The Instrumentality Test
Chapter Twenty-Nine
Syllabus topic 2, "State: Need for widening the definition in the wake of Liberalisation".
Pages 134 to 138 of 304
In one line
The courts stopped asking how a body was created and started asking whether it is really the government wearing another form, and produced a list of indicia to answer it.
In the wording a student can write in an exam: the instrumentality or agency test asks whether a body, whatever its legal form, is an instrumentality or agency of the State. In Ramana Dayaram Shetty v. International Airport Authority of India the Supreme Court held that there is no cut and dried formula, and identified as relevant the holding of the entire share capital by government, extensive and unusual financial assistance, a monopoly status conferred or protected by the State, deep and pervasive State control, functions of public importance closely related to governmental functions, and the transfer to the body of a department of government. In Ajay Hasia v. Khalid Mujib Sehravardi the Court applied the same tests to a society registered under an ordinary Act, holding that the form in which the State chooses to act cannot decide whether a fundamental right applies.
The reasoning behind the test
The argument is short and it should be given before the list of indicia, because the list without the argument is only a list.
The State may perform a function through a department, a statutory corporation, a government company or a registered society. The choice among those forms is the State's own, made for administrative or commercial convenience. If the applicability of Part III turned on which form was chosen, the State could remove any activity from the reach of the fundamental rights by a decision nobody could challenge, taken for reasons that have nothing to do with rights at all.
The courts therefore ask a question that the choice of form cannot answer: is this body, in substance, the State? The indicia are evidence going to that question, and that is all they are.
The tests as first stated
Facts. Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628, (1979) 3 SCC 489, decided 4 May 1979. The Authority invited tenders to run a restaurant and two snack bars at Bombay airport, confining eligibility to registered second class hoteliers with at least five years' experience. Of six tenders only the fourth respondents' was complete and it was the highest, but they were neither running a second grade hotel nor had they five years' experience. The Authority accepted it. Paragraph 8 of the notice reserved a right to reject any tender without reasons.
Held. Accepting a tender from a party who did not meet the Authority's own published standard was discriminatory, because it excluded others similarly situated, and it was arbitrary and without reason; the acceptance was invalid as violating the equality clause. The eligibility condition was an objective test, and the Authority could not justify what it did by saying it might have rejected all tenders and negotiated directly, because it had not done so.
The Instrumentality Test
On article 12, Bhagwati J. asked when a corporation becomes an instrumentality or agency of government, and answered that there is no cut and dried formula which would provide the correct division of corporations into those which are instrumentalities of government and those which are not. Relevant considerations include: the holding of the entire share capital by government, which goes a long way; extensive and unusual financial assistance, where the government's purpose in giving it coincides with the purpose for which the body uses it and that purpose is of a public character; a monopoly status conferred or protected by the State; deep and pervasive State control; functions of public importance closely related to governmental functions; and the transfer to the body of a department of government.
The judgment also produced the sentence that has outgrown its subject: every action of the executive government must be informed with reason and should be free from arbitrariness, and that is the very essence of the rule of law and its bare minimal requirement.
Why it matters. It is the origin of the test, and it is also the origin of the proposition that arbitrariness in State action is itself unconstitutional, which is developed in [Arbitrariness].
The tests restated, and extended past statutory bodies
Facts. Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487, (1981) 1 SCC 722, decided 13 November 1980. Admission to the Regional Engineering College, Srinagar, run by a society registered under the Jammu and Kashmir Registration of Societies Act 1898. Candidates challenged a viva voce lasting two or three minutes a candidate, consisting of formal questions about parentage and residence with no relevance to the subject, and carrying a third of the total qualifying marks. The society denied that it was "State" at all.
Held. The society is "State" within article 12 and is bound by article 14. Its composition is dominated by nominees of the Central and State Governments; the money to run the college comes entirely from those Governments; its rules require their prior approval; its accounts go to them; it must comply with their directions; it cannot dispose of immovable property without their approval; and the Governments may appoint and remove members. That control is so deep and pervasive that the society is merely a projection of the Governments: the voice is that of the State and the Central Governments.
The Court held that the tests are the same whether the body is a statutory corporation or a society registered under an ordinary Act, because the form in which the State chooses to act cannot decide whether a fundamental right applies. On the merits, allotting a third of the marks to an interview conducted in that way was excessive and arbitrary.
The Instrumentality Test
Why it matters. It is the case usually cited for the settled formulation of the tests, and it is the case that carried them past bodies created by statute. After Ajay Hasia the enquiry is genuinely about substance, and the legal instrument of creation is only one fact among several.
Using the test in a problem
Six questions, and the answer to none of them is decisive on its own.
Who owns it? Is the entire share capital, or the whole of the corpus, held by government?
Who funds it? Is the financial assistance extensive and unusual, and does it meet substantially the whole of the expenditure? Occasional grants and ordinary subsidies available to everyone in the sector do not count.
Does it hold a monopoly, and if so, who gave it? A monopoly conferred or protected by the State is significant; a monopoly the body achieved for itself is not.
Is the control deep and pervasive, or merely regulatory? This is the question that decides most modern cases, and it is developed in [The Retreat, and What Survived It].
What does it do? Are its functions of public importance and closely related to governmental functions?
Where did it come from? Was a department of government transferred into it?
Then stand back and ask the real question, of which those six are only evidence: is the voice that of the government?
What the test achieved, and what it left unstable
What it achieved. It made article 12 follow public power rather than legal form, which is what the drafters' inclusive definition invited. Through the 1980s it brought a very wide range of bodies within Part III, and gave employees and contractors of public sector undertakings the protection of articles 14 and 16.
What it left unstable. A list of six indicia, none decisive, with no rule about how to weigh them, is not a test so much as a licence to reach either answer. Different Benches applied it differently, and a body could be held to be State in one case and not in another on facts that were hard to distinguish. That instability is what produced the correction described in the next chapter.
A worked example
A society is registered under the Societies Registration Act to run a college. Its governing body has eleven members, seven nominated by the State Government. Ninety-five per cent of its recurring expenditure is met by State grants. Its rules require the Government's prior approval, its accounts are submitted to the Government, it must comply with directions issued by the Government, and it cannot sell its buildings without approval. It was formed by transferring a Government-run college into it. A candidate refused admission alleges that the admission procedure is arbitrary.
The Instrumentality Test
Is the society "State"?
Ownership and composition. Seven of eleven members are Government nominees, so the composition is dominated by the Government.
Funding. Ninety-five per cent of recurring expenditure is extensive and unusual financial assistance, not an ordinary grant available across a sector.
Control. Prior approval of rules, submission of accounts, compliance with directions and a bar on disposing of property are the marks of deep and pervasive control, and they are particular to this body rather than applying to every society in the State.
Function. Education, closely related to a governmental function.
Origin. A Government college was transferred into it.
Legal form. A registered society, not a statutory corporation. On Ajay Hasia that makes no difference, because the tests are the same and the form in which the State chooses to act cannot decide whether a fundamental right applies.
Answer. The society is State, the voice being that of the Government, and article 14 binds the admission procedure. On the merits, an interview carrying a third of the marks and conducted in two or three minutes on questions about parentage and residence was held excessive and arbitrary in Ajay Hasia itself.
Quick revision
- The test asks whether a body is an instrumentality or agency of the State, because the State's choice of legal form cannot decide whether Part III applies.
- R.D. Shetty: no cut and dried formula. Indicia are entire share capital, extensive and unusual financial assistance, State conferred or protected monopoly, deep and pervasive control, public functions closely related to governmental functions, and transfer of a government department.
- R.D. Shetty is also the source of the rule that every action of the executive must be informed with reason and free from arbitrariness.
- Ajay Hasia: the same tests apply to a registered society, and control so deep and pervasive that the body is a projection of government makes it State. The voice is that of the government.
- Six indicia, none decisive, and no rule for weighing them. That is what made the test unstable and invited the retreat.
Test yourself
1. Why can the State's choice of legal form not decide whether Part III applies?
2. List the six indicia from R.D. Shetty, and say what R.D. Shetty said about whether they amount to a formula.
3. What does R.D. Shetty say about arbitrariness and the rule of law, and where else in this book does that proposition reappear?
The Instrumentality Test
4. What did Ajay Hasia add to R.D. Shetty?
5. What made the test unstable, and what did that instability lead to?
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.