'LIC IPO To Bring About Rs 70K Crores For Nation's Development' : Madras High Court Dismisses Policyholder's Challenge Against 5% Disinvestment

The bench of Chief Justice Munishwar Nath Bhandari and Justice D. Bharatha Chakravarthy was dealing with a writ petition challenging Sections 128 to 146 of the Finance Act, 2021, with an alternative prayer to declare Section 5(9) of the Life Insurance Corporation Act, 1956 and Sections 128 to 130 and Sections 132 to 146 of the Act of 2021 as ultra vires Article 110 of the Constitution of India. An alternative prayer was also made to declare Section 140 of the Act of 2021 as ultra vires Article 110 of the Constitution of India.

Petitioner is a policy holder of Life Insurance Corporation (LIC), third respondent. It is submitted that every participating policyholder was entitled to a minimum of 90% of the surplus arising from non-participating policies, but the amendment under challenge has reduced their entitlement to nil and, therefore, being a policyholder, she has challenged Sections 128 to 146 of the Act of 2021, apart from Section 5(9) of the Act of 1956.

It is to be noted that the amendments were brought in after the Finance Bill was classified as a money bill under Article 110 of the constitution.

The court held that the challenge was made to the amendments by way of Article 110 of the constitution without challenging the certificate issued by the Speaker of the House. Further, the procedure for certifying the Finance Bill as a money bill have been duly complied with and therefore there is no constitutional illegality.

The court also highlighted that the word "only" used in the definition of Money Bill has to be read along with Article 110(1) (g) of the constitution which provides for any matter incidental to any of the matters specified in (a) to (f) of Article 110(1) and therefore should not be given a narrow meaning.

Background

President of India promulgated the Life Insurance (Emergency Provisions) Ordinance, 1956 to vest management of all life insurance business in Central Government pending nationalization in the backdrop of alleged mismanagement of the affairs of number of insurance companies. This ordinance was then converted to an act which was followed by the Life Insurance Corporation Act of 1956. The Act of 1956 provides for regulation, management, audit and control of the affairs of LIC, apart from other subject-matters.

On 1.2.2020, the Union Government of India announced that the Government proposes to sell a part of its holding in the LIC by way of IPOs. Accordingly, the Finance Bill, 2021 was introduced in the Lok Sabha carrying out the appropriate amendments to the Act of 1956 to give effect to the proposal for bringing the IPO. Clauses 119 to 137 of the Finance Bill, 2021 sought to amend/insert/substitute various provisions of the act.

Amendments

• Section 5 of the Act was amended to issue shares to the Central government against paid up capital invested by it in LIC as well as issue of bonus shares which could be offered by way of IPOs and the resultant money could be invested into the Consolidated Fund of India.
• Section 2 of the Act was amended to introduce new clauses to define expressions like "Board of Directors", "Chairperson" "Director", "Financial Statement", etc.
• Section 4 was amended for vesting the general superintendence and direction of the affairs of LIC to its Board of Directors.
• Section 4A, 4B, 4C and 4D were inserted to provide for disqualifications to be a director, disclosure of interest by a director and senior management; bar on LIC from entering into any contract or arrangement with a related party; and, adjudication of penalties for contravention or violation under the Act of 1956, respectively.
• Sections 5A, 5B, 5C, 5D, 5E and 5F have been inserted in the Act of 1956, by way of Section 131 of the Act of 2021, to provide respectively for transferability of shares, voting rights, maintenance of register of members, declaration in respect of beneficial interest in shares, deeming of LIC's shares to be securities and rights of registered shareholders to nominate.
• Section 19 was substituted by Section 132 of the 2021 act to provide for an Executive Committee of the Board, its composition and functions. Sections 19A, 19B, 19C and 19D were amended to provide for various committees of the board namely Investment Committee; Nomination and Remuneration Committee; Audit Committee and Other Committees.
• Section 23A was inserted to provide for holding of Annual General Meeting and other general meetings of registered shareholders.
• Section 24 was substituted to provide for LIC having a multiplicity of funds, establishment of reserves and maintenance of separate funds for performing and non performing shareholders.
• Sections 24A, 24B and 24C were inserted to make the financial preparation/maintenance of proper Books of Accounts, Financial Statements and Board's report mandatory and Section 24D provided penalties for non-compliance of the same.
• Section 25 deals with appointment of Auditors. Sections 25A, 25B, 25C and 25D provide for the removal and resignation of auditor, powers and duties of auditor and auditor's report, internal auditor and special auditor respectively.
• Section 28 as substituted provides for the manner in which the surplus from life insurance business should be utilized. 100% of the surplus relating to non-participating policyholders was allocated to the registered shareholders in addition to 10% of surplus relating to participating shareholders.
• Section 28A was amended to provide for allocation to or reservation of balance profits from other businesses to its members.
• Sections 28B and 28C was inserted to make provision regarding declaration of dividend and crediting of unclaimed and unpaid dividend amount to an unpaid dividend account.
• Section 46 was amended to declare that the defects in the constitution of the Board and committees will not invalidate their acts and proceedings.
• Section 47 was substituted to provide protection to any director or employee against prosecution for any action taken under the Act.
• Section 48(2) was amended to give powers to the Central Government to make rules for various other matters relating to the Act.
• Section 49 was amended to vest the power to make regulations relating to the functioning of LIC on the Board of LIC.
• Section 50 and 51 were inserted to deal with the form, manner, etc. for companies to apply with modifications to LIC and the power of the Central Government to remove difficulties by order published in the Official Gazette.

Arguments of the petitioner

The petitioner mainly challenged the amendments on the ground that the subject-matter would not fall within the definition of Money-Bills and therefore Article 110 of the constitution was not attracted. He argued that there was no nexus in reference to the Consolidated Fund of India for making amendment therein and there were other amendments of similar nature which do not attract the purpose of 2021 amendment.

It was also contended that the 2021 amendment inserted Sections 5(4), 5A(1) and 5A(2) by virtue of which the central government could sell up to 49% of the ownership of LIC as opposed to the entire ownership being vested with the central government.

As per the pre-amended provisions of the Act of 1956, 90% or more of surplus from life insurance business was to be allocated to or reserved for the life insurance policyholders of the Corporation, but by virtue of the amendment, the rights guaranteed under Section 28 of the Act of 1956 have been taken away.

The petitioners also argued that by virtue of the amendment under Section 5(9) of the Act of 1956, a reservation to the extent up to 10% of public issue has been made on competitive basis in favour of the LIC policyholder as one of the reserved categories, whereas earlier a policyholder was entitled to get 90% of the surplus amount.

Arguments for the respondents

The counsel for the respondents contended that the petitioner failed to satisfy the triple test for challenge to the provision on the following grounds:

• constitutional bar;
• constitutional illegality; and,
• constitutional fraud.

It was contended that the union is empowered to carry on any trade or business under Article 298 of the Constitution of India. Therefore, the decision of the Central Government to trade 5% of its shareholding in LIC through IPO is constitutional and valid.

The respondents also argued that the procedure for certifying the Finance Bill as a Money bill was duly complied with and therefore there is no constitutional illegality.

Reliance was placed on the decisions of the Apex Court in Justice K.S.Puttaswamy (Retd.) and another v. Union of India, (2019) 1 SCC 1 and Rojer Mathew v. South Indian Bank Limited and others, (2020) 6 SCC 1, where it was established that the expression "Money Bill" cannot be construed in a restrictive sense and that the wisdom of the speaker of Lok Sabha must be valued.

It was argued that prima facie the word "only" is not restrictive of the scope of the general terms and if a Bill substantially deals with the imposition, abolition, etc. of a tax, then the mere fact of the inclusion in the Bill of other provisions which may be necessary for the achievement of the objective of the particular Bill, cannot take away the Bill from the category of Money Bill.

When the Parliament endowed with plenary powers had passed the Bill and the Standing Committee on budget after scrutiny and due diligence had approved it, it cannot be pleaded that there was fraud on the Constitution.

The respondents further argued that the petitioner has approached this court after almost eight months when IPO is going to be issued and, therefore, the writ petition suffers from laches on the facts of this case.

The court agreeing with the contentions of the respondents and relying on the decision of the Apex Court in K.S Puttaswamy and Rojer Mathew dismissed the petition.

"The intrusion or inference to the implementation of a public interest policy by way of legislation should be eschewed, as it directly impacts the economic growth of the country and interference therein may have far reaching consequences, because the receipt of money into the Consolidated Fund of India is to be used for the development of the country." the court added.

Advocates Abhishek Jebaraj and SG Arul Mozhi Selvan appeared for the petitioner. The respondents were represented by Additional Solicitor General N. Venkataraman, Senior Counsel Satish Parasaran Mr. Prasad Vijayakumar and Mr. B Deepak Narayanan.

Case Title: L. Ponnammal v. Union of India

Citation: 2022 LiveLaw (Mad) 109

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