The recent verdict of the Hon’ble Supreme Court in the case of The Coal India Limited & Another v. Competition Commission of India & Another upholding that Coal India Ltd. comes under the purview of the Competition Act, 2002, has been applauded by the Legal Pundits as it puts a final nail in the coffin of the Coal India Ltd. which has enjoyed its monopoly since its inception.
The present work while perusing this verdict, attempts to analyse the position of Coal India Limited from the perspective of the principle of ‘Special Responsibility’ read with Article 39(b) of the Indian Constitution thereby establishing a jural relationship and at the end attempts to establish as to how this verdict erred in extending the scope of Competition Act, 2002 to Coal India Ltd. which enjoys a valid monopoly through the creation of Coal Nationalisation Act.
State Monopoly a legitimate exception in the matter of ‘material resources’
The expression “material resource of the community” does not mean that the ownership of the resources must already vest in the State. The distribution envisaged by Art. 39(b) necessarily includes transformation of wealth from private ownership into public ownership by nationalisation. The Constitution (Twenty-Fifth Amendment) Act has given a new edge to Directive Principles incorporated in Art. 39(b) and (c). It gives primacy to all laws (not merely those relating to land reforms) which seek to implement the Directives incorporated in these two clauses. These Clauses, as observed above, aim generally at securing an egalitarian operation of the economic system. The scope of laws, therefore, which can be protected under this amendment is very wide.
A law relating to the creation of State monopoly should be presumed to be in the interests of the public. By nationalization, the State can take over any property on payment of an amount determined by it and not market value, making the acquisition thereby affordable which is a relevant consideration under Article 39 (b), and this is where the Coal Nationalisation Act, 1973 stands. Though Coal is no longer an essential commodity it remains an important natural resource which is a ‘material resource’ and its proper allocation is vested with the State.
To substantiate the above proposition, let us analyse the position of the Coal Nationalisation Act through the lens of The General Insurance Business (Nationalisation) Act, 1972. This legislation was implemented to nationalize the national insurance industry in order to better meet the economic needs of the country. Its purpose is to promote the growth of the general insurance business in the best interest of the community and prevent the accumulation of wealth that could harm the overall economic system. The Insurance Regulatory and Development Act, 1999 put an end to the exclusive control of the general insurance industry. While insurance companies are now obligated to engage in competition with others in the industry, this does not necessarily imply that public sector insurance companies must have equal opportunities as private insurance companies. Nevertheless, it should be clarified that insurance companies are not obligated, either by policy or by law, to regulate all insurance contracts with the consideration of Directive Principles. However, insurance companies need to demonstrate fairness and reasonableness in all their transactions and the same goes with Coal India Ltd.
If one examines the preamble of the Coal (Nationalisation) Act which states “…in order that the ownership and control of such resources are vested in the State and thereby so distributed as best to subserve the common good, and for matters connected therewith or incidental thereto.” It can be seen that the matters related to coal are solely vested with the State which aligns with Article 39(b) of the Indian Constitution thereby creating a valid exemption. Hence, the verdict appears to have overlooked the real essence of Article 39(b).
There is no doubt that Coal India Ltd. is in a dominant position by contributing around 82% of the total coal production in India. However, this position cannot be equated with abuse of dominant position or anti-competitive activities. A law relating to the creation of State monopoly should be presumed to be in the interests of the general public. ‘Material resources’ are a class in itself and the State or the Central Government has absolute control over these resources because both Central and State Government are a class in itself. This perspective is based on the premise that all actions carried out by the government are done in the best interest of the general public. This means that these actions are done on behalf of the public or that any resulting losses or gains affect the public as a whole. The goods consigned to the Central or State Government are presumed to be used for governmental activities that serve the public interest, including the effective administration of government agencies unless proven otherwise.
The jural relationship between Article 39(b) and Section 4 of the Competition Act
In the case of Rashbihari Panda v. State of Orissa The court determined that the law granting the State exclusive control over trading in a specific commodity should be evaluated based on whether the State receives all the advantages from it and whether the monopoly is not exploited to benefit a select group of individuals. Furthermore, it was determined that if the Government’s actions are undertaken in the best interest of the general public, they are not subject to judicial review. However, the Government cannot use its monopoly to establish a monopoly in favor of third parties. So now the question here arises whether this verdict (CIL v. CCI) has indirectly overridden the Constitution?
There is no doubt that the Coal Nationalisation Act created a monopoly in the favour of the State. In the case of Loknath Misra v. State of Orissa the court held that “ If the purpose of the legislation is to establish a monopoly for the State in a specific business, it is evident that the State must be distinguished from regular citizens and treated separately in terms of operating the business. This classification would be entirely rational and aligned with the objective of the law. The Orissa Motor Vehicles (Regulation of Stage Carriage & Public Carrier Services) Act, 1947, which established a monopoly or a joint stock company where the Union of India and State Government would collectively hold controlling interest, was deemed legally valid and rational. Such monopoly can only be held to be arbitrary if such monopoly violates any provision of the Constitution and during the course of the arguments, CCI never challenged the validity of any provisions of the Coal Nationalisation Act. Therefore, bringing any act that is Constitutionally valid under the garb of anti-competitive activities or abuse of a dominant position is virtually overriding the Constitution.
In Union of India v. Association of Unified Telecom Service Providers of India and Others the apex court has rightly pointed out that “Undoubtedly, the State has the responsibility of acting as a custodian of natural resources and is obligated to manage them for the welfare of the citizens. This includes ensuring fair distribution to promote the collective well-being, as stated in Article 39 of the Constitution. As the sole custodian of all the resources in the country, the Government also possesses the exclusive authority to establish the terms and conditions under which it grants the exclusive rights to these resources. The Government should exert effort to secure the optimal value for its valuable rights and should not recklessly dispose of them, ensuring that no arbitrary actions are taken.”
The best example is of Kendu Leaves. In Vrajlal Manilal & Co v. State of MP the court reiterated the view expressed in Akadasi’s case. Only the provisions of the law that were fundamentally linked to the establishment of a monopoly were safeguarded. The Court, in affirming the monopoly trade in Kendu leaves, determined that the transportation of leaves after purchase or sale was not regarded as an inherent or essential aspect of dealing with those leaves.
The declaration that the Directives are “not enforceable by any court” does not provide the “raison d’être” for their disregard. By definition, a blatant breach of the Directives could render a law unconstitutional. Article 37 stipulates that the Directives cannot be enforced through the judicial process unless they have been implemented by legislation. The lack of implementation of the Directives does not infringe upon any individual’s constitutional rights and does not provide any grounds for the issuance of any judicial orders. This signifies that the State is prohibited from arbitrarily disregarding them and passing laws that openly contradict them. The former is indisputable, while the latter is not permissible. The laws and executive actions should be designed to support and advance the Directives and should include provisions for their effective implementation.
In the case of State of TN v. L. Abu Kavur Bai the Hon’ble Supreme Court held that “If the State chooses to monopolise trade in certain essential commodities or properties in order to implement the ideals contemplated in Article 39 (b) and (c), Article 31 (2) is completely excluded; otherwise, no State monopoly is ever possible because a reasonable amount which may have to be paid as compensation may completely drain the financial resources of the State or the public exchequer to such an extent that the noble endeavour to monopolise a particular commodity or property is rendered impossible.”
The Raghavan Committee on which the CCI heavily relied also mentions to be deemed dominant, a corporation must be in a position of such economic strength that it can act independently of its competitors and customers to a significant extent. To assess dominance, it is necessary to consider the limits on an enterprise’s ability to operate autonomously. The existing market share is necessary but insufficient for supremacy. Despite a significant market share, a firm may be restrained by the possibility of competition from potential entrants as well as the purchasing power of its current consumers, particularly when coal pricing is done through a two-mode online bidding procedure. This procedure became more rigorous after the coal gate scam.
- A ‘Special Responsibility’ in terms of Article 39(b) of Indian Constitution
In essence, ‘special responsibility’ refers to the added obligation of a dominant firm/entity to ensure that its actions and commercial decisions do not unfairly manipulate genuine market competition. Consequently, many tactics are deemed illegal when employed by a dominant company, but permissible when employed by a non-dominant company due to the concept of unique responsibility.
The definition of a dominating position is based on the principle of market power, which enables a company to act without being constrained by competition. This autonomy allows a company to control the market in a way that harms its competitors and consumers economically. The question at hand is whether Coal India operates as an autonomous entity. No is the answer. The organization was unable to operate autonomously from market influences since its actions were limited by stakeholders, including other Ministries and other State bodies.
In India, the evaluation of the strength of an enterprise is determined not only by its market share, but also by various other factors. These factors include the size and importance of competitors, the economic power of the enterprise, the commercial advantages it has over its competitors, the dependence of consumers on the enterprise, and the barriers to entry such as regulatory, financial, marketing, and technical barriers. Other factors considered are economies of scale, the high cost of substitutable goods or services for consumers, countervailing buying power, market structure and size, social obligations and costs, and the relative advantage of the enterprise in contributing to economic development. These criteria are outlined in section 19(4) of the Competition Act, 2002. Mere high market share is not an indication of dominance.
Even the contention that Coal India abuses it dominant position then in 2022 Coal India outsourced mines to take on the private players this step was taken by Coal India in order to be more competitive in the market.
The argument raised by the CCI that CIL has manipulated the pricing in the Fuel Supply Arguments (FSA) does not appears to be good in legality as the fixation of price of coal by the Central Government, regarding the quality thereof, had all along been subjected to statutory orders. The principle of free competition lies at the heart of the Commission’s mandate under the Preamble and section 18 of the Competition Act, 2002. The aim of the Commission is the institution of a system of undistorted competition which is commensurate to the promotion of the interests of the consumer. A dominant enterprise can impede free competition in the relevant market over which it enjoys a position of strength. The very jural relationship between Article 39 (b) of the Indian Constitution Act and Section 4 of the Competition Act, 2002 is that when it comes to “material resources” the State being the parens patriae cannot be said to be abusing its dominant position unless its decisions violate any provision of the Constitution. The authors would again like to reiterate that though Coal is no more an essential commodity, and it does not come under the purview of Essential Commodities Act and to this extent the judgment in Ashoka smokeless seems to negate the contention of the Coal India Limited but the same judgment also mentions that ““Coal” indisputably plays an important role in development of economy of the country. It had been the subject matter of regulatory measures even under the Defence of India Rules.” The question which now arises here whether the argument of CCI even extends to this?
The monopoly created by the Coal Nationalisation Act is a monopoly created under Article 19(1)(6) of the Indian Constitution and Article 19 (1)(6) begins with a non-obstinate clause which runs as follows:
“Nothing in sub clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub clause, and, in particular, nothing in the said sub clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to
- the professional or technical qualifications necessary for practising any profession or carrying on any occupation, trade or business, or
- the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise.”
The same was even appreciated in the case of GHCL Ltd. v. Coal India Ltd wherein the CCI held that “CIL was deemed to have a natural monopoly in the relevant market for the manufacturing and distribution of non-coking coal to thermal power producers, including captive power plants, in India. After the Nationalisation Acts were passed, the coal industry underwent reorganization and was divided into two main public sector companies. The first one, CIL, took over the old government-owned mines of the National Coal Development Corporation (NCDC) as well as the nationalized private mines. The second company, SCCL, was already owned and managed by the Andhra Pradesh State Government prior to nationalization. Therefore, considering the regulations stated in the Coal Mines (Nationalisation) Act, 1973, the responsibility for coal production and distribution rested with the Central Government. Consequently, CIL and its subsidiary businesses were granted exclusive control over the production and distribution of coal in India. Due to the statutory and NCDP plan, the coal corporations had obtained a commanding position in terms of coal production and supply. The dominant position of CIL was established by the implementation of the Government of India’s program, which involved the creation of a public sector enterprise called CIL and transferring ownership of private mines to it. Consequently, CIL and its subsidiaries did not encounter any competitive rivalry in the market, and there was no opposition at the horizontal level to counter the market dominance of the Opposite Parties.”
Therefore, even if all the contentions of the CCI are to be accepted then Article 19 (1) (6) overrides the Competition Act, 2002 in this aspect. Distribution of material resources comprehends nationalisation. Hence, by virtue of this judgment it appears that the Apex court has erred in expanding the scope of Competition to Act, 2002 to Coal India Ltd. which has enjoyed a valid monopoly by virtue of Coal Nationalisation Act.
Authors and Designation:
- Varun Kumar, Principal Associate, Karanjawala & Co.
- Shreshth Srivastava, Associate, Karanjawala & Co.
“Content reflects personal views and should not be construed as the work of the organisation.”
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