LAW RESOURCE INDIA

Strong State institutions are even more necessary when we are dealing with Nation’s resources and we allow contractors to exploit them

Posted in CONSTITUTION, DEMOCRACY, FUNDAMENTAL RIGHTS, JUDICIAL ACTIVISM by NNLRJ INDIA on May 9, 2010

EXTRACT FROM JUSTICE B SUDERSHAN  REDDY JUDGMENT IN RELIANCE VS RELIANCE WHICH EMPHASISED THAT NATURAL RESOURSCE BELONG TO THE PEOPLE OF INDIA AND FEW INDIVIDUALS AND PARTIES CANNOT EXPLOIT IT.

Jus publicum privatorum pactis mutari non potest.”

Public law cannot be changed by private pacts.

– Digest of Justinian

“Political democracy cannot last unless there is at its base social democracy…. On the social plane, we have in India a society based on the principle of graded inequality, which means elevation of some and degradation of others. On the economic plane, we have a society in which there are some who have immense wealth as against many who live in abject poverty…. How long shall we continue to live this life of contradictions? How long shall we continue to deny equality in our social and economic life? If we continue to deny it for long, we will do so only by putting our political democracy in peril. We must remove this contradiction at the earliest possible moment or else those who suffer from inequality will blow up the structure of political democracy which this Assembly has so laboriously built up”.

3. Those who know the Constitutional history of India recognize the above to be the wise words of Dr. Ambedkar, one of our founding fathers. Those who are concerned about the welfare of our people, and the future of our nation, his second warning will always be a matter of intense intellectual disquiet:

“Indeed if I may say so, if things go wrong under the new Constitution, the reason will not be that we had a bad Constitution. What we will have to say is that Man was vile.”

It is never enough to have a written constitution. We need people who, in the course of working the Constitution, to borrow a memorable phrase from Granville Austin, will exhibit qualities of great integrity and a deeply felt ethical urgency to ameliorate the social and economic conditions in which our people live and suffer. That obligation arises from the very politico-constitutional ideals and structures upon which the State has been formed and the future of the nation premised. In disputes such as the one before this Court, the lens of the Constitution has to be used to examine the implications with respect to achievements of such ideals and the strength of our institutions. The power that is vested in the State, and exercised by its agents, is the power of all the people and not just of those with great wealth and status.

The vesting of such powers is an act of faith and of trust, two qualities that are to be earned, sustained and nurtured. Continuance of such faith and trust undoubtedly depends, in the least, on the belief that people have that such powers are being exercised to further the Constitutional goals. To the extent that the people begin to believe that their faith and trust were misplaced, and that their collective powers are being improperly used for the benefit of the few, as opposed to being used for public welfare and interests, one may reasonably conclude that at least the effective functioning of the State would have been compromised. Those with knowledge of history, and an inclination to learn from, it would necessarily be concerned about the situation today and potential consequences in the future. For them the words of Dr. Ambedkar would appear to be prescient and wise.

4. The wisdom of the ages, garnered through eons of humanity’s collective struggles to find for all a life of dignity and fraternity – a dignity that arises from and is informed by liberty, equality, and justice in all walks of life and a fraternity that seeks to promote such dignity for all is the fire in which the Constitution of India has been forged. The very structure and text of the Constitution, when viewed through the lens of history and the working of the instrument itself, clearly demonstrates that it crystallizes collective human wisdom in its triadic ethical foundations. Those foundations are:

(i) the Preamble that soars in eloquence in its articulation of collective human aspirations as national goals and sets out the raison d’etre for the nation itself;

(ii) the Fundamental Rights, that provide various necessary freedoms for the individuals and social groups, and places upon the State certain affirmative obligations to eliminate those institutional and socio-economic conditions limiting such freedoms, so that all can strive towards the achievement of the goals set forth in the Preamble; and

(3) the Directive Principles of State Policy, fundamental to governance and necessary for the achievement of all round socio-economic development so that the goals of the Preamble can be secured, and the effective exercise of the Fundamental Rights by all can be ensured.

5. It was recognized early in our struggle for freedom that, as India awakens politically an explosive situation could develop if the contradictions were not resolved soon. Thus, it was felt that the State ought to play a key role in ensuring that all the people are assured, a life informed by liberty, equality, justice and fraternity, so that their dignity, as individuals and as social beings, can be secured. To this effect, the State has been given the powers to place reasonable restrictions even on the Fundamental Rights of the individuals for the achievement of broader good for all, the powers to enact socio-economic legislation to effectuate re-distribution of wealth and ensure equitable access to material resources and to frame policies that ameliorate the harsh consequences of the civil and the market spheres of social action that people participate in. Where such power is vested in trust by the people, it implies, as a necessary corollary, a trust that such powers will be fully used to further the Constitutional goals within the four corners of Constitutional permissibility. Availability of such powers to use, in a practical sense, implies that those powers have not been abjured or derogated from.

6. The dawn of independence evoked much hope; and also much anxiety, especially amongst scholars and observers from the West, about the feasibility of the experiment of India as a Constitutional democracy. Yet, in our seventh decade of freedom and the sixtieth year of constituting ourselves as a Sovereign, Socialist, Secular, Democratic Republic, it is apparent that we have survived, and indeed by and large flourished as a political democracy. In part, this was surely on account of the great moral integrity and wisdom that our founding fathers and early political leadership brought to the table, and the efforts they put in towards building the institutions of our democracy. Additionally, credit must also go to the socio-political and economic policies initiated and implemented, of course with varying degree of success and failure, for sustaining the hope that the promises enshrined in the Constitution are at least being sought to be achieved. However, a much larger measure of credit ought to go to the people: those people who turn up in ever larger numbers to the voting booths and continue to retain trust in the basic principles of democracy, notwithstanding their abysmal lot in life. Yet, when the State attempts to alleviate just a part of the burden of their continued dehumanized condition, such attempts are decried as populist by the elite of this country.

7. So, willy-nilly, we come back to the question asked by Dr. Ambedkar: how long will our people bear the contradictions of endemic and gross inequalities? An aspiring and youthful population can be a great boost to the economy and the society. It would be tautological to state that the GDP would grow rapidly with a larger proportion of the people in the productive phases of their lives. But, the same youth unemployed or underemployed, malnourished and without the capacity or hope to lead or achieve a dignified life, can be the most dangerous of all forces

8. A small portion of our population, over the past two decades, has been chanting incessantly for increased privatization of the material resources of the community, and some of them even doubt whether the goals of equality and social justice are capable of being addressed directly. They argue that economic growth will eventually trickle down and lift everyone up. For those at the bottom of the economic and social pyramid, it appears that the Nation has forsaken those goals as unattainable at best and unworthy at worst. The neo-liberal agenda has increasingly eviscerated the State of stature and power, bringing vast benefits to the few, modest benefits for some, while leaving everybody else, the majority, behind.

“… these global imbalances are morally unacceptable and politically unsustainable.1

9. We have heard a lot about free markets and freedom to market. We must confess that we were perplexed by the extent to which it was pressed that contractual arrangements between private parties with the State and amongst themselves could displace the obligations of the State to the people themselves. Judge Richard Posner, one of the doyens of the free market ideology and responsible for building the intellectual foundations of the neo-liberal segments of the law and economics jurisprudence, had this to say about the recent global financial crisis and it is worth quoting him in-extenso:

Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government’s myopia,passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, be in a depression. We are learning from it that we need a more active and intelligent government to keep our model of capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience—the self healing powers—of laissez-faire capitalism”.

10. History has repeatedly shown that a culture of uncontained greed along with uncontrolled markets leads to disasters. Human rationality, with respect to pursuit of lucre, is essentially short run. So long as there appear to be possibilities of making profits, especially windfall profits, the fears that the competitors would reap them will drive businesses into taking greater and greater risks; in fact, even by self-enforcement of blindness to the potential for market collapse. To say that it was a failure of regulation is trite. Markets failed because regulation had practically ceased to exist. Finally veering around to the view that regulation of markets is absolutely essential, after spending a lifetime arguing for the opposite, and noting that the capacity for self-regulation was highly over-rated, Judge Posner in his own inimitable manner says:

If you’re worried that lions are eating too many zebras, you don’t say to the lions, ‘You’re eating too many zebras’. You have to build a fence around the lions. They’re not going to build it.”3

11. Historically, and all across the globe, predatory forms of capitalism seem to organize themselves, first and foremost, around the extractive industries that seek to exploit the vast, but exhaustible, natural resources. Water, forests, minerals and oil -they are all being privatized; and not yet satisfied, the voices that speak for predatory capitalism seek more, ignoring the lessons from history and current experiences. One of the lessons of history is that, barring a few, most of the countries endowed with vast and easily exploitable natural resources have fared far worse than those with smaller endowments, on almost every social and economic indicia. As Joseph Stiglitz points out:

“[T]here is a curious phenomenon…..‘resource curse.’ It appears, that on average, resource rich countries have performed worse than those with smaller endowments – quite the opposite of what might have been expected………..[B]ut even when countries as a whole have done fairly well, resource rich countries are often marked by large inequality: rich countries with poor people…….. [T]wo-thirds of the people” in an oil rich country that is also a member of a global oil producing countries group “live in poverty as the fruits of the country’s oil bounty go to a minority…… These puzzles cry out for an explanation, one that will allow countries to do something to undo the resource curse…..We understand in particular that much of the problem is political4 in nature……. [W]hen compared to countries dependant on the export of agricultural commodities, mineral and oil exporting countries suffer from unusually high poverty, poor health care, widespread malnutrition, high rates of child mortality, low life expectancy, and poor educational performance – all of which are surprising findings given the revenue streams of resource-rich countries.” 5

12. We draw attention to this problem, because, even though it is often associated with those countries that depend mostly on earnings from export of natural resources, similar effects can also arise from activities within the domestic economy. Take the case of India itself. We cannot by any stretch of imagination claim that we are a resource poor country. Yet, as we cast a glance across the face of our land, the greater incidence of social unrest, and movements for greater self determination, seem to occur by and large in states and regions that have plenty of natural wealth and paradoxically suffer from low levels of human development. We hasten to add that we are not suggesting that absence of resources would lead to a better situation. Rather, it is to point out that the problems arise because exploitation of those resources occurs without appropriate supervision by the State as to the rates of exploitation, equitable distribution of the wealth it generates, collusions between the extractive industry and some agents of the State and the consequent evisceration of the moral authority of the institutions of the State.

13. The crux of the problem is, as Prof. Terry Lynn Karl says:

“….utilizing petroleum wealth effectively is not easy…… Because the institutional setting is generally incapable of dealing with economic manifestations of resource curse, it ends up transforming them in a vicious development cycle or “staple trap.”6

14. One would have expected, that with the resources being owned by the people as a nation, it would be the State public institutions that would actually operate the extraction industry. For a few decades that was the case, and it was beset by problems of administrative apathy and even pilferage. Over the past two decades vast tracts of Nation’s resources have again begun to be licensed for exploitation by private parties. Be that as it may, it must be emphasized that the on going process cannot dispense with the role to be played by the State. Strong State institutions are even more necessary when we are dealing with Nation’s resources and we allow contractors to exploit them

15. The law is for the benefit of the people. Even where it does not work in its full measure all the time, the public nature of law is still capable of exerting moral authority and bringing comfort to the people. But, when law is pushed into unseen categories, effectively hidden from public gaze, it raises suspicion- especially when it purports to deal with the collective resources of the people. When the threshold of public scrutiny is crossed, it raises vital issues regarding our continued fealty to democratic values, constitutionalism, accountability, transparency and the rule of law. Jody Freeman and Martha Minnow write:

“[T]he primary concern, voiced in recent years by critics in public policy circles and in academia, is that the ubiquity of governance by private contractors strikingly outstrips our legal and political capacities of oversight meant to ensure that the contractors ;execution of those governmental functions complies with democratic norms.”7

16. We are not saying that markets have no role to play in a developing economy or that private initiative be suppressed and that all markets are essentially and only tools for expropriation and continuance of social injustices. We are stating that our Constitution posits that markets can be inimical to social justice, especially when left unregulated. Laissez faire market is a myth and it is, as Prof. Cass Sunstein points out:

“….a grotesque misdescription of what free markets actually require and entail. Free markets depend for their existence on law……moreover, the law that underlies free markets is coercive in the sense that in addition to facilitating individual transactions, it stops people from doing many things they would like to do. This point is not by any means a critique of free markets. But it suggests that markets should be understood as a legal construct, to be evaluated on the basis of whether they promote human interests, rather than as a part of nature and the natural order….. markets are a tool, to be used when they promote human purposes, and to be abandoned when they fail to do so…Achievement of social justice is a higher value than the protection of free markets; markets are mere instruments to be evaluated by their effects.”8

17. The Constitution of India postulates that monopolies, created by an inequitable distribution of resources and their concentration in the hands of the few, are inimical to democracy and the values of equality and justice in all spheres of social action. They were the lessons of history. While large economic organizations might be necessary to accomplish certain kinds of tasks, it is imperative that the State always be watchful that they do not take over the essential functions of the State, especially of policy formulation. In its dealings with such entities, the State should always be mindful that it does not convey that its public law duties could be bought or abrogated in any manner.

18. One may ask why in a Company Petition such a discussion of constitutional values has had to come about. Such is the nature of the dispute itself. The Company Petition, and the Scheme of Arrangement that it arises from, ostensibly, are to be dealt under Sections 391 through 394 of the Companies Act; but, involve at their foundations, a claim by Reliance Natural Resources Limited that it is entitled to receive, on account of a private pact between members of the Ambani family, vast quantities of natural gas, amounting to a significant portion of what would be available for the entire country, at a low price and for a long time, de-hors any policy made by the Government of India. It claims that the GoI has a right to enter into and has actually entered into a contract that allows, Reliance Industry Limited to produce and decide how to use a precious and a scarce natural resource belonging to the people of this nation without any governmental supervision. Further, RNRL also claims, that its vested interest in such vast quantities of natural gas is such, that subsequently framed governmental policy cannot have a bearing on such an entitlement irrespective of public interest implications.

19. Apart from the above, this particular case also implicates aspects of accountability of members of the managements of corporations, who are also promoters and powerful shareholders, to the Board of Directors and other shareholders. One of the principal claims of RNRL in this case is that a private pact between the family members of the Ambani family can bind the Board and the Company, in the context of reorganization of the company without the shareholders having any knowledge of the extent of value that is actually likely to be demerged, even if such likely value runs into many thousands of crores of rupees and possibly hundred fold more than the assets and liabilities that were actually shown as being demerged in the Scheme document placed before the shareholders.

20. For a long time now, it has been well recognized that the modern industrial and post-industrial corporations control such a large extent of economic and social spheres that their activities necessarily have a wide and pervasive impact on the lives of most of the people of the country. We recognize that, in many normal instances, when issues of public interest are not apparent on the face of the record, then a Company Petition is normally, and rightly, treated as a matter of corporate law. However, when the conflict involves the right to use vast swaths of a national natural resource that is owned by the people, public law is necessarily implicated to a small or a large extent. Further, when publicly listed companies, with many millions of shareholders of ordinary people, do not reveal the full extent of value that is to be transferred, it would obviously implicate the broader principles of corporate law.

21. That is why we began this section with an epigraph, “Jus publicum privatorum pactis mutari non potest” from the Digest of Justinian. Natural Gas belongs to the people of India, and vests in the Union of India, to be held for the purposes of the Union.The Constitution of India commands the Government to frame policy to prevent the distribution of such resources in a manner that may be inimical to national development. Ultimately, the residual owners of a company are its shareholders, and they have a right to know what is happening to the company and its assets, including assets by way of contractual rights, so that they can take an informed decision about a proposal that is put up for their consideration. For the past three hundred years of evolution of corporate law, the principal theme has been the protection of those who give their wealth and resources in trust to a company. Managements and Board of Directors of companies have a fiduciary responsibility to the shareholders, and neither the processes nor the substantive objectives of protection of the shareholders can be derogated from.

1 Quoted in Joseph Stiglitz, Making Globalization Work: The Next Steps to Global Justice, p. 8, Allen

Lane (2006).

2 Richard A. Posner: “A Failure of Capitalism: The Crisis of ’08 and the Descent Into Depression”, p. xi.Harvard University Press (2009).

4 The word political is being used in a technical sense to denote the state and all of its institutions, rather than merely political parties or to denounce the normative desirability of democratic political processes.

5 Joseph E. Stiglitz, Making Natural Resources into a Blessing rather than a Curse, in “Covering Oil” Ed. Svetlana Tsalik and Anya Schiffrin, Open Society Institute (2005), p. 13-14.

6 Terry Lynn Karl “Understanding the Resource Curse” in Covering Oil (Open Society Initiative, 2005).

7 Government by Contract: Outsourcing And American Democracy, Ed. Jody Freeman and American Democracy.

8 Cass Sunstein: Free Markets and Social Justice (Oxford University Press, 1997)

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