Opinion: N Srinivasan Case Judgment- Adding an Explanation to the Exercise of Quasi- Legislative Functions

In the previous post, I had discussed the issue with respect to BCCI’s amenability to Writ Jurisdiction of the Supreme Court under Article 32 by addressing the queries raised in the Zee Telefilms case from the observations in the present case.

There was also reference to the BCCI’s amenability to the Jurisdiction of High Courts under Article 226 on the ground of its performance of ‘public functions’. Once the Court had established this (which was easy, since the Constitution Bench decision in Zee Telefilms had held the same), it made the BCCI’s administrative actions open to judicial review.

The present post deals with its one such administrative function, i.e., the Amendment to Rule 6.2.4 of the IPL Regulations. The Bombay High Court had earlier repelled the challenge and upheld the amendment in question by its judgment and order impugned in the present Civil Appeal.

In this post only first strand of the Court’s reasoning would be analysed, i.e., striking down the provision for perpetrating Conflict of Interests. The second independent strand is of the amendment contravening public policy, which will not be dealt in this post.

A. Impugned Provision

The Rule prior to the amendment stated:

“No Administrators shall have, directly or indirectly, any commercial interest in the matches or events conducted by the Board.”

Later the following phrase was added to it:

“excluding events like IPL or Champions League Twenty 20.”

B. Issue

While there was no problem with (a) the competency of the authority amending the Regulations, and (b) the procedure fairness involved in carrying out the same; there was issue of infirmity in whether the amendment falls foul of any statute or principle of law, violation whereof cannot be countenanced.

C. Contention

It was contended that the as much as the amendment permits commercial interest to be held by administrators in the events organised by BCCI it violates a fundamental tenet of law that no one can be a judge in his own cause, a facet which must guide every action that BCCI takes in the discharge of its public functions.

D. Decision

The Court in its first strand of reasoning held that the impugned Rule has caused the present situation of Conflict of Interests where Mr. N. Srinivasan, being the Head of BCCI, was involved in many situations where his own team CSK was being compensated for losses incurred by it at various junctures. One of the three instances, the Court mentions is one where BCCI awarded compensation of a sum of Rs.10.40 crores to Chennai Super Kings – on account of the cancellation of the Champions League Tournament 2008. The Court noted that it is not in dispute that Mr. Srinivasan was one of those who contributed to the taking of the decision to award that amount towards compensation to his own team.

In other words, Court stated:

“This enabling provision disregards the potential conflict of interest which will arise between an administrator’s duty as a functionary of the BCCI on the one hand and his interest as the holder of any such commercial interest on the other.”

The Court differentiated between the scenario where conflict may arise even when rules do not specifically permit such a conflict situation with that of a scenario of permitting acts which will per se bring about such a conflict.

E. Analyses

The first strand of the Court’s reasoning is important for the jurisprudence of Administrative law. Administrative Actions can be classified into 3 types: (a) Quasi- Legislative, (b) Quasi- Judicial and (c) Pure Administrative Actions with or w/o Civil Consequences.

Principles of Natural Justice are not required to be followed in the first type, since being a policy decision there is a creation of rights and liabilities and no issue of either deciding or affecting the rights and liabilities of the parties involved. The act of amending the Rules is a Quasi- Legislative Action, therefore, cannot be found foul of violating the PNJs.

It should be noted that the Court rejected the contention that the amendment is bad for it was carried in a hasty manner without giving adequate notice to the members of the Organisation while stating:

“…[though there can be] suspicion as to bonafides of the exercise but a mere suspicion may not be enough…so long as the forum where the matter was taken-up, discussed and a resolution passed was competent to deal with the subject, procedural deficiencies which do not affect the competence of the authority do not matter much.”

Clearly, the Court has not commented on whether bona fide of the administrative rule making is a relevant consideration for judicial review of Quasi- legislative action. It merely stated that a mere suspicion of absence of bonafide is not enough. In my opinion, the Court misconstrued the argument of procedural deficiencies highlighting malafide of the administration to that of the argument of procedural deficiencies striking at the competence of the administration to engage in quasi legislative action. The Court did not address if the bonafide of the administration, if proved to be absent, could be a ground of striking down the Quasi- legislative action. It merely termed the activities of hastily proceeding with the amendment as a "procedural deficiency" which did not strike at the competency of the Administration's action, whereas, the argument was that such activities show the malafide intention in carrying out this Amendment operation.

So far so good, but for the Supreme Court the problem arises when such action is the cause of violation of PNJs, i.e., even though good faith or other PNJs are not required to be followed while exercising such power, the exercise of such power when leads to situations of biasness or conflict of interests situations, then, there is a problem.

Therefore, there cannot be a rule permitting those acts and transactions which would by their very nature bring about a conflict of interest. Such rules therefore, hinder the ability to undertake Pure Administrative actions by not giving due credence to PNJs. The test is not whether there is any bias when Pure Admin Action is undertaken, but whether there is any reasonable likelihood of bias that determines whether the action can be faulted. The instances where the BCCI (including Srinivasan) compensated CSK for losses, are instances of Pure Administrative Action affecting rights and liabilities, which are foul of non- adherence to the PNJs. Hence, in my opinion the judgment is landmark for adding an explanation to the exercise of Quasi- Legislative actions, that such actions should not promote violation of PNJs, even though to exercise such actions there is no need to follow PNJs. 

Opinion: N.Srinivasan Case Judgment and Resurgence of Functional Approach to bring BCCI under Article 12 Ambit?

BCCI v. Cricket Association of Bihar and Ors.

The Supreme Court has recently decided the case pertaining to the former BCCI Chairman, who is also the owner of one of the teams in the Indian Premier League (IPL). The case also pertained to the allegations of betting and spot fixing against one Guruappa (being de facto the controller of the team Chennai Super Kings) and Raj Kundra (being the owner of the team of Rajasthan Royals).

While the judgment pertaining to match fixing and betting is purely factual and based on the findings of a 3- member Committee formed to investigate into the allegations, the part where the Supreme Court dwells into the jurisdiction over BCCI on the pretext of performing a public function and secondly the part where it deals with the Conflict of Interest contention against Srinivasan and strikes down an amendment into the IPL Regulations that had allowed for commercial interests in events of IPL, Champions League to even those who were members of the BCCI, constitute important legal positions in the area of Constitutional and Administrative Law.

The present post deals with the first issue, i.e. Issue 1- Exercising Jurisdiction over BCCI

The Court refused to dwell into the discussion as to whether BCCI is an instrumentality of state as per Article 12 and consequently could be made amenable to Writ Jurisdiction of the Supreme Court under Article 32, in lieu of the settled position of law in the case of Zee Telefilms Ltd. and Anr. v. Union of India and Ors.[1] The Court reiterated the conclusion (reached in the same case by a larger bench) that since BCCI performs a public function (despite not receiving any financial, …assistance from the government), therefore it is amenable to Writ Jurisdiction of the High Court under Article 226.

This approach of holding BCCI to be amenable to the Article 226 jurisdiction can be termed as ‘functional approach’, where the function of the BCCI is similar to that of a State. Interestingly, this approach was rejected by the Supreme Court in the Zee Telefilms case in exchange for approving the Legal Approach (i.e. ‘other authorities’ in Article 12 are those which are made by Statutes)

Parts of the Judgment Muddling the already Fuzzy Jurisprudence on Article 12

Before proceeding with the issue it must be commended that the Court had taken care of dividing the judgment in 7 parts and clearly demarcated every issue to be decided. (and yes, this rarely happens in our judgments)

There have been various tests laid down for determining “other authorities” for the purposes of Article 12. Broadly:

§  The functional test (whether the function performed by the corporation is a public function), or

§  the control test/ legal approach (whether there is deep pervasive control of the Government as in financially, administratively or functionally, and whether the Board was created by a Statute or autonomous approved in Pradeep Kumar Biswas v. Indian Institute of Chemical Biology and Ors.[2] and Zee Telefilms cases).

The Court, in the present case, quoted from the cases of Sukhdev v. Bhagatram Sardar Singh Raghuvanshi[3] and RD Shetty v. IAAI and Ors.[4] those parts of the precedents which highlight the functional approach taken towards determining whether a Corporation can be termed as ‘State’ or not. For illustrations, it cited paras from the Sukhdev and RD Shetty cases stating:

“23. Borrowing support from the above decision and several others this Court in Sukhdev’s case (supra) held:

“97. Another factor which might be considered is whether the operation is an important public function. The combination of State aid and the furnishing of an important public service may result in a conclusion that the operation should be classified as a State agency. If a given function is of such public importance and so closely related to governmental functions as to be classified as a governmental agency, then even the presence or absence of State financial aid might be irrelevant in making a finding of State action…”…

24. In Ramana Dayaram Shetty v. International Airport Authority of India and Ors…this Court referred to American decisions…to declare that if the functions of the corporation are of public importance and closely related to governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of the State. This Court said:

“16. There is also another factor which may be regarded as having a bearing on this issue and it is whether the operation of the corporation is an important public function. It has been held in the United States in a number of cases that the concept of private action must yield to a concept of State action where public functions are being performed.”” [Emphasis Added]

Then, the Court referred to the judgment in the case Board of Control for Cricket in India & Anr. v. Netaji Cricket Club and Ors.,[5] where the Court had held that the Boards control over the sport of cricket was deep and pervasive and that it exercised enormous public functions.

It is also apposite to refer to the reasoning of the Court in holding that there is a pervasive control of the BCCI over Competitive cricket in India.

Rejection of the Functional Approach in Zee Telefilms case

This reasoning of Netaji case was found by a Constitution Bench in the case of Zee Telefilms Ltd. to be insufficient for fulfilling Article 12 threshold since the State/ Union has not chosen the Board to perform these duties or functions. The absence of any authorization was the pivotal in holding that BCCI is not a State. In other words, functional aspect has to be coupled with authorization from the State to a Corporation to undertake such public activities, otherwise merely performance of public functions is not enough.

Present Case impliedly Contravening Zee Telefilms’ Reasoning.

Now contrast this reasoning with what the Court in the present case had stated, while holding that BCCI is amenable to Article 226 jurisdiction.

“It is common ground that the respondent-Board has a complete sway over the game of cricket in this country. It regulates and controls the game to the exclusion of all others. It formulates rules, regulations norms and standards covering all aspect of the game. It enjoys the power of choosing the members of the national team and the umpires. It exercises the power of disqualifying players which may at times put an end to the sporting career of a person. It spends crores of rupees on building and maintaining infrastructure like stadia…It sells broadcast and telecast rights and collects admission fee…activities are undertaken with the tacit concurrence of the State Government and the Government of India who are not only fully aware but supportive of the activities of the Board.” [Emphasis Added]

Further the Court observed:

“The State has not chosen to bring any law or taken any other step that would either deprive or dilute the Board’s monopoly in the field of cricket…Government of India have allowed the Board to select the national team which is then recognized by all concerned and applauded by the entire nation including at times by the highest of the dignitaries...” [Emphasis Added]

The employing of phrases ‘tacit concurrence’ and ‘allowed the Board to select the national team’ clearly indicate that (a) the functional approach is important and (b) there is State/Union's tacit/ implied approval of BCCI's actions and thus the twin requirements of an authorization by the State/Union along with the performance of public functions (as held in the Zee Telefilms case), is being clearly (and I think, inadvertently) addressed by the Court in the present case. While an argument can be made that there is no express authorization, the presence of aspects of ‘state choosing to not bring the BCCI’s activities within a legal enactment’ and ‘BCCI’s power of selecting players to represent the Indian Nation at an International level’, clearly indicate implied authorization by the State/Union.

Conclusion

While the Court in the present case has categorically stated that it would not address the issue of BCCI’s amenability to Writ Jurisdiction u/Article 32 on the basis of Article 12, nevertheless, the reasoning employed to justify interference of High Court under Article 226 certainly hits the reasoning of Zee Telefilms case.

No doubt, the Zee Telefilms case has duly noted that there is no de jure authorization by the State/Union. But the Court’s rejection of the aspect of de facto authorization of the State/Union appears to be somewhat confusing when it states:

“The Union of India has tried to make out a case that the Board discharges these functions because of the de facto recognition granted by it to the Board under the guidelines framed by it, but the Board has denied the same. In this regard we must hold that the Union of India has failed to prove that there is any recognition by the Union of India under the guidelines framed by it and that the Board is discharging these functions on its own as an autonomous body.”

Clearly defacto recognition cannot be proven by production of any guidelines or rules/ regulations, since the very nature of such recognition is that such cases can be proven only by factual understanding, i.e., proving the existence of tacit or implied understanding. The observations in the present case that “the State has not chosen to bring any law or taken any other step that would either deprive or dilute the Board’s monopoly in the field of cricket” and ‘allowing the Board to select the national team’ do indicate the presence of State’s approval of the actions of the BCCI and there being a defacto recognition of BCCI representing India.

Whatever may be the long term implications of such statements, but clearly these observations do make a lot of sense in recognizing BCCI’s role as performing public functions and Article 12 understanding.

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[1]  (2005) 4 SCC 649.

[2] (2002) 5 SCC 111.

[3] (1975) 1 SCC 421.

[4] (1979) 3 SCC 489.

[5] (2005) 4 SCC 741.

Update: Creating a smooth Sail for FDI- Easing of the "Optionality rules" by RBI

In a significant move the RBI has proposed relaxation of rules on Call and Put options last week when it allowed buyback of DoCoMo’s shares by Tata-Teleservices in their telecom joint venture. This decision of the central bank reflects a paradigm shift because the last notification by it on “Pricing Guidelines for FDI instruments with optionality clauses”[1] in January 2014, specifically mentioned that the right to exit to a foreign investor will be without any assured return. And in this case the buyback of the shares has been at a “previously assured price” which is allegedly much higher than the independently ascertained value.

It is important to note that the last amendment by RBI on option clauses remained fraught with contentions of having a number of practical challenges in implementing it but that would not be a point of discussion in this post.

Analysis

The RBI has reportedly asked the Finance ministry for downside protection to foreign investors upon their exit and extending the same option to the industry in general. This is thought provoking because one would have expected such a request to come from the ministry to the RBI and not the other way around. Taking such an approach would increase the capital flows in the country and would be in consonance with the government’s current policy of attracting foreign capital. This move will also affect the contracts that the private equity has with Indian companies and where such matters are in arbitrations and where major defence taken by Indian corporates is the fact that Indian law restricts payout at a price based in downside protection.

Assuming that the Finance Ministry agrees to this proposal this move might have the result of increasing the inflow of capital but it may also prejudice the interests of the Indian companies who will at the time of exit of their partners be compelled to pay an assured price which most of the times will be greater than the fair market value. This goes against the logic which used to be forwarded by the Indian regulators prior to 2014 amendment i.e. these protections were necessary owing to weak leverage position of the Indian companies in such contracts.

Nevertheless it is suggested that in order to attract more FDI the government needs to revisit its capital control regime holistically so that once there is more clarity on all options to foreign investors to exit the foreign investment will increase.

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[1] A. P. (DIR Series) Circular No. 86 dated 9th January 2014.

Criminal Liability of Directors: Sunil Bharti v. CBI-Part II

In the last post we discussed that lifting of corporate veil would not affect criminal liability of a director for offences committed by the company itself. This post summarizes the judgement of Supreme Court in Sunil Bharti v. CBI.

I.                   Facts, Charges and Journey to Supreme Court:

In the 2G Spectrum scam, CBI named four persons as accused in the charge-sheet viz. Mr. Shyamal Ghosh and three companies (Bharti Cellualar Ltd., Hutchison Max Telecom (P) Ltd. and Sterling Cellular Ltd.). The Trial Court Judge[1] found that there is enough incriminating material to proceed against them on the charges made under Section 120B IPC r/w Sections 13(2) and 13(1)(d) of Prevention of Corruption Act, 1988.

At the same time, the Trial Court Judge found that Mr. Sunil Bharti (Chairman-cum-managing Director of Bharti Cellualar Ltd.), Mr. Asim Ghosh (Managing Director of Hutchison Max Telecom (P) Ltd.) and Mr. Ravi Ruia (Director in Sterling Cellular Ltd.) are “alter ego”[2] [see footnote for definition of "alter ego"] of their respective companies. According to the Trial Court Judge, the acts of the accused companies could be attributed and imputed on their respective “alter ego”.

On this premise, the Trial Court Judge felt that there was enough material on record to proceed against these three persons as well. Accordingly, apart from the four accused named in charge-sheet, these three persons were also put at trial and were proceeded against offences under Section 120B of IPC, and under Sections 13(2) and 13(1)(d) of Prevention of Corruption Act, 1988.

Two of the above two directors appealed in the Supreme Court against the order of Trial Court Judge implicating them as accused.

II.                Issue: Whether in the instant case the Director can be held liable for the offence committed by the company itself.

III.             Ratio:

A.     Company liable for acts of alter ego

While discussing the liability of company for acts of its alter ego, Supreme Court heavily relied on Iridium Motorola case. It discussed that as per Iridium Motorola case a company can be held liable for offences involving mens rea as necessary ingredient. And, to know the mental state of the company, the mental state of the person in control of affairs is attributed on the company.

Then, the Apex Court distinguished the present case from the Iridium Motorola case. Present case relates to criminal liability of alter ego for offences committed by the company whereas Iridium relates to criminal liability of company for acts of alter ego. Thus, present case is exactly reverse scenario of Iridium Motorola. Then, Supreme Court discussed this reverse situation.

B.     Alter ego liable for acts of the company

As per Supreme Court, an “alter ego” can be made held liable for the acts of the company only in two situations: 

    1.    When there is a categorical provision in the statute making such a person vicariously liable,[3]or

  2. When there is enough material to attribute the alleged acts of criminality to the said person.

Then Supreme Court determined whether any of these two situations is applicable in the instant case. The Court firstly discussed the second situation and held that second situation is completely inapplicable as the Trial Court Judge did not proceed against the directors on the basis of incriminating material. Rather, the judge proceeded on the basis of principle of “alter ego”. Further, Supreme Court ruled that even if he proceeded on the basis of incriminating material, his order does not state valid reasons for proceeding against the directors.

With this, the Supreme Court moved to the applicability of first situation in the instant case. With respect to first situation, it must be noted that the directors were charged under Section 12B IPC and Sections 13(2) and 13(1)(d) of Prevention of Corruption Act, 1988 for the offences committed by their respective companies. There is no provision in IPC and PC Act which states that whenever a company is proceeded against offences under PC Act its person in charge would also be proceeded. On this premise, the first situation is also inapplicable.

For these reasons, the charges against Appellant-Directors were ordered to be dropped and order of Trial Court Judge was dismissed accordingly.

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[1] In 2G Spectrum, case, a Special Court was established to conduct trial. Throughout the judgement in Sunil Bharti case, the judge conducting trial was called Special Judge.

[2] “Alter ego” of a company is a person who controls the affairs of the company and represents its directing mind and will.

[3] Examples of such categorical provision: Section 141 of Negotiable instruments Act which stipulates that when a person which is a company commits an offence, then certain categories of persons in charge as well as the company would be deemed to be liable for the offences under Section 138. Section 32 of Industrial Disputes Act.