Corporations and Public Undertakings: Definition and Characteristics

4. Managed by a board appointed by the Government. The Government appoints the chairman and members, and often reserves power to issue directions on questions of policy.

5. Freedom from ordinary government procedure. It is not bound by the civil service rules or by the treasury and financial procedure applicable to a department, and it frames its own regulations for its staff and its business.

6. A public purpose. Its objects are public and its profits, if any, are not distributed to private shareholders.

7. Accountability without departmental control. It is answerable to the legislature through its annual report and accounts, to the Comptroller and Auditor General for audit in most cases, and to the courts, but not to a minister for its day to day working.

Public corporation, government company and department compared

This table is the single most useful thing in the chapter, and it is regularly examined.

The last row is where administrative law enters, and it is the subject of [Liability of and Control over Public Corporations].

Is a corporation part of the State

This is the question that turns a topic in public administration into a topic in law, and it has a constitutional test.

Article 12 defines the State, for the purposes of Part III, as including the Government and Parliament of India, the Government and legislature of each State, and all local or other authorities within the territory of India or under the control of the Government of India. Everything turns on "other authorities".

Facts. Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487, concerned admissions to the Jammu and Kashmir Regional Engineering College, Srinagar, which was run by a society registered under the Jammu and Kashmir Registration of Societies Act 1898. The preliminary question was whether that society was a State within Article 12, so that a writ would lie against it and the fundamental rights would bind it.

Held. The writ petitions failed on the merits, but the college was held to be a State within the meaning of Article 12. The composition of the society was dominated by representatives appointed by the Central Government and by the Governments of Jammu and Kashmir, Punjab, Rajasthan and Uttar Pradesh with the approval of the Central Government; the money required to run the college was provided entirely by the Central Government and the Government of Jammu and Kashmir, and any other money could be received only with their approval; the rules made by the society required the prior approval of both Governments; the accounts of the society had to be submitted to both Governments for scrutiny and satisfaction; and the society had to comply with all directions issued by the State Government with the approval of the Central Government.

Why it matters here. It establishes that the form of the body is not decisive. A society registered under a Societies Registration Act is not a corporation created by statute at all, and yet it was held to be the State, because in substance it was financially, functionally and administratively dominated by government. The same reasoning applies with greater force to a statutory corporation.

A worked example

Identify what each of the following is.

1. A body constituted by the Maharashtra State Electricity Regulatory Commission Act, with a chairman and members appointed by the State Government, its own staff, its own fund and power to sue in its own name. A statutory public corporation.
2. A company incorporated under the Companies Act in which the Government of India holds ninety per cent of the shares. A government company. Its constitution is its memorandum and articles, not a statute, and whether it is State under Article 12 is decided on the Ajay Hasia approach.
3. The Directorate of Municipal Administration in a State Secretariat. A government department. It has no separate legal personality and cannot be sued in its own name.
4. A society registered under the Societies Registration Act which runs a college, funded entirely by government, its governing body dominated by government nominees, its accounts submitted to government and bound by government directions. In form a society, in substance the State: Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487. A writ lies against it.
5. A private engineering college receiving no government funds, affiliated to a university. Not the State merely because it is regulated. Regulation is not domination.

What it does NOT mean

It does not mean a public corporation is a government department. It has separate legal personality, its own staff and its own funds, and it is not part of the Government.

It does not mean it is a private company. It is created by statute, financed by public money, managed by a government appointed board and directed to a public purpose.

It does not mean the label decides the legal question. Ajay Hasia holds that a society may be the State, and the same approach means that a body called a corporation might not be, if government has no real control over it.

It does not mean autonomy excludes accountability. The corporation is freed from departmental procedure and remains answerable to the legislature, the auditor and the courts.

Quick revision

1. A public corporation is created by a special statute, is a body corporate with perpetual succession and a common seal, may sue and be sued in its own name, is financed from public funds, is managed by a government appointed board, is free of ordinary government procedure, serves a public purpose, and is accountable without being under departmental control.
2. It exists to combine the flexibility of a business with the accountability of a public body, because a department is too rigid and a private company answers to shareholders.
3. Distinguish it from a department, which has no separate personality and whose staff are government servants, and from a government company, which is registered under the Companies Act with the Government holding at least 51 per cent of the paid up capital.
4. Its powers are only those the statute confers; an act beyond them is ultra vires.
5. Whether it is the State is decided under Article 12, which includes local or other authorities.
6. Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487: a registered society was held to be a State because its composition was dominated by government nominees, it was funded entirely by government, its rules required government approval, its accounts went to government and it was bound by government directions. Form is not decisive; substance is.

Test yourself

1. Define a public corporation and state its characteristics. A public corporation is a body corporate created by a special statute of the legislature to carry on a function of a public character, usually commercial, industrial, financial or developmental. Its characteristics are that it owes its existence and its powers entirely to that statute, so that an act beyond the statute is ultra vires; that it has a separate legal personality with perpetual succession and a common seal, and may sue and be sued, hold property and contract in its own name; that its capital is provided wholly or largely from public funds; that it is managed by a board appointed by the Government, which usually retains power to issue directions on policy; that it is free from the service rules and financial procedure applicable to a government department; that its objects are public and its profits are not distributed to private shareholders; and that it is accountable to the legislature through its report and accounts, to the auditor and to the courts, but not to a minister for its day to day working.

2. Distinguish a public corporation from a government company and from a government department. A government department has no legal personality separate from the Government, its staff are government servants, it is financed through the budget from the Consolidated Fund, it is bound by government financial and service rules, and it is under the full control of a minister. A public corporation is created by a special Act which is its constitution and can be altered only by amending that Act; it has separate legal personality, its own staff and funds, freedom from departmental procedure, and is subject to government direction on policy rather than on daily working. A government company is incorporated under the Companies Act, with the Government holding not less than fifty-one per cent of the paid up share capital; its constitution is its memorandum and articles, which are easily altered, and government control is exercised through shareholding rather than through statute.

3. Why was the device of the public corporation adopted? Because neither of the existing forms was suitable for the commercial and industrial functions the modern State took on. A department is answerable to a minister, bound by service and financial rules, and unable to act quickly or take commercial risk, which suits the administration of justice or revenue but not the running of a bank or an airline. A private company is efficient and flexible but answers to its shareholders and pursues profit rather than a public purpose. The public corporation was designed to combine the flexibility and initiative of a business with public ownership, public purpose and public accountability.

4. Is a society registered under the Societies Registration Act ever the State? Yes, if in substance it is an instrumentality of government. Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487, held that a society running a Regional Engineering College was a State within Article 12, because its composition was dominated by representatives appointed by the Central and State Governments, the money to run the college was provided entirely by those Governments and other money could be received only with their approval, its rules required prior government approval, its accounts had to be submitted to both Governments, and it had to comply with directions issued by the State Government with Central Government approval. The form of the body is therefore not decisive; what matters is whether it is financially, functionally and administratively dominated by government.

5. Are the employees of a public corporation government servants? No. Because the corporation has a legal personality separate from the Government, its employees are employed by the corporation and are governed by its own regulations rather than by the civil service rules, and they cannot claim the protection of Article 311, which applies to persons employed in civil capacities under the Union or a State. That does not mean they are without protection: if the corporation is the State within Article 12, the fundamental rights bind it, so its employees may complain of arbitrary treatment under Article 14 and may proceed by writ under Article 226.