Disinvesting of Hindustan Zinc Ltd.; SC smells irregularities in bidding process, directs full-fledged CBI enquiry in the matter

Supreme Court: The Division Bench comprising of Dr. Dhananjaya Y Chandrachud* and B V Nagarathna, JJ., partly allowed the petition challenging Union Government’s disinvestment of its shareholding in Hindustan Zinc Ltd. (HZL). The Bench, though held that the government was within its powers to disinvest its shares, it was of the opinion that a full-fledged CBI enquiry was required regarding previous disinvestment by the government. The Bench stated,

“There is no bar on the constitutional power of this Court to direct the CBI to register a regular case, in spite of its decision to close a preliminary enquiry.”

HZL was incorporated as a public sector company to develop the mining and smelting capacities, so as to substantially fulfil the domestic demand for zinc and lead. In 1991-92, the Union Government disinvested 24.08 per cent of its shareholding in HZL and again in 2002 it disinvested 26 per cent of its shareholding in HZL to a ‘strategic partner, Sterlite Opportunities & Ventures Ltd. (SOVL). Consequently, the Union Government was left with an equity holding of 49.92 per cent.

Res Judicata and PILs

While determining the issue that the first relief sought by the petitioners, i.e. residual disinvestment can occur only after the amendment of the Nationalisation Act 1976 was  substantially similar to the reliefs sought by Maton Mines Mazdoor Sangh when the disinvestment of 2002 and 2014, the Bench opined that the Court must be alive to the contemporary reality of “ambush Public Interest Litigations” and interpret the principles of res judicata or constructive res judicata in a manner which does not debar access to justice. The Bench expressed,

“While determining the applicability of the principle of res judicata under Section 11 of the Code of Civil Procedure 1908, the Court must be conscious that grave issues of public interest are not lost in the woods merely because a petition was initially filed and dismissed, without a substantial adjudication on merits.”

Considering that the three judges Bench had rejected the petition filed by Maton Mines Mazdoor Singh in limine, without a substantive adjudication on the merits of their claim, the Bench held that the instant petition was not barred by res judicata.

Whether disinvestment was barred by the Nationalisation Act 1976?

Relying on the object of the Nationalisation Act, 1976 which was to acquire control over the strategic mineral deposits of lead and zinc, since zinc plays important role in the country’s economy, the petitioners contended that disinvestment could not be made without amending the Nationalisation Act 1976. Assailing the contention of the petitioners, the Union Government made following submissions:

1. After 16 March 1999, the mining of zinc has ceased to retain a strategic character, given the changes in industrial policy.
2. There was no challenge to the disinvestment which took place in 1991-92 or in 2002.
3. The HZL had ceased to retain its status as a government company within the meaning of Section 617 of the Companies Act 1956.

In view of the above, the Bench opined that it would be inconsistent to read an implied limitation on the transfer by the Union Government of its residual shareholding in HZL representing 29.54 per cent of the equity capital. Considering that HZL was not a government company, the Bench stated, when a decision has been taken by the government as a shareholder of a company to sell its shares, it acts as any other shareholder in a company who makes the decision on the basis of financial and economic exigencies.

Whether the decision in Centre for Public Interest Litigation would result in a bar on the disinvestment of the residual shareholding?

In Centre for Public Interest Litigation v. Union of India, (2003) 7 SCC 532, the Court had held that that the divestment of the shareholding of the Union Government in HPCL and BPCL, as a result of which the companies would cease to be government companies, could not be undertaken without amending the statutes under which they were nationalized. Distinguishing the decision in Centre for Public Interest Litigation, the Bench stated that HPCL and BPCL were government companies when the disinvestment action was challenged while HZL ceased to be a government company as a consequence of the disinvestment in 2002, since its shareholding fell below 51 per cent. The Bench opined,

“The fact that the Union Government is amenable to the norms set out in Part III of the Constitution would not impose a restraint on its capacity to decide, as a shareholder, to disinvest its shareholding, so long as the process of disinvestment is transparent and the Union Government is following a process which comports with law and results in the best price being realized for its shareholding.”

Hence, the Bench held that the decision of the Union Government, as an incident of its policy of disinvestment, to sell its shares in the open market, could not be questioned by reading a bar on its powers to do so, from the provisions of the Nationalisation Act 1976.

CBI’s preliminary enquiry

Evidently, in spite of conflicting opinion of the Director of CBI and the Director of Prosecution, CBI regarding the closure of the preliminary enquiry and conversion of it into a regular case; and the fact that the matter was referred to the Attorney General but the Court was not apprised of the status of referral, the preliminary enquiry was closed.

Upon perusal of reports and recommendations in favour of registration of a regular case, which indicated irregularities in the decision to disinvest 26 per cent, instead of 25 per cent, in the bidding process and the valuation of 26 per cent equity for disinvestment, the Bench opined that the disinvestment in 2002 evinced a prime facie case for registration of a regular case. The Bench stated,

“We are desisting from commenting on some crucial facts and names of individuals involved, so as to not cause prejudice to the investigation of the matter.”

Accordingly, opining that there was a prima facie case for cognizable offence, as mandated in para 9.1 of the CBI Manual, the Bench held that a full-fledged investigation must be conducted.

Hence, the petition was partially allowed. The CBI was directed to register a regular case and periodically submit status reports of its investigation to the Court.

[National Confederation of Officers Association of Central Public Sector Enterprises v. Union of India, 2021 SCC OnLine SC 1086, decided on 18-11-2021]

Kamini Sharma, Editorial Assistant has put this report together 

Appearance by:

For the Petitioners: Prashant Bhushan, Senior Counsel

For Union of India: Tushar Mehta, Solicitor General

For Sterlite Opportunities & Ventures Ltd. (SOVL): Harish Salve, Senior Counsel

*Judgment by: Justice Dhananjaya Y Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud