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Economy Sep 27, 2012

10 takeouts on SC opinion: Sibal wins on points

By R Jagannathan

Did the government win its zero-loss argument in court? What did the Supreme Court actually say on the presidential reference made to it by the government on the compulsory auction of natural resources, as suggested by a two-judge bench that handed down the 2G spectrum verdict in February?

Here are a few takeouts from the Supreme Court's "opinions" on the government's reference. The five-judge bench, headed by Chief Justice SH Kapadia, had Justices DK Jain, Ranjan Gogoi, Dipak Misra and JS Khehar as it other members.

First, this is an advisory opinion of the court under Article 143(1) of the Constitution and not a verdict. Actual cases may find the courts giving different verdicts, depending on the specific circumstances. Only broad principles have been stated.

Second, it does not affect the 2G judgement. Even before the hearings on the presidential reference, the Supreme Court had explicitly stated that its answers would not affect the 2G verdict which cancelled 122 licences issued by A Raja in 2008. This means spectrum will have to be sold by auction. Sibal's zero-loss theory thus will not hold in this specific case.

Third, on the main reference, whether auctions are the only way to allocate scarce natural resources, the Supreme Court has gone with the government. Score one for Kapil Sibal & Co. The court said, "We would unhesitatingly answer it in the negative since any other answer would be completely contrary to the scheme of Article 14." Article 14, which deals with equality under the law, merely prohibits "the state from taking up actions that may be arbitrary, unreasonable, capricious or discriminatory".

Fourth, the court also debunked the principle of revenue maximisation as the only goal of alienating natural resources. That's a psychological win for Sibal, since the whole point of claiming zero-loss on spectrum was to say there can be no loss if revenue maximisation was not a goal of policy.

It also has implications for the Coalgate debate. The court opinion suggests that if coal blocks are given for free for a specific public purpose-like cheap power generation based on tariff-based competitive bidding-the courts will not consider that as violative of the constitution.

The court was emphatic: "The submission that the mandate of Article 14 is that any disposal of a natural resource for commercial use must be for revenue maximisation, and thus by auction, is based neither on law nor on logic. There is no constitutional imperative in the matter of economic policies - Article 14 does not pre-define any economic policy as a constitutional mandate."

It added: "Auctions may be the best way of maximising revenue but revenue maximisation may not always be the best way to subserve public good. Common good is the sole guiding factor under Article 39(b) for distribution of natural resources. It is the touchstone of testing whether any policy subserves the "common good" and, if it does, irrespective of the means adopted, it is clearly in accordance with the principle enshrined in Article 39(b)."

Fifth, Justice Jagdish Singh Khehar, in an addendum, made it clear that profit maximisation would be very important when resources were handed over for commercial purposes. "When natural resources are made available by the state to private persons for commercial exploitation exclusively for their individual gains, the state's endeavour must be towards maximisation of revenue returns. This alone would ensure, that the fundamental right enshrined in Article 14 of the Constitution of India (assuring equality before the law and equal protection of the laws), and the directive principle contained in Article 39(b) of the Constitution of India (that material resources of the community are so distributed as best to subserve the common good), have been extended to the citizens of the country."

He also said: "No part of the natural resource can be dissipated as a matter of largesse, charity, donation or endowment, for private exploitation. Each bit of natural resource expended must bring back a reciprocal consideration. The consideration may be in the nature of earning revenue or may be to "best subserve the common good". It may well be the amalgam of the two. There cannot be a dissipation of material resources free of cost or at a consideration lower than their actual worth. One set of citizens cannot prosper at the cost of another set of citizens, for that would not be fair or reasonable."

What does this mean for Coalgate? It means where blocks were allocated free for, say, generating cheap power, the court may take one view, since there is "reciprocal consideration", but if they were given free for, say, making steel or cement, where companies make profits from the marketplace, the courts may decide differently.

Sixth, the court made out a strong case for not have auctions in some cases. Sibal should be cock-a-hoop over this. The court said: "A fortiori, besides legal logic, mandatory auction may be contrary to economic logic as well. Different resources may require different treatment. Very often, exploration and exploitation contracts are bundled together due to the requirement of heavy capital in the discovery of natural resources."

Seventh, the court specifically rejected the argument that lack of auctions had the potential for abuse. It said: "A potential for abuse cannot be the basis for striking down a method as ultra vires the Constitution. It is the actual abuse itself that must be brought before the court for being tested on the anvil of constitutional provisions. In fact, it may be said that even auction has a potential of abuse, like any other method of allocation, but that cannot be the basis of declaring it as an unconstitutional methodology either."

In short, "neither auction, nor any other method of disposal, can be held ultra vires the Constitution, merely because of a potential abuse".

This means it could uphold a first-come-first-served policy on spectrum as valid, but if Raja, or anyone else, tweaked the policy for favouring someone, the courts would come down heavily on them.

Eighth, the court clearly stayed away from stepping into the policy domain. It resolutely refused to decide on how natural resources should be allocated since it does not have the competence to do so, and because it "respects the mandate and wisdom of the executive for such matters. The methodology pertaining to disposal of natural resources is clearly an economic policy".

But it did not say the executive could do anything it likes in the name of policy freedom. "When questioned, the courts are entitled to analyse the legal validity of different means of distribution and give a constitutional answer as to which methods are ultra vires and intra vires the provisions of the Constitution."

Ninth, the court differentiated between the means adopted (auction or some other method) and its purpose to decide whether it would intervene. It said: "Alienation of natural resources is a policy decision, and the means adopted for the same are thus, executive prerogatives. However, when such a policy decision is not backed by a social or welfare purpose, and precious and scarce natural resources are alienated for commercial pursuits of profit maximising private entrepreneurs, adoption of means other than those that are competitive and maximise revenue may be arbitrary and face the wrath of Article 14 of the Constitution."

Tenth, the court has clearly said that its opinion may vary from case to case. It has neither "prescribed or proscribed" anything. "We believe, a judicial scrutiny of methods of disposal of natural resources should depend on the facts and circumstances of each case, in consonance with the principles which we have culled out above. Failing which, the Court, in exercise of the power of judicial review, shall term the executive action as arbitrary, unfair, unreasonable and capricious due to its antimony with Article 14 of the Constitution."

So who won, who lost?

The UPA has won the arguments on the principle of the right to decide policy. But the court has reserved for itself the right to see if policy and precept are in accordance with the principle of transparency and public purpose.

This is not an unambiguous victory for anyone - the government or the public interest litigators who managed to the 2G licences cancelled. Coalgate can go the 2G way still.

Read the full text of SC observations

SC Advisory Jurisdiction

by R Jagannathan

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