of India Limited in 1944. It was the sole producer of zinc and lead from its mines in Rajasthan. The Union Government acquired the company through the Metal Corporation of India (Acquisition of Undertaking) Ordinance in 1965, later replaced by the Metal Corporation (Nationalisation and Miscellaneous Provisions) Act 1976. HZL was incorporated as a public sector company in 1966 to manage the mining and smelting operations.

The Union Government began disinvesting its shareholding in HZL in 1991-92, selling 24.08% of its stake. In 2002, it sold another 26% to Sterlite Opportunities & Ventures Ltd. (SOVL), making SOVL a strategic partner. This reduced the Union Government’s stake to 49.92%. SOVL further increased its stake to 46% by acquiring 20% from the open market.

SOVL exercised its first call option in 2003, acquiring another 18.92% of the equity, raising its stake to 64.92%, while the Union Government’s stake reduced to 29.53%. In 2012, the Union Government announced its decision to disinvest its remaining 29.54% shareholding.

A preliminary enquiry was initiated by the CBI in 2013 into alleged irregularities in the 2002 disinvestment. The present Public Interest Litigation (PIL) was filed in 2014, challenging the proposed disinvestment of the remaining 29.54% stake and seeking a direction to the CBI to file status reports on its investigation.

Timeline

Legal Framework

The case primarily revolves around the interpretation of the Metal Corporation (Nationalisation and Miscellaneous Provisions) Act 1976 (the Nationalisation Act 1976) and the Companies Act 1956 and 2013.

The Nationalisation Act 1976 was enacted to acquire control over lead and zinc deposits, vesting the undertaking of Metal Corporation of India in the Central Government. Section 4(1) of the Nationalisation Act 1976 provides for the taking over of the management of the undertaking of Metal Corporation. Section 7 of the Nationalisation Act 1976 states that the undertaking of the Metal Corporation shall stand transferred to, and shall vest absolutely in, the Central Government. Section 9 of the Nationalisation Act 1976 empowers the Central Government to direct the vesting of the undertaking in a government company.

Section 617 of the Companies Act 1956 defined a “government company” as one in which not less than 51% of the paid-up share capital is held by the government. Similarly, Section 2(45) of the Companies Act 2013 defines a government company.

The key sections of the Nationalisation Act 1976 discussed in the judgment are:

• Section 4(1): “On the commencement of this Act, the Metal Corporation of India (Acquisition of Undertaking) Act, 1966 (36 of 1966), shall stand repealed, and on such repeal, the undertaking of the Metal Corporation, which had been transferred to, and vested in, the Central Government by virtue of the provisions of Section 3 of the Act so repealed, and the undertaking of the Metal Corporation together with all its properties, assets, liabilities and obligations specified in sub-section (1) of Section 4 of that Act and such other properties, assets, liabilities and obligations, acquired or incurred, for the purposes of its undertaking, after the 22nd day of October, 1965, which stood, by virtue of the provisions of Section 12 of the said Act, transferred to, and vested in, the Government company formed in pursuance of the provisions of Section 12 of the Act aforesaid shall, by virtue of the provisions of this Act, be deemed to have been retransferred to, and re-vested in, the Metal Corporation, and, immediately thereafter, the management of the undertaking of the Metal Corporation shall be deemed to have been transferred to, and vested in, the Central Government.”
• Section 6(1): “Notwithstanding anything contained in the Companies Act, 1956, or in the memorandum or articles of association of the Metal Corporation, so long as the management of the undertaking of the Metal Corporation remains vested in the Central Government, — (a) it shall not be lawful for the shareholders of the Metal Corporation or any other person to nominate or appoint any person to be a director of the Metal Corporation: (b) no resolution passed at any meeting of the shareholders of the Metal Corporation on or after the commencement of this Act shall be given effect to unless approved by the Central Government; (c) no proceeding for the winding up of the Metal Corporation or for the appointment of liquidator or receiver in respect of the undertaking thereof shall lie in any court except with the consent of the Central Government.”
• Section 7(1): “On the appointed day, the undertaking of the Metal Corporation, and the right, title and interest of the Metal Corporation in relation to its undertaking, shall stand transferred to, and shall vest absolutely in, the Central Government.”
• Section 9(1): “Notwithstanding anything contained in Section 7, the Central Government may, if it is satisfied that a Government company is willing to comply, or has complied, with such terms and conditions as that Government may think fit to impose, direct, by an order in writing, that the undertaking of the Metal Corporation and the right, title and interest of the Metal Corporation in relation to such undertaking shall, instead of continuing to vest in the Central Government, vest in the Government company either on the date of publication of the direction or on such earlier or later date (not being a date earlier than the appointed day), as may be specified in the direction.”

Arguments

The petitioners argued that the Union Government cannot disinvest its residual shareholding in HZL without amending the Nationalisation Act 1976. They contended that the Act was enacted to control strategic mineral deposits of lead and zinc, and that the government’s 29% stake ensures a veto over key decisions in HZL. They also argued that the 2002 disinvestment was illegal and that the CBI should be directed to investigate the matter thoroughly.

The petitioners relied on the judgment in Centre for Public Interest Litigation v. Union of India [(2003) 7 SCC 532], arguing that any disinvestment by the Union Government can only be undertaken with the approval of Parliament or through its intervention. They also stated that the Nationalisation Act 1976 prohibits the government from taking any step by which the acquired undertaking ceases to be a government company.

The Union Government argued that the petition was barred by res judicata, as a similar petition had been dismissed earlier. It stated that the policy of disinvestment has evolved over time, and that HZL ceased to be a government company after the 2002 disinvestment. They also argued that zinc is no longer considered a strategic asset and that the government is entitled to sell its shares as a shareholder. The Union Government also stated that the residual shareholding would be sold in the open market, following SEBI rules.

SOVL argued that the petition was barred by res judicata and that the disinvestment of 70.5% of shares in HZL was not under challenge. They stated that HZL had ceased to be a government company and that the transfer of the remaining 29.54% would only raise finances for the government without impacting management or control.

The CBI stated that its preliminary enquiry was based on source information, not on the complaint of the petitioner’s brother. It also stated that the closure of the enquiry was based on the CBI manual and that the former Attorney General had not advised SOVL.

The arguments can be summarized as follows:

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the present writ petition is barred by the principles of res judicata due to the dismissal of an earlier petition.
2. Whether the Union Government can disinvest its residual shareholding of 29.54% in HZL without amending the Nationalisation Act 1976.
3. Whether the decision in Centre for Public Interest Litigation applies to the present case.
4. Whether the CBI’s decision to close the preliminary enquiry was justified.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the earlier dismissal of a similar petition did not bar the present petition on the grounds of res judicata, as there had been no substantive decision on the merits of the issues. The court also held that the decision in Centre for Public Interest Litigation did not apply to the present case because HZL had ceased to be a government company.

The court found that the Union Government’s decision to disinvest its residual shareholding in HZL was not interdicted by the principles laid down in Centre for Public Interest Litigation. The court also noted that SOVL had stated that it would not exercise its second call option.

The court directed the CBI to register a regular case regarding the 2002 disinvestment of HZL, finding sufficient material for such action.

How each authority was viewed by the Court:

• Centre for Public Interest Litigation v. Union of India [(2003) 7 SCC 532]: The court distinguished this case, stating that it applied to companies that were still government companies, unlike HZL.
• Lalita Kumari v. Government of Uttar Pradesh [(2014) 2 SCC 1]: The court referred to this case to discuss the process of registering an FIR and conducting preliminary enquiries.
• Life Insurance Corporation of India v. Escorts Ltd. [(1986) 1 SCC 264]: The court cited this case to emphasize that the government, as a shareholder, has the same rights as any other shareholder.
• Central Bureau of Investigation (CBI) v. Thommandru Hannah Vijaylakshmi @ T.H. Vijaylakshmi and another [2021 SCC OnLine SC 923]: The court referred to this case to highlight that a Preliminary Enquiry is not mandatory in all cases which involve allegations of corruption.
• Manohar Lal Sharma v. Principal Secretary [(2014) 2 SCC 532]: The court cited this case to emphasize the duty of the CBI to convert a preliminary enquiry into a regular case when a cognizable offence is evident.
• Shashikant v. Central Bureau of Investigation [(2007) 1 SCC 630]: The court referred to this case to highlight that the Supreme Court has the power to direct the CBI to conduct an investigation in exceptional cases.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the fact that HZL was no longer a government company when the decision to disinvest the residual shareholding was taken. The Court also emphasized that the Union Government, as a shareholder, had the right to sell its shares like any other shareholder. The Court was also concerned about the irregularities in the 2002 disinvestment and directed the CBI to investigate the matter.

Fact:Law Ratio

The court’s reasoning can be broken down as follows:

The Court considered the argument thatthe 29.54% shareholding provided the government with a veto over key decisions, but it ultimately concluded that this was not a sufficient reason to prevent the disinvestment.

Conclusion

The Supreme Court’s judgment allowed the Union Government to disinvest its residual stake in Hindustan Zinc Limited, holding that the Nationalisation Act of 1976 did not prohibit such a sale after the company ceased to be a government entity. However, the court also ordered a CBI probe into the 2002 disinvestment, finding sufficient grounds to warrant a full investigation.

The key holdings of the Supreme Court are:

• The present writ petition is not barred by res judicata.
• The Union Government can disinvest its residual shareholding in HZL without amending the Nationalisation Act 1976.
• The decision in Centre for Public Interest Litigation does not apply to the present case.
• The CBI’s decision to close the preliminary enquiry was not justified, and a regular case should be registered.